On condition of obtaining a loan to finance the purchase and related costs, rental property investment provides an appropriate response to borrowers who do not have personal contributions.
Whether you want to pay less tax, have additional income for retirement or build real estate, here are our tips for finding rental financing without contribution to the best rate conditions.
Estimate your rental investment capacity
There is no point in risking a loan refusal by presenting yourself to your banker with a poorly prepared file. Check your financing capacity before even launching the first research, which is a little more complex than when buying a main residence.
Firstly because the debt ratio is not understood in the same way and secondly because rental investment must take into account additional risks such as the risk linked to the absence of a tenant, but also the fiscal impact of rents on income.
Unless you have sufficient means, for a first rental transaction, it is probably better to start by buying an apartment rather than looking to invest in a property for investment, even if after reading specialized forums, becoming a rentier without any personal contribution seems to be the goal of many budding investors.
Calculation of the debt ratio after the operation
Do not make the mistake of thinking that your project is neutral because the rents cover the monthly payments of the loan. Even if the operation presents a perfect financial balance, it will always have a negative impact on the debt ratio.
Rental income is taken into account by the bank
The amount retained by the bank for the calculation of the debt ratio corresponds to net income, that is to say, once all costs and charges have been deducted (loan interest, property tax, insurance contributions, etc.). ). In the absence of specific information, the lender can retain 70 or 80% of the gross rent.
Situation before investment
A couple has $ 2,800 in monthly net income. He owns his main residence for which he repays a loan up to $ 650 per month. Its debt ratio before the rental operation is 23.2%.
Real estate project
He decides to set up a first rental real estate project. He chose an old apartment with a sale price of $ 120,000 + $ 8,500 in notary fees. It is assumed that the rents cover the loan, home insurance (owner not occupying) and unpaid rents, as well as the property tax, or $ 720 per month.
Financing of the operation
The financing is done without contribution up to 110% with a real estate loan of 128,500 $ over 20 years at a fixed depreciable rate of 1.62% and an insurance rate of 0.35% on borrowed capital. The monthly payments amount to $ 665, including $ 37.48 in insurance premiums.
Impact on the debt ratio
His income now amounts to $ 3,520 (salaries + rents) and the repayment of loans to $ 1,315. The logical consequence of the rental loan, its debt ratio is also changed and climbs to 37.3%.
Despite the fact that rental income covers all expenses, the couple’s debt ratio has increased significantly. This consequence is, however, more “arithmetic” than financial and in no way calls into question the obvious good operation carried out by the couple and the expected good rental yield or the financing of the property.
Tax impact and reintegration of property income
The net property income determined in Annex No. 2044 is taxed in the same way as wages when you file your tax return. You must, therefore, take into account the tax impact in your future budget estimate.
You will find several simulators on the Internet, including that of the tax administration site. Namely: if the amount of annual rents does not exceed $ 15,000, you can opt for the micro-land regime. You benefit from a standard abatement of 50% and do not have to complete form 2044.
The importance of forecasting
The essential elements of the risk analysis are obviously based on the good financial health of the investor (CDI, good bookkeeping, correct debt ratio, sufficient living left…), but the presentation of the real estate project is an aspect of mounting the file that should not be overlooked.
Establishing a provisional rental budget must be thought of as a business plan and generally meets a threefold need:
- Allow the investor to verify the profitability of the investment.
- Demonstrate to the banker that your financial package is based on objective data.
- Prove that your mortgage application is solid.
It must include a realistic simulation of income and expenditure and be based on comparative elements such as rents charged for the same type of property in the neighborhood. You can rely on local real estate ads for this.
You will find in this article all the details to build an effective rental forecast and convince the lender that the project is viable.
To know: remember to gather all the supporting documents: property tax of the seller, rental announcements, simulation of tax impact, rental insurance quote … You will show your seriousness and prove to your banker that you are determined to lead ultimately your project.