Author Topic: Canada Case - How much cash to jump in???  (Read 2853 times)

Le Poisson

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Canada Case - How much cash to jump in???
« on: November 03, 2015, 07:14:46 AM »
I'm interested in getting started in REI but have some questions about how things work....

Lets assume that I can find a decent duplex in small town Ontario for around $160,000.

All other factors aside, when is it safe to jump in?

Mortgage wants 20% down = $32,000
Closing costs/legal fees = $3500 +/-
Initial repairs, who knows, but I'd want $10,000 on hand for opening day surprises = $10,000
Deadbeat tenant/cashflow/tenant placement/legal problems = ????
Initial Maintenance fund = ????

So looking at this, for a first rental you need at least $70,000 in liquid cash according to my napkin calcs. Of course some of these numbers could be flowed in different directions ie. if the unit has no issues within the first couple months, your $10K repair fund immediately gets tossed in other areas - maybe to backstop cashflow.

How much of that startup capital can I pull from equity in our family home? I'm pretty sure its a percent of the equity in our house, but is there a formula?

An extension of this, assuming you are starting out, where do you put your rental income? In my head it makes most sense to stash it in a GIC so its fluid to roll into the next investment/pay for repairs, etc. but I also want to build up my TFSA's as a retirement vehicle and tax shelter. Can I have my cake and eat it too?

Specifically I'm looking at teh Canadian situation. I love my US friends, but your rules and strategies are a little different from what we have here.

ashfo

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Re: Canada Case - How much cash to jump in???
« Reply #1 on: November 03, 2015, 11:45:02 AM »
Not too sure about the first part of your question.  It seems a bit high to me.  But I think that would be dependent on the property you settle on.  The down payment, closing costs, and initial maintenance costs come to $45500.  I think the other categories would be dependent on the property you choose.  Is it already fully rented or is it completely vacant?  How much deferred maintenance is there?  What is the vacancy rate like in this small town Ontario?  Depending on the answers to these questions, and the expenses of the properties, I would figure out my reserve funds from there.

As for pulling money from your family home you can borrow up to 80% loan to value, depending on your lender, sometimes its only 75% LTV.  So if your home is worth $300,000, and you own $150,000 still, you could borrow $90,000 ($300,000*80%-$150,000).  This could be a cash-out refinance, or a home equity loan of some form.

I'm not sure the best option for keeping rental income.  Right now, as an owner occupant of my duplex I just look at the rent as another pay check.  I can afford the mortgage and property expenses off of my work income.  So I just put the full rent amount away in my TFSA high interest savings account making 2% interest.  This will be the down payment for my next property.

Le Poisson

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Re: Canada Case - How much cash to jump in???
« Reply #2 on: November 03, 2015, 12:09:49 PM »
Not too sure about the first part of your question.  It seems a bit high to me.  But I think that would be dependent on the property you settle on.  The down payment, closing costs, and initial maintenance costs come to $45500.  I think the other categories would be dependent on the property you choose.  Is it already fully rented or is it completely vacant?  How much deferred maintenance is there?  What is the vacancy rate like in this small town Ontario?  Depending on the answers to these questions, and the expenses of the properties, I would figure out my reserve funds from there.

As for pulling money from your family home you can borrow up to 80% loan to value, depending on your lender, sometimes its only 75% LTV.  So if your home is worth $300,000, and you own $150,000 still, you could borrow $90,000 ($300,000*80%-$150,000).  This could be a cash-out refinance, or a home equity loan of some form.

I'm not sure the best option for keeping rental income.  Right now, as an owner occupant of my duplex I just look at the rent as another pay check.  I can afford the mortgage and property expenses off of my work income.  So I just put the full rent amount away in my TFSA high interest savings account making 2% interest.  This will be the down payment for my next property.

Thanks Ashfo - I'm still figuring this stuff out, so I don't have a particular property in mind right now, but I'm targeting around $160K since that's what most of the reasonable looking duplexes are coming in at. Stateside they are a lot cheaper, but I don't see much in Ontario. Gatineau and Windsor are also both appealing as entry markets, but they are a little far away for comfort.

