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L

Little1

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Nov 4, 2011
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Hi there everyone,

I have been wanting to venture in to real estate for some time now and I have a few questions as I am need some advice.
 
I currently have a home worth approx 180k, I owe 75k on it currently. I have had my home for 4 years and have made significant principal payments on it. I do have 2 roommates which allow me to do so, the house is not costing me anything really and I have done a significant amount of work to it - roof, furnace, fence, insulation, bathroom, and some lipstick :) With this house the interest rate is fairly high, 5.19 % with one year remaining on the mortgage - I have asked the bank and they have told me that to break my mortgage, it would be approx 2000$
 
I have approximately 75k in liquid savings in the bank and I am wondering how I should start my real estate career.
 
I think that I would like to buy a duplex/triplex/fourplex etc (having more tenants under one roof seems to be more cost effective...)
 
I am not sure if it would be better to sell my principal residence and purchase a duplex with 5% down (as I would live in one suite), OR refinance my principal residence, keep it, rent it out  and buy and live in a duplex at 5% down OR refinance, keep it, and keep living there, and purchase a rental at 20% down OR .......
 
I am a bit stuck of where to start! or how each decision will affect me in the future in real estate. Or if this is a good time to buy. I feel like Winnipeg is a good market but with the changes in mortgage rules recently, am wondering if value's will drop here as well. It is a different market than Vancouver or TO but am not sure how it will effect me.
 
I am located in Winnipeg
Any help is appreciated!
 
Save more before investing

Do this by increasing your income, and decreasing your expenses (if possible - growing income much less painful :) )
 
Get an line of credit (LOC or HELOC) up to 75 or 80% at prime or prime plus 0.5% to pay off the expensive mortgage and have cheque writing capacity for a real estate opportunity. Then look for suitable duplexes, up/down suited bungalows or fourplexes in appreciating, nice, high demand parts of Winnipeg. Understand prices, mortgage options, landlord techniques and rent control rules. Write offers after thoroughly researching rents and properties in a very small sub-market of say 4x6 blocks for one property type. Find a capable & reliable mortgage broker, lawyer and realtor for your power team.
 
Thank you for your response :) I am not sure how else to increase my income, I do have a full time job with the federal government as well as 2 roommates that live with me. I don't really have that many expenses. I eat in, do cheap entertainment options, don't have expensive electronics, no smart phone or data plan, drive a modest car ( paid for, no loan). What would you suggest for the amount I should save?. I thought between the 75k in the bank and approx 105k in principal in the house, I had a good start! Your insight is appreciated!
 
Thanks Thomas for replying as well! I am not sure I understand you about LOC & HELOC To pay off my mortgage. Could you explain it a bit further? So I shouldn't use the money I have in the bank to pay it off?
Would you also see an accountant versed in real estate before you purchased or the lawyer before?
 
A LOC is a right to borrow against security, such as a house. It is more flexible than a mortgage but slightly more expensive.



You could also get a new, higher mortgage, but then you pay interest on cash that you may not need.



Example: Your house is $180,000. Mortgage is $75,000 (or 37.5% LTV). Bank approves 80% LTV LOC, i.e. $144,000. The first $75,000 is borrowed at 3.5% (prime plus 0.5) to pay out the mortgage. Then you have $69,000 left you could use at any time, for any purpose, but pay no interest on it until needed.



Or you use the surplus cash you have and pay down the $75,000 too, to 0, to lower your interest costs, and then borrow up to $144,000 when you need it, say for a new boat or better: an investment property in a rising market.
 
If you decide to stay in your current residence then paying the mortgage off with the $75K may make sense. Unless you are declaring the income from the boarders (which most don't seem to do in my experience) then there is no reason to keep paying the 5.19% (non-deductable I assume) interest while earning minimal in the savings. If however you intend to rent out the current property then keeping the mortgage will give you an interest expense to offset against the rent which you will have to declare. I suggest consulting an accountant before proceeding.

Putting a HELOC then will let you access the $75K to invest but with the interest being deductable (if borrowing to invest).

If you would like to go the HELOC route I suggest you do so sooner rather then later as new lending guidelines limiting HELOC's to 65% will be kicking in later this year.
 
Thank you both for your replies, it has given me much to think about. I have been thinking about the moving aspect, and I would do it if it got me much further ahead but not sure that it would. Because my current situation works with the roommates and the house not costing me anything I am not so inclined to move unless there is a good reason for doing so?
In regards to an accountant, should this person be in your home area or is it a person that can be remote?
 
One more thing, if I pay down the existing mortgage, I can pay off another 10000 this year with out penalty and another 13000 next year, but if I make lump sums like that will it trigger anything..like getting audited? Not sure about the roommates money....
 
I believe the CRA rules are national in scope so location shouldn't be an issue. The accountant can confirm this as well as address your trigger question.
 
Thank you curtissvidal, I am making arrangements to talk with an accountant now! And smithbrown, can you further explain?
 
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