An investment (rental) property can be an excellent option for generating additional monthly income. It can also grow your wealth over time if done correctly.
This strategy has multiple options and outcomes that can benefit you:
- Supplementing income now and boosting pension in the future create more financial freedom.
- Allowing you to buy your dream retirement home now and rent it out until you are ready to use it.
- Increase monthly cash flow for potential expenses beyond retirement savings.
- Utilize a multi-unit home (such as a duplex) by renting out one of the units.
Buying a rental property comes with different qualifying criteria and mortgage product options than traditional home purchases. Before you purchase a rental property, be aware that:
1. The minimum down payment required is 20% of the purchase price. Also, the funds must come from your savings. You cannot use gifted funds from an immediate family member. Another option is to utilize the existing equity in your primary residence and refinance for the cash to purchase your rental or investment property. Be sure to factor in funds for closing costs, potential repairs, and unforeseeable maintenance.
2. A portion of the rental income can be used to support the mortgage. Some lenders will allow you to use 50% of the rental income towards the total income amount. Others may allow up to 90% of the rental income and subtract your expenses.
3. Interest rates usually have a premium for rental property mortgages. This premium can be anywhere from 0.10% to 0.25% on a regular 5-year fixed rate.
Rental properties can be a great way to supplement income and make the most out of your retirement. It can offer you the monthly cash flow and will have the ability to sell the property in the future. The sale of a rental property will be subject to capital gains tax. Your accountant will help you with that aspect if you decide to sell in the future.
Lastly, it is essential to maintain a cost-effective calculation. These calculations involve the cost of your investment and consider maintenance amounts. You will compare the result to current rental prices to be sure it is a profitable investment before purchasing.
If you are planning to purchase an investment property, be sure to reach out to your mortgage professional to understand the requirements and discuss your options.