Monthly Mortgage Newsletter - August 2020

So, you are looking to purchase a second property! Congratulations! This is a great opportunity for you to expand your financial portfolio and ensure stability for the future. However, before you launch into this purchase there are a few things you should know, depending on which type of second property you are looking to purchase.

Second Property with Intention to Rent 

Buying a property for the purpose of renting it out to someone else comes with different qualifying criteria and mortgage product options than traditional home purchases. 

Before you look at purchasing a rental property, there are a few things to consider:

1. The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else.
2. Only a portion of the rental income can be used for the qualifying and determining how much of a mortgage you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income while subtracting your expenses. This can have a much higher impact on how much you can afford. 
3. Interest rates usually have a premium on them when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate. 

Vacation Property 

While vacation properties are not always the best investment, they are popular options for people who want to get away from it all! If you're inclined to head down that road, buying a vacation property is essentially like purchasing a second home. The minimum down payment is the same at 5% and you have to go through the same processes as your first mortgage. You would also need to have the same insurance premiums as with a regular home.

If you are considering buying a unit within a hotel as a vacation spot (known as "fractional ownership"), it can be difficult to get financing. 

It is important to note that if there is any mention of using your vacation home to provide rental income, you would need to put 20-25% down and it will be treated like an investment property.

Secondary Property 

Most people are trained to stay out of debt and don't tend to consider using the equity in their home to buy an investment property, but they haven't realized the art of leveraging. If you're using equity from your primary residence to buy an investment property, keep in mind that the interest you're using is tax deductible. Consider that you're buying an appreciating asset, and if you put a real estate portfolio and a stock portfolio side-by-side, they don't compare.

Who is a good candidate? 

You might be surprised to learn that you don't need to make six figures to get in the game. Essentially, you just have to be someone who wants to be a little smarter with their down payment. Before taking on a secondary property, it is important to remember that the minimum down payment is the same as with a property for rental and will be 20 or 25% of the purchase price. Rental income from the property can be used to debt service the mortgage application, but do bear in mind that some lenders will have a minimum liquid net worth requirement outside of the property. Also, if you do eventually want to sell this property, do note that it will be subject to capital gains tax. Your accountant will be able to help you with that aspect if you do decide to sell in the future.

When it comes to purchasing a secondary property, whether for investment or rental or vacation, it can be a great opportunity! However, do note that most lenders will limit the number of mortgages in a portfolio. If this is only property number two or three, you won't have any concerns, but as you expand your portfolio you may run into limits at five properties (at which point you would be considered a commercial file).

A mortgage broker can work with you and may even be able to find options to increase the number of investment properties should it become necessary. 

So, you are ready to sell your home! Whether you are up or down-sizing, selling your home can feel like a large undertaking - but don’t worry! I have put together some things to know before you sell to make the process as smooth as possible.

Improve Your Curb Appeal: When it comes to selling your home, first impressions matter. If a potential buyer pulls up to see overgrown weeds, clogged gutters or cracked concrete, they may have a negative first impression of the home, making it harder to impress them once they are inside. Attending to landscaping and any outdoor maintenance or repairs will go a long way in making your home more appealing. A pressure wash and new coat of exterior paint can also do wonders to give your home a facelift!

Get Rid of Clutter: In addition to updating your homes curb appeal prior to sale, you also want to ensure that you are de-cluttering your space. Removing personalized photos, collectables, memorabilia and other knick-knacks will help open things up and allow potential buyers to envision their own belongings in those spaces. While major renovations are not necessary, a fresh coat of paint and managing any minor repairs will also help to ensure the best first impression!

Set a Reasonable Asking Price: One of the most important aspects for the successful sale of your home is to price accordingly. Even though it can be difficult, when selling your home it is vital to avoid emotional decisions or anchoring your listing price to

your home's previous value. In order to achieve the best asking price for your home, it is best to study the market and enlist the help of a real estate agent who can ensure you get the most value from the sale. 

Choose the RIGHT Real Estate Professional: As mentioned, a real estate agent can help you maximize the sale of your home by working to get you the best asking price and help you walk through the sales process. To ensure you have the best realtor on your team, there are two things you can do. The first is to ask your mortgage broker if they have any realtors they recommend as we work with realtors regularly. I would be happy to set up a call with you and discuss your options! Once you have a realtor in mind, it is best to conduct an interview to ensure they are the right fit for the job and that their interests align with yours. 

Understand the Costs: Before you get to the point of reviewing a purchase offer, you should have a reasonable understanding of potential gains (or losses) within your acceptable price range. To do this, you need to understand the costs of selling your home, which include: 

• Real estate sales commissions
• Closing fees
• Title charges
• Transfer and recording charges
• Additional settlement charges, if applicable
• Debt obligations related to existing mortgages

Buying a home is one of the largest investments you will ever make! In order to make your home hunting experience the best it can be, there are a few key mistakes to avoid and be aware of before you start your journey:

1. Not Getting Pre-Approved: One of the most important aspects of buying a home is the mortgage application and approval process. No matter what time of home you are looking for, you will need a mortgage. One of the biggest mistakes when it comes to the home-buying process is NOT getting pre-approved prior to starting your search. Getting pre-approved determines the actual home price you can afford as it requires submission and verification of your financial history to ensure the most accurate budget to fit your needs.
    
2. Not Setting or Following a Pre-Determined Budget: Another mistake that people make when home-hunting is not setting, or following, a pre-determined budget. It can be tempting to start looking at the top of your budget, or even slightly over, but when you consider closing costs and the long-term financial responsibility of home ownership, it is best to avoid maxing yourself out. Getting pre-approved will help determine what you can afford, as well as making an appointment with your mortgage broker to determine your financial situation and the best options for you now, and in the future.
    
3. Not Hiring a Real Estate Agent: Your mortgage broker and your real estate agent are two of the most important members of your homebuying A-Team! In today’s competitive real estate market, it can be very difficult to acquire property without the help of a realtor. One reason is that realtors can provide access to properties that never even make it to the MLS website! They can also gain access to information about homes that may come onto the market, before a listing is even signed. Most importantly though, a realtor understands the ins-and-outs of the home buying process and can tell you how to be successful in your endeavors to purchase a home by guiding you through the process from the first viewing to having your bid accepted.
    
4. Focusing Too Much on Aesthetics: While we understand that bad interior design can really affect the perception of the home, you don't want to be blindsided by it. At the end of the day, aesthetics can always be updated! Giving up the perfect price or location or size for a few aesthetic details (such as paint color, flooring, or even outdated appliances or light fixtures) is one of the biggest mistakes people make! Most homes have incredible bones that only need some minor tweaks to become your perfect space.
    
5. Not Thinking Ahead: What you want and need in a house today, could be very different from what you want and need in a house in the future. It is important to be able to look ahead - are you planning on having children? Are your parents getting older and in need of a retirement space? These are things that are good to take into consideration when buying a new home. Buying a home isn’t a permanent decision as you can always sell your home later on if it doesn’t work for you in the future, but it is almost always easier to plan ahead so you can grow with—and not out of—your home whenever possible.

If you are looking to purchase a new home, whether your first space or a step-up from your current living situation, I would be happy to help! Please don’t hesitate to reach out to set up a virtual appointment and discuss your mortgage options, pre-approvals and everything you need to know BEFORE you get started.