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How to buy an investment property as a first-time home buyer in Canada

March 15, 2024
5 mins
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The prospect of diving into the world of real estate investment can be both exciting and overwhelming, especially if you’re a first-time home buyer in Canada.

While the process may seem complex, strategic planning and careful consideration can help you make a well-informed decision in order to maximize your return on investment.

In this article:

Investment property vs. Primary residence

An investment property is purchased with the primary purpose of generating income and building wealth. These properties are not intended for the owner's personal use, but rather for renting out or selling for profit. On the other hand, a primary or principal residence is the main home where you or your family lives.

An investment property can take the form of cottages, condos, single-family homes, duplexes, and multi-unit buildings. With duplexes and multi-unit buildings, you have the option to live in one unit while renting the other(s).

Responsibilities of an investment property owner

While the idea of being a landlord may be tempting, there can be big risks and responsibilities involved. Some of these include:

Market fluctuations: Real estate markets can be volatile, with property values fluctuating due to economic trends, supply and demand, and other factors.

Vacancy and loss of rental income: There may be periods when your property is unoccupied, leading to a loss of rental income. It’s important to factor in potential vacancies when calculating your expected return.

Property depreciation and maintenance: Over time, properties can depreciate, or lose value, due to wear and tear, outdated features, or changes in the neighbourhood. Meanwhile, maintaining your property can be expensive and/or labour-intensive.

Interest rate changes: If you have a mortgage on your property, changes in interest rates can affect your monthly payments and the overall cost of the loan.

Legal issues: As a landlord, you may face legal issues related to disputes with tenants, such as non-payment of rent, property damage, or eviction proceedings.

Compliance with local laws and regulations: Property owners must comply with all relevant laws and regulations, including building codes, zoning laws, and health and safety standards.

Securing appropriate insurance coverage: Your property must have sufficient insurance coverage to protect against risks such as fire, flood, or liability for accidents.

Capital gains: When you sell your property, you may be liable for capital gains tax on any profit you make above a certain threshold. It’s important to factor this into your financial planning.

Understanding your financial position

Before purchasing an investment property, take a hard look at your financial situation. Assess your credit score, evaluate your current debts, and determine your budget for the investment, including your down payment.

Typically, you’ll need a minimum credit score of 680 to qualify for investment property financing. Unlike purchasing a primary residence, which requires a minimum down payment of 5 per cent, for an investment property you’ll need at least 20-25% of the purchase price. So, if you’re considering a million-dollar property, you’ll need $200,000 - $250,000 upfront.

Knowing what you can afford will help you set realistic expectations and narrow down your property search.

Related: How to dispute your credit score in Canada

Financing options and mortgage types

When it comes to financing an investment property, first-time investors have a few options. First, you could save enough cash to outright purchase the property. However, given today’s real estate prices, many investors opt for a traditional mortgage or investment property mortgage.

Traditional mortgages (especially when an owner-occupied property) are easier to qualify for, carry lower down payment requirements, and typically have lower interest rates and longer amortization periods. Whereas, an investment property loan has a shorter term and carries a higher interest rate, along with higher down payment requirements. They’re often more difficult to qualify for, with investors needing a higher credit score and lower debt-to-income ratio in order to qualify.

OPM, or Other People's Money, plays a significant role in real estate investment by providing investors with loans, partnerships, or investors, to acquire and leverage properties. This allows investors to make larger investments than they could have with their own resources alone. Bear in mind, you’ll have the split the profits. If the return on investment (ROI) is lower than anticipated, you’ll still be held responsible. For instance, if a rental unit remains vacant for an extended period, you’ll need to cover expenses (mortgage, maintenance, etc.) even without rental income.

Related: Mortgage amortization: Should you go long or short?

Can you use the First Home Savings Account to buy your first investment property?

While Canada offers various incentives and programs to support first-time home buyers, both the First Home Savings Account (FHSA) and the Home Buyers’ Plan (HBP) are available for primary residence purchases only.

To withdraw funds from your FHSA, the government requires you to intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.

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Compare Mortgage Rates

Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.

Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.

