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Mastering the Art of Financing Investment Properties in Ottawa

When it comes to real estate investments, Ottawa offers a promising market with lots of opportunities. Whether you’re an aspiring property investor or a seasoned expert, it’s essential to understand the financing options available. This article breaks down the types of financing for investment properties and how to know which one is right for you.

Benefits of Investment Properties

Investment properties, often residential or commercial real estate assets, are usually purchased to generate income or profit. Investors can rent out these properties to tenants, providing the owner with a steady income stream. The benefits of investment properties in Ottawa include:

  • Income Generation: Rental income serves as a way to cover mortgage payments and property maintenance, but it can eventually become a stable source of cash flow as well.
  • Asset Appreciation: Over time, property values can appreciate, increasing the overall worth of the investment. 
  • Tax Benefits: Deductible expenses, such as mortgage interest, property taxes, and maintenance costs, can lead to significant tax benefits.
  • Control and Flexibility: Investors have control over property management, allowing for decision-making and customization based on their investment goals. 
  • Physical Asset: Those who purchase an investment property have a more tangible perspective of what they have purchased compared to stocks or bonds.

Mortgages, Loans, and Financing Options

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Navigating real estate financing strategies is crucial to securing an investment property. There are different Ottawa investment property mortgages and loans that can empower investors like you to make informed decisions that align with your goals. Here are some options to consider:

Residential Mortgages

Residential mortgages are loans specifically designed for purchasing residential properties, including single-family homes, townhouses, and condos. These mortgages typically offer various term lengths and interest rate options. Here are some requirements to keep in mind:

  • Investment properties must be residential buildings with four units or less. There may be exceptions for properties with up to eight units in specific circumstances.
  • If you don’t intend to live in one of the units, the property is considered non-owner occupied. This means lenders would generally require a down payment equal to or greater than 20% of the purchase price.
  • Your property is considered owner-occupied if you intend to live in one of the units. This case may allow for lower down payments, usually 5% to 10%

Insured Mortgages

There are three default insurers available to buyers who have less than the 20% down payment needed for an investment property. These include Sagen, Canada Guaranty, and Canada Mortgage and Housing Corporation (CMHC). Each offers similar terms and has the same cost to the borrower. 

For example, CMHC insurance protects lenders against default, making it easier for buyers to qualify for a mortgage with a lower down payment. The following conditions apply:

  • The investment property must have four units or less.
  • The property’s purchase price must be less than $1 million.
  • The property must be owner-occupied (you must live in one of the units).

Multi-Residential Financing

Multi-residential financing options cater to investors looking to purchase properties with five or more units, such as apartment buildings. Financing for these properties may involve commercial loans or specialized mortgage products tailored to multi-unit investments.

Generally, qualifying for commercial mortgages for this type of investment property can be more complex. They often involve higher interest rates of all the financing options and require a minimum down payment of 20% of the purchase price.

In some cases, specialized mortgage products, like those with CMHC, might allow you to put down less than 20%, but this is evaluated on a case-by-case basis. In addition, CMHC is the only insurer that finances multi-unit properties. While they can finance up to 95% of the value of a multi-unit, CMHC generally finances 85% of the value or less. 

Another advantage of CMHC financing for a multi-unit property is the fact that they have programs offering an amortization of 40 and 50 years on qualifying properties. As a rental owner, this helps significantly with cash flow. 

Private or Alternative Mortgages

Alternative or private mortgages offer financing solutions outside of traditional banks or lending institutions. These mortgages are typically provided by private investors or alternative lenders and may be suitable for borrowers with unique financial situations or credit challenges. However, they often come with higher interest rates and fees.

These mortgages can also be leveraged as repositioning loans. For example, if you are buying a property with the intent to renovate, increase the value, and get new tenants, you may only seek a one or two-year loan term with higher interest. This is because alternative or private lenders generally have a higher willingness to allow property owners to stabilize the asset. After increasing the rental’s value, you can then move to a better-rate mortgage with the completed project.

Credit and Financial Preparation

The flag of Canada features jigsaw puzzles with the words - Credit and cities

When financing investment properties in Ottawa, assessing and preparing your credit and financial standing is crucial. Lenders will evaluate creditworthiness and financial stability when evaluating loan and mortgage applications, so a proactive approach to securing favourable terms can make a difference. Here are some things to consider:

  • Check Your Credit Report: Obtain a copy of your credit report from major credit bureaus and review it for errors or discrepancies. Disputing inaccuracies can help boost your credit.
  • Boost Your Credit Score: Take measures to boost your credit score by lowering credit card balances, paying bills on time, and avoiding new credit inquiries in the months leading up to applying for a mortgage.
  • Build a Strong Financial Profile: Lenders assess various financial factors, including income, employment history, debt-to-income ratio, and assets. Strengthen your financial profile by maintaining stable employment, minimizing existing debt, and accumulating savings for a down payment and closing costs.

Negotiating the Best Financing Terms

Securing favourable financing terms will help maximize returns and minimize costs when investing in Ottawa’s real estate market. With a professional mortgage broker who understands the market and can help you navigate these waters effectively. When you work with the Chris Allard team, we connect with you to:

  • Compare Lenders: We’ll shop around and compare offers from multiple lenders to leverage competition and negotiate favourable terms, including interest rates and loan terms. 
  • Seek Flexibility: Once you have found a loan that suits your needs, we’ll negotiate for flexible loan terms that align with your investment strategy, such as adjustable-rate mortgages, interest-only payments, or prepayment options, to optimize cash flow and mitigate risks.

How to Know Which Financing Option is Right for You

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Selecting the most suitable financing option for your investment properties in Ottawa requires careful consideration of various factors.

First, assess your investment strategy. Consider factors such as investment horizon, risk tolerance, and desired level of involvement in property management to determine whether a long-term mortgage, short-term loan, or alternative financing aligns with your strategy. Here are some other factors to keep in mind:

  • Your Financial Position: Check your credit score, income stability, existing obligations, and available funds for a down payment to determine your eligibility for different financing options and the amount you can afford to borrow.
  • Market Conditions: Stay informed about Ottawa’s real estate market trends, interest rate fluctuations, and lending criteria to identify financing options that offer competitive terms and favourable conditions for investment properties.
  • Consult with Experts: Seek guidance from a mortgage broker who can provide insights into available financing options, potential risks, and opportunities specific to the Ottawa market and your desired investment property.

Reaching Out to the Experts

Sound financial planning and due diligence are paramount when securing the right financing options for your unique situation. If you’re unsure where to start, connect with the Chris Allard Team today. With years of experience in the Ottawa mortgage industry, we can help you find the best solutions for your investment objectives.

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