Finance Your First Investment Property
I was recently on a weekend trip and while on the plane I listened to The Canadian Real Estate Investor podcast which was talking about different ways to finance your investment property. There are many Canadians who value owning property, not only as a place to live but also as an investment. Real estate offers stability and there is room for growth to diversify and build wealth.
The financial aspect of acquiring an investment property can be a big barrier which stops people and keeps them in analysis paralysis. Some questions to ask are: Where do I find the money and finances needed? What strategy do I use?
There are a variety of strategies one can use, and I will just briefly mention some of them. It is important to recognize that no matter which strategy you decide will work best for you, there will be sacrifices.
House hack: A way to get home ownership without getting home poor. Live in a place you where you can rent some of it out (bedrooms or a suite). This does require you to live with tenants and/or roommates, but it allows you to put less down and live on the property while renting out other rooms or parts of the property. Some types of properties include those with additional rooms or separate units (ex. multifamily properties). These are properties that can be created, and you do not necessarily need to buy them that way.
BRRRR strategy: Harder to do now, but it can be a way to get rental income but also increase value. The key to this strategy is that you need to have a good plan that works and you need to be aware of market risks.
B: Buy a rental property that meets your investment criteria. Need to have it undervalued (example: need a cosmetic or a full renovation), something you can improve and that you understand those numbers.
R: Rehab. Prepare and renovate it.
R: Rent it out. Ideally rent should be more than mortgage payments and expenses.
R: Refinance. Use rental income and home value appreciation to finance the next deal. Ask the mortgage broker before you do the cash out refinance. Need to know where you are going to invest it as you do not want to pull too much money out.
R: Repeat it. Continue to do the method on another property.
With any of these strategies you still need to have money to do it and be approved for a mortgage. People will invest in your deals if you are good at doing them, but the easiest way to do your deals at the beginning is to use your own money. However, saving up for a down payment can take many years. There are many ways to save money to help get the down payment.
RRSP: can withdrawal up to $60,000. Don’t need to pay tax if you put it back into your RRSP within 15 years.
TFSA: can withdrawal without paying tax on the money, but need to wait till following year to put the money back in.
FHSA: good to start the account right away as your contribution amount starts once it is open. Funds can be transferred to an RRSP or a TFSA. Can withdrawal without tax if it is going towards a down payment.
Other investments accounts.
Family or friends.
Get a co-signer to help approve you for a mortgage for various reasons.
Who can be a co-signer? Anyone. It is a large responsibility, so usually just close family and friends who are financially fit. Need to have a solid income and a strong credit score to prove they could pay the mortgage payments if they are not being paid. You can remove the co-signer later down the road.
I hope this blog piqued your interest and made some wheels turn! Have a listen to The Canadian Real Estate Investor podcast to learn more!
Danielle Westwood, Head of Investor Engagement
