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)

[Shaf]

..... What the heck is HELOC?
Home Equity Line of Credit

[cheap sk8]

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.

That's true now because you don't own both. Each is registered to a different party. Once you purchase the other and transfer the name to yours as is the other, it becomes one property. As far as the government is concerned, real estate is the land and not the building (yeah, they charge you tax for size of the building). Once one person owns two parcels of land next to each other, the land is joined and treated as one.

You really need to discuss this with a real estate attorney before buying. You will need their services anyway to draft the rental or lease agreement (don't ever use those useless agreements you find at real estate boards). Better to start planning before you commit, before the potential of legal mistakes. They happen, and serial tenants know how to expoit them to their advantage.

[TrevorK]

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)


If you are really wanting to do this, you can always take out a secured line of credit against your home equity for 15%.....

[daisyville]

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.

cheap sk8,
I do appreciate your comment.
I'll check into it.

Just wondering (and I'm wondering respectfully, not trying to flame you or anything) if you have any professional expertise in this area to make that comment, or if you've experienced something similar?

Just wanting a frame of reference for this comment.

Many thanks - again appreciate the tip,
Trac

[CSK'sMom]

Tracy, we have a friend that does this as his living. He started out with 1 house and now have over 60 buildings (not units!). We had thought about doing this a few years a go and the one thing he kept saying to us is this... If you're not sure you can financially carry the property for at least 6 months then don't do it. Then he brought up the dollars needed to cover damages, unpaid bills, etc by tenants. After starting out renting houses he switched over to renting houses to university kids. He routinely takes a 3 bedroom house and turns it into a 6 bedroom house. He also now tends to buy townhouse complexes and small apt. buildings...

Cheap sk8, I would ask the same question of you as Tracy. Our friend owns 10 semi's on the same street (5 buildings in a row!) as well as other semi's. He has never had a problem selling off one side when he has owned the other...

[daisyville]

Well, met with accountant. Spoke with banker. Spoke with another lender.

Short story is, a crazy banker/lender would give me the mortgage (who knew?) and the associated expenditures plus municipal taxes are about $40 more per month (estimated at full asking value of property) than a projected monthly rental.

So...now I stew about it.

CSKs Mom, I think that advice about "can you take a hit for 6 months" is pretty sound. My accountant friend suggested 3. Same philosophy, slightly different time frame.

The financing proposed would give me access to about another additional $16K for emergencies should I need to.

Anyway, it's giving me a headache :)

I'll let ya know what I decide.
Trac

[danno567]

I have pondered the same issue, but for when we decide to move out of our townhouse to a house three years from now. Want to keep our townhouse to rent out, and use the equity in our present townhouse to put onto a house in three years.

Good luck! I hope it works well for you.

[TrevorK]

CSKs Mom, I think that advice about "can you take a hit for 6 months" is pretty sound. My accountant friend suggested 3. Same philosophy, slightly different time frame.


Remember to count in your emergancy fund amounts needed if a tenant leaves the place in a mess (Paint, repairs, carpets, lino, etc...).

There's never a guarentee of getting more than the damage deposit, but it is very easy for a tenant (Even with you next door) to cause 2000-3000 in damage (Then add in the amount of rent/utilities you're out while fixing the place).

[jckc]

Anyway, it's giving me a headache :)



Is this a pleasant, feel-good headache? :)

I have no suggestion to make. What you are doing is exactly what I would like to do in the future. I have no suggestion to make because I haven't even have my first place yet :)

Best wishes!

[William W]

Put it this way, assuming you can rent it all the time, and the house is able to carry itself, (ie Rent => than Mortage + Insurance + other expense) there is no way that you can lose out on this.

(1) Historically speaking, real estate price do goes up over a long period of time.
(2)A city that has less than 1% of vancacy, indicate that there is a shortage in housing, which means 2 things, it will be very easy for you to rent out the unit, and there are pressure that property value will go up because of this shortage.

