Always wanted a rental property: Is it doable?

[daisyville]

This is for you savvy RFDers.

I've always wanted to have a small rental property, in addition to the family home my daughters and I occupy.

I currently live in a semi-detached home on a quiet street. This morning I noticed the "other half" has put up a for sale sign. Hmmmmm. How convenient.

So, here's the situation:
I'm a single parent, two daughters
Virtually no capital in the bank as I just separated from my husband
I make a reasonably good living, and it's as secure as any job I suspect
I have no other income stream other than my career.

I don't know the list price yet, but I'll predict it's about $190K.

Who's the math whiz around here? Likely not do-able, but I'd be really interested in hearing the educated perspectives on the options.

Tracy

[YYZer]

Need a lot more information to make a determination:

1) Any debt?
2) Any monthly payments - car, mortgage etc.?
3) What is outstanding on your current mortgage, and what is the current value of your house?

If you have enough equity on your house, and you take out a second mortgage on it to realize approximately $50,000 to put on the new house (you want to put down about 25% to avoid the extra CMHC tax for less than 25% downpayment), a 5 year mortgage at approximately 5% interest / year (25 year amortization) is $872.41/month. Basically, you would have to recover at least that amount per month plus all extra costs (heating, property taxes etc) to not assume any more payments per month. You would be gaining the capital portion of the mortgage. You could probably rent for a bit less than that amount since the capital you gain per month at a 5% interest rate is quite significant.

At $190,000, assuming you are paying nothing down, you would owe $1105 / month on your mortgage. That is not including the costly CMHC mortgage insurance you would have to purchase for properties with less than a 25% downpayment.

All in all, it is doable, but very dependent upon the questions that I outlined at the start and how much you expect to receive in rent.

[daisyville]

Right.
No consumer debt.
No car payments.
No credit card or Line of Credit payments.

My home value, estimated $210K, mortgage on it $110K.

What I don't know is the vacancy rate in my community or what the fair rental rate would be for the property. I should do some detective work.

[me!]

You can use the equity in your own half to purchase the other half. At one time I purchased a house with no job, but lots of equity. other than that banks won't want to talk to you. Unfortunately lending policies are different for houses as they are for rental apartments. They base mortages for rental on the income the rentals produce versus how much money you make for homebuyers.

(I have no idea how or why they decided to lend to me without a job that time)

[cheap sk8]

Two points:

First, consult a mortgage broker. They don't get paid unless you get a loan (strictly on commission) so they are somewhat more, ahem... flexible with your loan application. Plus this way, your credit rating only gets hit once, versus each time you ask for a loan and may get turned down.

Second, it seems that this property is attached to your current property (semi-detached)? Even if its not, (ie its your next door neighbour), if two homes are registered to one person, they are no longer seperate at the land registry office, meaning both properties become one. If down the road you want to sell one, it will be difficult since then you will have to apply to sever the property. It is recommended that you seek legal advice on what name to buy the property, so this will not be a problem for you in the future.

[ramoose]

Right.
No consumer debt.
No car payments.
No credit card or Line of Credit payments.

My home value, estimated $210K, mortgage on it $110K.

What I don't know is the vacancy rate in my community or what the fair rental rate would be for the property. I should do some detective work.

A couple of things to remember is your payments on your own home will be increased by the $50,000. mortgage unless you can rent the unit out to cover all the $140,000 and the $50,000(2nd). The $50,000. interest can also be deducted off your income tax as it is used for an investment.

[PrinceMS]

A couple of things to remember is your payments on your own home will be increased by the $50,000.

I am sorry, can you plz explain to me - why original mortgage is increasing 50g?

[TrevorK]

I am sorry, can you plz explain to me - why original mortgage is increasing 50g?

She stated she has no capital, which means her downpayment will have to come from her equity in her home.

Typically, on a rental unit you are supposed to provide 25% downpayment, which is around 50K, which needs to come from the equity in her current home.

So her current home mortgage goes up 50K in order to put 50K down on the new house. It's really just a paper thing - but since the two mortgages have to be kept seperate it needs to be done.

[daisyville]

well I've chatted with an accountant. We're scheduled for 'cocktails' to talk some more

Anyway, I think it's likely do-able, just gotta find the kahunas. Regarding the same owner, one semi-detached unit, this would not be an issue as they are separately deeded, separately surveyed, unique properties, albeit attached.

I'll let ya know! Thanks for all your input.
T

[dlander]

First figure out if rent will cover mortgage + property tax + maintenance.
You don't want to have to have to cover any of this stuff using your salary.

And do understand fully the risk. Like stocks, property values can go down as well as up. Think 1989-1995. Toronto prices probably fell 20% over that time. If you put 25% down on the rental this would be awfully painful.

We've had 10 years of rising home prices. And now we are facing rising interest rates which increase morgage payments reducing affordability, and putting downwards pressure on prices. Just my opinion but you would have been well advised to buy a rental 5 years ago. Now may not be the time.

