Are you buying a home and want to convert your home to a rental property?
Many clients buying a new home dream of keeping their existing home as a rental property. Qualifying for another mortgage plus maintaining the current one is more difficult with the rule changes.
Consumers view things that if my mortgage and property tax payments are covered by rent, it shouldn’t be an issue. Lenders do not take the whole amount of the rent collected when qualifying for the new mortgage.
Lender choice is key as it affects your buying power immensely. Here are a couple of options:
Rental Property Cashflow VS Rental Income Add-back
Lenders don’t make available to the public is how they treat the potential rental income or how they look at the liabilities.
There are two different approaches that are the most commonly used.
Rental income add-back: The lender will add a percentage of the rental income to the client’s income when qualifying however they factor in the entire property debt. This includes the mortgage payment, property tax, vacancy and more.
Cashflow Analysis: This method allows the lender to deduct the rental property expenses from a percentage of the property’s rental income. In 99% of the cases, you will want to work with a lender that offers a cash flow analysis and not the add-back option.
The cashflow analysis allows the majority of the liability to be offset by the rental income even if the rent does not cover all of the expenses. It will cover the majority and the right lender will allow the shortfall to be added to the liabilities. If there is extra income after the expenses are accounted for, the extra income can be used to help you qualify.
Which lenders use which policy?
Chartered Banks generally use the add-back of the rental income and the full debt when qualifying for another home purchase. They also want to see that you have significant cash reserves or a net worth per property.
Monoline lenders who source their mortgage business through the mortgage broker channel use the best cashflow calculations available. They will take 80-85% of the rent collected confirmed by an appraiser and subtract the property expenses. If there is more income to debt, it wipes out all the mortgage debt payments, and the extra positive cashflow is added as income.
This calculation allows consumers to qualify for a little higher purchase price and allowing them to keep their home as an investment property. The best part is you have a tenant pay down the mortgage balance over time and capitalize on the appreciation and tax benefits.
If you have equity in your home and want to buy another property but don’t have the down payment. We can refinance your existing home to 80% of its appraised value. This new mortgage will pay out the existing one and any excess cash can be used for the down payment. When refinancing, it’s a great idea to extend the amortization out to 30 years so that the principal and interest payments are low making the cashflow better.
Other things to consider:
Property management: Who is going to take care of this rental property? You or are you going to have a property management company handle everything for you for a fee.
Property Insurance: You will need some changes to your current homeowner’s insurance policy to convert it from an owner-occupied home to a rental property. There are some very important clauses you will want to be included so consult with your insurance advisor for more information.
Tax: Working with a good tax accountant who is familiar with investment properties is key. There are certain expenses that can be used at tax time.
If you’re looking to buy a new home and want answers regarding keeping your current Edmonton home, let’s schedule an appointment so you know exactly where you stand.