Buying an investment property, step by honest step
These are the steps to actually buy a rental, tying together the financing, the numbers, and the closing so they line up in the right order. It is the same process as buying any home, with a few extra rules that apply once a property is an investment rather than your own address, and I have flagged the honest bits along the way.
Start with the financing, not the listings
It is tempting to open the listings first, but on a rental the smart move is to sort your financing before you fall for anything. A rental you will not live in is what lenders call non-owner-occupied, and the rules there are stricter than for the home you live in. Knowing what you can actually borrow, and on what terms, keeps you from getting attached to a place you cannot fund.
Two rules shape everything on an investment purchase. First, a non-owner-occupied rental needs at least 20 percent down. As a plain example, 20 percent of an $800,000 property is $160,000, and that has to be your own money, not borrowed against the same purchase. Second, the low-down-payment insurance that helps many first-time buyers is not available on a rental you will not occupy, so there is no way around that 20 percent floor.
CMHC insurance is mortgage default insurance that lets owner-occupiers buy with a smaller down payment. It exists for homes you live in, not for a pure rental, which is why a non-owner-occupied investment property needs the full 20 percent down and cannot lean on it.
The stress test still applies too. Lenders qualify you at a rate higher than the one you will actually pay, to check you could still carry the mortgage if rates rose. On a rental they will weigh the expected rent alongside your own income, but the test does not disappear because the property earns money. The investment property financing guide walks through how lenders look at all of this in detail.
The 20 percent is a floor, not a target. Some lenders want more down, or a stronger rate, depending on the property and your situation. Treat 20 percent as the minimum to get in the door, and confirm the real number with a mortgage broker before you count on it.
Run the numbers before you fall in love
A rental is a business, so the deciding question is not whether you like the kitchen, it is whether the math works. Do this part with a cool head, before emotion gets involved. The order is always the same: estimate the rent the property can realistically command, work down to NOI, check the cap rate, then bring in the mortgage to see the cash flow and your cash on cash return.
NOI, or net operating income, is the rent left over after the operating costs of running the property, before the mortgage. Cap rate is that NOI divided by the price, a quick way to compare one property's earning power against another regardless of how each is financed.
Cash flow is what is left each month once the mortgage is paid out of the NOI, the money that actually lands in your pocket or comes out of it. Cash on cash compares that yearly cash flow to the actual cash you put in, so you can see what your own money is earning.
The exact figures depend entirely on the property, the rent, and your mortgage, so there is no shortcut number to memorise here. What matters is running the same steps every time so you are comparing like with like. The how to analyze your first rental guide works through each step slowly, and the calculators below do the arithmetic for you.
Budget the cash to close
Your down payment is the biggest cheque, but it is not the last one. On top of it you need the cash to close, and on a rental a couple of those costs work differently than they do for someone buying their own home.
The largest is usually land transfer tax, the tax the province, and in Toronto the city, charges when a property changes hands. The important difference for an investor is that the first-time buyer rebate does not apply to a rental, so you budget the full tax with nothing knocked off. On top of that come your legal fees for the lawyer who closes the deal and an inspection if you have one done. The exact land transfer tax depends on the price and the municipality, so run your own number with the land transfer tax calculator rather than guessing.
ACB stands for adjusted cost base, roughly what the property has cost you for tax purposes. Your acquisition costs, things like land transfer tax and legal fees, are generally added to the ACB rather than deducted as an expense in the year you buy. In plain terms, they lower your taxable gain later when you sell, instead of giving you a deduction now. Your accountant will confirm how this applies to you.
Picture an investor looking at an $800,000 property. Before making any offer, they set aside the 20 percent down payment, which is $160,000, because a non-owner-occupied rental cannot go lower. Then they add the cash to close on top: land transfer tax with no first-time rebate, legal fees, and an inspection. Only once that full pile of cash is accounted for do they feel ready to write an offer, so there are no surprises between acceptance and closing day.
The offer and its conditions
When the numbers work and the cash is ready, you make an offer. On a rental it is the exact same Agreement of Purchase and Sale that any buyer signs, the legal contract that sets the price, the closing date, and the conditions. Nothing about the form changes because you are an investor.
The Agreement of Purchase and Sale is the written contract between buyer and seller. It is the same document whether the property is a home or a rental, and its conditions are the safety valves that let you confirm things before the deal becomes firm.
One condition matters even more on an investment: the financing condition. Because the 20 percent rule, the stress test, and how a lender treats the expected rent can all affect what you are approved for, a financing condition gives you the window to confirm the mortgage before you are locked in. It is your protection if the lender's view of the property differs from yours. The making an offer guide covers how the agreement and its conditions fit together.
Closing day
Closing on a rental looks the same as closing on any purchase. Your real estate lawyer does the heavy lifting: they check the title to make sure the seller can actually sell and that nothing unexpected is registered against the property, then they handle the transfer and the money through Teraview, Ontario's electronic land registration system. On closing day the property registers in your name and the keys are yours.
Title is the legal ownership of the property. Teraview is the province's online system that lawyers use to register that ownership and record the transfer. You will not touch it yourself, your lawyer works within it on your behalf, the same as on any purchase.
From there the property is yours to run as a rental, and the numbers you checked at the start become the numbers you live with. That is exactly why the early steps matter so much: a deal that made sense on paper is a far calmer thing to own.
Have a question while you read? I am one message away.
Enter your name and email and your PDF copy is ready to save, handy to take to your mortgage broker, lawyer, or accountant. This guide is free to read here, always. The download is just nice to have.
Thank you
Your copy is ready. Tap below to save it as a PDF, then take it to your mortgage broker, lawyer, or accountant.