First property - buy own home or an investment property?

15 Replies

Hello,

I live in Vancouver, BC and would both like to get rid of rent by buying my own home as well as investing in rental properties, wherever it is smartest to do so. I am saving up to buy my first property and should be ready to do so around 2022/2023. Currently shooting for around the 500k mark as that’s affordable and lands me close to downtown for my preferred lifestyle, if it’s my own condo that I buy first.

What would you recommend, buy your own home first or buy a rental (an investment property?) If you buy your own home, seek to pay it off ASAP first before buying the next investment (a safe, low risk path,) or use that extra savings to put a down payment for the next rental?

I don’t want to get myself into a position where I can’t pay both my own home and my rental property mortgages if the rental becomes vacant for a long time. Yet, I don’t want to be too conservative and miss out on building a bigger real estate portfolio. People on the BP podcasts sound like they just keep buying and buying without fully paying off, but how do you safeguard against long vacancies so that you don’t end up having to foreclose?

Also, I am new to digging through this website. Please advise or link to any sources/pages that you think might be important for me to look into along this long and exciting new journey that I will embark upon. I will be searching deeply through the site.

Thank you so much for your time and help!

Kind regards,

Nicolette

Buy sooner. Find a private lender to loan you what you need for the downpayment ASAP. As soon as you close, advertise vacancy and fill any bedrooms with renters. They'll cover the extra private loan payment and part of your mortgage.

Around BP, living in a primary and renting bedrooms is known as house hacking and it's the fastest way to build wealth early in the investing game. Perhaps it isn't your ideal, but if you can force yourself to tolerate it for at least a year, you'll come out so far ahead, it will shock you.

As for the other part of your question: the forums are a great place to learn. Read other people's posts. You'll learn and be exposed to so much. And listen to the podcasts. I prefer the original back when Josh was host, and the Money podcast is great too. Best of luck!

@Nicolette Kiss I definitely agree with @Jody Sperling about house hacking being a viable strategy given your situation.

Here is a blog post on the BP website that explains it even further:

https://www.biggerpockets.com/blog/house-hackingcase-study

Its the easiest way to supercharge your investing early on.

Hope this helps!

@Nicolette Kiss - You shouldn't comprise. AS @Jody Sperling mentioned, house hack a single family or multi-family and have a majority of your home payed for. That is how most successful real estate investors start. 

In regards to how to safeguard against vacancy, screen tenants really well and have decent reserves. If you do both of these, you shouldn't have an issue. If someone has a good credit score, good references, and good income then 9/10 they will pay on time and if they don't you evict in 2 months and move onto the next tenant. 

In reference to leverage, it depends on what you are comfortable with. On BP, a lot of successful investors have high risk tolerances and as a result, can leverage more equity towards buying properties. Other investors want to pay off the mortgage quicker and have more equity in the deal. Personally, I use lines of credit on property to buy more property rather than waiting for it to be paid off. Start listening to the BP podcast, become a fanatic. Real estate is pretty straight forward, just gotta put in the work to learn it. 

@Nicolette Kiss why would you anticipate long vacancies? Ideally, you're buying in a location where the vacancy time between tenants is 0-2 months. 

Your reserve build-up will protect you in rare situations where you don't receive rent for 6+ months. 

@Nicolette Kiss it looks like you received a lot of good advice from investors that may not be familiar with our market.  As you know, 500K doesn't buy much in Metro Vancouver.  I agree with the strategy of owning a property that you can partially rent out, but If you aren't willing to sublet a room and have tenant roommates, you'll need much bigger pockets or move up the valley for a property with a legal suite to rent out.

Here is my suggestion... live where you want (i.e. Metro Vancouver) and buy a rental where the numbers make sense (hint... it's not Metro Van as there is no cash flow here).  Take your 500K, spend less on your residence (i.e $350k for a condo in Port Moody) and buy in a market where the other $150k can be put to good use as a rental.