It sounds like you are telling me I need to do some legwork on the buying side that is very property dependent/specific, then apply my own risk aversion to it.

Our family home has about $188K in equity. We are carrying a $20K HELOC. That gives me about $168,000 in equity.

($525,000*0.8-$357,000)=$63,000  <--- if this is right, I need to find $100K before I can even entertain this. I now feel like a trainwreck. <Edit - D'oh - no this is the size of downpayment I have. Aye Carumba, wake up!>

Are you worried about pulling down payments out of a TFSA? It seems like you are drawing down your protected (tax-sheltered) limits every time you buy a house. Wouldn't it be better to not draw down the TFSA for a investment that will be hit with Cap. Gains and count against you for income tax? I would have thought a short term investment like a GIC would have been a better way to have the money earn at least some interest, while knowing that you were going to recycle it into another house in the next few years. I like to see my TFSA as a locked vault that will take extraordinary measures to open up - different approach I guess.
« Last Edit: November 03, 2015, 12:56:08 PM by Prospector »

Captain and Mrs Slow

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Re: Canada Case - How much cash to jump in???
« Reply #3 on: November 03, 2015, 12:21:07 PM »
He doesn't ever respond to comments (odd as he is realtor) but Ryan Price has an excellent series of blog posts on how to buy real estate (the numbers side) on his blog

http://www.ryanprice.ca/

ashfo

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Re: Canada Case - How much cash to jump in???
« Reply #4 on: November 03, 2015, 01:12:01 PM »
I go back and forth on using my TFSA as a savings vehicle for real estate.  I get your point about it being a locked vault and eventually I'll probably do that.  But at this point in time saving I'm up for more rental properties, and I wouldn't be putting anything into my TFSA for index funds, so since you can take money out one year, and replace it in the next I think it's a pretty good vehicle right now for saving for real estate.  But once I get a few more properties I will change my TFSA to an investment account instead of just a high interest savings account.

Right now you have access to or at least the possibility of access to $63,000 in home equity. So if your $70,000 estimate in your first post is what you would feel comfortable having then you are close to that.  If you would feel more comfortable with $100,000 then you have more saving to do. It's up to you to figure out your risk tolerance at this point.

You might want to talk to your lender or another mortgage broker about the possibility of buying a rental property using the equity in your home.  Maybe see how much of your home equity they would allow you to access and how much of a mortgage you would qualify for.  You could then decided if you need more time to save or if you should start looking for properties.

Le Poisson

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Re: Canada Case - How much cash to jump in???
« Reply #5 on: November 03, 2015, 01:23:54 PM »
He doesn't ever respond to comments (odd as he is realtor) but Ryan Price has an excellent series of blog posts on how to buy real estate (the numbers side) on his blog

http://www.ryanprice.ca/

Thanks for pointing me at that - great info right there.


Le Poisson

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Re: Canada Case - How much cash to jump in???
« Reply #6 on: November 03, 2015, 01:25:55 PM »
I go back and forth on using my TFSA as a savings vehicle for real estate.  I get your point about it being a locked vault and eventually I'll probably do that.  But at this point in time saving I'm up for more rental properties, and I wouldn't be putting anything into my TFSA for index funds, so since you can take money out one year, and replace it in the next I think it's a pretty good vehicle right now for saving for real estate.  But once I get a few more properties I will change my TFSA to an investment account instead of just a high interest savings account.

Right now you have access to or at least the possibility of access to $63,000 in home equity. So if your $70,000 estimate in your first post is what you would feel comfortable having then you are close to that.  If you would feel more comfortable with $100,000 then you have more saving to do. It's up to you to figure out your risk tolerance at this point.

You might want to talk to your lender or another mortgage broker about the possibility of buying a rental property using the equity in your home.  Maybe see how much of your home equity they would allow you to access and how much of a mortgage you would qualify for.  You could then decided if you need more time to save or if you should start looking for properties.

