Hi Friend,
I hope that you are doing well.
I get asked a lot of questions from new real estate investors who are looking to purchase their first rental property.
A question that I get asked on occasion is:
“How do I buy a rental property?”
When I was first starting out as a real estate investor over 7 years ago, I had a limited understanding of how to finance my first rental property.
With the knowledge that I have gained since then, I have gone on to purchase Oakville real estate, Hamilton real estate and Toronto real estate. Most importantly, I have been able to successfully finance all of these purchases.
There are different methods in which you can finance a rental property. However, the most important method in my opinion is the method in which you leverage your principal residence.
How to Leverage Your Principal Residence
Mortgage and financing rules are different depending upon which country you live in. In Canada, you were once able to leverage your principal residence to 80% of the Loan To Value (LTV).
Let’s look at an example to help illustrate this point:
Example
You own a home and the value of that home is $500,000.
You have an existing first mortgage on the home in the amount of $100,000
If you take 80% of the value of your home, you get a figure of $400,000 ($500,000 * 80%)
This means that if you get your bank or lender to place a ‘secure line of credit’ on your home, you used to be able to get 80% of the LTV.
Meaning that the maximum ‘loan’ that your bank/lender would be willing to place on your home would be $400,000.
So now, if you place a secure line of credit on your home, the maximum amount here would be $400,000.
However, you must also remember that there is a $100,000 first mortgage on the property as well.
All this means is that you subtract $400,000 by $100,000, which equals $300,000.
$300,000 is the amount of a secure line of credit that you would be able to get.
*Note: 80% LTV used to be the guideline in Canada. There have been recent mortgage rule changes implemented by the Federal Government which have changed this value*
What Does This Mean?
The bottom line as to what this means is that you now have $300,000 to invest in real estate. This $300,000 can be used as a down payment towards your first, second or third rental property.
Once you have figured out where your down payment will be coming from (you just have), you then have to obtain a 1st mortgage for your rental property.
All things being equal, mortgage brokers in Canada are able to grant multiple mortgages to an individual. The Big Five Banks in Canada, are limited as the the number of mortgages that they can issue to an individual. Therefore, the mortgage broker industry often services real estate investors who are purchasing multiple properties.
In Summary
Lots of new real estate investors stress out as to where to find the money to buy a rental property. For many of them that own a principal residence, chances are is that your potential down payment was sitting there all along. You just need to know how to uncover it, by properly leveraging your principal residence.
Happy Investing!
Neil Uttamsingh
ps: Remember! I am an experienced real estate investor and Licensed Realtor. I help new real estate investors like you purchase your first rental property. If you are looking to purchase Oakville real estate, Hamilton real estate or Toronto real estate, send me an email at NEIL@FIRSTRENTALPROPERTY.COM and I will help you get started!
