In this episode Carla & Adrian talk about how to get started as a property investor and buying your first rental property.
Welcome to Canada's Property Management podcast, your number one resource for investing, managing, and maximizing the value of your real estate assets. And now here's your hosts, Carla Browne and Adrian Schulz, Canada's rental property experts.
Adrian Schulz (00:19):
In today's episode, it's probably going to be one of our most listened to episodes since everybody wants to get into the real estate investment business. So today we're going to talk about how to buy your first rental property. Before I get into my magical tips or points, Carla, do you want to provide some insight into the current market and economic condition?
Carla Browne (00:49):
Sure. Just as you said, magical. We get to see each other as we're doing this podcast. I know our listeners aren't seeing this, but I was envisioning you sitting there with your microphone and your headset and this great big unicorn thing as a... So Adrian, the magical unicorn. Okay. Yeah.
Adrian Schulz (01:06):
It's raining kittens and rainbows.
Carla Browne (01:08):
Yeah. I think that this is a really interesting topic because it's one that comes at us all the time. But there's so much in the news right now about inflation. And I think that this is where people, when they're getting into the rental market, now there's almost this concern on like, what does that mean because of inflation? Right? Is that going to mean that now I'm going to not going to be able to have renters or that the houses are going to be out-priced from what I can afford?
Carla Browne (01:34):
The way I kind of summed it up is that the real estate market is hot, but inflation is hotter. And this is a good thing. This is a good thing for us as investors. So if you have money sitting in a bank account... And people often do have enough money sitting in a bank account. For our younger generation, they can just go sell an NFT, can't they? And all of a sudden they have a down payment, or this is what the stories say in the news. A down payment essentially for a property. So if you put that in a bank, it is not making really any money, right? So you are actually losing money nowadays by not taking that money and investing it in something safer than an NFT. Not that I'm against NFTs and cryptocurrency. I'm not. It's just that I'm very much pro what real estate can do for somebody in their future.
Carla Browne (02:19):
So I think that's important for people to understand when it comes to inflation, that if you aren't spending the money in your bank account and investing it, somewhere you're probably losing money. And that you had to wrap your head around that a little bit, right? Because everything costs more.
Adrian Schulz (02:32):
Yeah. Even investing in simple things like GICs, I think it's completely ridiculous. If you're going to save and invest, at least put some effort into it and select a proper equity portfolio. Or like us, we love real estate assets because you can see them and touch them and smell them and I suppose you could taste them if you wanted to.
Carla Browne (02:58):
Taste them, that's interesting. So that is usually the biggest hurdle, is that people just don't understand what it takes to get into it as far as a down payment. So that's the biggest hurdle. So let's talk about that piece on how someone goes about doing this, Adrian.
Adrian Schulz (03:15):
Yeah. So the general rule of thumb is, for a rental property of one to four units within that one property, the minimum down payment is 20%. That is if the property is being purely used as a rental property. Here's where it gets interesting. If you intend on buying a duplex and you decide to live in one and rent out the other, that you can do with 5% down. If you purchase a three or a fourplex and intend on living in one of the units, that you can do with 10% down. So the general rule of thumb of 20% down payment for a rental property does not always apply if you intend on living in one of the units. That's down payment.
Carla Browne (04:10):
Yeah. So when it is considered more of a residence like that duplex scenario, there are also incentives that the government has as well. And they've announced some new ones in the last federal budget. So because housing affordability is such a big topic right now in Canada, just because of... Now this has not really astounded me, but they say housing costs, so that's not just mortgage costs or rental costs but that's taking into electricity and food and everything that goes into your housing needs, has actually increased by about 50% in the last two years. And we know that wages certainly haven't increased at that rate either. So I think that being able to take advantage of some of the federal incentives definitely will help as well.
Adrian Schulz (04:55):
Yeah. I mean, if you have the financial means right now to acquire a rental property, again, I don't think that there's a better time because there's less and less first time home buyers at the moment being able to find a home, but they still want to live in something that feels like a home, which is just a great opportunity for even that single fan rental property where they may choose to reside for 2, 3, 4 years while they save up additional monies for their down payment when they're able to go buy a home.
Carla Browne (05:33):
Exactly. And there's other avenues as a first time investor, too that you can look at. Joint ventures or raising capital. We're not going to get into that because that's not necessarily the specialty that we do at Real Property Management, but we can definitely point them in areas to get some information if somebody's interested in doing that. It's not out of reach for anyone. And we actually see people who maybe don't know where they want to plant themselves, or because there's been a shake up in job industries and things like that dealing with the pandemic, that they're not sure where they want to plant themselves for sure. So we see people buying properties as investment properties and then renting themselves. It's really interesting, but I've seen it now quite a few times.
Carla Browne (06:16):
The other part is that don't rule out where you live. So if you live in Vancouver and you live in Toronto and you're totally discouraged that you might not be able to get into the housing market in those particular areas because those are by far the highest priced areas in Canada, there's lots of areas in Canada that have strong, strong, strong rental markets that you can get into investment real estate for a lot less.
Adrian Schulz (06:40):
One of the things I want to talk about is how do you qualify for the financing on a rental property. So we spoke briefly about down payment. And there's creative ways that you can get the funds for a down payment, such as pulling equity out of your own primary home and using that equity that's been really growing aggressively over the last few years and using that in a way that benefits your future in investing in a rental property.
Carla Browne (07:11):
Let's just clarify, what does that equity mean? Because I think a lot of people look at, "Oh, I bought this house for or $500,000 and now I owe $200,000." And all they're looking at is their $200,000 debt. So talk about what that equity really means.
