Buying a second property - Is it doable?

[CaramonLS]

So, getting married and the idea of condo living doesn't exactly fit into our future plans. So we are planning on getting a house within about 1-1.5 years.

Bit of background, I've got 200k of the condo paid off, with about 120 left to go. The condo is in a pretty good location and I really don't want to sell it, with the property currently being worth ~380-390. I frequently see condos in the building renting for about $800 more than my current mortgage + fees combined.

Can I qualify for a bigger mortgage based on potential rental incomes?
How does a down payment work in this situation? Am I expected to put down the same % as I would as if I was a first time buyer?
I currently have a HELOC, can I used that for a down payment on a new place?

Just wanting to examine my options before I give up on a potentially decent income property.

[Mortgage Made Easy]

Can I qualify for a bigger mortgage based on potential rental incomes?
How does a down payment work in this situation? Am I expected to put down the same % as I would as if I was a first time buyer?
I currently have a HELOC, can I used that for a down payment on a new place?

Just wanting to examine my options before I give up on a potentially decent income property.

Thank you for the question CaramonLS... we get this question quite a bit since CMHC made guideline changes earlier this year (May). I will put a quick post here and then PM with more details.

Yes you can use rental income for qualifying. Some lenders use less rental income than others so this is very important in qualifying depending on your overall financial situation (income vs. liability).

For down payment, currently the minimum down payment for an OWNER OCCUPIED property is 5%... again it comes back to the overall financial situation and in some cases, lenders may want more.

Yes, you can currently use your HELOC for the down payment. NOTE: There are some new guidelines for 2015 that all Banks/ Lenders will be using to qualify HELOC's...

Ultimately, there are a few strategies to consider to make sure that you minimize your risk as a landlord and to ensure you can qualify for 2 properties.

[Jimmy Stang]

I've got a similar question. My wife and I have been musing about moving into a slightly larger home, but possibly keeping the existing home as a rental property (or selling it at a future date, market permitting).

Suppose our existing house is worth about $420k, and we owe maybe $170k on it. And we'd probably want to buy something for about $550k. Is it possible to use some of the equity in the existing house to put down on the new one? Obviously a lot of this will depend on our household income, etc., which I could provide via PM if that would help assess the situation.

And I'll be honest, my motivation is partly that I'd like to have a second property to build some equity and eventually income. But the idea of having an overlap between my current home and possible new home is appealing. It would allow for time to renovate both homes, if necessary, and would also permit us to find a new home without the pressure of having to find an interim arrangement if we didn't find the "right" home, etc.

It might not even be possible in our situation, but I thought I'd float the question here. Feel free to reply here with general details, and then we can talk more personal stuff via PM or email if you'd like.

[Mortgage Made Easy]

I've got a similar question. My wife and I have been musing about moving into a slightly larger home, but possibly keeping the existing home as a rental property (or selling it at a future date, market permitting).

Suppose our existing house is worth about $420k, and we owe maybe $170k on it. And we'd probably want to buy something for about $550k. Is it possible to use some of the equity in the existing house to put down on the new one? Obviously a lot of this will depend on our household income, etc., which I could provide via PM if that would help assess the situation.

And I'll be honest, my motivation is partly that I'd like to have a second property to build some equity and eventually income. But the idea of having an overlap between my current home and possible new home is appealing. It would allow for time to renovate both homes, if necessary, and would also permit us to find a new home without the pressure of having to find an interim arrangement if we didn't find the "right" home, etc.

It might not even be possible in our situation, but I thought I'd float the question here. Feel free to reply here with general details, and then we can talk more personal stuff via PM or email if you'd like.

Hi Jimmy,

Yes it is possible to use some of the equity in the current house for the purchase of the NEW home. Depending on the current mortgage setup, we would look at a refinance to assist in qualifying (if needed) but to also ensure you are cash flow positive for renting.

You can refinance up to 80% of the current home to access the equity. Based on $420,000 value, you would be able to refi up to $336,000 getting access to $166,000.

This will give you 20% down payment ($110,000 on $550,000 purchase) on the new home and some extra if needed for renovations you were talking about.

Look forward to hearing from you ~ Tim (will PM as well)

[Jimmy Stang]

Thanks Tim! Well that certainly does give me some food for thought. I'd like to bonce some numbers around with you at some point, although it isn't terribly urgent. Perhaps in the next week or two I'll send you a message and we can arrange a chat.

This is still in the phase of "I wonder if..." but you can't ever move forward without exploring the details.

Thanks again!

[Mortgage Made Easy]

Thanks Tim! Well that certainly does give me some food for thought. I'd like to bonce some numbers around with you at some point, although it isn't terribly urgent. Perhaps in the next week or two I'll send you a message and we can arrange a chat.

This is still in the phase of "I wonder if..." but you can't ever move forward without exploring the details.

