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TDS Changes - Need your input

Trizzy

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Hey all. Had a question regarding debt service ratio and the changes that were made back in April, 2010.



I current own a property in Kitchener which was purchased last year for $324,000 with 5% down and has a current outstanding balance of $313.5K. It's owner occupied, and it is a rental propery generating $1750/month. I undervalued the cost of my unit for rent. If my current tenants choose to leave after their lease is up(the fall), I fully intend on increasing my rents to approximately $2400/month, depending on the supply/demand and interest.



I intend on purchasing a 2 bdrm condo within Kitchener either later this year or early next year with intentions of renting it. I will be looking at purchasing in the $135,000 range, with an LTV of 80% or less if I have the finances at that time. It should respectably average $900-1100/month rent. Now I should mention here that I intend on, if possible, implementing the Smith Manoeuvre on this property, which would require a readvanceable mortgage.



I would estimate I earn $40,000/year ballpark figure from my profession.



I have already been in contact with my previous broker(OMAC), who I used for the first property I purchased. I relayed all of these numbers and facts to them and they responded saying, "You will need to have an income of at least $49K/yr to qualify for a purchase of $140K with 20% down based on the current information that you have given me. If your tenant moves out and you can increase your rent on that property then the income can be $45K/yr". Would the amount they specified constitute both my earned and rental income, or just earned?



I assume that their lenders do not allow the 80% or 100% offset for rental income. So what are my options from here? Private lenders?
 

IFBManagement

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You should contact Peret Kinch team to help you with all these questions.

check his website www.peterkinch.com
 

SpecialEd

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Can you tell me how you own a $324,000 house that you live in and that also generates (or can realistically generate) $2400 a month in rental income? Because I want in!!!



Your LTV on the condo you want to purchase will have to be 80% or less due to the changes in mortgage law.
 

Trizzy

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To respond to your inquiry Special Ed.









It's a duplex, the upper unit is 1800 sqft. with 5 bedrooms rented to students and the downstairs is a 1 bedroom unit I live in. The property is a short drive to the UofW, and has amenities everywhere closeby(I.E Elementary/High school, grocery store, bus route, hospital). Other units in my area are generating approx. $400-600 per room, sometimes more the closer you are to post secondary schools( I.E UofW or Connestoga College). I know this because I have asked other Landlord's tenants what they are being charged. If you divide my $1750/month by 5 rooms, thats only $350/per room all inclusive! They have a damn good deal if you ask me, hence why I can justify asking what is fair according to the market. I am essentially bring my rents up to $500/per room.









I am aware of the fact that rental properties other than your primary residence require AT LEAST 20% down. I think I failed to iterate properly that I will be putting 20%+ down.









Any suggestions how I can aquire financing?
 

RobMacdonald

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You may run into some issues with using the rent from your residence. Reason being as most lenders will only use the market rent for the purchase of calculating an offset. Lenders will use offsets, but you must verify the income. If you provide 5 lease agreements, it most likely will not fit their guidelines. So if the market rent is actually $1200 to $1500 for a top floor of a house, then some lenders may offset the amount against the mortgage payment and others will use a portion to be added to your income.
 

Trizzy

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Again I apologize for not being specific enough. I have 5 bedrooms rented to one group of students who pay me one full amount at the price of $1750/month. I advertise the unit per room, but prospective tenants will be in groups. I only defined the cost per room for the purpose of clarifying the confusion for Special Ed.



With what you have told me and what I already concluded, I basically only have the option of using lenders that offer 80%+ rent offset.
 

Trizzy

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I would assume most RE investor are stuck in the same dilemma. I will check out Dominion. Anyone refer any lenders that they know use the 80% rent offset?
 

RobMacdonald

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If you only have 2 properties at this point, there are a couple of lenders you could potentially work with that offer 80% offset on rental properties. You should also be looking for a lender that has a good policy for income from your principal residence.



One other point from you earlier post regarding the Smith Manoeuvre. When you buy the condo, your interest is already tax deductible, so you'd be better off working on your residence mortgage for accelerated pay down and then readvance that mortgage for future investments.



Feel free to give me a call and we can discuss in more detail.
 

Trizzy

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Just to clarify, I only own one property. I plan on purchasing my second.









I did not realize that mortgage interest is tax deductible on rental property. I suppose it would make more sense to execute the strategy on my primary. The only issue here that I forsee is that lenders who offer the readvanceable mortgages typically require at least 20% down, and I only have 5% down.









Thanks again for your help and I will consider you when I am closer to my purchase.
 

Trizzy

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lol thanks! It's a modest portfolio at the moment, but it will expand.



Off the topic for a second, my name really needs to be changed. lol Trizzy is a little juvenile, not sure why I used it on a mature forum. Ah well, can't kick nicknames given to you I suppose. :)
 

Selanders

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There are lender's that will use 80%-100% of your rental income but keep in mind the following.

If you are using your rental property as a "boarding house", not as it's single or double family intended use, some lenders will not finance your property or use the multiple rents.

For instance most lenders will only use one rent of a home that has an illegal suite.

You may, have multiple rents from your students that brings in an awesome rent amount but actually hampers your ability to qualify for financing on future projects.

Shawn.
 

Trizzy

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I don't believe my property falls into the categorization of a boarding house. It is zoned and deemed a legal duplex. and I collect one rent check from a GROUP of students. They are all friends, therefore for all intents and purposes are considered a family.



I only used the rent/room example to better demonstrate the breakdown of my current and projected rental income. I would hate having to collect 5 seperate rent checks from one abode.
 

housingrental

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Hi Trizzy

A few thoughts

If memory serves on your situation you are unlikely to get close to $500 per room for your location on re-rental.



