# New Grad: Living at home and buying rental property? Thoughts on future plans...



## speedboxx (Dec 31, 2013)

Hi guys,

I know there is a social stigma of living at home with parents after 18, but I am hoping for this discussion to be around the financial perspective of this topic and whether it is a good idea/feasible. Also, I would also be interested in tips that more experienced members might have towards relevant topics such as taxation, mortgaging, and etc..

I am a recent graduate and bought a $400,000 rental property last year with 20% down. No problems whatsoever with my tenants, and it is a cash flow positive property. I live at home and therefore don't have much expenses. Based on my take home income and spending habits, I think within the next year I will have enough saved up to do 20% down for a second rental property (assuming $400,000 for the place). How easy would it be for me to get a loan on another rental, assuming I can put 20% down? Would the bank take into consideration that I already have a profitable rental? I know they base their borrowing from a debt ratio, but since I am cash positive on my current rental, would that not effectively lower my overall debt ratio? My credit score is perfect, I have a decent income, and have no other debts. 

After this 2nd rental, I am hoping to finally commit to an actual primary home. It might take me another year (or maybe a little more for a bigger emergency fund) to save up 20% down, assuming a $400,000 house. I will probably be around 26 - 27 at this point. Once again, would the banks likely lend money for this, assuming I already have two existing rentals? Or perhaps it be a good idea to utilize the equity in the two existing rentals towards a downpayment for the 3rd house? Would a major bank even approve of this type of lending, or would I have to start looking into other mortgaging (broker) options? With rental properties, my goal would be to minimize how much I have to pay for the mortgage each month such that I can maximize cash flow. With a primary, non income generating property, my priority would be to pay off the place faster. 

As mentioned before, I am still a young guy so I would consider myself inexperienced with these issues and I wouldn't mind getting some advice from you guys towards the feasibility of my plan. As much as I would like to move out right away, I also recognize the need to set myself up financially at a young age and I am willing to make the sacrifice of living at home a bit longer. I know that once I start having the responsibility of mortgaging a primary non-incoming generating home, it will take me much longer to save up for further investment properties and my cash flow will be much tighter. Although I make a decent income now, I also work in a pretty volatile industry (oil & gas) and would prefer to be a bit more stable/experienced in my career before committing to an actual primary residence.

Your thoughts towards this would be great. Thanks!


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## realist (Apr 8, 2011)

I am by no means an expert but would ask this:
- How much profit are you making in the current rental? If they were to leave can you cover multiple months of no renters?
- If you are considering a second house could you rent it then move into it yourself?


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## Causalien (Apr 4, 2009)

Whatever calculation yo are makng now is probably not real. It is not a stigma. Just the fact that your parents are subsidizing your living expnses so your real expnses are still unknown. Also, when you eventually made it. It is a sweeter victory knowing you did it without your parents.


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## Taraz (Nov 24, 2013)

I hope you're paying your parents (some) rent, or at least chipping in with housework, not just freeloading off them. As for rentals, I think the financing requirements are more stringent, though I'm not sure what downpayment would be required. 

It sounds like you're doing well though - congrats! I'd live at home as long as your parents / girlfriend will permit it.


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## explorer416 (Jun 11, 2010)

Right now the interest on your mortgage on your rental is deductible as you have borrowed money to invest. Once you pull money from the equity of that rental for personal use (for your own primary place), it is my understanding that you will lose the ability to deduct the interest from your rental. Better to keep personal equity and investment equity clearly separate.


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## MRT (Apr 8, 2013)

First, who gives a d**n about social stigma. Your 'social status' neither pays the bills nor (hopefully) is responsible for your happiness. An increasing % of young people are choosing to live at home longer...whether to recover from student loans, to help care for family members, cultural norms, or due to simple financial constraints. It is also an INCREDIBLY smart financial decision if you are able to bank money while at the same time helping out your parents. Consider that many critics of staying at home longer are merely jealous of your opportunity they either did not have, or chose not to consider. You don't 'win' anything for getting out of the house ASAP after 18...quite the contrary on a number of fronts. 

