Canada's Mortgage Expert
How tenants can pay your mortgage...
June 2, 2016 | Posted by: Jay Meakin
How tenants can pay your mortgage
PAUL BRENT The Globe and Mail, May 25, 2016
This year, twentysomethings Sarah Aradi and her husband moved into a basement apartment in a
house in Chilliwack, B.C., a booming city about an hour’s drive from Vancouver.
Before rushing to take pity on the fate of poor, priced-out millennials consigned to a
subterranean existence and a lifetime of renting, it should be noted that the couple actually own
the house and rent the upstairs to tenants in addition to owning a second income property nearby.
Rental income at both properties is more than covering expenses and Ms. Aradi, 26, expects that
she and her husband are on schedule to purchase a third income property in about three years.
Given the runup in home prices in Canada – driven disproportionately by red hot markets in
Vancouver and Toronto – people could be forgiven for believing that home ownership, let alone
purchasing an income property, is suddenly out of reach.
Ms. Aradi and her husband, Tim, are proof that with discipline and a plan, it can be achieved,
even with modest incomes. Ms. Aradi, a digital media co-ordinator, has something of an
advantage over most people, however. For the past eight years she has worked for REIN Ltd.
(Real Estate Investment Network), a 24-year-old, B.C.-started organization that touts and teaches
the ins and outs of real estate investing, mostly in Vancouver, Calgary, Edmonton and Toronto.
That has given her an advantage over most Canadians, but to her credit she and her husband
acted on their acquired knowledge. For the majority of people, who are not intimately connected
with the real estate world, what do they need to know to purchase an income property without
mortgaging their future?
“You really have to crunch the numbers,” says Brendan Powell, a broker and team leader with
Sage Real Estate Ltd. of Toronto. Besides worries about debt ratios and tenants’ rights, would-be
buyers of rental properties have to think about many of the same factors as those buying a
primary residence. Top of that list: the old real estate adage of location, location, location. “If
you’ve got something close to the subway or close to the kinds of tenants you want to attract,
that is going to make a huge difference,” he says. “If it is not, even if all the numbers work, but
you have over-renovated and [expect] to get a luxury tenant, it won’t work.”
Motivations of income property purchasers also vary, he has found. Some are looking for cash
flow to carry the costs of the property over the long run while others are less concerned with
maximizing rent and are instead looking for capital appreciation of the property. “Those two
[goals] often are at odds.”
Perhaps the lowest-risk routes for homeowners to become landlords is for them to buy a primary
residence that has a rental suite or to renovate their existing home to accommodate renters. (Most
would likely not choose to live in the basement like the Aradis).
Kim Gibbons, a Toronto-based mortgage broker, notes that the homes with rental units “are
highly coveted in this city, so if you find one and want to buy it, then you better act quickly on it
because they don’t last very long.” One key advantage of the owner-occupied rental approach is
that you can get by with a smaller down payment (5 per cent versus 20 per cent for a rental-only
property), she says.
Given the shortage of rental apartments in most major Canadian cities, municipalities’ attitudes
to illegal apartments is complicated. As many as 80 per cent of basement apartments in Toronto
don’t comply with all guidelines and could be considered “illegal,” according to Sage’s Mr.
Powell, but the city also faces low vacancy rates and it encourages density.
Whether a rental unit has a municipality’s blessing or not will not prohibit a purchaser from
obtaining financing, however, says Ms. Gibbons. Some lenders may only want to offer a
mortgage on properties with legal apartments but there are always some lenders willing to
finance “illegal” units for a higher interest rate.
Ms. Gibbons is working with a client who is in the process of remortgaging his current principal
residence and using the equity in that house to finance the purchase of a second home, with plans
to rent out the first home to tenants. In this instance, the math is trickier than with an owneroccupied
“In that case, the thing to watch out for is debt ratios and can it service [expenses] properly,” she
says. “There is double the upkeep, double the taxes, insurance, maintenance, and utilities.”
The mortgage broker also advises her would-be landlord clients to contemplate the nightmare
scenario: tenants refusing to keep paying rent. “It could leave you in a crunch. The rules tend to
lean toward the tenant.”
Ms. Aradi, a veteran tenant evaluator despite her age, says landlords cannot skimp when it comes
to screening renters. “I have a very, very rigorous tenant-screening profile that I go through.” She
conducts a phone interview first, followed up by an in-person meeting with an application form
and a background and credit check.
“I only want people that I feel are going to be great tenants,” she says. “It is a more in-depth
process, it is not just shoot me a message on Facebook or on Craigslist and you have got the