Buying Rental Property for Income or Investments

Published on 29 August 2022, 07:22:56 AM

When you need a mortgage helper, try buying rental property. For rental income or space for extended family, buying a rental property in Ontario is a perfect use of mortgage financing. 

Axess Law has a real estate lawyer (Toronto area or Ottawa) if you need to close a real estate tra

nsaction quickly or cheaply. We keep our mortgage discharge fee low, and complete all the legal documents you need for buying rental property.

Whether you live in your new home or rent it out, we make discharging a mortgage in Ontario and buying a home for rental income easier. See our FAQs for questions to ask a real estate lawyer.

Renting Income Properties

Up to 47% of young adults in the Greater Toronto Area live at home because of high housing prices. A modest rental unit in your principal residence or buying rental property for investment can be a solution. Young people going to school, professionals just starting their career, and even seniors who are downsizing all want a home of their own. With over 4,700 adults looking for a place to live in Windsor alone, the possibilities are huge.

Buying Rental Property That Fits Your Ambitions

Finding properties that make getting around by bus or arriving at class on time easier can increase your potential rental pool. Look for properties on or just off main streets and suburbs with reliable transit access.

Accessibility matters. Working professionals or students with physical disabilities will appreciate your thoughtfulness. Check out homes with direct street access, fewer steps up and accessibility friendly finishes, like linoleum instead of tile or rug. Buying rental property with wide doorways, low counters, and generous hallways makes navigating easier for renters who use wheelchairs or walkers.

If you plan to live there yourself, look for Ontario municipalities that allow tiny homes, coach houses over a garage, or legal secondary suites. They give you income and privacy.

Ontario Building Code Liabilities

Buying rental property that’s outdated can create its own hazards. Older homes often have outdated wiring, plumbing, and insulation. But updates to the Ontario Building Code could make renovating heritage homes more costly than it first appears.

Up to the late 1970s, hazardous asbestos ceiling and floor tiles and insulation were still being used in Ontario homes. That has to be professionally remediated if you plan on renos. Windows, ceilings, and staircases have height requirements, and fireproofing with sprinklers or smoke alarms is mandatory under the Ontario Fire Code when buying rental property. 

Talk to your municipality, an architect, engineer, or qualified residential designer with a BCIN (Building Code Inspection Number) about any changes you plan to make before buying rental property. They can advise you on getting a building permit, and what to expect timewise or for your budget.

Are Spaces Suitable for Living?

Some spaces are too awkward to be desirable. Small changes, like enlarging bedroom closets or swapping out a pedestal sink for a vanity, can make an outdated rental suite more desirable. Expect to spend thousands on structural changes if a basement lacks windows that can be used as a fire exit or an outside entrance. Prevent unforeseen grief by getting estimates from reputable contractors, knowing your limits, and keeping a generous reserve fund.

Hire Builders You Can Trust

Cash transactions or low bids that seem too good to be true usually are. If your reno doesn’t pass inspection, you may have to pay to have it fixed. Hire someone you can trust and hold back 10% of their bill for 45 days after completion — just in case you get left with construction liens from unpaid subcontractors. You can protect yourself from personal injury claims, fire, gas leaks, or theft by informing your home insurer about your reno project. Remember, your home’s new replacement value may be quite a bit higher than your current insurance.

Qualifying for the Mortgage Stress Test

Mortgage lenders welcome income properties, as long as units are legal and permitted. Your lender will hire an independent appraiser to view your property before approving new financing and discharging mortgage obligations you already have. After the initial inspection, you’ll be on your own to rent and maintain it. 

Is it Your Principal Residence?

Between 50% and 100% of gross rental revenues can be included in mortgage affordability calculations. Plan to live in a two- to four-unit rental home as your principal residence and, with a Canada Mortgage and Housing Corporation (CMHC) high ratio mortgage, the required down payment can be as low as 5%. (Plan ahead with RRSP mortgage savings.) Your eligibility will be based on from 50% to 100% of gross rental incomes you collect, and your gross annual  income from other sources.

Income Property Only

Expect to put 20% down for a CMHC-insured income property mortgage for two to four rental units if you won’t be living there. Your mortgage eligibility will most likely be based on 50% of the net rental income (gross rent minus operating expenses) and your gross annual income. 

The cost of your mortgage principal, interest, property taxes and heat will be included in the mortgage stress test. Income from rental units minus heating costs tenants pay, and other income from employment, pensions or investments, count towards your eligibility.

You must show you can meet the mortgage payments at the interest rate your lender offers plus 2% or 5.25%, whichever is higher.

Are Rental Properties Good Investments?

Good question. Buying rental property as an investment can be profitable, provided you have researched the market well, and keep your property in good shape. You can put any uneasiness you have about:

• is owning rental properties profitable? or
• what is the average profit on rental property?

by using the 2% rule.

What is the 2% rule? Basically, it’s a rule of thumb for calculating the rent-to-price ratio when buying rental property. Let’s say you plan to buy rental property in Toronto, a rowhouse for $950,000 with 20% down. That gives you a mortgage of $760,000 and monthly payments of around $4,244 for 25 years at current interest rates. Following the 2% rule, you’d need monthly rental income of 2% of the purchase price, $19,000. 

That’s what makes the 2% rule difficult to apply in cities with high housing prices. On the other hand, if your goal is to offset the cost of a principal residence, renting your townhouse through Airbnb, or leasing a secondary suite and selling when your home appreciates, could cover most of your expenses and give you a profit.

Deducting Rental Income From Taxes

Rental income offsets mortgage payments for income tax purposes. Income property owners deduct a share of property taxes, insurance and utilities, legal or accounting services, advertising, or fees to find renters and materials (but not labour) for minor repairs, like fixing plumbing. Capital appreciation on your home is deductible, but you may have to pay it back if you sell. 

Legal Advice for Buying Rental Property

We know you have questions to ask a lawyer when buying rental property. Before you sign any agreement of purchase or sale for an income property or renovations, show it to an Axess Law real estate lawyer in Ontario. We have lawyers near you who can review your agreement’s terms and conditions for errors, omissions, or clauses that could trip you up legally later.

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