Blog > What You Need to Know About the Down Payment for Rental Property

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Have you been playing with the idea of investing in rental properties? If yes, then maybe it’s time to stop thinking about it and start acting. Do you know that one well-managed rental property can become the foundation for building a reliable source of income during retirement?


Did you also know that a single rental property can multiply into a portfolio of income-yielding real estate investments that you can leave to your heirs? Real estate investing has consistently proven to be one of the most reliable ways to build wealth that will outlive you and your descendants.


This is why the wealthiest individuals and families in the world hold a substantial part of their wealth as rental properties. You too can become one of those people; all it takes is buying that first rental property.


Buying a rental property in Canada

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If you are like most people who want to invest in real estate, you would need a loan to buy your first property. What is the process for getting a rental property loan? What are the steps you can take to make your real estate investment journey as smooth as possible?

The first thing is to know that the process of getting a rental property loan is more difficult than the steps for getting a mortgage for your primary home. Rental properties carry a higher level of risk for lenders. To offset those risks, lenders impose more stringent conditions on borrowers.

To qualify for a rental property mortgage, you must satisfy the following conditions:

  • Ideally a credit score of 680, or preferably 720.
  • Proof of income whether you are an employee, business owner, or earn commissions.
  • A low debt profile to show that you have enough disposable income to pay the mortgage.
  • Proof that you have enough money to make the down payment on the rental property.

This last requirement is the one many prospective investment property investors struggle with. Saving up enough money for the down payment on a rental property can be challenging. Here are the things you need to know about making the down payment on a rental property.

What you need to know about a down payment for a rental property

Down payment requirements for a rental property may be as low as 5% or as high as 20%, depending on three factors, namely:

  • The type of rental property
  • The number of units in the building
  • If you will occupy one of the units on the property

Types of rental properties

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Rental properties in Canada are typically classified into two categories: residential and commercial rental properties. A property may be classified as residential or commercial depending on zoning laws. But here is a simple way to tell if a rental property is commercial or residential.

  • Commercial rental properties are buildings with five or more units.
  • Properties with a maximum of four units are typically categorized as residential.

Mortgage terms for commercial properties are a lot tougher than the requirements for residential rental properties. This post will not concern itself with the details of commercial property mortgages. The focus is on down payment requirements for residential rental properties.

The two main criteria that determine how much down payment you need to make on the building are the price of the property and the number of units in it. And how much down payment is required for residential rental properties? The range is typically between 5-20%.

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Down payments less than 20%

To be eligible for a down payment of less than 20%, your rental property must meet the following conditions:

  • It must have 1-4 units and be within a residential zoning.
  • The purchase price for the building cannot exceed $1 million.
  • It must be owner-occupied; you must live in one of the units for at least 1 year.

For owner-occupied buildings with 1-4 units, down payment requirements are as follows:

  • Owner-occupied rental properties with 1-2 units, the down payment is 5%.
  • Owner-occupied rental properties with 3-4 units, the down payment is 10%.


Down payments 20% and over

For the following types of rental properties, the down payment will be a minimum of 20%:

  • The building should have no more than 1-4 units and be within a residential zone.
  • The price of the property can be higher than $1 million.
  • The rental property is not owner-occupied; you don’t have to live in one of the units.

For all such properties, regardless of whether there are 1, 2, 3, or 4 units in the building, the down payment is always 20%. The advantage of making a 20% down payment on your rental is you get the most favorable terms from lenders, and you are exempt from mortgage insurance.


Mortgage default insurance

For down payments of less than 20%, lenders will ask that you buy mortgage insurance. This gives them an additional layer of protection in case of default. Do remember to factor in this cost before you decide on how much downpayment you want to pay on your rental property.


Written by Liam Watson

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