Rental Property Purchase with HELOC

Last Updated:
Jul 9th, 2021 9:01 am

Tags:

SCORE
+1
1
0

Reply to ThreadReply

Search this thread

Search this thread

Jul 8th, 2021 1:57 am

OldSchoolSnail [OP]: Newbie; Jul 7, 2021; 37 posts; 41 upvotes

Jul 8th, 2021 1:57 am

Rental Property Purchase with HELOC

Please educate me regarding the purchase of a rental property in *Toronto North York, Ontario (specifically along the Yonge Street corridor between Steeles Ave and Sheppard Ave).

I'd like to use a HELOC or HEL for the 20% rental property down payment. I've provided the below numbers using a HELOC interest only payment situation to keep my monthly payments as low as possible (as opposed to a HEL where I'm paying interest + principle per month)

Here's the situation with estimated numbers:

My primary home value
$1.3 million ($245K left on mortgage)
*access to $755K home equity

Approximate Rental Property Purchase Price
$800K

Rental Property Monthly Fees
$525 Maintenance Fee
$267 Property Tax ($3200/year)

HELOC @ 2.65% for $755K ($160K 20% down payment + 595K rental property remaining purchase price)
$1667.29/month interest only payment
*Since I only qualify for $755K max HELOC on a 800K rental property, I am assuming I would have to pay the remaining difference in saved cash ($45K remaining rental property purchase price + $25K land transfer tax + $1K lawyer fees = $71K)

Rental Rate
$3600/month
*assuming tenant pays utilities

The Breakdown:
- Monthly rent brings in $3600
- My monthly expenses are $3422 ($525 maintenance + $267 property tax + $1667.29 interest only HELOC). The total monthly cost for me would be $2459.29

Therefore per month, I would be at a profit of $178. Once again, this would be based on me having to pay $71K in saved cash ($45K rental purchase difference + $25K land transfer tax + $1K lawyer fee).

Would this be the best situation for me? I crunched some numbers about using the HELOC to pay for the 20% down payment and putting the rest on a mortgage, but the monthly cost would be much higher since I would have to pay the principle + interest on the mortgage in addition to paying the HELOC.

Hopefully my numbers/explanation makes sense. Any help/suggestions are very appreciated. Even a virtual slap in the face saying I shouldn't be doing this is fine too.

Thanks family.

13 replies

Jul 8th, 2021 2:30 pm

hockeyfan1990: Deal Addict; Apr 18, 2017; 1053 posts; 920 upvotes; Toronto

Jul 8th, 2021 2:30 pm

All your numbers are out the window once rates rise and/or lender calls to cover the HELOC. What will you do then lol

Jul 8th, 2021 2:41 pm

senasena: Deal Addict; Feb 19, 2019; 1970 posts; 3096 upvotes; Stouffville ON

Jul 8th, 2021 2:41 pm

You are not accounting for insurance, repairs, vacancies etc.
You would also be better off with the mortgage at a lower rate even though your cash flow will be negative by a pretty significant amount.

I think you should also make a distinction between cashflow and costs.

Full Time and Full Service Realtor

Jul 8th, 2021 2:57 pm

vprime77: Member; Apr 20, 2016; 305 posts; 274 upvotes

Jul 8th, 2021 2:57 pm

You are proposing to use up all your HELOC room. I would rather use a lower portion of the HELOC and buy a precon unit with a closing a few years out. It's almost the same as what you are trying to do with much less money down. You can stagger 1 or 2 precons to better utililze your HELOC.

+1

Jul 8th, 2021 3:29 pm

AppleDogwood: Jr. Member; Mar 29, 2020; 103 posts; 108 upvotes

Jul 8th, 2021 3:29 pm

Just use the HELOC as a down payment and get a mortgage for the rental.

Jul 8th, 2021 5:03 pm

DaMan12: Deal Addict; Jan 15, 2010; 1534 posts; 1893 upvotes; Toronto

Jul 8th, 2021 5:03 pm

If you're worried about carrying costs, why not buy a place with 35% down (HELOC or combination of HELOC + cash)? That should make it manageable. Otherwise do as other have said, buy some pre-con units and play the capital appreciation gambling game.

Jul 8th, 2021 5:15 pm

BigDurian: Member; Mar 1, 2016; 388 posts; 332 upvotes

Jul 8th, 2021 5:15 pm

I don’t understand why you want to borrow $750k to bring in $178/month. I also don’t understand where $3422 comes from...what is the difference between costs and expenses.

You would be better off borrowing and investing in a diversified dividend growth portfolio at 4% and skip all the headaches of being a landlord:

home-equity-leveraged-dividend-growth-i ... d-2455354/

Your $178/month will become a negative $122/month the first time you have a vacancy.