You have already accomplished a lot at your age - are very leveraged - have a very low income to debt level - and might in the future have your asset value and/or rental income impugned from rental licensing in Kitchener.



It sounds like you should slow down - save up more $$$ as a reserve fund - wait to see what actual rents you can get in September (don't count your chickens until they hatch is the saying?) - and what the future brings until you take on even more real estate.
 

bizaro86

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[quote user=Trizzy]I did not realize that mortgage interest is taxable on rental property. I suppose it would make more sense to execute the strategy on my primary. The only issue here that I forsee is that lenders who offer the readvanceable mortgages typically require at least 20% down, and I only have 5% down.





If you only have 5% down in your principal residence, you probably can't refinance to a readvancable product unless it has appreciated since you bought it, since you'll ned 20% equity for the HELOC portion.



I would also check into whether the interest on the portion of your personal residence that you're renting out it tax deductible anyway. It may be, since you're using one suite to earn income, while the other is being used for your personal benefit. I'm not sure about this, so please check into it before taking action based on this comment.



As for you forum name, I personally wouldn't worry about it (as you can see mine isn't exactly adult, and I most certainly qualify as a full-on grown up). I would liken your forum name to your skin color. It doesn't affect your ideas or qualifications, and anyone who would judge you by it probably shouldn't. (Assuming it's non-offensive, which yours isn't, in my opinion.) It also depends on your purpose of using the forum. Some members may be wanting to add business to their professions (realtor, mortgage broker, property syndicator, appraiser, etc) and may want a more client-facing approach. I assume you don't fit into that category by your question.



Best regards,



Michael
 

bizaro86

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[quote user=housingrental]wait to see what actual rents you can get in September (don't count your chickens until they hatch is the saying?)


This is great advice, since you don't get the market rent, you get whatever you get from one specific tenant/group of tenants.



Also, since you're in Ontario, couldn't your tenants decide to stay and you'd only be able to raise their rent by the statutory amount? That's my understanding of the law, but I'm not in Ontario, so I won't comment further on that.



Regards,



Michael
 

Trizzy

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Just a few [quote user=housingrental]Hi Trizzy





















A few thoughts





















If memory serves on your situation you are unlikely to get close to $500 per room for your location on re-rental.





















You have already accomplished a lot at your age - are very leveraged - have a very low income to debt level - and might in the future have your asset value and/or rental income impugned from rental licensing in Kitchener.





















It sounds like you should slow down - save up more $$$ as a reserve fund - wait to see what actual rents you can get in September (don't count your chickens until they hatch is the saying?) - and what the future brings until you take on even more real estate.





Just to elaborate a bit on my logic. I had alot of interest in $1750/month, so much in fact that I had to turn away SEVERAL groups of students/young professionals. Now if I had generated so much interest for a property at that price situated where it is, there must have been a reason for it. I speculate quality/price was the predominant factor.





Understandably, going from $1750/month to upwards of $2400/month is a durastic incease. According to other tenant's accounts, They are paying upwards of $500/room for a SMALLER townhouse FURTHER away from UofW than my property. My current tenants got the benefit of my inexperience. That being said, I am still breaking even while living in the property. Therefore, any gain in rents becomes profitable at this point. So I will set my asking price initially at $2400/month, and if necessary continue to decrease that price until I find suitable renters.




As for another property, I am ready to expand. I have a great support system if things don't go as expected, and expanding only leads to more opportunity to grow. It will likely be a condo, so I have little to do as far as maintenance and daily tasks are concerned.




As far as rental licensing in Kitchener is concerned - Is it imminent? Unlikely. Unless KW amalgamates and adopts the same bylaw, which I don't forsee occuring. Kitchener and Waterloo are very much different cities. In fact, as I intend on investing primarily in Kitchener, the new rental bylaw proposal in Waterloo could bode well for me. With significantly higher rents inevitably being passed on to tenants in Waterloo, Kitchener will become an attractive alternative to Waterloo, as price is the number one concern for most student renters. Many students will likely remain in Waterloo and simply absorb the additional cost, however I can anticipate an increase in demand for my units.





My 2 cents.
 

Trizzy

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[quote user=bizaro86][quote user=housingrental]wait to see what actual rents you can get in September (don't count your chickens until they hatch is the saying?)



This is great advice, since you don't get the market rent, you get whatever you get from one specific tenant/group of tenants.



Also, since you're in Ontario, couldn't your tenants decide to stay and you'd only be able to raise their rent by the statutory amount? That's my understanding of the law, but I'm not in Ontario, so I won't comment further on that.






Very true about actual market rents opposed to 'preconceived' rents. We shall see what I can actually fetch, however like I said, I shouldn't get any worse than break even(which isn't bad either way!)



You're absoloutely right. They have the option of staying on a month to month basis or resign a year lease, and I really have no grounds to force them to leave. I am at the whim of their decision. If this is the case, i'm not at all worried. I have no qualms with my current tenants, and should they decide to stay, I know I have a solid, mutually respected relationship. To some, that can be considered sometimes as good as an increase in cashflow.



As for a rent increase to my current tenants, what's the point? lol, the consumer price index states in Ontario we increase our yearly rents to .7% of our current rental rates..Yay us!(Sarcasm)
 

OurRealtor

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Who are Smith Manoeuvre? Are they lenders?



On What part of tax deductible is applied? Is that deductible applied over Mortgage Interest? or Property tax will be decreased due to tax deductible calculated over Mortgage Interest? Pls explain by Giving an example by putting some assumed or appx figures for the same subjective property.



Thanks
 

RobMacdonald

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Smith Manoeuvre is a book about an accounting concept to use a mortgage to reduce the tax you pay. It gives you a strategy to convert non-tax deductible debt to tax deductible debt. It's the mortgage interest that is the tax deduction.
 
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