Real Estate

Investment property as first home

  • Last Updated:
  • Jul 11th, 2018 9:19 pm
[OP]
Newbie
Feb 20, 2015
45 posts
2 upvotes
Niagara Falls, ON

Investment property as first home

Hello,
I am purchasing my first home ever and i put down the minimum payment of 5%. I've consolidated the CMHC Mortgage insurance into the Mortgage. My goal is to sell it within the next 5-6 years closer to the GO Train Launch here in Niagara for profit. Wondering if this is the best way to go about it.
Since this will be my principal residence, even if i don't live there i can make a section 45(2) election to avoid capital gains tax when i sell it if within the first 4 years? Should i amortize over a 30 year period in order to keep monthly payment low since i won't have
to pay the entire loan over a 30 year term and not pay more interest in the long term. I will be selling within 5-6 years and i think the interest is spread out evenly over a 30 year amortization period so i will save money by having a lower monthly payment for the first few years?
Thanks
2 replies
Deal Fanatic
User avatar
Nov 2, 2013
5610 posts
1474 upvotes
Edmonton, AB
bamage wrote: I've consolidated the CMHC Mortgage insurance into the Mortgage. My goal is to sell it within the next 5-6 years closer to the GO Train Launch here in Niagara for profit. Wondering if this is the best way to go about it.
Should i amortize over a 30 year period in order to keep monthly payment low since i won't have
to pay the entire loan over a 30 year term and not pay more interest in the long term.
Don't know why you'd "save" money; you're spending more in interest. However, interest is a tax deduction, and you have more free monthly cash flow to use as you desire.
i put down the minimum payment of 5%. I've consolidated the CMHC Mortgage insurance into the Mortgage
You'll probably get a lot of angry responses here on the RFD. There are a lot of angry anti-debt, anti-risk people eating from the Bank of Mom and Dad for the large 20% downpayments for extravagant homes, whose hobby consists of praying for a massive market crash.

That being said, the CMHC Mortgage Insurance is not tax deductible, since it's meant for first-time homeowners living in their principal residence, not for investment properties. It's a large expense as well, so make sure you REALLY intend to buy and hold this property for the time period you mention. Also, you can't get a 30-year mortgage wth 5% down anymore (Mortgage Brokers: correct me if this has changed).

On the bright side, mortgage interest again, is tax deductible, so the extra bit you incur from putting 15% less down will lessen tax bleed. Also, theoretically your ROI (return on investment) is higher, as even after the extra interest and CMHC cost, you're generating more profit per dollar of your own cash:
ROI = cash return / initial cash investment


So suppose you pay $26,000 down (6.5%) to close on a $400,000 property.
(You will not spend just 5% since there are closing costs; most lenders ask to see 1.5%.)
You sell after 5 years. We'll not look at closing costs for simplicity.
- CMHC cost: -$15,200; -$3,040/year avg.
- Interest cost: -$55,163; -$11,033/year avg.
- Property taxes: -$3,000/year
- Rental income: +$19,200/year ($1,600/month)
- Appreciation: +$48,841/year avg. (10% YoY)
ROI = (48841 + 19200 - 3000 - 11033 - 15200)/26000 = 149%

Now if you put 20% down, interest cost changes over the 5 years to $8,933/year avg., and you save CMHC cost.

ROI = (48841 + 19200 - 3000 - 8933)/86000 = 65%

Along with the higher ROI and decreased tax burden, you can also invest the remainder of the 15% downpayment you otherwise would have put down, into something else.

Also, you will pay less tax equal to $2,100 x (your marginal tax bracket) , where $2,100 is the extra yearly interest you pay.
But, before you sell, your cashflow will decrease by this amount, so it is more stressful to endure on an ongoing basis.
Accountant (Public Practice)
  • Oilfield & Industrial Services, Environmental Services
  • Road Construction
  • Transportation & Logistics
  • Tax & Financial Analysis
  • In the Western Canadian Oilfield since 2013
Deal Addict
User avatar
Dec 13, 2016
4095 posts
3602 upvotes
You can't make a principal residence election if you have not lived for a number of years,

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)