Despite COVID-19’s negative impact on our economy, one industry that has remained strong is Canadian real estate, making rental property investment one of the safest and most profitable investment assets. In 2022 the demand for housing reached unprecedented highs.
For investors wondering how to enter the rental property investment market, here are three areas to consider: qualifying for a mortgage, investment/investor criteria, and investment property types.
Rental property investment mortgage qualifications
Although there are many factors that influence a lender’s decision to grant a mortgage, two of the most important are your debt to income ratio and your FICO score.
Debt to income ratio. Mortgage lenders consider several factors before agreeing to grant loans, and the debt-to-income ratio plays a role. Simply put, it’s the amount of money you owe versus the amount of money you earn. If you’re in a high-income job and have very few debts, you’re in an excellent position to be granted a loan at a reasonable interest rate.
Credit Scores in Canada provide a numeric range called a FICO score. FICO scores range from 300 (low) to 900 (excellent). Lenders want to see evidence that you have a history of paying your bills on time and access your credit score for your credit history. Although each lender has specific criteria, typically, anything between 600-650 is considered a good credit score, which means you have a history of regular payments and a decent debt to income ratio.
Things to consider before you buy a rental property investment
You’ve no doubt heard the expression “begin with the end in mind” – the same concept applies to real estate goals
What’s your exit strategy?
What do you want your real estate investment to do for you? I once attended a motivational seminar where the speaker said that most people fail to realize their goals because they set vague goals. Set specific, realistic goals within a reasonable time frame, then work backward. Rather than saying – I want to own millions of dollars of investments, reframe it to I want to own two single-family residences, each worth $500,000, that make at least $1500 per month cash flow within four years.
What area is best for you?
There are many options for real estate investments throughout Canada. To see which area meets your criteria, run a market analysis. A market analysis provides detailed information about the economy, employment, environment, future development conditions, proximity to universities, colleges, schools, main arteries, and amenities.
What property is best for you?
Which type of property are you most comfortable managing? Single-family dwellings are a great real estate investment that attract families who want to stay put. Student residences, short-term or vacation properties, offer excellent income, need to be centrally located or situated in a desirable neighbourhood, and require a well-oiled maintenance team to keep the operation running smoothly. Condominiums offer excellent entry-level pricing and attract singles, couples, and those who enjoy the convenience of having work and amenities within walking distance but may have higher turnover rates.
Do you know the housing market in your area?
Will the rental property you want to buy cover all your expenses every month (loan, interest, taxes) and still cash flow? Don’t fall in love with a property, neighbourhood, or price until you’ve crunched your numbers. If it cash flows, it’s a good investment. If it doesn’t walk away.
Once you’ve investigated, it’s time to look at how/where to invest. Here are typical entry points for Canadian real estate investors.
Types of entry point rental property investments
Principal residence property investment or house hacking is an entry point for many Canadian investors. Since house hacking is one of the few real estate investments you can buy with a mere 5% down payment, the idea is to pay off your mortgage and grow your wealth while renting a room/rooms or a suite in the house to tenants. The tenants contribute to paying off your mortgage while your home appreciates.
Multi-family property investing of four or fewer properties qualifies under a residential mortgage. Many investors begin their real estate journey by purchasing a duplex, threeplex, or fourplex, living in one of the units, and renting out the other units to tenants.
Short-term rentals can offer an amazing opportunity to diversify your income and offer high potential revenues. Short-term rentals include Airbnb rentals of a room/rooms in a house to entire suites/condos/houses and rooming houses. Although short-term rentals are considered a safer investment than a single-family dwelling, it’s necessary to investigate the legalities of running this type of business in your area/property and know the organization and maintenance involved first. Short-term rentals are attractive because, unlike a single-family dwelling with no income when vacant, short-term rentals always have one or a few tenants paying rent even if another tenant moves out.
The Covid influenced emerging Canadian real estate trend in 2021-2022 is to work remotely, leaving expensive cities for smaller, more peaceful centres or the suburbs. The 2021 Canadian census report supports this population migration trend. Intertwined with migration trends is a digital technology which has facilitated remote work, increased productivity, and promises employment increases in Alberta’s digital, scientific, healthcare, and manufacturing sectors. Outlier communities such as smaller cities within a 50-100 km radius of larger centers offer Canadian investors lower prices and a higher standard of living.
Vacation/Cottage Country Investing – As fewer people are willing to travel abroad, people look to cottage rentals for a change of scenery. Even if you choose not to rent, a cottage in a desirable location that is well maintained will appreciate over time, making it an excellent long-term investment. Overall, as the economy continues to recover, Canada’s housing market is expected to keep pace, making real estate a safe and profitable investment strategy for years to come.
Do you have investment tips you’d like to share with me? I’d love to hear about them [email protected]
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