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Mortgage considerations for real estate investors

As an investor you follow a different approach than the average home buyer and you are subject to a different set of rules. Where do you start when it comes to financing?


You should first consider your primary objective. For example, you may want your investment property to create an ongoing revenue stream by renting it for steady, monthly income. Or you may hope to benefit from rising home values if, for example, you plan to purchase a house, renovate it and resell it at a higher price.


What kind of property do you want?

Most, first-time investment property buyers tend to start with condos and single-family homes, however, multiplex units are generally more likely to be cash flow positive. With property, bigger is not always better because it likely means more taxes and more space to maintain — and the incremental rental income you’ll receive may not cover your additional expenses. You’ll also want to consider what types of properties are in demand for your purposes.


What is an ideal location?

To attract high-quality tenants, look for a property close to schools, hospitals, public transportation, businesses, retail, etc. Focus on neighbourhoods where demand for rental properties is strong and expected to remain so for the immediate future. Solid financial advice is also critical since buying an investment property means you should also consider financing methods. Most lenders have special programs to help purchase investment properties, but keep in mind that they are subject to different policies than if you were going to live in the home yourself.


What should I consider?

For investment properties, you will be required to make at least a 20% down payment. If you plan to buy an investment property, your primary residence may be a good place to start looking for financing. For example, if your home is worth more than your outstanding mortgage, you may be able to utilize some of the available equity. Depending on the amount of equity you have built up, you can borrow up to 80% of the value of your home to finance the purchase of an investment property.


Interest rates and qualification guidelines may be slightly different as well. A lender will be using rental income to help support the qualification for the mortgage.


 

Content provided by Naheem Ladha, naheem@mortgagesmatter.ca


 

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When and How can a Landlord enter their Rental Unit?

There are generally two different ways for a landlord to enter a rental unit, one is with notice the other one without notice. Sections 26 and 27 of the Residential Tenancies Act (RTA) apply. The times for entry are generally limited to between 8 AM and 8PM.


1. Entering without notice

The landlord is allowed to enter a rental unit without written notice only in the following cases:

  • Emergency, e.g. flood
  • The tenant consents to the entry at the door
  • The lease requires the landlord to regularly clean the unit
  • There is an agreement to terminate the tenancy (N11), or either party has given proper notice of termination, and the landlord wants to show the unit to a prospective tenant
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2. Entry with 24h written notice

The landlord can enter their rental unit with written notice for any of these purposes:

  • Repairs & maintenance
  • Entry for a lender or for insurance purposes
  • For a prospective buyer viewing the property
  • For an inspection to see if repairs are needed
  • Other reasonable grounds

Proper service of the notice is required. This means handing it to the tenant at the unit, sliding it under the door, putting it in the mailbox or posting it on the door. You have to list your reason for entry as well as the date and time window of the visit.

If your entry is being refused, document your attempts. Then call Rental Housing Enforcement 1-888-772-9277 to see if they can help you get access. If that fails, consider issuing a notice of termination based on substantial interference with your rights as a landlord, Form N5. The tenant then has 7 days to comply, after which you can file for eviction.

What to do when a tenant changes the locks? Under the RTA they are only entitled to do so with your consent. You have two options, either file form L8 with the LTB in order to obtain a key (or have the lock changed back), or serve the tenant with an N5 for termination.

Find more information on entering a rental unit on the LTB website

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The 3 Factors Responsible for Downtown Toronto Condo Prices

People often ask me "how is the market?". Apart from the fact that the single housing market is going nuts, the conversation quickly goes to condominiums, downtown Toronto condos that is. There has been an enormous influx of new listings in the 4th quarter of 2020, especially in the downtown core, where we saw over 200% more listings at the end of December compared to the previous year. Not surprisingly, prices had started declining at  that point. In January 2021, condo prices were down 8% compared to January 2020, February has shown them down 6% year over year. But what are the factors behind these figures?

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1. Students & other Renters
When looking at rental condos, students form a solid piece of the pie. The number of international students in Toronto is massively down, while domestic students have opted to live outside the city, mostly with parents, where they can quite easily do their learning online.
The story is similar with other renters. With city amenities mostly closed, the appeal of living downtown has drastically diminished. Rents outside the city are lower and a commute is not such a big deal for most, as we work from home anyway. And who knows if we'll ever go back to "normal" work-at-the-office hours.
Needless to say, vacancy in the downtown core is going up, rents moving downward (roughly down 20% as of now), leading investors to pull out of the market.

