Zero Down

[AdamBlackmore]

I`m a 25 year old professional who has been interested in real estate for some time and am ready to take the plunge. I will be investing in student property in the Guelph/Waterloo area. I have a very secure job and an excellent credit score of 770. I have no debt and $35,000 in the bank. I have no house or rents and am currently living with family for almost free.

I have qualified for a primary mortgage with 0 down. I was going to buy a place, rent most of it out, and then when I was satisfied it works I`d move out and rent entire thing. (Year or so). First option upon moving out was grabbing a duplex/triplex with friend, share one part, rent out the rest. It would be a 50/50 partnership, I`d provide small downpayment, they`d be able to grab owner occupied mortgage (Their first place). I`d then go from there.

The previous scenario makes me a bit nervous because it seems I may be playing in a bit of "grey" area for first property. Another idea: With my credit, I will qualify for CMHC 0 down rental mortgage for one unit (Which a student lodging house would be I`m assuming). I am willing to live with family a bit longer until I am sure it is stable if I go this route. I would then buy that duplex/triplex with friend and while highly leveraged, I`d have lots of deductions, cheap living, and good amount of cash in bank as slush fund. I`d then go from there. The problem with this scenario is the huge 7.25% insurance premium on a 0 down rental unit.

Is the 7.25% insurance premium worth it for 0 down? It seems to be if it allows for more flexibility with $$ although may have negative cash flow for a while. (Plan on keeping slush fund 4-6 months worth of expenses)

Am I risking getting in trouble if I buy as primary res, rent most of it out, and then move out within a year or so?

Any input from experienced investors would be fantastic on what they would do in my situation. Thanks.

 

[Nir]

How about buying a triplex for around $200K, 5 or 10% down and renting it all out while living with your parents? With such a credit score and secured job I do not see why you can not buy it alone (without partners at this point) as long as you prepare well for the meeting with the banker/mortgage specialist with a well prepared binder. Just make sure the property carries itself with the % you choose to put down. I strongly recommend you read the book "Real Estate Investing in Canada" by Don Campbell to ensure you analyze the property correctly and are well prepared for the meeting with the bank.

Good Luck!
Neil

 

[AdamBlackmore]

Thanks for your reply. I wont` be able to find a decent triplex(if any) for $200,000 in Guelph/Waterloo area.
Your right, I can put down 10% using CMHC rules for 3-4 unit rentals. But I can get a lodging house for 0 down for it is classified as just one unit. While more likely dealing with negative cashflow for first bit (Try best to break even!), isn`t my ROI generally much higher if I do 0 down lodging vs. 10% triplex??? If you are suggesting going on own for second property, I`d rather not because I`d be so highly leveraged.

I`ve read all three of Don`s books, they are fantastic. I love the investment binder idea, but will not need to convince the bank for this first property... just want some opinions on my two different options for 0 down. The first option seems a bit in "grey" area, and second one has huge insurance premium. Anyone have any reasons why 0 down in this situation may not be best bet???

 

[Nir]

Good job learning from Don`s books!

I look at it from a different angle: while it is very true that in real estate cash is the bottleneck to investing alone, whether you put 0 or 5% down does not matter that much as both are considerred very little down. I`m not sure I understand your concern to be highly leveraged. Please note: the more properties you have the more leveraged you will be and the higher your passive income will be ---> and this is the really important number (in addition to appreciation), not your leverage.

I recommend you focus on finding good deals, i.e. annual rent to purchase price ratio >12%. In Ontario there are high potential areas where you can find triplex for less than 200K! It should not be an average property. As a rule of thumb look for possible but difficult to find deals.

 

[dwb]

In regards to the 7.25% fee for CMHC, as I understand it, that is tax deductible for you.

I`m double-checking with my accountant but that is the major reason I am going ahead with it for the purchase of one of my properties closing soon.

I plan on using the cash I had for the downpayment on renovations now instead which will boost the property value, attract better quality tenants, and also justify higher rent than I would have received previous to the renovations.

Bottom line, even the high 7.25% fee was ok because of its tax dedcutibility and so I could use cash for renos instead of downpayment.

 

[AdamBlackmore]

Thanks for your reply. That was exactly my thinking, except rather then renovations, it allows me to grab a second property much, much faster. Is the entire 7.25% tax deductible?? If so, that is amazing. I just assumed it would be treated as part of purchase price, and only interest accured on the extra 7.25% would be tax deductible (And of course, negative cash flow if it pushes you into that area). Does anyone know for sure?? Is the entire 7.25% insurance premium tax deductible on a 0 down CMHC rental mortgage? Or is it treated as part of purchase price?

If you look at ROI, the 7.25% penalty looks like a worthwhile sacrifice. However, I`m new, don`t have any friends or family in real estate, so I value the opinion of you all.

 

[Thomas Beyer]

consider TAXES !!

when selling your OWN home in Canada: no taxes !!

If selling an investment property: capital gain or income taxes if not properly structured !!

So, I recommend you do NOT buy that triplex, but a large single family home, perhaps an acreage with a cottage or 2 on it, where you sub-let 2-3 rooms or the basement or the cottage or a floor or 2 ! .. then you have income to offset your expenses and pay no taxes on the gain .. and you pay no rent either.

Consider a mortgage @ 85% or 90% .. using say 25K to 30K as the downpayment .. then the fee is lower !

100% mortgage is OK in a strong and rising market with break-even cash-flow .. which your town may not be .. so be careful with too much leverage !

 

[vroom]

QUOTE (KW1 @ Feb 10 2008, 07:26 PM) Thanks for your reply. That was exactly my thinking, except rather then renovations, it allows me to grab a second property much, much faster. Is the entire 7.25% tax deductible?? If so, that is amazing. I just assumed it would be treated as part of purchase price, and only interest accured on the extra 7.25% would be tax deductible (And of course, negative cash flow if it pushes you into that area). Does anyone know for sure?? Is the entire 7.25% insurance premium tax deductible on a 0 down CMHC rental mortgage? Or is it treated as part of purchase price?

If you look at ROI, the 7.25% penalty looks like a worthwhile sacrifice. However, I`m new, don`t have any friends or family in real estate, so I value the opinion of you all.

The full CMHC fee is tax deductable but not all at once. You must divide the amount you paid by 5 and claim that amount as an expense each year for 5 years.

 

[Thomas Beyer]

QUOTE (vroom @ Mar 10 2008, 03:34 PM) The full CMHC fee is tax deductable but not all at once. You must divide the amount you paid by 5 and claim that amount as an expense each year for 5 years.

0% fee @ 80% leverage .. 7.25% fee @ 100% .. so 7.25% for add`l 20% .. or 33% ! expensive money .. but MAYBE worth it in a fast rising market !

careful with too high a leverage !!

leverage can bite you on the downside .. markets don;t always go up up up .. sometime they go down for a while .. or are flat`ish like many markets right now !