# First time buyer with a 20% down for a rental. Should I wait or stop paying rent now?



## venture89 (Aug 24, 2011)

Hello All,

I've been reading the posts in this forum for a while now and I decide to open a topic with regard to my situation because I think the expertise here can help me out a lot.

*This is my situation.*
I have a down payment of about 110,000 and my monthly net income is $5000. At the moment I rent a one bedroom apartment downtown for $1150/month. I am single at the moment and I plan to stay that way for at-least 4 more years.

*Property that I am interested.*
Value $530,000
Type: semi-detached
Rooms: 3 bed + 3 wash rooms + separate entrance basement with 2 rooms + 2 kitchens
Rental Income history: 2100 for upper floor + 1200 for the basement last year
Tax: 3000/yr
Parking income: $150/month

If I buy the property I plan to move into the basement. In that case rental income will be $2100/m and the cash flow for the first five years will be -4043,-3540,-3015,-2459,-1879. But I would have added to my networth because of the principle paid and possible 1% yearly increase in the property value.

*The real question is if this is a good time to buy?* I don't know if anyone can answer that question but I have been following forum topics that started in 2009 Nov with regards to housing bubble in Canada. They are still arguing about this and no bubble has happened so far. Link Here

There are some reports (From TD I think) that said housing correction might happen in 2013. By that time I would have paid 24000 in rent money. 

The worst part of this is I am getting so many confusing ideas in my head (from news, realtors, friends). This is going to be the biggest investment of my life so far and I want to be very careful here. That is why I wanted to ask a forum that is neutral and seems to be filled with people who have done it all before. Any thoughts/advice is highly appreciated. Thank you all in advance.

P.S Please feel free to ask any questions.





I have done some calculations for the cash flow using a simple calculator available at http://www.goodmortgage.com/Calculators/Investment_Property.html


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## Four Pillars (Apr 5, 2009)

Those rental rate sound very optimistic for a $530k house in T.O.

I have no idea what will happen to the real estate market in the future. 

My advice is to look at the affordability of the house you want to buy - if you want to buy now and you can afford it, then go ahead.

The problem with real estate is that even if you can predict the future, the cycles can be very, very long. Life can pass you buy while you wait for the "big correction".


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## Easy Does It (Sep 24, 2010)

Did I miss the part about heat/hydro and water? 3.3% I assume is for a 5 year fixed which is truly unbelievable. At the end of your 5 year term you will have paid about 11% of your mortgage balance which would now be about 375K owing. Have you used higher rates to see what would happen to your mortgage payments in 5 years? Let’s say for arguments sake rates in 5 years are at 6% (who really knows) your mortgage payments will jump about 35% alone. The other thing to consider is why move in the basement when your current rent is lower than what you can get for the basement? I personally find it sad that you have to put up 110K to live in a basement and take on 420K in debt to do so. Personally I believe the risk to be much too high. I remember when I was able to buy rental properties that actually produced positive cash flow; it really didn’t matter if the property increased in value. Until that change’s it’s impossible for me to get excited about real estate.


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## marina628 (Dec 14, 2010)

I suggest you add in a car payment and deduct 20% from the rent to allow for vacancy.Also budget for 5-6% .Also add a wife and couple kids when you will need to move upstairs and will only have the basement rent.I am also not sure about this 4% increase in rent every year .Income history seems to indicate you have a particular home in mind as well.How about house insurance? I pay $1900 a year for a house in the $600,000 range and I live in country.Then you need to cut grass , get rid of the snow ,get some furniture .I am sure there are others who can add to the list but that is just off top of my head


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## dogcom (May 23, 2009)

Don't look so much at some future correction as getting a property in a good area at a great bargain price that you can easily afford. Set the deal to your liking and don't play games with the future since no one knows for sure what the future will be.

Future number 1 - Deflation sets in nothing is done about it and housing prices collapse.

Future number 2 - Print money and pay it off so inflation goes wild house prices skyrocket.