Adrian Schulz (07:27):
No. So equity is the difference between the current market appraised value and what you currently owe, okay? For example, if the current market value of your home is $400,000 and you have a mortgage balance of $200,000, you have $200,000 of equity, okay? And there's various ways to access that equity, there's refinancing as a whole, there's getting a home equity line of credit, et cetera. It depends on your personal financial situation which route you choose to go. But there's a way to umps that equity to use those funds as a down payment. The beauty is, that equity that you're pulling out of your primary home, the interest that you pay on that is tax deductible. So a lot of people right away go, "What about interest rates? What about the debt servicing, et cetera?" That's a tax deductible expense as long as you're using those funds very clearly to invest in a rental property. And then of course that rental property mortgage interest is also tax deductible. But qualifying.
Adrian Schulz (08:43):
So aside from their being standard government regulated income requirements, if you go and try to do an online calculator, don't get discouraged because you get to use the rental income. The monthly rent on that rental property gets added to your own personal monthly income, which helps qualify for the rental property financing. You can add back. Between 50 and even up to 100% of the rental income can be added to your own personal income to qualify for the rental property mortgage financing. And this is a reason not to just, by default, walk into your own banker credit union. This is where you really want to use a qualified mortgage professional to help assess your primary financing and also your secondary or your rental property financing to assure it's set up correctly that you're set up for success for the long term, not just for the first rental property.
Adrian Schulz (09:49):
And I see a lot of people making that mistake. And we're talking right now about how to buy your first rental property. But believe it or not, if you make a mistake right now when you're buying your first one, you're really going to harm yourself when you buy your second and/or your third, et cetera. So the key is making sure that the entire lending legal infrastructure is set up correctly so that you can grow a portfolio down the road. So this is a very exciting time buying your first one. I actually find that the first one, financially speaking, is a lot easier for people than the second, third, fourth, okay?
Carla Browne (10:29):
Adrian Schulz (10:30):
That's because you've got that equity to pull out of your primary residents. Or if you can't do it alone, do it... And I hesitate to say this, but maybe you look at investing with a family member, maybe with a friend. There are some relationships that can withstand investing in real estate together and there are relationships that cannot withstand it, but sometimes it's something that's worth exploring.
Carla Browne (10:56):
Yeah. With some of the changes that came down on the federal budget or that are coming, there's some things that people need to be aware that are actually in favor of smaller investors, people who are just starting to get into a real estate investment. And that is the house flipping. So now when people buy a property because this, again, going back to make sure we're not looking at everything that's on reality TV on investment real estate because it's not, but you see these people going in and flipping the house and making umpteens and thousands and thousands and thousands of dollars, real estate is a good investment because it appreciates every year, probably anywhere from 10 to 15% appreciation of what is a safe bet and what you're going to see that piece real estate across Canada on average move. But when people go in and buy a property now, they're not going to be able to go in, rent it and flip it in a couple weeks or months. They're going to have to hang onto it for about 12 months.
Carla Browne (11:51):
So maybe this is an opportunity for you to get in with a family member or another friend that you think you can be partners with, but maybe look at it from a short term basis. And that gives you then enough cash to pull out of the property in a year to maybe then go on your own separate investments if the partnership isn't something you want long term. So there's lots of ways that you can get really into that.
Carla Browne (12:11):
The other part is that the government is now, which they're not doing in the states which is really interesting, but in Canada, they're looking at real estate investment as a new real estate and asset class. So if corporations going in right now and buying neighborhoods, which is a huge thing in the US, they're not going to be able to do that as easily in Canada, which opens up the door, keeps the door open for smaller and investors to get in and start looking at how they can create wealth through the real estate asset.
Carla Browne (12:38):
So, Adrian, I personally know that you have a story of your own when it comes to your first rental property. So why don't you tell the story before we wrap up this episode?
Adrian Schulz (12:49):
Yeah. The story and the magical tip of the episode are one in the same, and it goes like this.
Carla Browne (12:55):
Go unicorn, go.
Adrian Schulz (12:56):
Go unicorn, go. Team unicorn.
Carla Browne (12:57):
Adrian Schulz (13:00):
Yeah. I'm reminded by my daughter's dance recital where they have to be unicorns and dance.
Carla Browne (13:06):
Of course. Yeah.
Adrian Schulz (13:07):
Anyway. So the story goes like this. When I bought my first property, it was a side by actually. Within a few days or weeks of having moved in, the neighbor knocks on my door and says "We actually want to sell too. Would you be interested in owning both halves?" And I'm like, "Yes, but I just bought this one. I'm not sure how that would work." One can only come up with so much money within days or weeks. Long story short, even at that time, one would assume you had to put 20% down on a rental property. Lo and behold, I had a wonderful and smart mortgage broker. Call out to Alan Federle if he's still around, I think he's in BC now. And he said, "Actually, Adrian, all you have to do is move." And I said, "What do you mean move? It's next door." "Yes. Rent out your current home and buy your next home with as little as 5% down" right?
Adrian Schulz (14:08):
So I was literally able to rent out. I had prospective tenants coming through. I rented out my own place. Because it was my neighbor, I was able to negotiate the closing date. I literally moved next door into the second property, which became my primary home. The magical tip there is, don't discount finding a different home for yourself and making that your new primary home and renting out your current home. That's one of the easiest ways to get into rental property investing.
Carla Browne (14:43):
Now that's real property management.
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