Investment Property Basics
| Factor | Primary Residence | Investment Property |
|---|---|---|
| Minimum down payment | 5% (insured) | 20% (no insurance) |
| Mortgage rate | Lower | 0.25-0.5% higher |
| Rental income | N/A | Helps qualify |
| Tax deductions | Limited | Many expenses deductible |
| Capital gains | Exempt (PRE) | Taxable |
Down Payment Requirements
| Property Type | Minimum Down |
|---|---|
| Single-family rental | 20% |
| Duplex (non-owner-occupied) | 20% |
| Triplex/Fourplex | 20-25% |
| 5+ units (commercial) | 25-35% |
| Owner-occupied duplex | 5% (with CMHC) |
Down Payment Sources
| Source | Details |
|---|---|
| Savings | Most common |
| HELOC on primary residence | Interest may be deductible |
| Gift from family | Gift letter required |
| Other investments | Sell stocks, use TFSA |
| Joint venture partner | Share ownership |
Cash Flow Analysis
Key Metrics
| Metric | Formula | Target |
|---|---|---|
| Gross Rent Multiplier | Purchase Price ÷ Annual Rent | Under 15 |
| Cap Rate | Net Operating Income ÷ Purchase Price | 4-8%+ |
| Cash-on-Cash Return | Annual Cash Flow ÷ Total Cash Invested | 5-10%+ |
| Cash Flow | Revenue - All Expenses | Positive |
Sample Analysis
| Item | Monthly |
|---|---|
| Gross rent | $2,500 |
| Less expenses: | |
| Mortgage (P+I) | $1,400 |
| Property tax | $350 |
| Insurance | $100 |
| Maintenance reserve (5%) | $125 |
| Vacancy reserve (5%) | $125 |
| Property management (0-10%) | $0-250 |
| Cash Flow | $150-400 |
The 1% Rule (Quick Test)
| Concept | Details |
|---|---|
| Rule | Monthly rent should be ≥ 1% of purchase price |
| Example | $400,000 property should rent for $4,000+/month |
| Reality (2026) | Very hard to achieve in major cities |
| Use | Quick screening tool only |
Financing Investment Properties
Lender Requirements
| Requirement | Typical |
|---|---|
| Down payment | 20-35% |
| Minimum credit score | 650+ (higher preferred) |
| Debt service ratios | Include rental income (50-80% typically) |
| Reserves | 3-6 months mortgage payments |
| Property cash flow | Usually positive required |
Rental Income for Qualifying
| Lender | How Rental Income Counts |
|---|---|
| Most lenders | 50-80% of gross rent |
| Offset method | Rental income offsets the property’s expenses |
| Add-to-income | Rental income added to borrower income |
Interest Rate Premium
| Feature | Impact |
|---|---|
| Investment property | +0.25-0.50% |
| Rental with < 2 years landlord history | Higher rates |
| Private lender | 8-12%+ |
Tax Deductions for Rental Properties
Deductible Expenses
| Expense | Deductibility |
|---|---|
| Mortgage interest | 100% |
| Property taxes | 100% |
| Insurance | 100% |
| Repairs and maintenance | 100% |
| Utilities (if you pay) | 100% |
| Property management | 100% |
| Advertising | 100% |
| Professional fees | 100% |
| Travel to property | Reasonable |
| Capital Cost Allowance (CCA) | Optional |
Capital Cost Allowance (CCA)
| Building Type | CCA Rate |
|---|---|
| Residential rental building | 4% (Class 1) |
| Furniture and appliances | 20% (Class 8) |
Warning: Claiming CCA reduces your cost base, resulting in recapture (taxes) when you sell.
What’s Not Deductible
| Expense | Why Not |
|---|---|
| Principal portion of mortgage | Not an expense |
| Your own labour | Can’t pay yourself |
| Capital improvements | Added to cost base |
| Land value | Not depreciable |
Buying Your First Investment Property
Step-by-Step Process
| Step | Action |
|---|---|
| 1 | Get pre-approved for financing |
| 2 | Define investment criteria (location, type, returns) |
| 3 | Analyze properties using cash flow calculator |
| 4 | Make offers based on numbers, not emotion |
| 5 | Complete due diligence (inspection, rent verification) |
| 6 | Close and prepare for tenants |
| 7 | Find and screen tenants |
| 8 | Maintain records for taxes |
Due Diligence Checklist
| Check | Why |
|---|---|
| Verify current rents | Income assumptions |
| Review tenant leases | Know the terms |
| Get estoppel certificates | Verify deposits, rent |
| Property inspection | Condition assessment |
| Review utility costs | Operating expense accuracy |
| Check zoning | Legal for rental? |
| Insurance quote | Know the cost |
Common Mistakes to Avoid
| Mistake | Better Approach |
|---|---|
| Buying with negative cash flow | Numbers must work from day one |
| Underestimating expenses | Budget 30-40% of rent for expenses |
| No reserves | Keep 6 months expenses in reserve |
| Emotional decisions | Buy based on analysis, not feelings |
| Being own property manager | Calculate value of your time |
| Ignoring location | Better properties appreciate more |
| Not getting proper insurance | Landlord-specific policy required |
Types of Investment Properties
| Type | Pros | Cons |
|---|---|---|
| Single-family | Simple, appreciation | Lower cash flow |
| Duplex/Triplex | Better cash flow | More management |
| Condo | Lower maintenance | Condo fees, rules |
| Multi-family (5+) | Economies of scale | Commercial financing |
| Pre-construction | Developer incentives | Risk, closing costs |