Future number 3 - Nothing happens house prices go up a little or stay flat.

So where will it go. No one knows but we do know the Fed will print money up until now so we will see.


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## the-royal-mail (Dec 11, 2009)

Have you calculate the effect of various interest rate increases? Eventually (and probably well before your house is paid off) interest rates will go up.

Can your pocketbook handle that?

Also, what about your quality of life? Will living in the basement and fightining with idiot tenants (and having to keep going over there to fix stuff) be an improvement to your current quality of life or a reduction in it? Do you have any experience or knowledge at all about being a landlord?

What if you lose your job and can't find suitable work immediately?

How is your rainy day savings fund?


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## venture89 (Aug 24, 2011)

Four Pillars said:


> Those rental rate sound very optimistic for a $530k house in T.O.
> 
> I have no idea what will happen to the real estate market in the future.
> 
> ...


Hello, 
The house is inside a student housing community basically inside the york university. So I think rental at this rate is possible (I have the owners word and also I personally know it from a friend of mine who rent out two doors down)


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## venture89 (Aug 24, 2011)

Hello All,

Thanks for the input so far. I hear lot of good arguments so here is my reply.

Hassle of tenants: I have time to deal with them (but no experience)
My experience fixing broken stuff: Nothing yet but willing to learn
Car payments: I paid upfront for a 2005 car (good deal!)
Wife and kids: no thanks!

This is what my current situation is. I would pay $24000 for some landlord and that is money gone. One can argue that 100K down-payment during this two year has some opportunity costs but looking at other investment opportunities such as stocks I am not sure. Also, I tend to more focus on making money from my business than investing earned money (I know I have to improve this!)

So if I move into the basement there is a -4043 cash flow first year. However, if I stay in the apartment downtown I have a -12000 cashflow! 

Again, thanks for the input so far!


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## balexis (Apr 4, 2009)

venture89 said:


> Hello,
> So I think rental at this rate is possible (I have the owners word and also I personally know it from a friend of mine who rent out two doors down)


If the owner has already leased the unit, you could ask for the leases paperwork. Looking at surrounding units is also a good idea, make sure to compare apples-to-apples (utilities included? parking spots? etc).

Also try to get some background infos on vacancy in the area. Is there students all year round, or is it empty during summer?

The more you know, the less suprises you risk of finding.

Otherwise if you are willing to work on your human relation skills (managing tenants in general, good and less easy, takes a good deal of interpersonal skills, you'll learn) and handyman skills (don't tackle electricity and plumbing at first if you have no experience in those, but most of the rest can be easily learned and done properly), go for it. It is an amazing experience, you WILL learn a lot. In the end, not everything is about the money and if you'd make 0.25% more in investing elsewhere.

My 2 cents anyway!

PS I own a duplex in which I live in since 2008. When I first walked in after closing, I never held a skillsaw in my hands. Now, I did a complete kitchen, bathroom, hardwood floors, ceramic tiles... Read books, browse the Internet and look at how pros do it. Then, and copy them!


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## Easy Does It (Sep 24, 2010)

venture89 said:


> Hello All,
> 
> Thanks for the input so far. I hear lot of good arguments so here is my reply.
> 
> ...



It sounds like you’ve already made up your mind about buying so go for it. Unfortunately theirs no one that will be able to tell if your going to loss money, breakeven or make money. You just have to jump in and see how it plays out and in 5-10 years from now you will have your answer. I will tell you that I bought my first piece of real estate back in 1997 at the age of 21. My 630 SF condo in Toronto was the same price as my parent’s semi-detached 1600 SF house with a huge backward in Ottawa. I knew noting about real estate at the time and I was still in school but took the plunge although I thought it was unbelievable expensive. 3 years later I stated to get into rental properties and EVERYBODY I knew thought I had completely lost my mind. Well after 8 years or so of owning rental properties I sold everything and made a killing and then EVERYBODY I knew wanted to do the same thing. Just goes to show you that you have to be comfortable with your decision and just go for it, it’s a learning experience.


