Will this strategy work? Rental Properties and Primary Residence

[alexei]

I would like to ask veterans on this forum if the following is a solid strategy to pay off the primary residence. Here is my situation.

My wife and I currently rent an apartment for $800 per month in Burnaby, a Vancouver suburb. Our dream, of course, is to live in our own residence. If we withdraw money from our RRSPs' via the Home Buyer's Plan then we'll have a 20% down payment for a condo in the 300-400K range and can become first-time home owners by the end of the year. However, I'm wondering if it would be more beneficial to wait and do the following:

1. Use the 20% down payment to buy a condo in Burnaby and rent it out for 5-6 years. The condo would have to be pre-owned already. By going through various classifieds, the rental rate for 1 bedroom seems to be in 1100-1300 range for a one-bedroom condo, and 1500-1800 for a two-bedroom condo.
2. Assuming the price of 350K for a one-bedroom condo, the monthly mortgage payments would be around $1500 per month. The typical maintenance fees and property taxes are $400 per month.
3. This gives a negative cash flow of 1200 - 1900 = -$700 dollars per month.
4. Then we would maximize the mortgage payments for 5-6 years to pay off the majority of the mortgage.
5. We would also have to pay back the RRSP money.
6. In 5-6 years we would sell the rental condo and use the home buyer's plan again to buy a new apartment, or better a house, as a primary residence.

I've seen in many threads that investors insist on having a positive cash flow but I'm wondering if this principle still applies in this case since the goal is not to have a reliable return on capital but to rent out an apartment to help us save enough cash for our own dwelling. What are the weaknesses of this approach? Also for rental purposes, is it better to buy a 2-bedroom apartment since it's more family friendly?

[peterk]

Not understanding... if you're cash flow negative how is having this rental helping you "save enough cash for your own dwelling"?

[Spudd]

I also don't get why you think this would be a good plan. Not only would it be losing money but you're still paying rent. Anyways, the home buyers plan can only be used to buy a residence for yourself, so the plan wouldn't work.

http://www.cra-arc.gc.ca/tx/ndvdls/t.../menu-eng.html

[Chris L]

This is a ridiculous strategy. Why not just save $700 a month toward something you can actually afford instead of subsidizing a tenant's rent and lifestyle? There's a good chance your condo will be worth less than what you pay for it today in 5 years. Then what?

[the-royal-mail]

OMG what a terrible idea.

A condo or an apt, assuming the same type of dwelling is pretty much the same. I've lived in both and the expenses were double in the condo vs. the apt which has twice as much space and allows me to leave anytime without needing to pay RE fees of 4-5% or worry about underwater mortgages and repairs.

I think people need to adjust their thinking from the "we want to own our own home" idea. None of us truly own any of this. We're either tenants or have our name on the title, but with the frequency of lifestyle changes the apt is far more flexible. Besides, very few people keep properties for their whole life. Sooner or later you'll have to sell. Just look at MLS to see how many people want to SELL these days.

This is the time to SELL, not buy.

Keep the apartment and save your money. You're very lucky to be able to have an apt for $800 these days.

[alexei]

Thanks for pointing out that HPB can only be used for the primary residence. I have one question though. Would I not be able to move into the the condo for a month and then convert it to a rental property? Here is the info from CRA:

"When you withdraw funds from your RRSPs under the HBP, you have to intend to occupy the qualifying home as your principal place of residence no later than one year after buying or building it. Once you occupy the home, there is no minimum period of time in which you have to live there."

Secondly, I am comparing three scenarios essentially. The final goal is the say - to buy my own place to live.

1. To stay at my current place and invest leftover money. After 5-6 years, I would use the money to buy an apartment/house. The risk here is the growth of housing prices in Vancouver area. Even at 2% growth in housing prices (inflation levels), the increase in the price will be almost equal to the interest that I can get from investing in the current market. I'm saying this because 2% of 350K = 7000. To gain this amount of money I would have to invest 140K at 5%, a sum that is simply not available for me at the moment. Yes there is currently a talk of market correction in the Greater Vancouver area but I'm assuming that at worst the prices will freeze for 2-3 years.

2. To get a mortgage, move into a condo, and pay the whole rent every month. Monthly expenses are $2000. None of this can be written of on taxes.

3. To mortgage a rental property and meanwhile live a rental property as well. Monthly expenses: -700 from the rental property and -800 from my own rent. That is a total expense of $1500 per month, with a saving of 500 over the second scenario. At the same time the tenant will pay of 60 months * 1200 dollars/ month = $72000 of the mortgage over next 5 years.

Where is the flaw with this logic? Would this make sense if my cash flow from the rental was 0?

[marina628]

I believe you have to wait 5 years from time you sell a property to qualify as first time buyer again and I do nto see any plan for vacancy , insurance etc.Horrible idea keep renting for $800 a month and keep pocketing the extra savings .property tax ,maintenance and utilities are probably going to be more than you pay in rent.

[peterk]

The jist of it is that you, Alexei, have convinced yourself that housing prices WILL go up, fast. So much so that it will somehow turn a terrible speculative housing investment, which you can't afford, into a great one!

If have have HAVE to invest in housing, and won't listen to anyone here telling you to STOP...consider atleast spending that $700/month on a REIT. It's just like buying a rental, but instead you get a tiny fraction of a million rentals that are all cash flow positive. If after 5 years housing has gone up, you cash-in! If it goes down, you at least have been getting juicy rental cheques (dividends) and have the benefit of a diversified housing portfolio to tame the volatility of a housing crash (hopefully).

[Chris L]

Yes there is currently a talk of market correction in the Greater Vancouver area but I'm assuming that at worst the prices will freeze for 2-3 years.

No, the worst case scenario is that home values plummet to zero due to Armageddon. Another worst case scenario is that prices plunge 20%, 30%, 40%, 50%, 70%, and so on and so forth. 2% increases are the norm. But prices have not been increasing at a steady 2% average, they've overshot by a large margin. Now let's average 2% out over the previous 10 years into the next 10 years for a 20 year average and what does the next 10 years have in store to bring us back to the mean? Yeah...a steady drop of about 10% a year to make up for the overshoot.

I know a guy who got reamed for the home buyers program because he did what you were thinking of doing. The tax man came to bite him because it looked fishy as he owned a lot of rentals and only lived in one of them. Invest in a REIT, save your cash until a deal appears irresistible. That's how you make money in RE. Has anyone supported your idea yet?

[Spudd]

If the monthly expenses of the condo are $2000, and the tenant is paying $1200, then you are losing $800 a month from renting out the condo. Plus there is a chance of vacancy. Plus you have to pay your own rent ($800). So you're paying $1600 a month for nothing. If you live in the condo you pay $2000 a month, some of which goes towards the mortgage and is therefore money in your own pocket.

You mentioned tax write-offs, but all that allows you to do is deduct your expenses from your income. Your income would be increased by the amount of rent the tenant is paying, and your expenses would presumably be lower than that (only mortgage interest plus condo fees can count as expenses, principle paydown is not an expense). So in the end you would pay MORE taxes by renting out the condo than by living in it yourself.