Investment Property Financing: What You Need to Know

Real estate investing can build substantial wealth, but financing rental properties is very different from financing your primary residence. Here's everything you need to know to secure investment property financing.

The Key Difference: How Lenders View Investment Properties

When you buy your primary residence, lenders focus on your income and credit. For investment properties, they also heavily weigh:

• The property's income potential: Can rental income cover the mortgage?
• Your real estate experience: First investment or seasoned investor?
• Your liquid reserves: Can you weather vacancy periods?
• The property type: Single-family, multi-unit, or commercial?

Down Payment Requirements

Investment properties require larger down payments than primary residences:

• Typical minimum: 20% down payment
• For experienced investors: May get 20% on additional properties
• For first-time investors: Some lenders want 25-30%
• Multi-unit properties: Often 25% minimum

Note: CMHC insurance (for down payments under 20%) is NOT available for pure investment properties.

The Debt Service Ratio: Your Most Important Number

Lenders use the Debt Service Coverage Ratio (DSCR) to assess investment properties:

DSCR = Annual Rental Income ÷ Annual Debt Payments

Most lenders want a DSCR of at least 1.2, meaning rental income is 120% of mortgage payments.

Example Calculation:

Monthly rent: $2,500 = $30,000/year
Annual mortgage payments: $24,000
DSCR: $30,000 ÷ $24,000 = 1.25 ✅ (Approved!)

What Lenders Consider "Rental Income"

Lenders don't count 100% of your rental income. They typically use:

• 50-80% of projected rent: To account for vacancies and expenses
• Actual rental income: If you have a signed lease
• Market rent analysis: From a professional appraisal

Your Credit Score Matters More

Investment property mortgages require higher credit scores than primary residence mortgages:

• Minimum: Usually 650-680
• Best rates: 720+
• Multiple properties: May need 740+

Income Documentation Is Stricter

Lenders want extensive documentation for investment properties:

• 2 years of tax returns: Including T1 Generals and NOA
• Current pay stubs: If you have employment income
• Rental income proof: Leases, rent rolls, T776 forms
• Other property documentation: If you own other rentals
• Business financials: If self-employed

Interest Rates: Expect to Pay More

Investment property rates are typically 0.25-0.75% higher than primary residence rates because:

• Lenders view them as higher risk
• Owners are more likely to default on investment properties in tough times
• No CMHC insurance option for lenders

Financing Multiple Properties: Portfolio Lending

As you acquire more properties, traditional lenders may cap you at 4-5 properties. After that, you'll need:

• Portfolio lenders: Specialize in investors with multiple properties
• Private lenders: Higher rates but more flexible
• Commercial mortgages: For 5+ units or commercial properties

Tax Advantages of Investment Properties

Don't forget the tax benefits that make real estate investing attractive:

• Mortgage interest is tax-deductible: Reduces taxable income
• Property expenses deductible: Repairs, property tax, insurance, management fees
• Depreciation: Capital Cost Allowance on the building
• Capital gains treatment: When you sell

Important: Consult with an accountant to maximize tax benefits.

Getting Pre-Approved for Investment Property

Just like with a primary residence, get pre-approved before making offers. You'll need:

• Proof of down payment funds
• Income documentation
• Credit check authorization
• Details on other properties you own
• Investment property business plan (for some lenders)

About the Author: Ragini is a FSRA-licensed mortgage broker with Blue Key Mortgage, powered by BRX Mortgage. She helps Ontario investors secure financing for single and multi-unit investment properties.