Buying an income property when I'm renting?

[streetcore]

Hi there,

I'm in kind of a unique situation and hoping I can get a bit of feedback and/or advice from some of the members here. I live in Toronto and I'm currently renting an apartment for $1100/month. I'm 51 years old, divorced with no kids, earn $40K a year, and I'm debt free. Before taking my current job about 2 1/2 years ago I was self-employed for almost 20 years. I was surviving and always managed to pay my bills, but I could never save much money, especially after the divorce.

Since I started working full-time I've saved almost $40K, which I'd like to use to get into the real estate market. I'm a very handy guy and enjoy doing renovation work. I also bought my first house when I was 24 and rented it out for few years when I went back to college. So I have some experience with home ownership and rentals.

However, $40K is not enough to get into the market here in Toronto. I don't want to stay here much longer anyway and may be moving back to my hometown to help take care of my elderly mother. There is generally a good selection of properties available there in the $100- $150K range, so I could afford to put 20 per cent down on a single family home, or a duplex/triplex, for an income property or possibly a fix-and-flip.

But here's my dilemma ... I'm thinking it would be better to apply for a mortgage while I'm fully employed, but I'm already spending about 35 per cent of my income on rent and hydro. So I don't know if I'd even qualify for a mortgage on an income property. If I quit my job and move back home, I could live rent-free with my Mom, but then it would be very difficult to get a mortgage unless I can find a full-time job for a year or more. If I go back to self-employment, I can probably forget about a mortgage for many more years.

Sorry for the long post and I know there is probably no easier answer, but is it even worth talking to someone about mortgages right now?

Thanks in advance for any advice.

 

[Thomas Beyer]

Contact a mortgage broker to get some insight on mortgage $s you could qualify for now. You do not need 20% down for a property you live in. Only 5% suffices and even with 10% down you could buy one for $400,000 and a $368,000 mortgage (incl. CMHC fees). That may make sense if you enivision living in GTA for 5+ years given provincial land transfer taxes, city land transfer taxes, legal fees, mortgage break fees and realtor fees.

You also need to research the target market, liaise with realtors, have a lawyer and know how to rent properties or find a property manager. As an alternative to buying in GTA you could buy an older house in your target city close to your mom, fix it up, and rent it. You could always move there yourself (i.e. cancel lease) if need be later when time is ready.

 

[streetcore]

As an alternative to buying in GTA you could buy an older house in your target city close to your mom, fix it up, and rent it. You could always move there yourself (i.e. cancel lease) if need be later when time is ready.

Thanks for the quick response. I might stay here longer, but I'd really like to leave Toronto within the next six months, so buying something here is not an option. I've been watching the market back home and I have an agent who's been helping me build a database of selling prices in neighbourhoods I'm interested in. I like the idea of a rental that I could potentially live in at a later date, preferable with an income suite, so that's the kind of thing I'm looking for.

I guess the next step is to find a mortgage broker and explain my situation to see what the options are. From what I've been reading traditional banks may not be the best choice for a situation like mine. Anybody have any thoughts on that? I do all my banking online and don't have any connections at a bricks and mortar bank anyway. I'm also assuming that it would best to talk to brokers and/or bankers in my hometown, rather here in Toronto. That's kind of tough since I'm only able to get home on the weekends.

Thanks again.

 

[Thomas Beyer]

T5 and/or line 150 on your income tax return is vital, not a bank connection. A mortgage broker shops around for you at various banks. It is done on the phone or online these days.

Banks would give you a mortgage with an annual up to 40% of your gross income (assuming no other debt payments like credit cards or car loans), so if $40,000 then $16,000/year. For $16,000/year at 3% with a 30 year amortization you can roughly get a $320,000 mortgage. As such a $350,000 or so home is in the cards if you live there yourself with $40,000 cash available.

Since you are handy, buying a house for say $200,000 then fixing it up as you live there, then selling it for $250,000 or more a few years later is a great way to build equity. Make $50,000 every 2 years, tax free, buying ugly houses, making them pretty while you live there, then sell them.

 

[streetcore]

Based on your math I won't be able to continue paying $1100 a month in rent and buy a property at the same time, unless the bank will apply a portion of the rental income toward my gross income. I've read that banks will do this and have seen numbers between 60 and 75 per cent. Is there a hard and fast number, or does it vary based on the property, the lender, etc? What if the property is vacant when I buy it? Will they consider the "potential" income if I plan to rent it after buying?

 

[Thomas Beyer]

Banks lend on a debt coverage ratio, using rules of thumb, such as 40% GTDS (gross total debt service) of your gross income. If you have no other (credit car, boat or car) debt, and rent, they will still use 40%. They may INCREASE your income based on rental income, but you will be OK for the first property. As stated, best discussed with a mortgage broker.

But you need 20% down for a rental property, so if you have only $40,000 then you cannot buy a house bigger than $200,000, i.e. a max mortgage of $160,000.

 

[SVS]

Based on your math I won't be able to continue paying $1100 a month in rent and buy a property at the same time, unless the bank will apply a portion of the rental income toward my gross income. I've read that banks will do this and have seen numbers between 60 and 75 per cent. Is there a hard and fast number, or does it vary based on the property, the lender, etc? What if the property is vacant when I buy it? Will they consider the "potential" income if I plan to rent it after buying?

If you purchase a property that is already leased, you can use the potential rental income to apply towards your income. If you buy a property with 5% and live in one side with the other rented on a lease you can apply the same tactic. The rates will definitely vary by the lender though, the only pain with this is that it's a little harder to get an exact number on what you can afford since properties and leases will vary.

 

[streetcore]

If you buy a property with 5% and live in one side with the other rented on a lease you can apply the same tactic. The rates will definitely vary by the lender though, the only pain with this is that it's a little harder to get an exact number on what you can afford since properties and leases will vary.

Thanks for the info. Living in the property is not an option since I'm currently working and paying rent in Toronto, and I want to buy a place in my hometown a few hours outside the city. I hope to move back there within six months to a year, if not sooner, but I'll have to quit my job to do that. I know I won't get a mortgage if I'm out of work for awhile, so I was hoping to get an income property while I'm still employed.

 

[SVS]

Thanks for the info. Living in the property is not an option since I'm currently working and paying rent in Toronto, and I want to buy a place in my hometown a few hours outside the city. I hope to move back there within six months to a year, if not sooner, but I'll have to quit my job to do that. I know I won't get a mortgage if I'm out of work for awhile, so I was hoping to get an income property while I'm still employed.

I actually did this when I transitioned into becoming a realtor. The only real way around it that I found which works, but has some grey areas. I didn't register my rent and had my address changed to dads and claimed an expense free living to help lower my ratios, I then bought a place in my intended area and told the financing company that it was my primary residence (if the property is far away you have to sell the financing company on you actually living there, generally they wont fly with an house or more commute in my experience), which was already leased then I kicked out the tenant paying less. Then once the deal closed I never moved in until several months later but I did go there on weekends to avoid to much suspicion just in case, the only downfall is you have to be sure you can carry the property with just half being rented. The upside is that you can do any needed renovations while you transition. It took me about 2-3 months, I had to claw and scratch and work some extra house those months to help build up a safe enough reserve to quit my job.

 

[streetcore]

The only real way around it that I found which works, but has some grey areas. I didn't register my rent and had my address changed to dads and claimed an expense free living to help lower my ratios, I then bought a place in my intended area and told the financing company that it was my primary residence

Thanks for the tip. I don't think it would for me because the distances are too great, but I admire your creative thinking ;-)