Investment Property Mortgage

Investment Property Mortgage

Ready to Invest in Your Future.

If this is your first investment property or you are adding to your existing portfolio, we can help you If this is your first investment property or you’re looking to add to your existing portfolio, I can help find the right lender and structure your mortgage to protect your investment.

What is an Investment Property Mortgage?

Buying an investment property requires a specialty mortgage. This customized mortgage requires a minimum of 20% down payment as it is non-owner occupied, meaning you are not living there. You can purchase an owner-occupied investment property such as a legal duplex. Because you shall live in one of the units, you can purchase it with as little as 5% down payment.

If purchasing a 3-4 unit property and residing in one of the units, you can purchase it with as little as 10% down payment.

Properties are also classified differently depending on the number of units in a building. If there is 1-4 units, it is still classified as a residential mortgage however if it has 5 or more units, it now becomes classified as a commercial mortgage.

Buying an Investment Property

The key to financing a rental property successfully is fully understanding how lenders calculate the property income and expenses.

It can be by deducting the expenses of carrying the rental mortgage from the income generated from the property, your debt load (from a lenders point of view) will often be unchanged.

This is compared to having the same income without the added expense of an additional property. This allows the average person with a decent income to purchase multiple rental properties.

Qualifying criteria differs between lenders and how they calculate these expenses. Here is a few:

  1. Rental Offset 
    Lenders usually offer rental offsets of around 50 – 70%. For example, a 50% rental offset means that 50% of your total rental income for the year will be used to offset expenses such as your mortgage payment, property taxes and utility costs. Lenders don’t offer 100% rental offset due to vacancies and other potential issues, such as unpaid rent. TDS with rental offset is calculated as follows: 

    TDS = (PITH* + Other Debts - (Rental Offset % x Rental Income)) / Gross Income

    *Note: PITH generally takes into account housing costs from all of the borrower's properties.

  2. Rental Inclusion 
    With this method, 50% of your annual rental income is added onto your actual income to qualify you. 

    TDS = (PITH + Other Debts) / (Gross Income + Half of Annual Rental Income)

    The final qualification method is based on a cash flow assessment, as income generated from the property is generally the primary source of repayment on the loan: 

  3. Debt Service Coverage Ratio (DSCR) 
    The DSCR is calculated as the Net Operating Income (NOI) from the property divided by the annual mortgage payments (principal and interest), where NOI is total income of the property less operating expenses. The DSCR ratio should ideally be over 1, meaning that the property is generating enough income to fulfill its debt obligations. The higher this ratio is, the easier it is to obtain a loan. 

    Net Operating Income (NOI) = Rental Income – (% Allowance for Vacancy and Collections x Rental Income) – Operating Expenses
    DSCR = NOI / (Annual Principal + Interest)

    When looking at the NOI, lenders will make sure the stated income and expense data are accurate, supported and reasonable. For instance, if the allowance for vacancies and collections is atypically low, a lender may substitute in higher “market” vacancy and collection rates. 
    Typical operating expenses subtracted from rental income include taxes, insurance, repairs and maintenance, utilities, and property management fees. 

Eva Neufeld brings over 20 years financing experience and has built a portfolio of 30 doors so she fully understands how proper structure is the key to buying an investment property.