# How do people go about to have rental properties



## CuriousReader (Apr 3, 2009)

I have been looking around to buy a 2-bedroom condo in North York area ... found some interesting ones, but just havent found the "this is it" one. It got me thinking that because it's quite a popular area, may be years down the road when I need to move to a bigger house, I can keep the condo to be a rental property, but then I was wondering how can I afford something like that?

Let's consider a generic scenario...

2-bedrooms in North York easily cost 350 - 450k ... years of saving of something like 100k for down payment say it's done with about 250-350k mortgage. This is is on average single-sourced income of about $50-70k. 

Few years down the road ... say 5-8 years or something like that, need to move to a bigger house (family, etc), and may be by then it's two-sourced income totalling about $120-140k a year? ...

How is it possible that one can buy a house without selling the condo? Where would the money for downpayment come from? With paying a mortgage and pushing as much money as possible towards mortgage, I dont think it's possible to save up another $100k ... not to mention if little ones come into play and you have even more expenses ...

How do people achieve this? 
I would like to know how to slowly but surely get to a position where I keep the condo I am buying as a rental property at the time I need to move out to a bigger house.

Note that the house might not be in popular area as the condo ... but it could still cost 400-700k.


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## Four Pillars (Apr 5, 2009)

With that kind of income, and that kind of real estate, I would forget about trying to own two properties at the same time.

As for the condo - you mention a $250k-$350k mortgage on a salary of around $60k? That's a debt/income ratio of 4:1 to almost 6:1 (higher end of range). 

I don't think you can afford it - don't forget about the condo payments as well.


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## CuriousReader (Apr 3, 2009)

Four Pillars said:


> With that kind of income, and that kind of real estate, I would forget about trying to own two properties at the same time.
> 
> As for the condo - you mention a $250k-$350k mortgage on a salary of around $60k? That's a debt/income ratio of 4:1 to almost 6:1 (higher end of range).
> 
> I don't think you can afford it - don't forget about the condo payments as well.


Not to worry about the debt/income ratio .. the ratio is lower in reality for my case. Plus, I'll have someone living with me which will help the monthly payments.

The numbers I gave above are just some rough numbers ... sometime I just pick the lower end of the income and the higher range of the debt side of things just to make it close to worst case scenario. 

But how do some people own multiple properties in Toronto? Do they simply make millions in income?


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## Sampson (Apr 3, 2009)

CuriousReader said:


> How do people achieve this?
> I would like to know how to slowly but surely get to a position where I keep the condo I am buying as a rental property at the time I need to move out to a bigger house.


Mike's got really good advice here. Its all about income, and savings rates.

To give you an idea how we did it, we had used a 35% down payment on the first condo, Debt:Income of about less than 1.5:1, maxed the prepayments (20% per year) and were on pace to pay it off in 5 years or less.

Skip forward a few years, our income has tripled, bought a house and again put 35% down (this time with some help from the equity from the condo). We paid an extra 15% against the principle over 3 years and are on pace to pay off the house in a total of 10 years. Debt:Income on this house a bit higher (we splurged a bit) of 2:1.

How do we do this?
i) crazy high savings rates (between 35-50%);
ii) healthy annual raises;
iii) very healthy income;
iv) low variable spending (< 20% net income)
v) rental that produces +ve cash flow

Even without (ii) or (iii), we'd be able to do it, simply by living well below our means.


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## Berubeland (Sep 6, 2009)

The answer is simply that people don't do it. Not serious investors. Lots of people get sucked into the idea that real estate is the path to riches and for some people it can be. 

But buying condos for 245K that can generate about $1400 in rent is not how. 

I have an investor that bought 3 condos. He bought them preconstruction and every month he is currently subsidising his tenant's rent by $200 per month since the maintenance fee have shot through the roof. 

Then a while ago two condos became empty and he had to carry them both for a month and a half. Then he was calling me everyday asking if I had rented them yet.

So the answer is don't


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## Four Pillars (Apr 5, 2009)

Just to add to Sampson's advice - another big factor is time/age.

If you are just starting out, then buying one property is a challenge for most. In my case, I've been a home owner for 10 years and have done some pretty good saving (maybe not quite as good as Sampson). 

At this point, I could buy a second property if I choose, but it's taken a lot of earnings and savings to get to this point.


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## Sampson (Apr 3, 2009)

Four Pillars said:


> In my case, I've been a home owner for 10 years and have done some pretty good saving (maybe not quite as good as Sampson).


I'm sure you have more fun than we do though


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## andrewf (Mar 1, 2010)

Rachelle, I probably haven't taken the time to yet but I think this is a good to say this: thanks for posting here. You've helped to cut through a lot of the hype around real estate for me. And considering how much real estate costs, making a mistake there can be one of the most expensive mistakes of your life.


