Mortgage question - Buy house. Keep condo as investment property..

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Dec 4th, 2018 7:51 am

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Feb 26th, 2018 3:18 am

TheImp [OP]: Temp. Banned; Sep 15, 2014; 2461 posts; 1248 upvotes; Scarborough, ON

Feb 26th, 2018 3:18 am

Mortgage question - Buy house. Keep condo as investment property..

Considering moving out of my condo and buying a house.
Now, the most conventional thing to do would be to sell the condo and use the proceeds as a downpayment on the house.

But what if I wanted to keep the condo as an investment property and rent it out?

If I went that route.. coming up with the 20% down payment would be a challenge.
Would I be able to borrow against the condo (ie. take out a mortgage.. I currently don't have one.. fully paid off!) for this? Or is that making the down payment with borrowed money and a no-no?

Related question.. for tax purposes (ie. rental income).. would it be better to have a mortgage on the condo?

I'm thinking the optimal strategy would be to take out the max mortgage on the condo (offset rental income with mortgage payments to reduce net income..).. I think that'd be 80%.. and take out a mortgage on the house I'll buy for the remainder?

Am I making any sense or am I totally confused?

This space for rent.

16 replies

Feb 26th, 2018 8:34 am

mazerbeaner: Deal Guru; Feb 22, 2011; 10460 posts; 12985 upvotes; Toronto

Feb 26th, 2018 8:34 am

It is better to have a balance on the condo as the interest is tax deductible however if you refinance and use the money for a primary residence that portion would not be deductible.

You don't need to put down 20% on the house, I find once you put down 10% the mortgage insurance payment is pretty low. Plus for the life of the mortgage you will get access to lower rates because it's insured so it's probably a wash in the end anyway. The only potential issue would be if you wanted a 30 year amortization which wouldn't currently be possible on an insured property.

+1

Feb 26th, 2018 8:39 am

rapashoo: Deal Addict; Mar 22, 2010; 3028 posts; 898 upvotes

Feb 26th, 2018 8:39 am

Without knowing your financial status, very hard to chime in on this but I will try anyway based on my situation as I was in your shoes once. I wanted to keep my condo and at the same time put a 20% down payment on my townhouse. Simply put, bank denied my proposal and they made me come up with 20% DP. Their argument was no matter what down payment for the property cannot be borrowed or backed by any credit vehicle. (They were willing to do bigger mortgage but not the 20% down payment. Pretty firm on that one)

So even if you take out max mortgage on your condo and use that money to pay 20% DP, bank will not allow.

I see two options here; one - borrow from family (my case, I borrowed from my parents and then 3 year later I sold the condo, returned the money to them). Or you rent out our condo, go get a room ($400-450 a month) and save up for 5% down payment and look for pre-construction townhouse/detached whatever you desire.

+1

Feb 26th, 2018 8:52 am

skeet50: Deal Addict; Jan 15, 2017; 4118 posts; 3623 upvotes

Feb 26th, 2018 8:52 am

This question comes up often on RFD and there is a general misunderstanding of expense deductions with rental properties.

The assets that you use to pledge or borrow against does not determine whether or not you can deduct the interest - it's whether or not you invest the borrowed money to earn income. The fact that the borrowed money is against a rental property is irrelevant.

In your case, mortgaging your condo and turning it into a rental and using those mortgages funds to buy your personal home will not allow you to claim mortgage interest.

+7

Feb 26th, 2018 9:54 am

BlueSolstice: Deal Addict; Dec 4, 2016; 1907 posts; 930 upvotes

Feb 26th, 2018 9:54 am

Seems like in order to deduct interest on the rental, you would need to see the condo to your wife, use the proceed to buy a house, then take out a second mortgage on the house to buy the condo back from your wife. That way, the mortgage was incurred for the purpose of buying a rental property.

Feb 26th, 2018 9:59 am

HoTiCE_: Deal Addict; Feb 21, 2004; 1461 posts; 220 upvotes; Montreal

Feb 26th, 2018 9:59 am

I did this 3-4 years ago exactly. Moved out of condo and rented it when we bought a house.

Others have already provided sound advice and if you have any more, let me know. The ONE THING not to forget is the day you move out of your condo, hire a professional assessment on your property to evaluate the price of it. This will allow you to properly calculate capital gains many years from now when you sell the condo.

Feb 26th, 2018 4:55 pm

TheImp [OP]: Temp. Banned; Sep 15, 2014; 2461 posts; 1248 upvotes; Scarborough, ON

Feb 26th, 2018 4:55 pm

Hmm..
Sounds like it might not make sense to do this.
Without being able to deduct mortgage payments.. all income from rent would be considered income (minus condo fees and property taxes, I guess..), and taxed at my marginal rate.. is that right?

In that case I'd probably be better off making a larger down payment on the house or investing the proceeds in the stock market..

This space for rent.

Feb 26th, 2018 5:16 pm

happytechnology: Newbie; Feb 24, 2018; 65 posts; 70 upvotes

Feb 26th, 2018 5:16 pm

what happens if you don't get the property appraised? how would the value get estimated down the line?

Feb 26th, 2018 5:20 pm

dpacto: Member; Mar 6, 2017; 382 posts; 259 upvotes

Feb 26th, 2018 5:20 pm

TheImp wrote: ↑ Hmm..
Sounds like it might not make sense to do this.
Without being able to deduct mortgage payments.. all income from rent would be considered income (minus condo fees and property taxes, I guess..), and taxed at my marginal rate.. is that right?