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## venture89 (Aug 24, 2011)

Thanks for the comments. Just like Steve Jobs said " you can not connect all the dots looking forward. You can only connect them looking backwards" lol

I think I will offer them around my affordability which is around 500K.
I will also find out from kijiji landlords if summer vacancy is a problem for the area (good point!)

Thanks for the tips!


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## peterk (May 16, 2010)

venture89 said:


> One can argue that 100K down-payment during this two year has some opportunity costs but looking at other investment opportunities such as stocks I am not sure.


This is a big red flag for me. There are just as many reasons to be "not sure" about the realestate market as there are the stock market. Factor in 4% yield on your down payment and your rent just got $370 cheaper per month..

Now I'm about the biggest advocate of renting over buying. But I'll concede that it _may_ make economic sense if you are willing to take on boarders to help pay your mortgage, like you say you will. 
Factor in your time to deal with tenants, repairs and mainenance(raking, shovelling, mowing, planting, watering, painting, etc) and charge yourself whatever rate you'd make at a part time job you could be doing instead. Because that's what it WILL be, a part time job.

Listen to The Royal Mail. DON'T be lulled in by these cheap interest rates. The numbers can make it look like you're being given a free house at 2.2%. And it'll make it look like you're drowning in debt at 6%

My question to you is - Do you intend on living here for a LONG time. If so, what makes you think that you won't want to move out of a student community once you are no longer a student? If your timeline is only ~5 years then you're really taking a HUGE risk with this..


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## venture89 (Aug 24, 2011)

peterk said:


> This is a big red flag for me. There are just as many reasons to be "not sure" about the realestate market as there are the stock market. Factor in 4% yield on your down payment and your rent just got $370 cheaper per month..
> 
> Now I'm about the biggest advocate of renting over buying. But I'll concede that it _may_ make economic sense if you are willing to take on boarders to help pay your mortgage, like you say you will.
> Factor in your time to deal with tenants, repairs and mainenance(raking, shovelling, mowing, planting, watering, painting, etc) and charge yourself whatever rate you'd make at a part time job you could be doing instead. Because that's what it WILL be, a part time job.
> ...


Hello peterk,

Thanks for the advice. I intend to keep this property for long term and I see my self saving for my real house within the next 5 years (from my business). 

Every time I go to the bank they keep asking me to invest the money. This house research has exposed me to other investments as well. So if I decide not to buy a property I will certainly look into these.

I do have ample amount of time on my side since I run the business from home. Only thing that worries me is the housing prices right now!


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## the-royal-mail (Dec 11, 2009)

venture89 said:


> Every time I go to the bank they keep asking me to invest the money.


And why, venture89, do you suppose that is?


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## venture89 (Aug 24, 2011)

the-royal-mail said:


> And why, venture89, do you suppose that is?


I am interested in investing money but I have a huge rental problem for the last 5 years. I have spent more than $41000 on just rent (no capital gains or principle paid). 

But looking into housing now I also see I will be spending 60% of my monthly payments as borrowing costs! (atleast for the first few years)

This forum has certainly inspired me to look into what my bank has to offer in terms of investment opportunities.


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## the-royal-mail (Dec 11, 2009)

It's good that you are noting your costs of borrowing on a mortgage. But I think you've missed my point.

The bank is there to make money. What investment opportunities? I've lost several grand in the past 8 months, due to a stock market that basically sucks. The bank wanted me to invest, saying the money "was doing nothing" by sitting in a "savings account" (the new 4-letter word, apparently).

Doing nothing...for them.

Your options are to take investment risk or poor performance in the markets. Or to take GICs at 1.25% interest. A TFSA is a great idea with a cash balance gaining interest at 1.25% or an RRSP to get the tax refund.

They want to sell you mutual funds and investments so they can take fees of 1-3% per year!

Couple that with the losses in the markets and it quickly becomes clear the only sure bet is that the bank will make money on you.

That's why they want you to invest.


