Multi Family Investing: 6 Things to Know About Multi-Family Rentals

Posted by on Thursday, December 1st, 2022 at 12:54pm.

What to Know About Investing in Multi-Family Rental Properties Looking to expand your real estate portfolio? Investing in multi-family real estate might be the right choice for you. Purchasing a multi-unit dwelling to stuff with tenants could provide reliable passive income and property appreciation as long as you hold on to it. The process isn't as simple as buying a building and filling it with tenants. However, when you break it down into smaller steps, purchasing a multi-family rental property can be one of the most straightforward and reliable types of real estate investments.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

Minimum Down Payments for Multi-Family Investments

First and foremost, you must recognize that the Canada Mortgage and Housing Corporation guidelines stipulate that ownership of any second property—regardless of whether you define it as an investment property or not—requires a minimum down payment of 20 percent.

However, that rule only applies if the investment property is your primary residence for at least one year. Therefore, if you purchase a multi-family home and live in one unit for a full year, you can pay between a 5% and 10% down payment. It's important to note that only homes valued at less than $500,000 can qualify for a 5% down payment. Any property that costs between $500,000 and $999,999 requires at least a 10% down payment, and buildings that cost more than $1 million will always require a 20% minimum down payment.

Commercial Mortgage Vs. Residential Mortgage

Regarding commercial and residential mortgages for rental properties, there's one primary deciding factor: the number of units. Properties that contain five or more rental units classify as commercial zoning, whereas homes with 1-4 units are considered residential.

There are numerous commercial real estate loans, but most commercially zoned rental properties require a 30 to 35 percent down payment and may also require commercial interest rates, as many lenders view these properties as higher risk. If you used the typical 3.49 percent fixed residential rate in your budget calculations, you might want to up that to the commercial rate of 5.49 percent, then run your numbers again. This change could make or break your decision to invest. Four units (or fewer) is the magic number here—this is the cutoff for the 20 percent down payment and residential 3.49 percent estimate.

How to Choose an Amortization Period

When purchasing a multi-family investment property, selecting the appropriate amortization period is essential. The amortization period is how long it will take to pay off the entire loan. This decision can affect your bottom line, as an extended amortization period results in lower monthly mortgage payments. Despite this, remember that an extended amortization will ultimately cost you more, as you'll be paying more interest over a longer period.

The most common maximums for residential properties are 25 or 35 years. If your down payment is less than 20% on the property and you plan to obtain mortgage default insurance from CMHC, you'll have a maximum amortization of 25 years. However, if your down payment exceeds 20%, extending your amortization up to 35 years is possible. Consider all parameters before ensuring you're getting the best deal for your situation.

Are Basement Apartments Legal?

Many homeowners consider converting their basements into rental apartments instead of purchasing a separate property. Doing so comes with its own pros and cons.

Although most Canadian provinces allow the rental of basement apartments, some zoning codes need to be followed to ensure the legality of these dwellings. In particular, investors and landlords should ensure they have their basement apartments inspected before renting them out to avoid any potential legal problems. These inspections ensure the rental apartments are up to code and meet the rules set out by each province's zoning laws—which can vary. Renting an illegal basement apartment can result in hefty fines, so investors and landlords need to do their due diligence when exploring this housing option. People who don't have a basement could pursue a similar investment by building carriage houses on their property.

Tax Considerations for Rental Investment Properties

If you plan on being a legit landlord and a true real estate investor, you should declare any rental income on your T4 and pay taxes on it. Hire an accountant—especially if you plan to purchase multiple properties—and talk to your lawyer about applying for a business number. This will allow you to claim rental income as a corporate earning and pay less around tax time. You may also want to invest in property management software to help keep on top of things.

How Long Should You Hold Your Investment

If you're interested in a regular monthly income stream (similar to a dividend-paying stock), you should anticipate a minimum 10-year ownership period on your income property. Ask any successful real estate investor, and they'll tell you that the assumption is that you are keeping this place forever. Yes, there are costs associated with any asset, and homes are no different: you'll pay land-transfer taxes and legal fees on the purchase, and still more realtor, legal, and mortgage discharge fees when the sale is finalized. Adopt a long-term outlook, allowing for your monthly payments from tenants and how the property will appreciate over time.

Are You Ready for Multi-Family Investing?

Scaling up from a one-bedroom condo can seem daunting if you're a beginner real estate investor. However, the process is manageable if you have the proper support. Start slow and start small. Above all, ensure you keep enough money socked away for unforeseen expenses. With these points in mind, every future landlord can enjoy successful multi-family investments.