Owning a second home.. how difficult is it?
 

Say I have a house and a mortgage but I would like to get into another house as strictly a rental property, how would I go about doing this?

If i've got a 10% downpayment saved up already for a second home is that all I would need? Would I need to be able to afford both mortgages in the event I could not find tenants for my house for an extended period of time (which is somewhat unlikely but im sure the banks would maybe want this).

I could probably afford both mortgages but ideally I would not want to be stuck in that situation.

My guess is that I would have to figure out how much rent I could get from my tenants and then be able to cover the balance of the mortgage payment per month. That is what i'm guessing. I guess it wouldn't hurt to talk to a mortgage broker but I thought I would get an idea or two here first.

Eventually I would like to have my own home plus 3 rental properties.

probably need to talk to the bank

If you're looking to get a 2nd home as investment, they'll take an approximate figure based on size and location of the property for the rent you can get and then use only a certain percentage of it to calculate the mortgage you'll qualify for.

bingo,

so in essence, you'll need to have sufficient income to cover a lot of both mortgages to be able to qualify, considering you still have heating/prop.taxes/water utilities to pay still on top.

It depends on the location but if it is local my professional opinion is that you should wait and not buy anything right now.

If you still wish to do so, your best bet is to add up your gross income and then figure out all your debts. The banks will not consider anything if your debt ratio is above 40%

So for example, if you gross $10,000 a month the most the bank will let you pay is $4,000 a month.

If your current mortgage is $2,000 a month and you have a car loan (or some kind of loan) for $500 a month, the most you can borrow is based on your payments which would be a max of $1500.

You can run the numbers yourself but that's what the bank will consider.

Mine too, yet the market is hot right now. I blame uneducated sheep who will be stuck with huge bills in 5 years time when rates have reset.

The Bank considers that the property will be rented XX% of the time and you'll have to cover 100-XX%. The XX% is based on factors such as city size, vacancy rate, ... so I expect it to be very high in Vancouver. It was 75% in rural Ontario when I was looking at investment properties before I moved.

So in your example, $1500 only has to be 25% of the housing costs, so he could take on $6K of mortgage expense.

Find house, buy house, rent house.

Its not very hard, yet sounds like you haven't run the numbers:
1. What are rents in the area you want to buy?
2. What are mortgages in the same area? property tax? condo fees?
3. Can you rent and make a profit? (not just break even, I'll explain why below)
4. What is the vacancy rate in the area you want to buy?

You may find it hard to get a rental property with only 10% down. When I looked 5 years ago many places wanted 15% down or $100K net worth (not including home equity).

Plus you'll have to pay CHMC fees.

That's a huge plus. Means when the worse occurs, and it will, you won't be forced to sell.

Don't guess, do the math.

Example monthly expenses ($500K 2bd condo in Kits, $400K mortgage, 20%/$100K down):
$1730 mortgage ($1300 interest, $430 principal)
$250 property taxes (0.6% of $500K)
$300 condo fees
$172 income tax ($430 principal taxed at personal income rate, lets say 40%)
$XX property management fees ($0 if DIY)
==
$2452 monthly rent required just to break even

Notes:
1. The underlined portion is what most people forget. Sure you can write off expenses to try and reduce this, yet with only a single rental property the number of expenses you're allowed to right off is limited.
2. Rents in Kits are $1800-2200 for $500K 2bd condos. You'd be losing money in Kits. Prices are similar in West End, Yaletown, North/West Van, ...
3. $1730 is at 4% over 35yrs. It could be ~$2200 when you renew if rates are 6%. Do you think you can get $500 more in rent in 5 years?
4. Vacancy rates are up this year compared to last, and should go higher after the Olympics. How long can you afford to have a rental sit unrented? How low can you lower rent to entice renters?

I'm looking for a place to rent currently and have noticed this:
- vacancy rate is much higher, many more units available than last year
- some units are sitting empty for at least a month between renters
- some units have reduced prices for Oct 1, since they didn't rent for Sept 1

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Using the example, if you broke even renting, after 5 years the only "profit" you've made is the money paid down on the mortgage (we're going to assume house prices stay flat in Vancouver for 5 years, very possible) == $430 x 60 mns = $25.8K

Consider the 20%/$100K initial investment, at 5%/yr would have made you: $27.6K Without the hassles of renting/maintaining a rental property.

---

Moral of story: Unless housing prices go up, there's very little money to be made in buying a rental in the over-priced Vancouver market since its near impossible to rent and make a cash flow profit.

My advice: You'd make more buying investments with low yields for the next 5 years, then buy a rental property before the next housing boom.

Taylor192 - FTW!

Thanks :thumbsup:

YMMV - my example is for a $500K condo in Kits with 20% down. Considering rents are just as high in other ares of the GVA, yet house prices can be much less, you might beable to make a positive cash flow.

10% down wont be feasible since you'll hit CMHC insurance... with today's rates the way they are still good at least until november. Its going up around then... if you get a variable close most banks are offering P+0.40 and P+ 0.60 for open variable. P= prime rate set at 2.25%. as for affordability or purchasing as a rental property make sure when you do apply for the mortgage just apply as a second home purchase rather than rental propery cos the LTV (loan to value) for rentals is 50% for most banks where as for second home can be same as your regular mortgage at 80% depending on how much money you make. good luck with your purchase :)

That's fraud BTW, and most mortgages has clauses you have to sign stating your intended purpose. If that changes, and your mortgage company finds out, they "could" penalize you, yet it is highly unlikely.

i do mortgages everyday... as for purchasing it as a second home... it comes down to approval by the adjudicator... applying as a second home has an easier approval rating and they do know 90% of the ppl that apply for it use it for rental but there are loop holes in the system that allow for this type of application. btw if this is fraud tell that to all the ppl that purchase under the secondary home purchase (mortgage).

Loop holes eventually get plugged.

It would suck to buy a second home, rent it, then at renewal be told "nope you need a rental mortgage" which is a tougher application and they get denied.

Its unlikely, yet owners should be knowledgeable that banks are legally allowed to cancel or refuse renewal on a home that isn't being used for the stated purpose.

I'll reiterate, since you didn't read it in the last post either, its unlikely. Yet its still a risk, and in bad times we know banks like to change the rules and be far more strict.