Rental Mortgage
“Over 90% of all millionaires become so through owning Real Estate”
- Andrew Carnegie
Maximum Loan To Value Ratios For Rental Property Mortgages
Up to 95% LTV for buildings with 1– 2 units
Up to 90% LTV for buildings with 3 – 5 units
Up to 85% LTV for buildings with 5 or more units
Rental property mortgage rates for buildings with 4 or less units are the same as single family home mortgage rates.
A 100% rental offset is available for rental properties with loan to values of 75% or less.
How To Buy Multiple Rental Properties
Have you ever wondered how an individual (or a couple) who earns $60,000 per year can afford to buy 3 properties worth over $675,000?
The key is how the mortgage lenders calculate the rental property income. Some lenders will take 50% of the rental income and add it to your annual income and then include the full carrying costs of the new mortgage into your debt. Other lenders will use what is called an 80% rental offset. Using this method, the carrying costs are reduced by 80% of the rental income. The way the rental income is treated is what will make a huge difference when trying to obtain multiple mortgages.
Here is an example of the different results obtained using the two different methods.
Our Client:
$60,000 annual salary
$1400 per month in primary residence carrying costs
$1400 per month in carrying costs of the rental property
$1400 per month charged in rent
Max TDS (Total Debt Service Ratio) = 42%
In this case our client could service $2100 per month in debt
The Properties:
All properties have a value of $225,000 and were purchased with 5% down
The interest rate used for all mortgages is 5%
The amortization period for all mortgages is 35 years
A CMHC premium of 3.15% was added to the mortgage of the clients primary residence
A CMHC premium of 6.90% was added to the mortgage of the clients rental properties
50% rental income added to income
The clients income using the 50% rental income will go up to $68,400 per year. The clients monthly expenses will rise to $2800 per month. This debt load exceeds the $2394 per month permitted by his new TDS ratio (using the higher income amount). Using this calculation this client would not qualify for a rental property even with the additional income.
How is an 80% rental offset calculated?
Principle + Interest + Taxes – 80% of Gross Rental Income = X
So in our above case it would be:
$1400 – $1120 (80% of $1400) = $280 (will be added to the monthly debt load)
If X is less than the carrying costs, the remainder is added to the debt. If X is greater than the carrying costs, the remainder is added to the income!
The clients income would remain at $60,000 per year. The clients monthly expenses rise to only $1780 per month, not $2800! Not only would the client qualify for a rental property, they would actually qualify for 2 rental properties!
The clients monthly debt obligations of $1960 (primary residence ($1400) + rental 1 ($280) + rental 2 ($280)) is less then his maximum total debt service ratio of $2100 per month.
If we assume that the properties are kept for the full amortization period (35 years) and that the value of the home does NOT increase or decrease in value over the 35 year period the annual rate of return on your investment would be 8.5%!
The above is an example of how a person (or a couple) earning $60,000 per year can obtain 3 properties (1 primary residence and 2 rental properties) with only 5% down. Obviously no two financial situations are identical. Factors such as the interest rate, income level, outstanding debts, value of the homes and property taxes will have an impact on the number of homes you may purchase.
Please feel free to call me if you would like to see if you would qualify for the purchase of rental properties.