Adviser worried because I’m using savings for down

6 Replies

22 yo investor in Fort McMurray Alberta going through the financing condition on a property with a mortgage adviser.

Started my career two years ago and saved up ever since for a 20% down on a property. Finally got enough for a property and now the adviser is telling me to be careful with due to her experience of people losing their equity from the market. (Believes the market is going to collapse)

I ran the numbers multiple times and though I understand I can’t think of every single scenario, I am confident that it is a smart investment. After the adviser informed me about the market, I had to step back and reassess and understand the risks I am taking.

I have read multiple posts about the possibilities of market collapsing however and came to the conclusion that if I maintain my job, and hold the property long term(15-20 years). I should be better suited to get through the housing market dip.

Info about investment.

555,000 sale price

Paying 20% down.

Around 1700 for mortgage. Additional of 800 for utilities, and property tax.

2500 monthly payments altogether.

(I’m able to get low interest rates)

It’s a legal basement and they’re paying 1400. I’ll be living on the main floor with my brother. He’ll be paying 500 monthly.

2500 monthly payment - 1900 monthly income = i pay 600 a month.

After five years I’ll be leaving the property and renting out the top to cover for everything plus cash flow while I get another property.

So as stated above, I should be okay if I’m able to keep the tenant, I keep my job as I hold the property long term. I’m not too worried about the equity as the market bounces in the long term outlook.

If there is anything I should watch out for, please do not hesitate to let me know. I am a very new investor and I feel like Dorothy after the tornado in wizard of oz.

If you are getting $1400 for the basement, then you must be able to get $1600 to $1800 for the top floor = $3,000 to $3200 per month and then you make a little more profit since your tenants will be paying all the utilities and you should net $700 to $900 per month in cashflow.

Then, you make even more money when you raise the rents even as low as $30 every year for both tenants and in a few years you are netting $1,000 per month. 

I agree that the change in market prices does not matter when you intend to hold the property long-term with the exception that nothing happens in your life where you have to sell the property e.g. sickness, or a lawsuit.

For $110,000 down and a $1,000 per month cashflow I would take the deal.

@Paolo Umali I, too, would take the deal.

One of the things I look at when purchasing a property is if I believe the rental market will stay fairly stabilized even if the the housing market collapses some. So, since you know your market, do you believe if the value of the home you’re buying fell from $550,000 to $475,000 could you still get $1400 for the basement and $1600-$1800 for the top part once you move out? That way your bills will still remain covered while the housing market recovers which it will eventually.

If the answer is yes, you can still generate $3,000-$3200 a month in rent because you have a good, desirable location then you should be fine to make the purchase.

If you think the whole economic basis of your town falls out if the housing market drops, like you live in an oil field town dependent on an oil boom it might not be a good opportunity.

@Alecia Loveless I’m not quite sure if I am able to maintain the same rental income had the market dip. Certainly another due diligence I should explore. I’m positive yearly leases can help maintain a consistent income but won’t guarantee after expiration.

Thank you so much for your input!

@Jack Orthman after some market research. A 3 bed 2 bath with this location, I can rent the main floor minimum 2k. Though I may even go lower due to competition, I can still make cash flow with the property. The only unfortunate thing is that I am forced to live in the property for 5 years in exchange for some down on property and low interest rates which I am completely fine with as I plan on staying for a while.

I believe I made a smart investment I guess it all just comes down to what I cannot control IE the housing market.

@Paolo Umali

I would save your savings and use an fha loan with a lower down payment. You’re gonna want that money for reserves and again when it is time to buy property 2.

What else would you use for a down payment?  If the numbers make sense, make sure you don't spend all of your savings (you need some for closing costs and the unexpected).  Fort McMurray has seen its ups and downs over the years.  No one knows what the market will do.  When you do sell it, you usually have more flexibility with the timing on a rental.  I wouldn't worry about it.

For utilities, is that part of the rent or do they pay for those?  I know with a basement suite the meter isn't always separate, but you should look into dividing the utilities.  You can do it based on size or number of people living there or a number of other metrics.

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