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## GeniusBoy27 (Jun 11, 2010)

Curious Reader:

I've been thinking about the same thing. How do people afford these houses?

My situation is that my wife and I are extremely high income earners. So we can afford to save and have alternative properties, but there are risks involved. However, our income allows us to take those risks.

In your situation, I think you should sell, to be honest.


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## Berubeland (Sep 6, 2009)

Dear Andrew,

Thank you  I'm afraid there are many similarities beween the stock market and the real estate business. Tons of people willing to sell you very questionable "investments" 

If I saved even one person from being scammed I'm quite happy.


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## Four Pillars (Apr 5, 2009)

Sampson said:


> I'm sure you have more fun than we do though


I did until the kids came along.  Now, it's a different kind of fun.

I've always heard how expensive kids can be, but in the first four years, ours have been a huge saving. We don't spend much on them and I don't do my any expensive "nights on the town" anymore or annual snowboarding vacations out west etc.


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## Scottlandlord (May 27, 2010)

Profitable investment in rental properties can be done. It's important to know and listen to someone who 'has done it' rather than people who 'say it can't be done.'

Is it easy? No. Not at all.

You need a very good team with you, including a terrific mortgage professional and a top-notch legal rep.


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## Ethan (Aug 8, 2010)

Your situation is very similar to mine. I bought my first house this summer, I plan on buying a second house in 3 years. At that time my current house will become a rental unit.

I made a 20% downpayment on my house this summer. I went with a floating rate mortgage, my payments are based on a 5.99% interest rate, however my floating rate is 2.8%. This results in monthly principal reduction of ~$1,000. Assuming rates don't increase dramatically, in 3 years I should have over $36,000 in equity built up on top of my initial downpayment. I plan on remortgaging my house to an 80% debt 20% equity level at that time, providing me with $36,000 cash. This money will go towards my downpayment on my 2nd house. I will still have a 20% equity position in my first house so as to avoid CMHC fees.

I plan on always maintaining a higher level of debt on the rental property, because mortgage interest on the rental property is tax deductible, whereas the mortgage interest on my primary residence is not tax deductible.

That's my plan. As others have mentioned, getting the 2nd property is dependant on having a high enough level of income to service the debt (in the eyes of the bank).


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## balexis (Apr 4, 2009)

> I plan on always maintaining a higher level of debt on the rental property, because mortgage interest on the rental property is tax deductible, whereas the mortgage interest on my primary residence is not tax deductible.


Are you sure that refinancing your principal house before switching it to a rental property will allow you to claim a deduction for the mortage interests? Seems to me that it won't, since the mortage money will be used to buy a personal residence.

However, you might be able to get a fair amount of deductability by implementing the Smith Manoeuver.


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## Ethan (Aug 8, 2010)

balexis said:


> Are you sure that refinancing your principal house before switching it to a rental property will allow you to claim a deduction for the mortage interests? Seems to me that it won't, since the mortage money will be used to buy a personal residence.
> 
> However, you might be able to get a fair amount of deductability by implementing the Smith Manoeuver.


I hadn't thought of that. I'll probably try it and see if the CRA challenges me.

What do you think CRA would do? Would they ask for proof that the debt proceeds were being reinvested into the rental property? In which case I wouldn't be able to provide them any audit support.

Maybe my little scheme won't work.


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## Young&Ambitious (Aug 11, 2010)

Haha Ethan I've been thinking of doing the same you're thinking of...I certainly hope it is doable! 

So thinking this through, if the new-property down payment is taken out from the first-property principal payments, the principal payments are non-deductible and made by the individual, therefore I can't see how the CRA could challenge this, albeit this would increase the oustanding mortgage thus increasing the tax deductible interest amount. Especially as this is under an individual and not a business set-up...


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## Scottlandlord (May 27, 2010)

Building up a large portfolio of rental properties is a heck of a lot easier if you are careful and start on the right track.

After their first rental, I've personally seen many people go two ways:

1. The rental runs quite well and the investor enjoys their investment for year*s* before making their next move. After all, that extra money is paying for the Bahamas trip and the new kitchen in your own home, why risk fate?

Or, more common:

2. The rental is full of problems and the investor says "enough is enough" and moves on to something else.

The best way forward is to keep positive, learn as much as possible, surround yourself with very good people and see success as a reason to march forward ...and problems as a speed bump to learn from.


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## GeniusBoy27 (Jun 11, 2010)

My experience mirrors Scottlandlord, though I've only been back in Toronto for 3 years. However, we've been investing over the past few years and making good profits on real estate, where it's cash flow positive on most of our properties. 