Jul 8th, 2021 9:47 pm

OldSchoolSnail [OP]: Newbie; Jul 7, 2021; 37 posts; 41 upvotes

Jul 8th, 2021 9:47 pm

AppleDogwood wrote: ↑ Just use the HELOC as a down payment and get a mortgage for the rental.

If I were to do this, I would be paying both the interest only portion of the HELOC and the rental mortgage (principle+interest). That would increase my monthly outgoing cash where it would surpass what the tenant is paying me. Unless I'm mistaken ...

Jul 8th, 2021 10:03 pm

OldSchoolSnail [OP]: Newbie; Jul 7, 2021; 37 posts; 41 upvotes

Jul 8th, 2021 10:03 pm

BigDurian wrote: ↑ I don’t understand why you want to borrow $750k to bring in $178/month. I also don’t understand where $3422 comes from...what is the difference between costs and expenses.

You would be better off borrowing and investing in a diversified dividend growth portfolio at 4% and skip all the headaches of being a landlord:

home-equity-leveraged-dividend-growth-i ... d-2455354/

Your $178/month will become a negative $122/month the first time you have a vacancy.

Great advice. My TFSA is maxed and doing quite well. It's just this portion of saved cash that is just sitting in my account that's losing value.

I've been contemplating either to put it in my non registered cash investing account or put it toward that rental unit.

Anyways, thanks for all the great tips. Keep them coming! Love the insight.

Jul 9th, 2021 2:58 am

Unknownname: Sr. Member; Jan 27, 2018; 534 posts; 523 upvotes

Jul 9th, 2021 2:58 am

Which condo are you buying for $800k that gives $3600/month rent?

+1

Jul 9th, 2021 3:57 am

OldSchoolSnail [OP]: Newbie; Jul 7, 2021; 37 posts; 41 upvotes

Jul 9th, 2021 3:57 am

Unknownname wrote: ↑ Which condo are you buying for $800k that gives $3600/month rent?

2+2 stacked townhouse.

Jul 9th, 2021 4:31 am

fogetmylogin: Deal Addict; Nov 13, 2013; 4392 posts; 2977 upvotes; Ottawa

Jul 9th, 2021 4:31 am

OldSchoolSnail wrote: ↑ Great advice. My TFSA is maxed and doing quite well. It's just this portion of saved cash that is just sitting in my account that's losing value.

I've been contemplating either to put it in my non registered cash investing account or put it toward that rental unit.

Anyways, thanks for all the great tips. Keep them coming! Love the insight.

No reason for not making non-registered investments. Dividend stocks get very good tax treatment. The market has done well over past 12 years but your plan would have made more if purchased at almost any point. Does that mean it will outperform over the next 12 no. Most of the outperformance of real estate is because of leverage. This magnifies returns but also magnifies losses which is often forgotten. I am not predicting a housing crash or a stock market crash. Both are possible events. What about a 10% sustained downturn due to higher interest rates. That means you lose most of your $71k if you sell and your monthly profit becomes a big loss as you start paying 4%, 5% 6% or even higher on your HELOC. The chance of them calling it in is lower with that much equity but still possible.

Still most likely outcome 20 years from now it's paid off and worth double providing a comfortable retirement. full on housing crash might mean you are broke and your whole life working was for nothing. Given your equity it would have to be a 50% drop to really reduce you to 0 so that's very unlikely but if that is a anything near a 5% outcome it seems not worth it.

Jul 9th, 2021 4:51 am

Quentin5: Deal Expert; Feb 8, 2014; 28886 posts; 12561 upvotes; Socially Distanced

Jul 9th, 2021 4:51 am

Are you insane?
That is incredibly tight.

As mentioned you have a surprise expense or rates go up or you have vacancy for a couple months and your screwed.

You are also not paying any principle at all, if you put that $178/m onto the principle and somehow rates and expenses and property tax and everything else never rise and you have no expenses ever it will take 353.46 years to pay it off!
Your great, great, great, great, great, great, great grandchildren will finally own it free and clear!

What is your annual income and how much extra cash do you save each month (right now)?
BTW would not a conventional mortgage get you a lower interest rate even if you have to use the HELOC for 5-20% down?

In fact in Rand McNally they wear hats on their feet and hamburgers eat people

Jul 9th, 2021 9:01 am

RichmondCA: Deal Addict; Mar 2, 2017; 3510 posts; 6822 upvotes; Toronto/Markham

Jul 9th, 2021 9:01 am

3,600 in rent on an 800k property seems pretty far fetched. I'd need to see an example of that along Yonge, anything that comes remotely close to that type of rent is over a million.

RE Broker

+2

Reply to Thread

Top