Need second opinion: buying 2-unit house to live & rent

[joyful girl]

Hi all,

I'm preparing to buy my first property in GTA, Canada. I'd like to run these numbers by you to see if I'm fairly on track, or if I'm getting into a big mess. What do you think?

An example of a semi-detached house I'm looking at is $424,000 so monthly mortgage payments will be about $2000.

I've estimated annual expenses at $20,865.
   3,790   Taxes
   720      Insurance
   1500   Hydro
   120      Advertising
   1500   Gas
   500      Water & waste
   12,735   Maintenance (at 3%)

I'll be getting more accurate numbers once I make an offer and start due diligence. But am I roughly ok with these?

That brings my total monthly bills to $3,645. I estimate I can live in the basement and rent out the top portion (2-3 bedroom) for $1,300 so I'll have to cover $2,345 myself.

Looking at the amortization table, I'm putting about $1,000 per month towards principal, averaged over the first 5 years. Since GTA is expected to continue growing strong and house prices are expected to increase, I can somewhat safely assume that when I sell, I'll get the same price I paid.

Currently I rent at $1,300. Assuming I put $1,000 a month on top of that towards a savings account (ie. paying off the principal) I'll be paying $2,300 every month... the same as my real expenses for owning the house.

I hope I explained it properly. I'd appreciate any feedback.

[Daleth]

How much are you planning to put down? And how does the price of this house compare to similar ones in your area (i.e. what's the local market like)?

[Another Reader]

Given that you can rent something decent for $1,300 and GTA prices are so high, why do you want to do this?  What's your income - is this easily affordable?  Have you looked at any of the rent vs buy calculators?  I likely would not do this in your shoes, unless there is something I am missing here.

[joyful girl]

@Daleth

The down payment is 5%, so $21k. It'll need another 20-25k for renovations. I'm concerned if I have estimated the monthly costs properly, or if I'll find myself paying a lot more. I've never owned a house so I have no idea the real costs.
The local market is going up. This is a fairly low price for my area for a freehold property.

@Another Reader

We can never safely assume anything, but it's likely property prices will continue to go up in GTA. So the amount I pay towards the mortgage principal is like putting money into a savings account. Once I subtract the rental income, my bills will be the same as my current rent. That's why I'm trying to figure out if the monthly expenses are about right.

Is that logic too faulty?

[Another Reader]

Ask anyone in the US if house prices always go up.  They most certainly do not, not even in the most desirable locations.  Economies change, interest rates go up, employment drops.  How will you feel if values drop 25 percent and you are trapped in the property?  What will you do if you lose your job - will you have sufficient reserves to carry the property?  What happens to your calculations when you have a vacancy?  Or a tenant doesn't pay and you have to go through an eviction?  Or you have to do $10k in repairs because the tenant trashed the place?  It's one thing to occupy a property, it's an entirely different thing to deal with tenants.

Look at the rent vs. buy calculators.  I think Arebelspy suggests the NYT version.  My guess is that it will be a long time before buying makes as much sense as renting where you are.

Don't get me wrong, real estate can be a good investment and owning a two family can be a good way to launch an investing career.  I'm just not convinced you have thought this through sufficiently and it's not clear how you would fare when (not if) something goes wrong.

[Peony]

To me, $2,345 sounds like a lot to live in a basement. Especially when your tenants will only be paying $1,300 for three bedrooms above ground.

[joyful girl]

@Another Reader you make too many good points for me to continue my wishful thinking. Thanks. Now I won't need a face punch after "investing" in my own home.