The key is being very patient on the purchase of properties and knowing the "number" by which you'll buy a property, and when you can let it go. I don't take it personally. I look at it strictly as a "numbers" game. If you're patient and work out the numbers, things go really well. I've also structured the majority of properties into numbered companies for tax purposes and also for distribution of flows (but that's another study).

Regarding the change from principal to rental. The second you go to rental property, the mortgage interest (not the principal on the rental property) is tax deductible (as well as a percentage of CMHC insurance, if applicable).


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## Scottlandlord (May 27, 2010)

GeniusBoy27 said:


> My experience mirrors Scottlandlord, though I've only been back in Toronto for 3 years. However, we've been investing over the past few years and making good profits on real estate, where it's cash flow positive on most of our properties.
> 
> The key is being very patient on the purchase of properties and knowing the "number" by which you'll buy a property, and when you can let it go. I don't take it personally. I look at it strictly as a "numbers" game. If you're patient and work out the numbers, things go really well. I've also structured the majority of properties into numbered companies for tax purposes and also for distribution of flows (but that's another study).
> 
> Regarding the change from principal to rental. The second you go to rental property, the mortgage interest (not the principal on the rental property) is tax deductible (as well as a percentage of CMHC insurance, if applicable).


Great post. I like how you have taken 'emotion' out of it and view it as a numbers game. It's not always easy, yet it's the best way to get where you want to go.

Where were you before heading to Toronto? Have you invested overseas?


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## UP_N_GO (Sep 10, 2010)

I have done it a was quite sucessful at it. First I saved and bought a comfortable and fairly new three bedroom house and paid it off in five years.
Saved enough to start buying rentals and bought a new duplex going for cost (good deal) and paid it off in five years (again) - this was my flag ship...
The best advice I ever got came from a wealthy property owner 'never put yourself in a position where you are equity rich, and cash poor'. Following his advice I made sure I had cash left over when I bought the next property and because the duplex was paid for I paid that off in three years (all rental income expenses etc went into one account).
I moved to a high end brand new house (the owner had to get rid of it - fantastic deal over in 20 minutes).
So far, all properties were great deals, I took my time, never bought a property I would not live in, always charged less than others (renter's avarage stay was 6 years) and kept the properties well maintained and renters happy.
The year after I bought our new house, I kept my cash and used equity to buy an expensive fourplex, but it was the best there was - the bank never had a problem because of my credit history. I thought the price was a little high but well worth it - Paid that off with the seven rents coming in and odly enough it was done in seven years (biigest mortage the bank had put through).
I had an income of 250K per year by then - success breeds success? So, I then bought a two acre lot and built the house of my dreams.
About that time, I was offered two ecellent fourplexes for less than twice the price of the last one. That would have now brought 15 rents, but I decided to retire and did not want to be away when something went wrong, so I declined. The following year, end of 06, properties had skyrocketed, so I sold at roughly three times the original price of the properties (by then they had long paid for themselves). The properties sold in less than 30 days - people were speculating, they lost because in 07 the prices crashed due to loosing one of the largest plants in the area.
Now I have my home here and a winter home in Yuma and we are quite comfortable.
Some co-workers who called me 'slum landlord' had long ago stopped calling me that and tried doing what I was doing, most failed.
The moral of all this is - take your time (I started at 40), save and pay off your own house, look for good opportunities, check the rental market, if time, price, quality and market are good, make your move, but keep some cash. If you rush in you will not make it.


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## GeniusBoy27 (Jun 11, 2010)

UP_N_GO said:


> I have done it a was quite sucessful at it. First I saved and bought a comfortable and fairly new three bedroom house and paid it off in five years.
> Saved enough to start buying rentals and bought a new duplex going for cost (good deal) and paid it off in five years (again) - this was my flag ship...
> The best advice I ever got came from a wealthy property owner 'never put yourself in a position where you are equity rich, and cash poor'. Following his advice I made sure I had cash left over when I bought the next property and because the duplex was paid for I paid that off in three years (all rental income expenses etc went into one account).
> I moved to a high end brand new house (the owner had to get rid of it - fantastic deal over in 20 minutes).
> ...


I think this is absolutely wonderful advice. Thank you.

Scottlandlord: I was in Boston for 7 years pursuing a dream, and then came back home to do the same. Simply put, I'm Canadian, love Canada and wanted to return home. I do what I love to do, as a job, which means in all honestly, I can't see myself ever retiring. 

I bought a place while in Boston that did very well, but I decided not to keep my property in the US, and to retain my dual income (in the US and in Canada) with the tax headaches that would be involved.


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## Scottlandlord (May 27, 2010)

I hear you.

I also love Canada. My time abroad made me appreciate it even more.

This really helps when I meet those "speed-bumps" along the way...


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