Thanks again ashfo - we are coming due for our mortgage very shortly (Yay! term 1 complete!) so we are starting talks with the banks etc. I think we are very close to right for this, but I am wary and a little concerned with what lurks in the deep. The first step is the hardest, right?

Captain and Mrs Slow

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Re: Canada Case - How much cash to jump in???
« Reply #7 on: November 05, 2015, 12:32:00 AM »
speaking of mortgages here's a great thread that I started over at Canadian Money Forum

Mortgage Advice

K-ice

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Re: Canada Case - How much cash to jump in???
« Reply #8 on: November 12, 2015, 02:19:08 PM »

Our family home has about $188K in equity. We are carrying a $20K HELOC. That gives me about $168,000 in equity.

($525,000*0.8-$357,000)=$63,000  <--- if this is right, I need to find $100K before I can even entertain this. I now feel like a trainwreck. <Edit - D'oh - no this is the size of downpayment I have. Aye Carumba, wake up!>


How much cash?  I would say zero to 20%.  I think you are trying to find a way to put zero cash down. Do you have savings? If yes, you still may not want to use them.  I would rather keep my savings and borrow money as long as my savings are earning more interest than the mortgage.  AND as long as the rental income covers all mortgage(s) & expenses.

I don't quite follow your numbers.  Your house is worth $525K but your current mortgage is $357K  so your equity is only $168K not $188.

As mentioned, of that you can only borrow a total of 80% from your house. New Canadian rules, this is only 65% for a full HELOC but you have lots of it as a real mortgage so you should be fine with 80%

I will assume the second line of your calculations are correct, so you could get $63,000 from your home.  You may want to look into getting your house appraised; the bank will do this if needed.


I wouldn't borrow the entire amount but just set it up as your rainy day fund.  You could/should set this up tomorrow and at least have that part of your financing ready.

On the rental, that is where you get the extra money:

$160K  Purchase price
$32 K down payment
$128K Mortgage on rental property  (I would put a HELOC of $1 on this place too and it can build as your rental emergency fund as you pay down the principal.)


As you already figured out, you will need to pull at least $40k for the down payment and closing costs.
With a good inspection you should know what your immediate fixer-upper costs are.

This $40K will likely be borrowed at a variable rate on your personal home HELOC. So use only 40K of the 63K.  If the place is in such bad shape that you need to borrow all $63K today I would walk away. Also, donít mix any other borrowing in this HELOC or it becomes complicated to deduct the interest for taxes. Even if the title is on your house the interest for this portion is still tax deductible because you used it to purchase rental property.  (FYI for Americans, we canít normally deduct interest on our prime residence.)

So numbers wise, it all looks possible. You do have enough equity in your home for the down payment+. Given the equity in the properties the bank may lend you that money. But honestly it is a bit tight. If you have a good steady job they will be more willing to take a risk.

But the bigger question is, can the incoming rents not only cover the mortgage but also the money borrowed for the down payment?  And the taxes, maintenance, management, vacancy etc.

Is it safe to jump in?

Yes, if your incoming rents minus expenses are cash flow positive. But you need to look carefully at your expenses because you have more expenses since you plan to borrow everything.

Quick math on the mortgage, $160K at 3% for 25y = pmt of $760 per month.  CIBC once did a quick calculation for me and said rents must be 2x that or $1520 per month.  Ball park, can you get that in your area?  But you should look at ALL expenses and check for cash flow positive. 
Leveraging that much borrowed money, & paying back the two loans would be my biggest concern.

But if it works, you have effectively put ZERO down and you are making an infinite ROI.

Le Poisson

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Re: Canada Case - How much cash to jump in???
« Reply #9 on: November 12, 2015, 03:03:31 PM »
K-Ice - thanks for an amazing post.

It sounds like I am teetering on the edge of viability. I'll aim to jump in in the coming year once we are a little more stable - maybe up our account by $25,000 or so to provide a better cushion.