Income property options for increasing your mortgage approval.
Dear Rebecca
We are currently renting and are wondering if we should buy a home when our lease is up? We have not owned before and are considering the pros and cons of owning a home versus renting. We are also thinking about buying a home that has a rental income to help with the mortgage. What are the options for keeping current tenant?
Nancy
Dear Nancy
Deciding whether to buy a home instead of renting is a decision based on each individual’s financial situation and lifestyle goals. Home ownership is the best choice for most people however it is not right for everyone. Your first step should be to contact a mortgage specialist who will walk you through your current income and expenses, and see, based on your needs and lifestyle, if homeownership is right for you. You can also find out from the mortgage specialist the requirements for buying a property with rental income. This can be a great option for increasing the amount of your purchase price.
What you can afford and how your monthly costs will change depends on several factors; the down payment you are able to make, the type of mortgage you choose, and the home you purchase. Older homes, which need updating, may have a lower price tag and a lower mortgage payment however; you will likely have higher maintenance and heating costs. Well-renovated and updated older homes and newer homes, which are more expensive to purchase, should have much lower maintenance and heating costs. If you purchase a home with an apartment or rental income, you will have the added benefit of the income from the apartment however, the downside is that you will also have higher property tax rate along with the job of being a landlord.
The biggest pros to home ownership are that you are gaining equity and rather than paying someone else’s mortgage, you are paying your own. The major disadvantage to home ownership is that you are responsible for maintenance and repairs and these expenses are not predicable. Many people will paint and make small updates in homes that they are renting with only the added benefit being personal comfort. However, when you do make repairs or updates in the home you own you may gain financial rewards for those updates when you sell.
If you are considering a tenant occupied home to help with the mortgage, and if your financing for this property is dependent on having a tenant, then it is necessary to have the apartment rented. A rental income history and a lease will also be required from the mortgage lender.
Purchasing a property, which is tenant-occupied, can be handled several ways depending on whether you and the current renters continue the lease. If there is a lease in place and the tenant wants to stay, the offer could be written with a condition to obtain vacant possession, with the exception of the area of the property occupied by the tenant, and would include you, as the purchaser taking over the lease.
You may also make the offer to obtain vacant possession of the property, concurrent with the termination of the tenant’s lease and then interview the tenants after the offer is accepted and conditions are met. Should the meeting be satisfactory, the offer would be amended to include the tenant’s continued occupation of the premises on closing.
Sometimes owners will time the sale of their property with the termination of the tenant’s lease. If you need a tenant and a new lease is needed, you may choose to include a third party condition in the offer, such that the offer is conditional on obtaining a new lease with the current tenant. If the tenants remain, it should indicate in your offer that any prepaid rent and damage deposit would be credited to the purchaser upon closing.
If you do not want to keep the current tenants, you would ask for vacant possession, with the understanding that the seller will have to give a minimum of notice to the tenant. The closing date would then be dependent upon the tenants notice period. How much notice, depends upon the terms of the lease.
The source for information for both landlords and tenants is the Office of the Rentalsman at 42 Queen Street, Fredericton NB http://www.snb.ca/irent/
To get a financial picture of “Rent vs Buy” this government website for Industry Canada, Office of Consumer Affairs, offers a good calculator. http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca01821.html
Happy House Hunting
