Should I Hold Off On My First Rental? High Prices

Question

Hi guys,

Ive been saving up for a down payment on my first rental. I want to put down 20% so i can have lower mortgage payments and increase cash flow as opposed to 5% (let me know if this is a good idea or not).

The huge difference in US and Canadian home prices and all this talk of the real estate "bubble" in Canada makes me pause though.

I wonder if it is the large metro areas like Toronto and the GTA skewing the numbers and if the smaller mid range communities will suffer a smaller price correction.

Im looking in the Ktchener/Waterloo area and wonder if prices are too high right now? Or if it is an okay time to buy?

Thanks!

Lee Jackson · Answer

Lots of good info guys!      I have a friend who just sold 2 duplexes for top dollar this summer, in Peterborough...   I would be thinking rents will be compensating

Conor Williams · Answer

Thanks @Jon Kepler I think i'll have to look beyong kitchener/waterloo as prices seem pretty inflated here

Jon Kepler · Answer

@Conor Williams, I invest in Owen Sound and I regularly find properties that meet my cap rate requirements. If you can't find what you are looking for in Kitchener/Waterloo, you may have to look a little farther away. However, properties are definitely out there.

Conor Williams · Answer

Thanks guys, @Roy N. I should have stated that I would live in one of the units for the 5% down option. But i gather 20% seems to be the better alternative. Thanks for the response.

@SOROUSH MIR SERAJI thanks for the response. I would be looking at a cash flow strategy as you stated it helps prevent the bubble from having as much of an impact.

Soroush Mir Seraji · Answer

Hello Conor,

I am from Vancouver and basically my market is even more over priced than anywhere in the country. I am also in the market for a cash flowing property. I have not look very seriously in Ontario market so I cannot make any suggestion for your market. However, with a market such as this you need to consider investing in a further city. The answer to your question typically is based on what you are after. So I would give you couple of scenarios:

1. You want to quit your job and cash flow is your goal. This is my favourite scenario and there are lots of deals out there that would 100% cash flow and some of them could cash flow very nicely. I have found quite a few cash flowing properties (+$500) but of course that is far away from where I live. I have found 2 properties that are cash flowing over $1000. The price range in case you wonder is $170K - $380K. Next week I am heading there to check them out and you can keep in touch and I will let you know the numbers once I closed on it. So in this case the key is to look farther and have the property managed by a property manager. This strategy kind of protect you against the real estate Bubble because whether the prices go up or down you are always cash flowing and probably you would get your investment money back in 5 or 6 years even if your property's value is cut in half.

2. You are buying for future appreciation. This is a bit riskier one (at least for me) but the key is to buy a property and break even on the cost of owning this property ($100 per month positive cash flow would be even nicer). However even if the prices go down sharply over time they would always come back up and one point in time they would go even higher than what you have purchased. The only problem is it might take a long time. The type of neighborhood you would buy though is very different than the previous scenario. You buy in a city or neighborhood that the land is ideally more limited, the population growth is higher than average provincial, the vacancy rate is low, the cities around your target neighborhood are all priced higher than this neighborhood, big businesses are moving into this market and etc. There are about 12 - 15 factors you want to look at. The nice thing about this scenario is more than likely you can buy near where you are located because cash flow is not the goal anymore appreciation is the goal.

Sorry this post is long I hope it is helpful. I am not a master in this but I have been educating myself for the longest time.

Roy N. · Answer

@Conor Williams

Unless you plan on living in {one of the units of} your rental, you must put down 20% if you are going the path of conventional financing.   High ratio mortgages (10% down) and the CMHC first-time-homeowners plan (5% down payment) are only available on owner-occupied, residential (1 - 4 units) properties; there may be further limitations on the number of units under the first-time-homeowners programme.

Prices are high across most of the country these days:  nationally, average housing prices are 5.3 - 5.7 times the average family income (depending on whose numbers you read), giving Canada the honour of being second or third on the list of countries where housing is least affordable.  The GTA (>7 times) and Vancouver (>11 times) are the primary upward forces on the national average, while the Maritimes are doing their best to be the anchor (Moncton, NB was ranked as having the most affordable housing in the country).

There are still "deals" to be had, but they are fewer and further between - as an example, we've had many a dance, but have not Closed on a property in almost 2-years.