Investing in a Second Property

If you're thinking about buying a house or condo as an investment property, market conditions are definitely in your favour. While the resale housing market has seen a tremendous amount of activity from first-time buyers in the past year, it's also a perfect time for existing homeowners to invest in secondary residential properties.

With record-low interest rates and significantly lower prices it's hard to go wrong - unless, of course you lack the financial means to make the investment. After all, you have to be ready to meet all the obligations that come with owning more than your principal property. For instance, keep in mind that if you intend to rent out the second property, you'll also have to be prepared to deal with tenants and handle maintenance costs.

Leverage

Secondary home ownership is an attractive investment option because it gives you even more leverage than you have with your principal residence. Leverage is when a relatively small amount of your money controls a much larger asset - like a property.

The more leveraged you are, the greater the financial return on your down payment becomes if the value of your property increases. There are very few other investments which can be purchased with such a small percentage of your own money.

Getting Financing

You should be aware that many lenders place non-owner occupied deals in the high-risk category and it's not that unusual to find lenders who will not finance rental units at all - or those who will only finance them if they are insured.

Obviously, lenders will want to know whether the property will carry itself. (Is there sufficient rent to cover the mortgage payment?) Don't make the mistake of assuming that a rental income of $500 per month will carry a mortgage payment of $500 per month. Only a portion of the rent is used to pay the mortgage; the remainder must cover taxes, maintenance, vacancy, bad debt and expenses.

Costs

You should also be aware that the cost of obtaining a mortgage (for legal and appraisal fees) on a non-owner occupied property can be higher than the cost of obtaining a mortgage on an owner-occupied property, when more than one unit - such as a duplex or triplex is involved. Interest rates charged on rental properties might also be higher because some lenders view these properties as being a higher risk.

As mentioned above, the main responsibility of having a second property is being able to carry it financially. And if you're like most people, you'll probably have to rent it to someone as a result.
This is also a great deal of responsibility because you will have to maintain the property in addition to your own principal residence, and you'll be responsible for finding tenants who you trust and feel comfortable with.

If you'd like more information about purchasing any type of residential property: from a first home to a second property or more, contact Elli or leave a message on the blog.

Top Reasons to have your Mortgage Pre-Approved

If you still aren’t convinced about the importance of pre-approved mortgages, take a look at the U.S. subprime loan crisis and their high ratio of defaulted mortgage loans. Country Wide Financial (one of America’s major leading mortgage lending firms) posted in their 4th quarter that 19% of subprime borrowers had missed a payment.[i]

The advantages of pre-approved mortgages far outweigh the hassle that some home buyers believe that it can be. For instance, many home buyers are not aware that when you are pre-approved, you can be guaranteed an interest rate for a period of time and for the pre-approved amount.

Another advantage is ease of convenience. Based on your pre-approved amount your realtor can search for properties within your “set budget”, therefore, saving time by narrowing the search. Once you and your realtor have found a property that you would like to make an offer on, pre-approval comes in handy when in a bidding war with other potential buyers for home. Some sellers are more likely to accept an offer from a buyer who has been pre-approved as it
cuts down on the wait time to move their home from conditionally sold to a firm sale.

Pre-approval puts you in the driver’s seat because now you can confidently search for a home that you know that you can afford. Let’s not forget about the ease of mind that this provides. So many times, home buyers search for homes that they believe that they will be mortgage approved for, make an offer, only to find out the deal fell through because their financing wasn’t secured.

The best advice that I can give anyone, is to do your homework before picking up the phone to call a realtor. There are various types of mortgages and terms that you should become familiar with and it helps when you know what the mortgage specialist is talking about. Remember, buying a home can be a daunting task but by being organized and prepared you can be one step closer to your new home.

[i] http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2007/04/