If you are thinking of investing in Real Estate any time soon, use this checklist to make sure you are well prepared and most likely to succeed in your Real Estate Endeavours:
☑️ 1. Your Acquisition and Exit Strategies
Why do you really want to invest in Real Estate? What are your short and long term investment goals? Are you planning on buying only one property? Maybe you are considering several different areas? Do you want to finance one property or 5, and over what period of time? You’ll need to have a good idea of your goals before seeking financing. A good team of qualified professionals will be able guide you in drafting your acquisition and exit strategies.
☑️ 3. Your Overall Credit Profile:
By checking first your credit yourself, you will have enough time to correct any wrong information that you see on your report. A credit score of at least 650 to 680 is the minimum you should aim for. If you aren’t quite there, don’t let it stop you – take action to improve it now so in a year or two you will be ready to invest in Real Estate. Just get in touch with me for a free review of your credit and personalized action steps to follow.
The better your credit, the more options you will have for financing.
☑️ 4. Proof of Income
Next the lender will want to make sure that you have sufficient Income to cover your own Financial Obligations.
We’ll review all your current obligations including your own mortgage/rent payments, property taxes, credit card balances, car payments etc., to ensure that the Total Debt Service Ratios on your own obligations are within the lenders guidelines of around 40%-42%. This means that no more than 40% to 42% of the gross household income can go towards existing financial obligations and shelter payments.
If you are a salaried employee, you will need a recent (less than 30 days old) letter of employment and pay stubs. The lender may also ask for copies of your most recent Notice of Assessment (NOAs).
If you are self-employed, or if commission income comprises a large portion of your income, you will need to provide proof of income for the last 2-3 years in the form of NOAs and/or T1 Generals and/or Financial Statements for your business, as well as proof that you’ve been in business for at least 2yrs, such as business registration or HST returns.
☑️ 5. Proof of Down Payment
When you are buying an investment property with the intention of renting it out, you will personally need to provide a down payment of at least 20% of the purchase price although some alternative lenders will allow for as little as 10% down payment (combination of first and second mortgage), but will charge you more in interest and lender fees.
In order for the lender to offer best rates, they will be looking for proof that your down payment isn’t borrowed. For example, are you getting your down payment from your bank account? Then you will need banking statements to confirm that the full down payment has been in your account for at least 90 days. Or, if you are planning on using your home equity on your principal residence, then you will need to get the Home Equity Line of Credit set up first. Or maybe, if the money for your down payment is coming from the sale of another property, the lender will require documentation such as an agreement of purchase and sale, together with a recent mortgage statement showing how much money will be coming to you from the sale.
☑️ 6. Emergency Funds / Closing Costs
In addition to the down payment, you will also need to show at least 1.5% of the purchase price in closing costs to the lender. You will also want to have an emergency fund set aside that will help you deal with unexpected expenses. Many investors choose to use a HELOC (Home Equity Line of Credit) secured by their home, or money their a savings account. This will provide you with the piece of mind that you have funds set aside in the case of an emergency.
☑️ 7. Existing Property Details
If you have other properties, you will need to provide the lender with most current mortgage statements and property tax statements for all of them, and current lease agreements if they’re rented out. Ideally, you need to show that existing rental properties are cash flow positive: rental income is sufficient to cover all expenses associated with maintaining the properties. If they aren’t cash flow positive, then the lender will add the shortfall to your existing liabilities to make sure you can afford to cover the shortfall on an ongoing basis.
☑️ 8. New Property Details
In addition to the MLS listing, Agreement of Purchase and Sale, and applicable waivers, you will need to provide either a lease(s) for the new property, or a letter from an appraiser confirming the current market rents: the price that can be expected from your property.
☑️ 9. Tenant Pre-Screening
Doing your due diligence and reviewing your tenants application is crucial to ensure landlord-tenant synergy! Of course, your real estate agent will help you find a qualified tenant and the whole purpose is to ensure your potential tenants are great tenants that will pay their rent and utilities on time, keep the property clean and are well behaved.
Past behaviour is a good indicator of future behaviour… a pattern could emerge that could result in non-payment of rent
so pre-screen, pre-screen, pre-screen!
Well, here you go now: you've learnt the basics of your Real Estate Investment plan. If you need more in-depth analysis, feel free to email me at Snezhana@MortgageCentreToronto.com or give me a call at 647-893-2535. I will be happy to guide you through the steps, review your current portfolio and financing structure, gauge your current investor knowledge and identify your financing needs.
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