Loading...Ontario remains one of Canada’s most attractive locations for real estate investment due to its population and growing economy. According to IRCC, Ontario is an attractive destination for new permanent residents in Canada. There’s always high demand for rentals fueled by immigration, international students, and the general high cost of purchasing properties forcing many to choose to rent instead of buying.
Furthermore, Ontario’s real estate prices have steadily increased over time. Ontario’s real estate market has shown resilience in the face of market changes, providing investors with a high return on investment and a sense of security over the long run. Ontario offers a plethora of alternatives for investors seeking to secure consistent rental income flow and possibly profit from future appreciation in property values. The difficulty, though, is frequently finding the money required to purchase a property especially with the high prices.
Let’s take a look at some of the options for those with minimal down payment.
Leveraging Existing Home Equity
Utilizing your home equity is a great option for those lacking their down payments.You can use the equity of a home or other property you currently own in Ontario to buy a rental property. The difference between the amount you still owe on your mortgage and the current market value of your property is known as your home equity. You can obtain funds by refinancing your mortgage, obtaining a home equity loan, or utilizing a home equity line of credit (HELOC) by leveraging this equity.
For example:
You bought a property for $1,000,000 and have a mortgage of $800,000. After a few years, the market value of your property has increased to $1,100,000 and your remaining mortgage balance is $750,000.
$1,100,000 – $750,000 = $350,000 in home equity
By using your home equity, you can invest in rental properties with little out-of-pocket money because you won’t need to come up with additional funds for a down payment. This isn’t exactly a “no money down” approach because it requires you owning your current property, but it’s still a clever financing solution for people who want to expand their real estate holdings. It’s also important to note that there is an element of risk involved with this approach — if you miss your payments, the lender can take possession of your home.
Seller Financing (Vendor Take-Back Mortgage)
A Vendor Take-Back Mortgage is a less known type of funding where the property seller becomes the lender for their property. The buyer would pay the seller in installments over time instead of getting a mortgage from a bank which helps the homebuyers that don’t qualify for a mortgage or a loan due to low income or bad credit history. The seller financing also offers flexible terms when it comes to payment schedules and interest rates with the legal protection in place for both parties of course. This option requires finding a seller who is open to the idea, but it does provide a great path to property ownership without the traditional upfront costs.
Partnerships or Joint Ventures
Forming partnerships or joint ventures is one of the most popular methods for purchasing rental property with no down payment. Collaborating with a fellow investor or group of investors allows you to combine your resources and divide the cost of buying the property.
To prevent misunderstandings later on, it is essential for partnerships to have defined roles, expectations, and profit-sharing agreements established up front. Talk to your lawyer prior to any purchase as they can assist with the different types of ownership that can be involved in such partnership and drafting agreements.
Rent-to-Own Option
A rent-to-own arrangement is an additional inventive method of purchasing a rental property with no down payment. Under this arrangement, you sign a lease with the opportunity to buy the property when the lease expires. A portion of the rent you pay goes toward your “down payment”. While usually rent-to-own agreements are aimed for end users, investors may still be able to obtain a rental property this way. You’ll also need to make sure you understand the rules, limitations, and possible regulations in a rent-to-own agreement. Reach out to us to learn about rent-to-own options.
Private Lender
Private lenders could be able to provide an alternate financing option if traditional banks or lenders ask for a down payment that you are unable to make. Short-term loans are provided by private lenders, who are people or businesses that frequently have laxer approval standards than traditional financial institutions.
Private loans might be helpful for buying rental homes with no down payment, even if they might have higher interest rates. If the investment is deemed appealing enough by the property’s prospective rental income or future worth, certain private lenders might potentially provide 100% financing. But bear in mind that you should proceed cautiously when borrowing from private lenders because the increased fees may have an impact on your overall profitability.
Government Programs and Grants
The Canadian government has a number of initiatives and incentives to assist first-time purchasers, new investors, and members of particular groups (including low-income families or people with disabilities) in purchasing real estate. Most of these programs are not geared towards investment properties, but you can still use them for significant savings on real estate purchases.
- The Home buyers’ amount
- GST/HST new housing rebates
- The Home Buyers’ Plan (HBP)
- The First Home Savings Account (FHSA)
It’s important to look into government programs for which you can qualify since they might lower the cost of investing in real estate.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) is a great way in investing in the real estate market. Instead of buying a property alone as an investment you can invest in a REIT and you can become an investor in properties they own. REITs typically own, operate and/or finance income-generating real estate like apartment buildings, office spaces and even hotels. Many REITs pay dividends which provide consistent monthly or quarterly payments. Investing in REITs offers a more hands-off approach to real estate investing, as you won’t have to worry about tenant management or property maintenance.
Insured Mortgages
Rather than the typical 20% down payment required for mortgages, there is also the option for a high ratio mortgage. A high ratio mortgage requires mortgage insurance due to the loan being so large. You will have to incur extra costs for the insurance, but this option allows you to purchase a rental property without needing to have the 20% down payment saved up.
- Increasing the $1 million price cap for insured mortgages (down payment is less than 20%) to $1.5 million.
- Previously, if you were to purchase a home for $1.2M, you would need to have a minimum of $240,000 (20%) down payment saved. Now, you can have less than that and still be able to get a mortgage.
- Expanding eligibility for 30 year mortgage amortizations to all first-time homebuyers and to all buyers of new builds
- For those who have minimal down payment saved, new/pre-construction purchase may be a viable option as many have a deposit structure where you pay your 20% (or possibly less) in installments over a period of time (sometimes years) before the building is finished construction. Contact us to explore pre-construction options in Ontario that match your needs.
Conclusion
In Ontario, it is not impossible to purchase rental property with no down payment. You can enter the real estate market with little initial investment by using innovative financing techniques including using seller financing, partnering, leveraging home equity, or even looking into options in pre-construction. It’s crucial to carefully consider which approach best suits your financial condition and long-term objectives because each has pros and cons of its own. Even if you start with little to no money down, there is a lot of room for success in real estate investing in Ontario because of the province’s robust real estate market and high demand for rental property.
*Disclaimer: The information provided in this blog post is for general informational purposes only and is not intended to be legal, financial, or professional advice. We recommend consulting with a qualified lawyer, financial advisor, or other professional before making any decisions regarding real estate investments or property purchases. All opinions expressed in this post are based on personal experience and research. Always do your due diligence and seek personalized advice when needed.