What yield do you need to buy to let?

Buy to Let

Buying an investment property is a fantastic way to create wealth and build your capital up. In Canada, and throughout the world, this is a popular technique to improve your net worth. You need to make sure you’re making the right property choice to ensure you turn over a profit from your original down payment. This will depend on a number of factors we will discuss in the following article. The idea of taking a leap into the relatively unknown can be overwhelming. By following these tips however, you can take a bit of the pressure off yourself and focus on what matters, the investment.

1. A guide to down payments for mortgages on rental income properties.

The down payment will depend on a few factors, the first, is the number of units in the building you want to purchase, the second is the purchase price and the third is whether you live in the building or not. If you reside in a building of four or less units, your down payment will be reduced to 5 to 7,5% as long as the purchase price isn’t over $1,000,000. In the case you don’t live in part of the investment property, or the property is larger, the down payment goes up to 20% as it’s considered a commercial property. A good way to find the perfect property is to use a good search engine, allowing you to filter by location, price, size etc.

For example, if you’re searching for an investment property to do rentals Montreal, simply search by location and in just a few clicks you can compare hundreds of different listings. Use these tools to speed up your search and find the property with a down payment that fits your budget.

ChaoTechin

ChaoTechin, Canva.com

2. What is rental income and how can I calculate it?

Your Gross Rental Income is basically the money you will make from your property once it’s rented out before deducting any costs that may incur. It’s easy to calculate as you only need to multiply the monthly rent charged by 12, as long as the property is occupied for the whole 12 months of the year of course.

To get the Net Rental Income, you must deduct your expenses. These usually are insurance expenses, your mortgage payments if you have one, property tax, the new washing machine you had to buy when the old one broke…. Anything related to the property that eats into the income it generates. Your Net Rental Income should of course ideally be the largest possible, the bigger the income the better the investment.

You can also create income from a rental if the property increases in value over the years. For example, if you purchase a property in 2022 for $500,000 and the market price increases over 4 years, by 2026 you sell it for $550,000 making a $50,000 profit. This is difficult to calculate of course as it totally depends on the market situation. If the market crashes, the value of your property will significantly reduce.

Luckily this doesn’t tend to happen too often, and real estate investments are considered to be one of the most stable forms of placing your money.

Max Vakhbovych

Max Vakhbovych, Canva.com

3. What should you be earning from your buy to let in Canada?

Most banks will offer a mortgage for property purchases as long as you can demonstrate a stable income. The amount you can borrow will depend on how much you earn. Whereas banks tend to allow a lower debt-to-income ratio for living in residential property they tend to be a bit stricter with commercial properties. The main reason being people usually will get rid of their 2nd property first, if times get tough, so the risk for the mortgage is greater for them with commercial properties.

The debt-to-income ratio for commercial properties in Canada is usually 45% compared to 36% for primary living in residences.

Anatoli Igolkin

Anatoli Igolkin, Canva.com

 

4. Where are the best areas for an investment property?

The most important thing to remember when purchasing a property is location, location, location as they say! You want an area with plenty of residential buildings, good schools, businesses, which will mean you’ll always have plenty of interested tenants. If you’re considering letting your property on Airbnb, consider proximity to tourist attractions, beaches, or even airports. These are some of the main points that experts keep in mind when placing their money.

Hopefully this guide will help you to figure out whether the investment property you have your eye on is a good or bad idea. Remember no investment is without risk, but if you do it right, you can increase your net worth in a relatively straightforward way. At the very least we hope this has given you a few ideas to start your search!