How to finance an investment property

Has buying an investment property been on your mind? Purchasing real estate is a popular method for investors to expand their wealth while earning a passive income. In 2021, investment properties made up 20% of real estate purchases as many took advantage of historically low interest rates last year.

Despite the lucrative investment returns, the thought of financing a property other than your primary residence can be intimidating. But, it doesn’t have to be. Whether you’re investing in a condo, house or a multiplex, the old adage rings true – preparation is half the battle. Knowing these key facts can help you on your way to becoming a real estate investor.

Save for at least 15%-25% in down payment capital

Unlike a primary residence, investment properties require a larger down payment. A minimum of 20% down payment is required by most lenders in Canada for non-owner-occupied rental properties, whereas the United States requires 15-25% depending on the type of property.

A larger down payment can help secure financing from traditional lenders because it shows that you are committed to the investment. Another benefit of putting down a larger sum is that you might qualify for a better interest rate, which means lowering your monthly expenses and increasing your cashflow.

Be a strong and organized borrower

An investor’s borrowing power depends on many factors, such as credit, income, savings and debt. Getting a mortgage on an investment property is often more challenging than financing your own home, as lenders set more stringent requirements for investors.

When starting the mortgage application process, the first step is to be organized with your documents. This means keeping important items such as your agreement of purchase and sale, proof of deposits, current lease agreements and financial statements all in one accessible place. Be prepared for lenders to request various documents to ensure that you are a good match for their loan offerings.

Leverage your home equity

One way to finance your investment is by tapping into your equity, whether it’s your primary residence or another investment property. Simply put, home equity is the remaining profit after the balance of your mortgage is subtracted from the current value of your home.

Traditionally, to access your equity, you would need to sell your home, but a home equity line of credit (HELOC) or home equity loan allows you to borrow against your equity, while keeping possession of your property. The interest rates tend to be relatively low, but keep in mind that your mortgage payments will increase because of your larger mortgage principal.

Be a savvy shopper

Shopping for the lowest interest rate is great practice when obtaining a mortgage, but it’s important to do your homework, since not all lenders finance investment properties. It is also imperative to know that the interest rate on investment loans is typically higher than the rate of a standard mortgage. In fact, the interest rate on an investment property can be up to 0.6% higher than a primary mortgage.

When you are unsure about which financial institution to work with, consulting with a mortgage broker can help determine which lender is right for you. An advantage of working with a broker is that with a single credit check, they hunt for the best product and rate that meet your needs. An added benefit of working with a mortgage broker is that their services are free of charge to the consumer. Instead, the broker is paid a commission by the lender only after a mortgage is successfully arranged, so it’s in their best interest to represent yours.

Turn your real estate investment goal into a reality

Now that you are equipped with the knowledge of what it takes to finance an investment property, the next step is to begin planning and shopping. For the best advice on where to begin your search, connect with a realtor to guide you in your real estate investment journey.

Connect with a real estate agent today!

When you're ready to invest in real estate, visit Nobul to connect with expert real estate agents who specialize in investment properties. Their expertise makes all the difference, providing guidance throughout your real estate investment journey and streamlining the home buying process. Check out Nobul today to connect with agents directly, view listings, and even get cash back when you buy!