[canadiantofu]

You just made it on the HELOC for down payment... because the max HELOC you can apply for is (210K * 75%)-current mortgage = 47.5K

The 47.5K is your 25% down payment required for your 190K rental property mortgage.

But.... is the bank willing to lend you (210k + 190k - 100k equity) = 300k in total mortgage? Base upon your gross income?

Just plugging the numbers in to a simple mortgage calculator; you’ll probably need around 80K - 85K in gross income.

However, some banks will allow you to include the potential rental income as well as your working income to be used as your new gross income for mortgage calculation.

Things you might want to consider.
1. Do you have cash around to bridge mortgage payments for your vacant periods.
2. How is the rental market in your area? (Very important)
3. Given your recent "separation" will your rental income have an affect on any support payments?
4. Your rental income is taxable and your Mortgage interest on your rental is tax deductible.
5. If you brought your house for less than 210K... the bank is going to want a new appraisal to set up the HELOC. See if you can negotiate a reduction or wavier on the HELOC setup fee.
6. If you set up a HELOC on your rental property as soon as possible. You can use this to bridge your mortgage payments at vacant time. (Risky). The minimum on a HELOC is 10K, so this means your new property (brought @ 190k) will have to be re-appraised at approx 200K

Sorry if my 2 cents is more like 10. Just my thoughts and opinion, not meant to be advise. Would be interested in what your accountant says.... good luck!

[daisyville]

You just made it on the HELOC for down payment... because the max HELOC you can apply for is (210K * 75%)-current mortgage = 47.5K

The 47.5K is your 25% down payment required for your 190K rental property mortgage.

But.... is the bank willing to lend you (210k + 190k - 100k equity) = 300k in total mortgage? Base upon your gross income?

Just plugging the numbers in to a simple mortgage calculator; you’ll probably need around 80K - 85K in gross income.

However, some banks will allow you to include the potential rental income as well as your working income to be used as your new gross income for mortgage calculation.

Things you might want to consider.
1. Do you have cash around to bridge mortgage payments for your vacant periods.
2. How is the rental market in your area? (Very important)
3. Given your recent "separation" will your rental income have an affect on any support payments?
4. Your rental income is taxable and your Mortgage interest on your rental is tax deductible.
5. If you brought your house for less than 210K... the bank is going to want a new appraisal to set up the HELOC. See if you can negotiate a reduction or wavier on the HELOC setup fee.
6. If you set up a HELOC on your rental property as soon as possible. You can use this to bridge your mortgage payments at vacant time. (Risky). The minimum on a HELOC is 10K, so this means your new property (brought @ 190k) will have to be re-appraised at approx 200K

Sorry if my 2 cents is more like 10. Just my thoughts and opinion, not meant to be advise. Would be interested in what your accountant says.... good luck!

Substantive meeting with accountant yet to come, but over a brief conversation he advised against a second mortgage on my current home, to operate my current home as is, and to put less than 25% down on the investment and suck up to CMHC for the penalty. That way my risk is reduced.

1. No cash around right now, at least not much, but that will change. It's a risk, I know (haven't made that decision yet).
2. rental market here is less than 1% vacancy rate. According to a property manager I spoke with, the demand is in the smaller home rental market (as opposed to apartments) in quiet neighborhoods. We have a winner there.
3. I don't get support from my ex.
4. Yes, accountant mentioned that.
5. If I don't get a second mortgage, I won't have to go that route I guess - not sure. Let 'em come and appraise though - I did killer renovations

10 cents always welcome. What the heck is HELOC?

[daisyville]

First figure out if rent will cover mortgage + property tax + maintenance.
You don't want to have to have to cover any of this stuff using your salary.

And do understand fully the risk. Like stocks, property values can go down as well as up. Think 1989-1995. Toronto prices probably fell 20% over that time. If you put 25% down on the rental this would be awfully painful.

We've had 10 years of rising home prices. And now we are facing rising interest rates which increase morgage payments reducing affordability, and putting downwards pressure on prices. Just my opinion but you would have been well advised to buy a rental 5 years ago. Now may not be the time.

True. I'd have to think of it as a business. If it becomes unprofitable, at least it's liquid.

I soak a fair bit of cash into my RSPs every year, and I'm not sure how well they've done to be honest. And they're not liquid....at least not without tax implications. (yes, I know a rental property sale would impact capital gains as well...)

[TrevorK]

You'll need 15% down I believe for CMHC...

Helping Create Opportunities for Rental Investors
Larger mortgage loans

When loans are CMHC-insured, the borrowers can obtain mortgage financing up to 85% of the value of the property without a maximum dollar amount. As a result, borrowers need less equity to purchase a rental property.

[daisyville]

You'll need 15% down I believe for CMHC...

Helping Create Opportunities for Rental Investors
Larger mortgage loans

When loans are CMHC-insured, the borrowers can obtain mortgage financing up to 85% of the value of the property without a maximum dollar amount. As a result, borrowers need less equity to purchase a rental property.

Thanks Trevor. If that's the case, the decision would be easy then.
(which would be - not right now. But save up some capital and try it again next year)