Investment property mortgages
Whether it’s your first rental or you’re adding to a portfolio, a mortgage professional who works with investors can help you structure financing, including how lenders treat rental income and what down payment you’ll need.
Key points
- An investment property is a home you buy to rent out.
- If you won’t live there, expect to put at least 20% down.
- Lenders count rental income differently, which changes how much you can borrow.
- Run the numbers with real costs, not just the rent and the mortgage payment.
What is an investment property mortgage?
It’s a mortgage on a property you plan to rent out, such as a condo, a house or a small multi-unit building. Lenders see more risk in rentals than in homes people live in, so the rules on down payments and rates are stricter.
There’s an important exception. If you buy a building with up to four units and live in one of them, it can qualify for an insured mortgage with a much smaller down payment.
| Property | You live there? | Minimum down payment |
|---|---|---|
| 1 to 2 units | Yes | Same as any home (from 5%) |
| 3 to 4 units | Yes | 10% |
| Any rental | No | Usually 20% |
Typical current rules. Lenders may ask for more.
How lenders count rental income
Lenders use one of two approaches. Some add part of the rent, often 50% to 80%, to your income. Others subtract the rent from the property’s costs and only count what’s left over. The approach a lender uses can change your borrowing power by tens of thousands of dollars, which is why investors benefit from someone who compares lenders.
| Approach | How it works | Usually better for |
|---|---|---|
| Add to income | A share of the rent is added to your income | Your first one or two rentals |
| Rental offset | Rent is subtracted from the property’s costs | Larger portfolios with strong rents |
Does it pay for itself?
A rental often costs more each month than people expect. Here’s a simple monthly view of a $500,000 condo with 20% down, at a 5% rate over 25 years.
| Monthly | Amount |
|---|---|
| Rent | $2,800 |
| Mortgage payment | −$2,330 |
| Property tax and insurance | −$400 |
| Condo fees and maintenance | −$250 |
| Vacancy allowance (5%) | −$140 |
| Cash flow | −$320 |
Many investors accept a small negative cash flow while the mortgage is paid down. Others need it to break even. Know which you are before you buy.
Costs beyond the mortgage
Budget for property tax, landlord insurance, condo or strata fees, repairs, and months without a tenant. If you use a property manager, expect to pay a percentage of the rent. These costs are why lenders and experienced investors look at net income, not just rent.
How NorthMerit can help
Tell us what you’re planning and we’ll connect you with one licensed mortgage professional who compares lenders for you. It’s free, and there’s no obligation.
Tax on rental property
Rental income is taxable, but you can deduct expenses like mortgage interest, property tax and repairs. When you sell, any gain is generally taxed as a capital gain, because the principal residence exemption doesn’t apply to a property you don’t live in. Speak with an accountant before you buy, especially if you’re buying with someone else or through a company.
Building a portfolio
Many investors use equity in one property to fund the down payment on the next. Each lender limits how many rental mortgages it will hold for one person, and some stop at four or five. Planning ahead with a professional helps you avoid being stuck with a lender that won’t finance your next purchase.
Common questions
How much down payment do I need for a rental?
Do lenders count rental income?
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