First Investment Property

[pluto]

I just found this forum yesterday and find the topic very interesting.

I`m looking at becoming a landlord in order to bring in some extra income, and hopefully see an appreciation in value down the road but this is secondary to me.

The situation I have is that my wife and I own a detached 3 bedroom house in Burlington, Ontario. I`ve had a conditional offer accepted on a house not far away but closer to my full time job.

Instead of selling my old house, I want to convert it to a rental property. I`ve done some research on the rents in the area by looking at classifieds in the paper/online etc.

I`m having some trouble with the cash flow calculations - basically if I take out a 75% mortgage on the full appraised value of the house (as of August when I ended my closed term mortgage and went into a fully open one) - the interest on the mortgage is so high that my rent has to be well above market to turn a profit, which I understand CRA looks at when considering deductibility of interest and other expenses.

Can I get away with `selling` the house to myself at a lower price, in order to keep the interest payments lower? By doing so I would be decreasing the proceeds available to purchase my new primary residence of course, but I can deal with that.

One person had suggested I do the following after the closing date on my new house (but before renters move in):

1) Gift the old house to my wife
2) Buy it back from her (at a lower than market price)
3) She uses the proceeds to pay off the outstanding mortgage on the old house, and applies any left over to the new house mortgage.

Can anyone see any issues with doing things this way, or suggest a better option?

Thanks!

 

[JasGrewal]

Hi:There are a number of issues to consider when dealing with CRA related matters. Not only is it necessary to be tax compliant, you also want to ensure that you do not trigger an audit as it can be expensive and time consuming.
My background is in tax litigation and have a number of key contacts within CRA. I am happy to advise you on the strategy you have outlined below and if there are alternative options in order to minimize your monthly liabilities.

Regards,
Jas


Jas Grewal, LL.B. , CMP

The Calum Ross Team

Senior Vice President, Mortgage Planner

The Mortgage Centre - Mortgage Professionals Inc.--/sizeo--> Build Wealth with our Client Personal Finance Library at: www.CalumRoss.comPhone. 416.410.9905 Fax . 416.410.9491

Putting our clients first has made us first. Our team has ranked in the top 1% in Canada since 2003.

 

[Thomas Beyer]

QUOTE (pluto @ Nov 13 2008, 06:56 AM)
Can anyone see any issues with doing things this way, or suggest a better option?



Thanks!


Welcome to the investment world !!



Renting and/or selling to yourself is not a great idea .. many houses do NOT make great investment properties as they are "too nice" i.e. too expensive for the realistic rent achievable .. likely your house fits this profile .. possibly the value today might be lower than in August too ..



Consider this action plan: Sell the house, get a nice cash cushion .. pay no taxes .. then find a house or better: 3 that will fit the 8-10% rule, i.e. the rent is high enough to cover your mortgage and expenses such as: taxes, maintenance, upkeep, management, the odd vacancy .. this is usually an older house or an uglier one or an up/down house where the top floor and the bottom floor can be rented plus the garage perhaps .. or it is out of town in smaller centers .. i.e. not in the big city !



Related post to read on "How to get Started": http://myreinspace.com/public_forums1/General_Discussion/61-4391-How_to_get_started_.html

 

[pluto]

Thanks for your reply Thomas.

QUOTE (thomasbeyer2000 @ Nov 13 2008, 11:07 AM) Renting and/or selling to yourself is not a great idea .. many houses do NOT make great investment properties as they are "too nice" i.e. too expensive for the realistic rent achievable .. likely your house fits this profile .. possibly the value today might be lower than in August too ..

This is a small part of the reason for renting, not wanting to put my house on the market during a slow sales time and end up having to sell it for less than what I could have got a few months ago (or hopefully in a few years again)

I think the rent I would have to bring in to carry the house is achievable given my market research, and I know the condition of the place having worked on fixing it up for the past 5 years. I think I have a pretty good idea of what could go wrong with the place (not much) - this has to be worth something.

I will check out that `How to get started` thread though, thanks for the tip.

I would still like to know however, if I did choose to proceed would there be any negative consequences of keeping the valuation of the rental property artificially low?

 

[invst4profit]

I agree with Thomas, get rid of it.

In the long run you are far better off taking the tax free sale now, even at a reduced amount, then trying to convert it to a rental.
Becoming a landlord because you are hoping to squeeze a few extra dollars out of a home that is a poor candidate for a rental is a receipt for disaster.
It sounds like a negative cash flow property, especially since most novice landlords under estimate expenses, and the home will need to be renovated for sale plus you will pay capitol gains on the sale.

Take a closer look at your cash flow calculations. Expenses will eat up 40-50% of your monthly income. From the rest you pay the mortgage and pay yourself if it goes that far.

 

[Dabbler]

QUOTE (pluto @ Nov 13 2008, 07:56 AM) I just found this forum yesterday and find the topic very interesting.

I`m looking at becoming a landlord in order to bring in some extra income, and hopefully see an appreciation in value down the road but this is secondary to me.

The situation I have is that my wife and I own a detached 3 bedroom house in Burlington, Ontario. I`ve had a conditional offer accepted on a house not far away but closer to my full time job.

Instead of selling my old house, I want to convert it to a rental property. I`ve done some research on the rents in the area by looking at classifieds in the paper/online etc.

I`m having some trouble with the cash flow calculations - basically if I take out a 75% mortgage on the full appraised value of the house (as of August when I ended my closed term mortgage and went into a fully open one) - the interest on the mortgage is so high that my rent has to be well above market to turn a profit, which I understand CRA looks at when considering deductibility of interest and other expenses.

Can I get away with `selling` the house to myself at a lower price, in order to keep the interest payments lower? By doing so I would be decreasing the proceeds available to purchase my new primary residence of course, but I can deal with that.

One person had suggested I do the following after the closing date on my new house (but before renters move in):

1) Gift the old house to my wife
2) Buy it back from her (at a lower than market price)
3) She uses the proceeds to pay off the outstanding mortgage on the old house, and applies any left over to the new house mortgage.

Can anyone see any issues with doing things this way, or suggest a better option?

Thanks!

We too are looking at the possibility of renting our existing home once we find another principal residence for ourselves. We initially took out the equity so we could start buying rental properties. However we are torn between looking for another principal residence or buy rental properties. We figured if we took care of getting the home that we want now and then turn our existing home into a rental; we`ve taken care of both of our current wants/needs. We don`t want to miss buying in this market now either. In the meantime we are suiting our house to get the maximum rents and searching for another home for ourselves.
Keeping our existing home and renting it, the rents will just barely cover the expenses which bites a bit I`d say. Reading the other posts makes me wonder.

 

[MikeMcCrae]

Can you not just refinance your existing house to an amount that will cash flow, or at least break even and then use the balance of the proceeds to buy your new house? I don`t understand why you want to "buy" the house at a lower value then it is worth so that you can pay higher taxes later.