Thanks again!

You're welcome. We're here when you are ready to chat. :D

[GoinAllTheWay]

I'd love some info on this too. Like Caramon and Jimmy, I'd love to have some investment properties. I bought a book called "Real Estate Investing for Dummies, Canadian Addition" and it has some good info in it.

I'm also an owner of a condo that I bought for $120k in 2000 (currently valued at $340k) and the mortgage is now getting pretty small. We'd like to hold onto the condo but use the equity to buy a house at some point.

Now if I'm understanding things, if I were to pull equity out of my condo, my mortgage would go up, yes?

[Mortgage Made Easy]

I'd love some info on this too. Like Caramon and Jimmy, I'd love to have some investment properties. I bought a book called "Real Estate Investing for Dummies, Canadian Addition" and it has some good info in it.

I'm also an owner of a condo that I bought for $120k in 2000 (currently valued at $340k) and the mortgage is now getting pretty small. We'd like to hold onto the condo but use the equity to buy a house at some point.

Now if I'm understanding things, if I were to pull equity out of my condo, my mortgage would go up, yes?

Correct, the mortgage would go up to a maximum of 80% the current value. Since you will hang on to it as a rental, we would keep the payments low for 2 reasons:

1- Cash flow positive - hopefully rent will cover expenses.
2- For qualifying for additional properties.

It is good to note that we get to use the rent on your condo to help offset liabilities (if needed that is). Do not hesitate to PM if you are interested in chatting further. ~ Tim

[pseudoreality]

Hi Jimmy,

Yes it is possible to use some of the equity in the current house for the purchase of the NEW home. Depending on the current mortgage setup, we would look at a refinance to assist in qualifying (if needed) but to also ensure you are cash flow positive for renting.

You can refinance up to 80% of the current home to access the equity. Based on $420,000 value, you would be able to refi up to $336,000 getting access to $166,000.

This will give you 20% down payment ($110,000 on $550,000 purchase) on the new home and some extra if needed for renovations you were talking about.

Look forward to hearing from you ~ Tim (will PM as well)

Thanks for this. I am in almost the exact same position, although I'm hoping I can convince my wife to wait a few more years before we upgrade.

I've got a question on the tax implications of doing this. I know in Canada you do not pay capital gains tax on your principal residence, but you do on income properties. Therefore I would imagine you would get the house you live in appraised before you move out and then when you sell it in the future you only pay the capital gains from that appraised value. Is this correct?

Also, would it make sense to maximize the leverage on investment property versus your principal residence due to the interest on investments being tax deductible?

[Mortgage Made Easy]

Thanks for this. I am in almost the exact same position, although I'm hoping I can convince my wife to wait a few more years before we upgrade.

I've got a question on the tax implications of doing this. I know in Canada you do not pay capital gains tax on your principal residence, but you do on income properties. Therefore I would imagine you would get the house you live in appraised before you move out and then when you sell it in the future you only pay the capital gains from that appraised value. Is this correct?

Also, would it make sense to maximize the leverage on investment property versus your principal residence due to the interest on investments being tax deductible?

Yes you would establish the value of your current home when you move out. This can be done by using an appraised value... Consult an accountant to be sure everythjbg is recorded well.

As for leveraging the existing property, yes this is one avenue but be sure to consult an accountant to ensure everything is done correctly.

[pseudoreality]

I was thinking of getting a fee for service financial advisor before I take thus step. Now are you saying I need an accountant too? Or can they be the same person?

[Mortgage Made Easy]

Yes it can be. I only suggest an accountant or someone who specializes in this area. We understand and can provide info... But we suggest to consult an expert to be safe.

[Calgary14]

Thanks for this. I am in almost the exact same position, although I'm hoping I can convince my wife to wait a few more years before we upgrade.

I've got a question on the tax implications of doing this. I know in Canada you do not pay capital gains tax on your principal residence, but you do on income properties. Therefore I would imagine you would get the house you live in appraised before you move out and then when you sell it in the future you only pay the capital gains from that appraised value. Is this correct?

Also, would it make sense to maximize the leverage on investment property versus your principal residence due to the interest on investments being tax deductible?

In case anyone is interested I did a small writeup on how taxes work when you move out of your home and convert it to a rental property. I have first hand experience with this as I did it 3 years ago. I tried to make it as simple as possible but if you have any questions let me know

http://www.ourbigfatwallet.com/how-the-principal-residence-exemption-works/

[Mortgage Made Easy]

In car anyone is interested I did a small writeup on how taxes work when you move out of your home and convert it to a rental property. I have first hand experience with this as I did it 3 years ago. I tried to make it as simple as possible but if you have any questions let me know

http://www.ourbigfatwallet.com/how-the-principal-residence-exemption-works/

Thanks Dan... are you located in Calgary?