[daisyville]

For those who are interested, here's an update:

I ran the "math" on the house attached to mine, and it didn't work out well.
Instead, I looked at other properties which were also rentable yet listed for a lower value. I saw a number of them.

Thought I'd put an offer in on one, but when I called the realtor to do it, it had sold when I was out of town on business. Wasn't meant to be I guess. Looked some more.

Saw another one that I thought had merit and was at the right price point this weekend, and I have an accepted offer (conditional upon financing, which expires Friday). So, if the bank is crazy enough to enter into this partnership with me (and the broker thinks it's a no-brainer for some reason) then I'll soon become Tracy the landlord.

For a while I thought I'd throw up. Then I felt kinda giddy. Now I feel just like I'll approach this very professionally and business like and let it ride itself out. So, with any luck, I'll be looking for a good tennant in Barrie for availability August 1!

I'll let you know if the financing doesn't work out. Otherwise, I've just expanded my portfolio!

Tracy

[guest10586]

I hope you know a lot about home repair or can get it done cheap. Another thing that you need to know is how to kick out tenants. The gov't in Alberta makes you give them 30 days notice. So they miss 1 month of rent, then get 1 month free and then they go to court. Lets just say they can be there a very long time if you don't know your stuff...

[jed]

I hope you know a lot about home repair or can get it done cheap. Another thing that you need to know is how to kick out tenants. The gov't in Alberta makes you give them 30 days notice. So they miss 1 month of rent, then get 1 month free and then they go to court. Lets just say they can be there a very long time if you don't know your stuff...

Actually, it varies - from immediately to 3 mos. Unless you can prove that they are being absolutely disruptive to the property or the other tenants, you might have to give them 3 mos. But you're right on to know the rules for your province. The local city hall usually can give some advice on where to get that info should you not find it.

[dolphie]

cool daisy....i for one, was wondering what you decided.
just bought my first house ...and hubby and i have been talking about rental properties as a good retirement income.
glad to see it worked out (so far) for ya

[Laptop Surgeon]

In Ontario, Landlord is entitled to collect 1st & last month rent only. NO other deposits is permitted (therefore damage, key, etc deposits are illegal), and get this "Landlord has to pay 6%/year on the last month deposit" back to the tenant. It is illegal for the Landlord to ask for post dated cheques.

If the tenant is late in payment, you can serve the N4 (Notice of termination of tenancy for non payment of rent) right away. There is a 2 week grace period before you can make application to the rental tribunal.

http://www.orht.gov.on.ca/userfiles/HTML/nts_3_5230_1.html

this is a useful resource for both landlords and tenants. (Applicable for Ontario only).
all the necessary notices and applications are in pdf format.

[HoTiCE_]

In Ontario, Landlord is entitled to collect 1st & last month rent only. NO other deposits is permitted (therefore damage, key, etc deposits are illegal), and get this "Landlord has to pay 6%/year on the last month deposit" back to the tenant. It is illegal for the Landlord to ask for post dated cheques.

If the tenant is late in payment, you can serve the N4 (Notice of termination of tenancy for non payment of rent) right away. There is a 2 week grace period before you can make application to the rental tribunal.

http://www.orht.gov.on.ca/userfiles/HTML/nts_3_5230_1.html

this is a useful resource for both landlords and tenants. (Applicable for Ontario only).
all the necessary notices and applications are in pdf format.


You think this is bad? The law in Quebec is just about 10x worse.

On a late payment, application can ONLY be made 3 weeks after the 1st. Then it takes about a month to go to the tribunal, which then gives another 2 weeks for them to move away and run with your money. Add to that about 329847324832 other laws that protects the tenant and you'll realize how frustrating it is to be a landlord in Quebec where the tenants have every rights and the landlord none.

I'm currently fighting a case from a tenant that owes me 4 months (because of all judicial delays) of rent. Probably will never see the color of this $

just my 2 c