advice for buying 2nd home as income property

[haggisns]

Hi,

My wife and I would like to have a second property for rental income.

Here are the specifics.
Location: Richmond Hill, Ontario
Constraint: My wife insists we tithe 10% of the gain on the sale of our 1st home to buy a second home.

1. We own completely (no mortgage) our 1st home, it is worth possibly $1.3 million in this inconceivable market. We paid $300,000 for it: if we make $1 Million, my wife wants to tithe to the church $100,000. I am not ready for this spiritually, so she is happy to buy a second little bigger home up north, if we can find it.

2.We'd like to buy a second home to live in and rent out the first home.

3. We have about $100,000 saved for a down payment.
4. We would be pre-approved for approximately $400,000

This means we could buy and live in about a $500,000 home about 30 minutes further north (Bradford, Uxbridge area). I know a $500,000 dollar home will be very difficult to find that is bigger than the 1.3 million home in Richmond Hill.

Questions:
1. Will the bank allow us to use say $1500 dollars a month rental income on 1st home to affect our pre-approved mortgage?

2.When it comes time to sell the first home worth nearly triple the 2nd home, we would have to move back into it and live in it for 6 months before selling it without having to pay capital gains? I believe this would be the procedure.

3.To rent out the 1st home, we need to set up an LLC. Would we put the 1st home (rented) owned by the LLC or can I put the 2nd home owned by the corporation but live in it and do the renting from the 1st home.

4. I'm trying to find the inflection point between where it makes sense to take the $100,000 dollar tithe hit vs keep the house and rent it out and not unnessarily pay capital gains, income tax,etc.

I know this is a really convoluted situation but its the one I am in and need some advice. We also want to help out our children with a home to gift to them in say 20 years or so.

Would a good mortgage specialist/tax expert know the answer to this?

Thanks!

Chris

 

[Vine Group]

Hi Chris. Please see my reply to your questions. I hope this helps.

1. The bank would consider the market rental income when completing your credit application. Moving back into your home doesn’t eliminate capital gains.
2. You will have to pay the capital gains for the appreciation value of the house during the time you don’t live in it.
3. You should own your new primary residence under your personal name to save on capital gains. You don’t need a LLC for two properties. The cost of servicing the LLC and transferring title may not be worth it.
4. Tax law is simple, you can only have one primary residence at any given moment. All other properties are subject to gains.

I recommend you refinance your current home for as much as possible. Take the funds and make the largest down payment possible on the new house. The new home you should get a re-advanceable HELOC/Mortgage. First, the long-term loan you set up as a mortgage. Second, the equity you see up as a credit line so you can access in the future. This way, you can claim the interest cost against the rental income. FYI, we have a credit line at product at Prime Rate. The standard is prime plus 0.50%.

If you would like to discuss, please call 1.844.411.VINE.

 

[Thomas Beyer]

Congrats on your home gain !

First thing: party, buy a new fancy car (Tesla, Lexus, Mercedes or BMW comes to mind) and go to Hawaii or a Caribbean island, business class, of course, in a fancy resort to reflect on life. 2 weeks minimum. THEN (and only then) decide on investment strategy.

Real estate should fund your life, and not be your life !

Tithing is a personal decision. One could argue the biblical laws of over 2000 years ago do not apply today as we pay substantially more in income taxes and many social services provided by churches or tithers then are today covered by government through the taxes you pay. So 10% might be excessive, but again, that is personal. Perhaps settle on 5% with the wife (average of 0 for you and 10% for her). But then: happy wife, happy life.

In my humble opinion, it makes NO SENSE WHATSOEVER to rent out a $1.3M house. Do not even think about it. Sell it. Then buy 3-4 cheaper rental properties, say a few townhouses (THs) or smaller up/down houses, (locally, or further out, far cheaper, for example in S-Okanagan www.oliverlanding.ca or in Edmonton https://www.dropbox.com/s/lgcs5tmjqdt95zo/Triurban-Suited-Home-Package-May2017.pdf?dl=0 ) or a commercial asset (multi-family, mobile home park, office building, industrial warehouse, retail mall) with far more cash-flow. With $1M cash you can buy a $4M 30-40-plex or 60 -90 pad mobile home park or a decent sub-urban strip mall, small office building or industrial warehouse with a few bays. More on investment options of $1M for cash-flow or maximum ROI here http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

An 7.5% to 8% CAP rate industrial warehouse or mobile home park for $4M would net $300-320,000 in net income, before mortgage payments of around $192,000 (assuming 4% interest rate, 25 yr amortization of a $3M loan), thus net cash flow of well over 10-12% cash on cash ie about $10,000/month plus mortgage paydown of $6000/month. Sweet. Far better than a $1.3M house rented for $3000/month !

That math also works with REITs btw, that yield 7-9% as $1M in cash buys you $3M in REITs, borrowed on margin at prime plus 0.5 to 1%. Using an 8% REIT that is $240,000/year or $20,000/month cash-flow before borrowing costs of $64,000 (using prime plus 0.5% on $2M margin). So $14-15,000/month. Still sweet and far better than a $1.3M house rented for $3000/month ! More liquid, but also more volatile. But far less work and very similar ROI on the $1M cash.

There are no LLCs in Canada. That is a US term. We just call it a corporation. You do not need a corporation to buy a few (town)houses. Too expensive to set up and maintain and too difficult to get a mortgage for 3-4 THs. Only if you buy a commercial asset should you get a corporation.