Second, the bank will ABSOLUTELY cares about your first rental...only it will likely not be a positive. Typically, lenders will only use 50% of the rental income to offset the expenses of the rental (mortgage, taxes, etc.) which may actually leave you in a negative situation in their eyes (despite positive cash flow in reality). The same will be true for the 2nd rental, AND they will factor in whatever rent you pay at home (if any). So, your gross income + 50% of your current and anticipated rental income will be used to qualify the mortgage for the 2nd rental, but the full mortgage payment and property for both (with your own rent, if any) will count as expenses. If you have zero debt and earn a fair amount of money, you may very well qualify...but I would HIGHLY recommend running the numbers with a broker before house hunting, to make sure you would qualify. 

Remember that banks don't care about a situation being good for you...they care about mitigating their own risk. In addition to the usual risk of job loss and things like that, with rentals there is the risk that you encounter bad tenants who cease to pay you, and typically a tenant does not maintain a home as well as an owner, so there may be a concern with the security as well. Usually an owner will do whatever possible to pay their own mortgage (we all need a place to live after all!) but will not go to the same extent to ensure payments are made on a rental, a car, a credit card, etc. However improbable they may be, it is indisputable that additional risks are associated with lending on investment properties, hence the tighter qualification criteria.

Third, and for your own benefit, you probably know (or ought to know) that the eviction process can be a nightmare. It can take months to successfully evict bad tenants, and if they are savvy regarding the law, they will know how to file appeals and create a number of delays. Landlords typically face the uphill battle in many provinces, rather than the tenant. The lender, the city, the hydro company, etc. also don't much care about your tenant problems...they want their money each month. So you would be wise to ensure that you have a sufficient fallback position to cover several months of expenses in case something goes wrong.

Finally, these additional risks need to be factored in when considering your 'return' on investment. If you are making 5% after all expenses, but it takes two rentals and hundreds of thousands of dollars of leverage to achieve that return, many would argue that it is may not be the best investment relative to the risk being taken...but that comes down to your overall risk tolerance, financial position, the prognosis for capital appreciation, etc. 

This isn't to discourage you, as the outcome can be very positive from a wealth-building and cash-flow standpoint...but it is critical to be aware of the risks you are taking on, what is involved in qualifying for additional loans, etc. My best advice is to get a solid mortgage broker involved early so that you aren't wasting your time, and to give serious consideration to your financial position in terms of fall back position, job security, etc.


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## Just a Guy (Mar 27, 2012)

Well, I don't see any issues with your situation from a living perspective. I would, however, question it from a business perspective. In my experience, it's hard to make a good positive cash flow from a single door that costs 400k. Now, if it's a multi unit or rooming house, that's different. Otherwise, you are probably fooling yourself financially. 

As for the financial questions...each property you own will make it harder/easier to get another loan depending on the economic climate of the day. Currently getting a loan is very tough these days. I'm talking to the banks right now about a loan and numbers that were positive last year are now negative...it's all a game, where the rules change almost daily. 

It's never a bad idea to check with a mortgage broker, chances are your own bank will bid, or at least match the offer. 
Is suggest you check out www.easysafemoney.com.


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## speedboxx (Dec 31, 2013)

Thanks for the replies, all are good points. 

I won't go into my family situation as that is not relevant to this discussion, but yes, I am helping out and for the short term I see it as more beneficial overall to stay at home (finances aside). 

I am using this first rental property to build experience and net worth. It is indeed a single zone property that is (so far) yielding positive cash flow. I would be interested in seeing cash flow numbers of typical single zone units and how the cash flow typically looks. To be honest, I somewhat regret not getting a dual zone unit for roughly the same price, as I realize those are typically more cash flow positive, but also comes with their own headaches for upkeep and management. 

Bad tenants are definitely something I try to educate myself on, in terms of the screening process and how a possible eviction scenario would look like. There are already hundred of topics on this area, but feel free to chime in with any other suggestions to keep in mind. 

Although I wouldn't mind a second rental before buying my (third) primary residence, I am also open to just buying a primary residence as the second property and try to obtain more rentals down the road. Of course, subsequent rentals would take much longer to obtain as my living expenses will be much higher living on my own. I do realize there are financial risks involved. Based on my current take home income, I could pay three mortgages and have room for very frugal expenses. This is of course, assuming I dont lose my job. However, this is not a situation I want to be in and I would rather build up an emergency fund to mitigate issues such as lost rent and etc. Worst case scenario is that I start tapping into my RRSPs.

At the end of the day, my goal is to increase my net worth by age 30 and to start off on the right foot while I'm still young. I am willing to take calculated risks, as well as making sacrifices to meet these goals. But criticism is always good, so please feel free to elaborate on any points which you think may be risky/not feasible.


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