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## marina628 (Dec 14, 2010)

I have 5 investment properties of my own and live in a $600,000 -$700,000 (4,200 sq ft with land) home but I will not touch markets like Toronto /Richmond Hill Where you pay $500,000+ for a townhouse.Not in these conditions where there is so much turmoil all around us.You also say you work from home? If you use this money for a down payment how much will you have left for emergency?What if you slip and fall in you new house and break your leg or back and can't work for 6 months?Are you prepared for this?Are you maxing your RSP? That is a good way to save 15%+ on taxes .Also you say it is near York University , typically you will get 8 months revenue out of students per year .


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## realist (Apr 8, 2011)

marina628 said:


> Also you say it is near York University , typically you will get 8 months revenue out of students per year.


Many of my friends at Waterloo had 12 month leases... which they had to pay if they could not find sublets. Which was pretty easy since Waterloo has a COOP programs so there are people there 12 months a year. 

Does York have COOP? Have you factored in the extra maintainance or depreciation that will come from having student tenants?

I am currently living in a basement of a bungalow as a tenant and have days where the toddler upstairs is kind of annoying. Are you sure you are comfortable living underneath a student house? 

I personally like the idea of buying a place and letting the tenants pay the mortgage for a while, but I would be sure you are prepared for all the "extras" that come with student housing, and make sure you can comfortable absorb a few months of no-tenants and rising mortgage rates as others have pointed out.


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## marina628 (Dec 14, 2010)

My friend lives near univeristy of Toronto where there are many student rentals ,she is now trying to sell her house as all the extra cars parking on the street and the noise and smell of weed when she walks her dog is getting on her nerves.It is a coin flip if you will get good tenants or the kind that will be partying their heads off for the first 4 months then get reality check when the grades come in.You can make good money off student housing but I personally would not want to be living in that house.
Anyway try going to get a mortgage approved before you get serious about this as this will be your home the bank will be approving you on your income not what you expect to get from student rents.With self employment they will
average your last 2 year tax assessments as your verified income .Also consider the fact you will be paying about $30,000 in fees if you decide this is not working and you want to sell in 2-5 years.I am not including what the bank will want to break your mortgage either so it is not a decision to be taking lightly.Plan for the worst but hope for the best


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## larry81 (Nov 22, 2010)

big WTF @single purchasing $530,000 home...


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## KristyW (Sep 7, 2011)

That is a big purchase for someone who is single. How much has that house depreciated over the years? I think in many cases, it is a buyers market for houses. I think if you are buying your first house, there's never been a better time with low rates and low housing prices. Will the prices go down even further? Perhaps but not knowing the future, I think they have hit their bottom and will slowly settle for a while and eventually over the next five or ten years start to go up again.
____________

Kristy - Has anyone ever used http://www.northamerican.com/ to move?


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## rd_aaron (Jun 24, 2011)

KristyW said:


> That is a big purchase for someone who is single. How much has that house depreciated over the years? I think in many cases, it is a buyers market for houses. I think if you are buying your first house, there's never been a better time with low rates and low housing prices. Will the prices go down even further? Perhaps but not knowing the future, I think they have hit their bottom and will slowly settle for a while and eventually over the next five or ten years start to go up again.


Housing is at an all time high. Where are you getting your info?


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## marina628 (Dec 14, 2010)

depends where you live ,I know my friend lives in Windsor and can't give his house away but of course in GTA a dog house will probably go for 100,000 lol


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## Cal (Jun 17, 2009)

My concerns would be your timing to enter into the RE market. You may have missed the boat on the easy money.

Also, when planning for such a short period of time 2-5 years, you really need to make sure you turn a decent profit, in regards to the rent paying down the mortgage and the appreciation of the asset. As when you sell, the RE agents are going to get about 4% of the selling price. That means you should probably aim to make 10% off of the deal. If you can't do it, no deal.

You seem to have good intentions, stay on the forum and learn a little more, perhaps some of the investing info will help you become a little more confident and knowledgable in investing.

All the best.


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