Challenging the 50% rule

[arebelspy]

Hmm... the cheap leverage I can get in the form of locking in today's low interest rates for the long term is the one thing that tips landlording into an option I'm interested in.  Without that, I would I'd need a killer deal to drop into my lap for me to be at all interested.

Exactly.  Real estate prices being super low is nice, but it's the low interest that is the real amazing part.  400 mortgage on $1000 rent.  Free cash flow plus they're buying the house for you.  How silly, and once in a lifetime, IMO. 

[eldub]

I did a bit of scribbling last night trying to put numbers to the two different scenarios. Again, the question is not really whether to go for this property. I already have it, the question is what to do with it. When it's time to leave, will be be better off (long game) keeping our current home as a rental or sell and move on.

I'd guess this won't happen for at least 5 years, maybe even 10 or more.  I came to the conclusion last night that given our timeframe, there are simply too many unknowns: future interest rates, future salary, future value of this house and the next house, rise in rents, inflation. I can try to estimate each of these given historical trends, but in the end I just didn't have any confidence in my final numbers.

I think the best I can do is just sit tight until the time is closer and re-evaluate. The thing that is bugging me now is that I don't know how to invest in the meantime. If we keep this house as a rental, we need to be saving more for a future downpayment. That changes where I would put our savings. I could split the difference, and invest 50% as if we need it for a downpayment but I'm not sure that would putus in a good position for either choice when the time comes.

I did find it interesting how mortgages work differently in the US and in Can. Sounds like those of you in the US would avoid RE investment in Can like the plague. And yet many have been successful, even in expensive cities like Victoria.

[JohnGalt]

The thing that is bugging me now is that I don't know how to invest in the meantime. If we keep this house as a rental, we need to be saving more for a future downpayment.

Is it possible to to use the equity you will have in your current house for a downpayment on a future house using a home equity loan? 

[totoro]

I think you are right to wait closer to the time.  In my view, your biggest risks are actually the mortgage rate in five years and house prices. 

I suspect we are in for a downturn in prices that may not be over in five years.  History points to 7-10 year real estate cycles in Victoria.  Mortgage rates are most likely going to be higher in five years. 

You could be in a situation in five years where your house is worth less than today and your renewal rate will perhaps be two or more points or more higher.  Longer term I believe that appreciation will pay off in the Victoria area though.  I've picked ten years as the safe window based on my research and my best guesstimate - but it could be incorrect.

I have a ten-year rate but plan to sell at the end of the term (maybe at year seven if prices rise at all) and take my equity and pay off my primary residence and retire.

As far as where to invest in the meantime, I'm not the expert on this but I wonder if you really need to be saving up for the down payment aggressively if you are going to borrow against your principal for the next purchase?  The Canadian Couch Potato has some good portfolio information but it is for the longer term.  Also, you can hold your own mortgage in your RRSP (you and your husband) which might make sense if rates are higher in the future.

Finally, real estate in Victoria has been a great investment for me.  I made $200 000 (not counting principal paydown) in five years tax exempt on my last home in five years with an initial down payment of $50,000.  Going forward I don't believe we will see the same appreciation short term, but long term it is likely to work strongly in your favour.

 

[eldub]

Is it possible to to use the equity you will have in your current house for a downpayment on a future house using a home equity loan?

Yes, that will certainly be part of a future downpayment, but it won't be enough to put down 20% on a new house, thus avoiding insurance fees (1-3% of the mortgage value, depending on the ratio)

[eldub]

Totoro:

Thanks for all your input. Sounds like you hit that sweet spot as far as timing. And I agree that long-term it should be a good investment, but it may be the case that we're stretched too thin to even play the game.

Interest rates and house prices five (or more) years from now will be a huge key as to what we decide. Hey, maybe you and I can do private sale then!

[totoro]

You never know...  :)