I'm assuming you've talked to a bank and found out what they will lend you.  For your own home, you need 5% down and would then have to pay for CMHC insurance.  You can also take advantage of several first time buyers offers (ask the bank as there is a newer one from the fed govt).

For a rental, you need 20% down.  If the rent for your current place is less than what you'd be paying for a mortgage (remember there are property taxes and condo fees on top of that if you own it), you may want to buy a rental not in Vancouver, but nearby (eg Vancouver Island).  You might be able to find a place with a suite in Nanaimo (might being the key word).  If not, for $500K you can get a less expensive home in a few of the towns.  You'd have to run the numbers to see if they work.  Check out what rentals are going for. I know Parksville and Qualicum they have 0 vacancies and rents are quite high.  

for rentals, I'd avoid condos if you can as the condo fees are not cheap and add up to a large percent of the rent.

Originally posted by @Cody Neumann :

@Nicolette Kiss

Why not start out with both? House hack by purchasing a duplex and rent the other side for yourself or buy a condo and rent out the other bedrooms.

 Most of the places I know in Canada, the two halves of a duplex are sold separately.  Prices in Vancouver are really high.  For a cheap house (not a duplex), she'd be looking at close to $1M and most are more than that.  Condos, you'd be looking at $400K to get in and those would be outside of Vancouver proper.

If it were me, I would buy a primary residence and house hack it. This will lower your living expenses dramatically and start building equity for you. Then I'd use that rent savings to buy more house hacks and investment properties. 

@Nicolette Kiss  Nicolette, welcome to BP. Something @Andrew Freed wrote jumped up at me, "Real estate is pretty straight forward, just gotta put in the work to learn it." This has been true in my case some 16 years ago. My advise to new clients that really want to grow a real estate portfolio is to have a financing game plan. Develop a vision for your new journey, understand your risk tolerance, and learn learn learn. All the best!

Welcome @Nicolette Kiss , many of the responses have been to house hack. Unfortunately these comments have been from people outside the Vancouver area and the people making the comments probably failed to realized that $500k will not buy you a place you can house hack in Vancouver. I always recommend house hacking when it's an option, however Vancouver is very expensive and buying a condo large enough to house hack could be out of reach.

My personal opinion would be to rent in Vancouver and invest somewhere else where the numbers make more sense. 

If you use your downpayment for a condo that generates zero rental income, any return on investment will be speculation on housing prices increasing, which is just that, speculation. If you buy a condo for $500k and the market doesn't increase while you've owned the property, you've made zero return.

However, if you rent in Vancouver, where the rent is fairly cheap in comparison to the cost of buying, and buy a rental property elsewhere (Prince George, Nanaimo, etc) the capital you put into the property will generate a return through debt pay down and hopefully some cashflow.

Think of it this way. The best way to make money in real estate is getting other peoples money (OPM). If you buy a condo and live in it, you get no OPM. If you rent in Vancouver and buy an investment elsewhere that you rent out, you collect OPM. If that rental unit generates $35,000 of OPM per year, that's $35,000 you've taken in. Yes, you needs to pay for insurance, property tax, interest etc, but even if only $10,000 is left after all your expenses are paid, that's $10,000 of OPM that you wouldn't otherwise have. 

As far as worrying about not being able to pay the mortgage due to vacancies, don't invest in small, one trick pony towns. Invest in a stable city and the risk will be minimal. In the 2008 recession in the USA, when people lost their homes and foreclosures were through the roof, rents increased and the vacancy rate decreased. The people getting foreclosed on were predominantly home owners, not landlords. Buy for cashflow and you'll ride out any bumps in the road. 

This is all really great info.  I am in Alberta and the opportunities are there, but quiet few compared to Vancouver.  My main concern is always maintaining the property.  As I am seeing labor costs are quiet expensive in Canada.  Anyone have any efficient methods to reduce those costs?

Thanks everyone for the responses. Let me sum up what I am hearing and add some follow-up questions, where appropriate:

>Better to jump in as soon as possible. There are solutions to make that happen.