2. The Rural Appeal
Who wants to be stuck in a downtown condo during a lockdown?! Most entertainment venues are shut down, and there is simply nothing to do. Singles and families alike have turned their backs to the city to live in the suburbs or even in rural communities. Nature has regained broad appeal, being able to go outside for a walk is valued much more these days. Being trapped in a high-rise not so much. On top of that, with working at home, there is an increased need for space, something that condos often can't provide. Selling their apartment in the city has enabled many to purchase a single family property somewhere else.

3. The Air BnB Dilemma
For obvious reasons, short term rentals have been suffering. International travel is almost non-existent due to Covid and domestic travel is at least severely reduced. Nobody wants to visit a city where everything is closed, and there's hardly any business travel either. With such reduced demand for short term rentals, some property owners have tried to convert their apartments to long-term rentals. With rents spiraling downward, that didn't provide the desired results, so basically such properties were losing money and soon put up for sale.

Who doesn't like a story with a happy ending?! We're not quite there yet but experts point out that the Toronto condo market has already seen its low point and is now trending upward. With immigration slowly picking up this might well be true. New Canadians moving to Ontario and Toronto are expected to spark demand for condos once more.
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All About Rent Deposits for Landlords in Ontario

There are two types of deposits that you can ask for as a landlord in Ontario, the rent deposit and the key deposit. While the latter can only cover the actual cost of a key replacement, the rent deposit is limited to the amount of one month's rent (or 1 week's on a weekly rental). The deposit has to be used for the final rent period and cannot be applied to damages or other costs. You can also not ask for any other types of deposits like a damage or security deposit. The legally permitted deposit in Ontario is therefore not a security deposit as may be found in other jurisdictions, but simply a rent deposit.

This is a definite downside for landlords in Ontario. Without a security deposit you may be exposed to the hassle of chasing a tenant for damage caused to the property. Tenant screening becomes the most essential task for you as a landlord. Regular inspections of the premises will be you early warning system.

You have an obligation to pay interest on the rent deposit annually. The interest rate is based on the rent increase guideline. Instead of paying out the interest you are allowed to add it to the deposit. You can also ask for a top-up in cases where the deposit is lower than one month's rent.

For example if the initial rent is $1000, you would generally increase it after 12 months by the guideline percentage. Assuming that is 2%, then the new rent would now be $1020. Equally, the one month rent deposit of initially $1000 would bear interest at 2%, so your tenants deposit has now grown to $1020. You can also pay out the $20 but in practice this is rare. This way, the rent deposit usually lines up with the amount due for last month's rent.

The LTB has a Q&A section on the topic here.

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Tenancy Agreements – The New Standardised Lease Form

The new standard form of lease is now mandatory for use with most residential tenancies in Ontario. To avoid confusion right away, the new form carries the date (2020/12) and can be downloaded here. Filling it is pretty straight forward, but if you are uncertain, seek legal help. Most paralegals will be happy to assist.

The new form makes the process more streamlined for both landlord and tenant. The document tries to make all provisions easy to read and clear to both parties. Room for interpretation is generally removed so it provides for more legal clarity. For example, it is now much harder to include provisions that contradict the Residential Tenancies Act, thus reducing possible confusion and void clauses.
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One of the goals for introducing the standard lease was to make sure, landlords and renters understand their rights and responsibilities, and to reduce the need for Landlord and Tenant Board hearings to resolve disputes. We will have to see in how far that becomes a reality. The form is for use with single family homes, apartment buildings, condominiums and secondary units (e.g. basement apartments).

Topics such as rent discounts, rent deposit, key deposit, services & utilities, smoking etc are all covered in the form. This will help you to specify items that are included in the rent, e.g. parking, storage, utilities, AC etc. It also sets out the other parameters you are working within. Use the opportunity to go through every section with the new tenant, firming up the common understanding of the lease. Hopefully, this discussion will help to reduce the chance of future issues.

Use the below guide for further reference.