Doing your market research before selecting your location for your investment property

Canada's real estate market is diverse, with variations in property values and rental demand across different provinces and cities. Investors look for regions with strong rental markets, steady population and job growth, potential for property appreciation, and other positive economic indicators. They also consider factors such as prices, neighbourhood shops and infrastructure, crime and safety rates, revitalization programs and local government investments, and school ratings.

RE/MAX lists Toronto, Calgary, and Vancouver as three of the top Canadian cities for rental investment in 2024. When it comes to identifying an up-and-coming neighbourhood,

Working with a local real estate agent and exploring detailed neighbourhood data on a property listing are just a few resources that can help you assess local property values.

Strategizing your investment: long-term buys or short-term flips

There are two main real estate investment strategies: long-term buy-and-hold or short-term flips. Long-term investors benefit from compounding returns over time, while short-term flipping allows for the realization of quick profits, taking advantage of short-term market movements.

Long-term investors typically incur fewer transaction costs compared to frequent traders or flippers, and do not need to constantly monitor the market, allowing them to avoid the stress associated with short-term fluctuations. On the other hand, short-term flips aim for a decent profit in a shorter timeframe. Rental income isn’t their primary focus; it’s about maximizing the sale price. But selling a property takes time, even for flippers. Plus, there’s no “sell” button—you need buyers, agents, and closing processes.

Related: Does it ever make sense to get into a bidding war on a house flip?

On January 1, 2023, the federal government introduced the Residential Property Flipping Rule (Anti-flipping Tax) which established properties owned for less than 12 months as taxable business income. They also implemented the Underused Housing Tax (an annual 1 per cent tax on the ownership of vacant or underused housing in Canada) to help increase housing availability.

Legal and tax considerations

The exact legal requirements of renting out an investment property vary based on local laws and regulations. Generally, the following documents are commonly used:

  • Lease (or rental) agreements
  • Tenant application forms
  • Tenant screening forms
  • Move-in/move-out inspection checklist
  • Security deposit receipts
  • Insurance documents

Landlords are also required to meet various minimum property standards, based on local regulations. As the owner of the property, you’re also required to pay any property taxes due to the local agency.

There are certain tax benefits for real estate investors. For example, the cost of repairs and maintenance on a rental property can often be deducted from rental income, reducing the amount of income tax owed. Additionally, if you sell an investment property for more than you paid for it, you may be able to offset the capital gains tax by deducting the cost of improvements made to the property.

Doing your due diligence and property inspection

Just like with a property you buy as your home, never underestimate the importance of a property inspection. A professional inspector can assess the condition of the property, uncover any hidden issues, and provide a comprehensive report. This step will help you avoid unexpected expenses and ensure the property meets safety standards. Additionally, an appraisal and title search can help investors make informed decisions.

An appraisal helps investors understand the property's current market value, aids in setting an appropriate purchase price or negotiating terms, and is often required for securing financing from a lender.

A title search reveals any outstanding debts or claims against the property, helps identify potential legal issues that may affect ownership or use of the property, and provides assurance to buyers and lenders that the property has a clean title.

When visiting potential investment properties, keep an eye out for red flags that may indicate potential issues or challenges, such as:

  • Structural issues: Cracks or foundation problems, uneven floors.
  • Water damage: Stains or mould, musty odour.
  • Roof condition: Visible damage including missing shingles or sagging.
  • Pest infestation: Droppings or nesting material, wood damage.
  • Electrical issues: Outdated wiring, flickering lights.
  • Plumbing problems: Water stains or leaks, water pressure issues.
  • HVAC concerns: Old or inefficient system, strange noises.
  • Environmental issues: Proximity to hazardous sites, flood zones.
  • Legal or zoning issues: Unresolved code violations, zoning restrictions.

As part of the investment property buying process, you’ll be working with your real estate agent, a home inspector, and lawyers. Always partner with experienced and reputable professionals to ensure accuracy and reliability to help you navigate your first investment purchase in Canada.

Read next: How to own real estate via the stock market if you don’t want to be a landlord

Caitlin McCormack

Caitlin McCormack is a writer based in Toronto. Her work has appeared in MSN, Food Network, HuffPost, What to Expect, Today's Parent, and Mashable, among others. When she isn't writing, she's busy chasing after her two sons, testing out new recipes, and working on her century-old fixer-upper.

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