>Consider house-hacking. But house hacking @ 500k could be tricky in the Vancouver market - may be out of reach without more funds or moving away from the CBD. Also, numbers in Metro Vancouver are generally not good. So also consider renting in Vancouver and investing elsewhere with better rental return numbers so that you gain a return via tenants paying down your mortgage/ building you equity and maybe some cash flow too.

>Primary goal for rentals should be cash flow? And maybe property appreciation over time?

>Can avoid vacancies via: a) effective tenant screening, b) having reserves to dip into and c) selecting markets with low rates of vacancy - such as stable cities. I would want a property manager to find and manage my properties, so I guess I would be relying on them having a solid screening process. As for reserves, is that our own savings or both that and cash flow from the property that we put aside for emergencies? Is the extra cash flow from a property generally enough to cover expenses or vacancies that come up for it? And finally, how exactly do we assess the vacancy rate of a location?

>One can use lines of credit on one property to buy another...Does that mean that we don’t have to save a full 20% for the second or following properties? What about the fact that lenders will see mortgage repayments, rent and such as a liability? Won’t that reduce our borrowing power?

>I like the idea of buying investments where the numbers make sense. But how do you go about picking such a location? Do you have to go off tips from people from here/elsewhere or is there another way about this? What is considered a good rental return? Is everyone here using the BP calculators to calculate their numbers? Do these resources work for the Canadian market too?

>Require 20% down to buy a rental property. Buying a rental in a thriving market might be a better idea than buying my own home to live in. Allegedly, Vancouver Island - Nanaimo, Parksville and Qualicum are good markets in terms of affordability and rental return. Possibly also Prince George and NB. Avoid condos or buy 2 bedroom instead of 1, as it is easier to rent out 2 bedroom condos. So would stand-alone houses be best? Avoid townhouses too? I see that some houses actually still have strata. Not sure how that works yet. Avoid those too?

>Don’t buy if the numbers don’t work. Factor in rising expenses and stagnating rental prices…..These numbers, are these property appreciation and cash flow?

>Some of the US advice does not work in the Canadian or Vancouver/BC market.

>With enough research, real estate investing can be learnt.

> @Theresa Harris , yes I have spoken with a broker and have a clear sense of my current and future borrowing power for property number 1.

>Some responses that I archived when posted have now disappeared from the thread - strange.

Next steps for me seem to be to figure out how to run the numbers on properties. I will dig through the site. Feel free to share anything you think might help.

Also, I am curious if the ‘Rich Dad, Poor Dad’ and US technique of buying properties under a business works here in the Canadian market? And if so, how to go about it and pros/cons. Any resources to look into for that would also be much appreciated.

Thank you so much lovely people :).

You did a good job summarizing everything.  In Canada, you can't borrow money for the down payment.

Reserves initially will be your savings or credit.  Once you have had the property for a bit, the cash flow can go to savings.  The reserves are for unexpected repairs and vacancies.  Some towns will post vacancy rates.  You can also get an idea from how many properties are for rent.  Look at places on Vancouver Island like Parksville and you won't see many (if any) places for rent as they have 0% vacancy.

As for places to invest, talk to people.  Do you know of towns where you might like to invest? There are lots of good places.  You will want to weighs the pros and cons.  Ideally you can find an area to invest where you have family or where you've lived before and know the area.  If not, you can always ask people for ideas.

If you go out of province, know the different costs.  E.g. BC has a transfer tax, AB doesn't.  Property taxes and insurance differ quite a bit between areas as well.

Every year you wait to buy, your downpayment power shrinks.

Knowing what i know now, i would have purchased my first property 2 years sooner than i did. Lost out on 10% appreciation per year.

As for buy to live in, vs rental. Either option is a win. Note, you can generally rent a much nicer place, than you can buy. So buy a rental, then rent someone else thats nicer. Leave yourself a 3 month+ savings blanket. Not that you will need it.