[pylon]

I am trying to buy a house right now, and I bank with RBC. I have the mortgage on my condo with them, and I plan to keep it as a rental. They will not allow me to use the rental income towards TDSR, even if I have a signed lease. Without the condo I easily qualify, with it, I am falling a bit short. What 'conventional' commercial lenders will allow rental income? I prefer to deal with a commercial, brick and mortar bank, or Credit Union, not one of those obscure mortgage only companies. I have heard way too many horror stories with them from my clients I deal with in finance like insane payout penalties, and predatory renewal rates.

Thanks in advance.

[Mortgage Made Easy]

Yes we have banks and credit unions that will use the rent on your current condo to help with qualifying.

I will PM.

Note that whoever you were talking to about the other lenders have misinformed you. In fact it is the opposite about penalties, renewal rates etc.

[Property Manager DB]

Thanks Mortgage Made Easy for all the info!

It's nice to have subject matter experts on this forum!

[Calgary14]

Thanks Dan... are you located in Calgary?

Yup - located in Calgary.

I'm considering buying another rental in the next couple years, but from what I have heard buying a 3rd property is tougher than buying a 2nd property (ie. more strict lending policies)

[Mortgage Made Easy]

Yup - located in Calgary.



I'm considering buying another rental in the next couple years, but from what I have heard buying a 3rd property is tougher than buying a 2nd property (ie. more strict lending policies)


Hi Dan - not necessarily tougher. Some lenders are more rental friendly than others. It still comes down to income vs. Liabilities and how much rent can be used on existing and subject properties.

We can run numbers anytime. Thanks for the message.

[Ace]

I am trying to buy a house right now, and I bank with RBC. I have the mortgage on my condo with them, and I plan to keep it as a rental. They will not allow me to use the rental income towards TDSR, even if I have a signed lease. Without the condo I easily qualify, with it, I am falling a bit short. What 'conventional' commercial lenders will allow rental income? I prefer to deal with a commercial, brick and mortar bank, or Credit Union, not one of those obscure mortgage only companies. I have heard way too many horror stories with them from my clients I deal with in finance like insane payout penalties, and predatory renewal rates.

Thanks in advance.

ATB does for sure.

[Mortgage Made Easy]

ATB does for sure.


Yes ATB is one of the lenders we would look at for this type of scenario.

[Teh_Bandwagoner]

You can refinance up to 80% of the current home to access the equity.


I thought that was changed to 65% a few years back. Did they up this to 80% now? Or is that only in certain situations?

Edit: Found it! Looks like it's 80 for refi, 65% for HELOC? http://www.fcac-acfc.gc.ca/eng/resources/publications/mortgages/Pages/Borrowin-Emprunte-1.aspx

[Mortgage Made Easy]

I thought that was changed to 65% a few years back. Did they up this to 80% now? Or is that only in certain situations?

Edit: Found it! Looks like it's 80 for refi, 65% for HELOC? http://www.fcac-acfc.gc.ca/eng/resources/publications/mortgages/Pages/Borrowin-Emprunte-1.aspx


That is correct. You refinance up to 80%. If you we obtaining a HELOC you can do a HELOC to 65% and add a mortgage of 15% to a total of 80%.

The maximum total refinance with all or a combination of products is 80%.

Let us know if you have more questions prof we can assist. ~Tim

[PaperBagger'14]

Sorry for the necro-bump here but I'm looking for some advice. I have a home right now that I have lived in for ~9 years. I easily have the equity in this house to refinance and make a 20% down payment on a second house. My big worry right now is the rental market, so I am planning on using a property management company (undecided which one). When using a property management company, is there any rental income protection in case the company cannot find tenants? What other clauses are common to find in an agreement with property managers? I'm curious as to the layout of these agreements as I would like some security in this investment. Thanks in advance!

[Mortgage Made Easy]

There is a rental management company on this forum that likely can answer your questions. His handle is "Property Manager DB".

To assist in making the numbers potentially work, we would look at the refinance numbers to gauge the cash flow etc. Lenders when qualifying do take into account vacancy, upkeep costs etc. This is part of the qualifying however the next plan is determining fair rent and positive cash flow.

Some of the factors that can help with cash flow is the proper mortgage setup. If you have questions, please do not hesitate to PM or call (403-648-1541). ~ Tim

Sorry for the necro-bump here but I'm looking for some advice. I have a home right now that I have lived in for ~9 years. I easily have the equity in this house to refinance and make a 20% down payment on a second house. My big worry right now is the rental market, so I am planning on using a property management company (undecided which one). When using a property management company, is there any rental income protection in case the company cannot find tenants? What other clauses are common to find in an agreement with property managers? I'm curious as to the layout of these agreements as I would like some security in this investment. Thanks in advance!