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Updated over 7 years ago, 07/12/2017
Between A rock and a Hard Place
Good Morning Bigger Pockets family, (Good Afternoon to some)
I have been learning as much as I can about investing, I have met a mentor, I have read books and have started networking as much as I can. I can honestly say since I have found bigger pockets my drive has shot way up. Now I am in a situation where I rent and my fiance and I are getting married next year. But I want to start investing now. Is it smart to buy duplex - fourplex now to build my portfolio and use my RSPs to knock away land tax since it will be my first purchase or would it be smart to buy my own home with my wife? I feel stuck and do not know what to do. any advice would be appreciated.
Thanks
Kolton
Kolton,
I don't know about Canada, but here in the states it is quite easy to get financing for owner-occupied 1-4 unit residential properties. Some folks buy their first investment property to live in and later buy their single family home. Many find that buying a single home first makes it more difficult to get their investment portfolio started. As with anything, there are exceptions. Good luck!
-JP
Buying a personal residence to live in is a non-performing asset. I would not buy a duplex because they are harder to sell. Think about the exit strategy. A four-plex is the best idea from your question, but pay yourself rent so that it can be seen as income for the building. This increases the NOI, thus the value of the asset. This will be needed if you want to sell or refinance the building in the future.
@Anthony Dooley I work full time at a pretty decent job, Would it be smart to hold off on paying my self rent for a year or 2 and use that towards a second property and potentially grow ?
@John P. Thank you for the response. It is a lot different in Canada though, especially with the prices.
Yes - I've noticed that home prices in Canada seem to be 2x to 3x what they are here in the states. Are wages similarly higher to compensate?
@David Dachtera I think minimum wage is 11 dollars here. it is supposed to go up to 15 by 2018/19 I think it is tougher here its because we are so close to Toronto. the major city.
@Kolton Lynch by living for "free" in a four-plex, you are cheating your rental property out of 25% of the Gross Scheduled Income, and thus lowering your net operating income NOI, which is what determines the value of the property. If you can increase your NOI by reducing expenses, raising rents, etc. you can increase the value of the property, refinance in a year or two, and use the cash from the equity to buy more property. This is a commonly used strategy, but it may not fit with your plan.
@Anthony Dooley Thank you for all your help. Hope Georgia is treating you well !
Originally posted by @Kolton Lynch:
@David Dachtera I think minimum wage is 11 dollars here. it is supposed to go up to 15 by 2018/19 I think it is tougher here its because we are so close to Toronto. the major city.
Sounds like one of those areas where the median household income won't buy the median home, falling short by more than half.
A four-plex's value is most commonly based on comps not on NOI. That is usually reserved for commercial properties, which are complexes with more than four units. I would recommend a four-plex and house hack as a starting strategy.
Hi Kolton Lynch , glad to hear you are thinking about your future. Real estate is my favourite type of investment and if you can find the right property go for it. What I would recommend though is to get a good team by your side to help you find a good deal and run the numbers and provide some financing advice as you are still very new. Depending on where you are looking a 2-4 Plex may be very difficult to find but not impossible. Find a good investor realtor (one who is an investor them-self and works with investors) and a good mortgage broker. Dalia Barsoum is the one I use she is great and will work out a plan for you based on your goals.
@Anthony Dooley, are 4-units in Canada valued like a commercial asset? Here in the US they aren't. It would make no difference if he is paying himself rent or not in valuing the property because the valuation will be based on comps. Additionally, lenders can use the expected rent in the calculations. Again, I know nothing of RE in Canada, so they might be a whole different game.
@Bryan O. @Anthony Hurlburt True, a 4 plex is not considered a commercial asset, however NOI is what I use to determine value. As you know, there are three common ways to determine value, comps is only one way. Since there are very few sales of 4 plexes in a given 6 month period, I doubt comparable sales would be useful. Therefore, if property A generates $1,000 per month and property B generates $2,000 per month, property B would be worth twice as much, all other factors being equal.
In so much as that's true, lenders will only consider comp.'s and an appraisal which, again will be based on comparable sales, and not on the property's income producing value.
You need to consider what the lender expects as well as analyzing the deal's value as an investment.
@David Dachtera the lender orders an appraisal. The appraiser determines the value. If there are no comparable sales of 4 plexes that are within 6 months old, how do you think the appraiser determines value? It's not a guess. Income determines the value of an investment.
@Anthony Dooley I have not seen that happen in this area. Here is how it works where I have bought and know of others who have bought: Lender orders appraisal. Appraiser cannot find comp 4-plexes within 6 months. Appraiser then looks in a larger area, goes back to 1 year, or comps off of triplex, duplex, or even SFR using the standard methods for doing comparison.
I had that problem when I bought my triplex. Residential property (1-4 unit) is valued based on comps. Yes, there are other methods to value property. That has no bearing on what appraisers actually do.
Using NOI as your internal valuation the way you are means that for any situation where an owner occupies, your valuation is flawed and you may be missing out on a great deal because your metrics do not understand how to deal with that scenario. The banks and appraisers do not have the same flaw in their methods, so the OP would be fine as an owner-occupant and there would be no impact to the property's value, except to you.
@Bryan O. I guess we do it a little different down south. If your lender accepts that appraisal, then great. Real estate values vary by neighborhood, so an SFR or duplex sale over a year old in a different zip code is not a comparable sale to a 4 plex. Multi-family buyers are primarily investors, which is totally different than a retail buyer of an SFR. Again, not comparable. I know this to be true. If I had a triplex sitting next your yours that brought in twice the rent, it would be worth more money to an investor regardless of comparable sales.
Well, yes - the appraiser's OPINION (make no mistake) is exactly that. The lender accepts it if the choose to, but no one else needs to. CMA or even your own conclusions based on recent sales will validate your analysis of the income value compared to the comp.'s. Then, you find a lender (commercial, etc.) who agrees with your assessment of the value. If no one agrees with you, then you need to check your evaluation.
Appraisers are only the last word as far as that lender is concerned.
@Kolton Lynch if your soon to be wife is down for a house hack I would say go for the duplex/triplex. That way you have your biggest expense paid for and hopefully are making a little income as well. account for a little more then 50% though on multi family properties. Also research how to "train your tenets" so they do not drive you crazy since you live next door.