In that case I'd probably be better off making a larger down payment on the house or investing the proceeds in the stock market..

where is your condo and how old is it? if it's in the suburbs and its old probably sell it but if its in downtown and you can get a mortgage and keep the condo and rent covers expenses for the condo you should probably keep it as the appreciation would be worth it down the road

regardless of tax benefits

Feb 26th, 2018 11:34 pm

TheImp [OP]: Temp. Banned; Sep 15, 2014; 2461 posts; 1248 upvotes; Scarborough, ON

Feb 26th, 2018 11:34 pm

dpacto wrote: ↑ where is your condo and how old is it? if it's in the suburbs and its old probably sell it but if its in downtown and you can get a mortgage and keep the condo and rent covers expenses for the condo you should probably keep it as the appreciation would be worth it down the road

regardless of tax benefits

It's in Scarberia

A few back if he envelope calculations..
Say I could net $300,000 from the sale (probably conservative). And I could rent for $1500/mo (again, probably conservative..)

After basic expenses (condo fees and property tax), I'd earn approx $11,000 before tax and $6500 or so after tax if all the rest of the rent is considered income (damn marginal tax rates!)

OTOH, if I apply that $300,000 from the sale to my mortgage on the house.. say at 3.5%.. that's $10,500. And I could probably do better with investments..

This space for rent.

+2

Feb 27th, 2018 10:50 pm

CdnRealEstateGuy: Deal Fanatic; Feb 2, 2014; 8965 posts; 2568 upvotes; Toronto

Feb 27th, 2018 10:50 pm

TheImp wrote: ↑ Considering moving out of my condo and buying a house.
Now, the most conventional thing to do would be to sell the condo and use the proceeds as a downpayment on the house.

But what if I wanted to keep the condo as an investment property and rent it out?

If I went that route.. coming up with the 20% down payment would be a challenge.
Would I be able to borrow against the condo (ie. take out a mortgage.. I currently don't have one.. fully paid off!) for this? Or is that making the down payment with borrowed money and a no-no?

Related question.. for tax purposes (ie. rental income).. would it be better to have a mortgage on the condo?

I'm thinking the optimal strategy would be to take out the max mortgage on the condo (offset rental income with mortgage payments to reduce net income..).. I think that'd be 80%.. and take out a mortgage on the house I'll buy for the remainder?

Am I making any sense or am I totally confused?

Can you get another mortgage while carrying the rental property? You may have no choice but to sell.

Get pre-approved.

Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative

+1

Feb 28th, 2018 3:18 pm

TheImp [OP]: Temp. Banned; Sep 15, 2014; 2461 posts; 1248 upvotes; Scarborough, ON

Feb 28th, 2018 3:18 pm

CdnRealEstateGuy wrote: ↑ Can you get another mortgage while carrying the rental property? You may have no choice but to sell.

Get pre-approved.

The issue is could I take out a mortgage on the condo and use it as a down payment on the house?
Effectively, I'd be borrowing the same amount of money, it'd just be structured differently (backed by two properties instead of one).

But that's a moot point if I cant deduct the mortgage interest on the rental property, as some others above have suggested is the case.. I don't think this makes sense financially without that deduction.

This space for rent.

Mar 1st, 2018 4:37 pm

rafay123: Newbie; Feb 26, 2018; 12 posts

Mar 1st, 2018 4:37 pm

For the first time home buyer what are the other options if dont have enough down payments so how to manage it . Can i use loan or the credit cards.Thanks

Mar 2nd, 2018 11:19 am

Chickinvic: Deal Fanatic; Dec 27, 2009; 7411 posts; 4678 upvotes; Victoria, BC

Mar 2nd, 2018 11:19 am

rapashoo wrote: ↑ Without knowing your financial status, very hard to chime in on this but I will try anyway based on my situation as I was in your shoes once. I wanted to keep my condo and at the same time put a 20% down payment on my townhouse. Simply put, bank denied my proposal and they made me come up with 20% DP. Their argument was no matter what down payment for the property cannot be borrowed or backed by any credit vehicle. (They were willing to do bigger mortgage but not the 20% down payment. Pretty firm on that one)

So even if you take out max mortgage on your condo and use that money to pay 20% DP, bank will not allow.

I see two options here; one - borrow from family (my case, I borrowed from my parents and then 3 year later I sold the condo, returned the money to them). Or you rent out our condo, go get a room ($400-450 a month) and save up for 5% down payment and look for pre-construction townhouse/detached whatever you desire.

That's weird. RBC had no issue whatsoever with us doing this 4 years ago. We used the credit line from hubby's townhouse in Victoria to purchase a townhouse here in Ottawa with 20% down (the entire amount came from the credit line and the bank was well aware of that).

Mar 2nd, 2018 11:30 am

hiphopforce: Sr. Member; Jun 18, 2004; 753 posts; 128 upvotes; Richmond Hill

Mar 2nd, 2018 11:30 am

PM you a proposed plan in full detail. Read it good. SPent my time sharing it with you.

Mar 3rd, 2018 3:28 pm

realtorhome: Sr. Member; May 3, 2013; 654 posts; 258 upvotes; Toronto

Mar 3rd, 2018 3:28 pm

happytechnology wrote: ↑ what happens if you don't get the property appraised? how would the value get estimated down the line?

This happened to me, my seller needed a property appraised from 10+ years ago. I couldn't find any appraiser that does historical appraisal, so the accountant checked with the CRA. The CRA was ok with a Realtor's appraisal, so I whipped one up and it got accepted.

Dec 4th, 2018 7:51 am

JayLove06: Deal Guru; Feb 29, 2008; 14630 posts; 10868 upvotes

Dec 4th, 2018 7:51 am

Wondering how everything worked out with OP. 80% offset is not used by all lenders. Some use as low as 50%. This is a PIA with me as I have rentals so I go with the bank that has the most rental offset friendly calculation.

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