Rent that Shack!
Do you have what it takes to become a landlord?
So, you're ready to move out of your starter home and into a larger residence. The thing is, your first home is so well-located that you'd love to hold onto it for a little longer - and maybe use it as a tool to launch you into the rental market. Before you make the commitment, however, here are a few things to consider:
1. Will you need to refinance?
Chances are, in the time you've owned your primary residence, you've had an opportunity to build up equity. The question is, will you need some of this equity to use towards a down payment on a second home - or do you have a separate down payment fund saved up?
If you need to tap into your home's equity, you're going to have to refinance - and you can only do so up to 80% of the value of your home. You'll also have to consider that with a refinance, you'll likely have to take on a new mortgage term, rate and amortization - and, depending on the details of your mortgage, this may need consideration if you are currently locked into a term.
2. Ensuring positive cash flow.
If you have to pull out some equity in your home for a second down payment, your mortgage payments are going to increase on your primary residence. For a rental property to make sense, you're going to have to make sure that you have positive cash flow - which means the going rental rate can cover your mortgage payments, property taxes and maintenance costs. Check out similar rental properties in your area either through rentfaster.ca, craigslist.com or kijiji.ca.
To keep your costs as low as possible, it's best to go with the longest amortization you can get your hands on - and the lowest mortgage rate. Keep in mind that if there is a deficit, it may affect your approval on another purchase if it becomes a large liability.
3. Tax implications.
If you end up using the money from your refinanced first property as a down payment for your second, you're going to want to research the advantage of the tax deductibility of your new rental property. You also want the advice of a tax accountant to discuss your rental property write offs, as well as capital gain laws when you sell.
4. Are you really ready to be a landlord?
Becoming a landlord brings on its own new set of responsibilities - and potential unforeseen costs that come with the care and maintenance needs of two residences – as well, you should be prepared to carry the mortgage cost of your rental in the case where you may be without a renter for a month or two.
Give me a call to discuss if this is something you may want to consider. In our current market, where sellers are enjoying the advantage, and property values are rising, you may want to explore this option…but let’s make sure it makes sense.