Newbie looking into buying: 1st Home or 1st Rental Property?

Question

Hi everyone,

I'm sure to more veteran investors out there, the answer is already obvious. But given the prices here in BC, specifically in Richmond and nearby cities in Vancouver, it is really a challenge for newbies like myself.

We are currently renting a 1 bedroom unit and since we are expecting our 2nd daughter really soon, space has been the first thing that we thought of resolving soon. My (total newbie) questions are:

1. Will it be better to purchase a bigger 1 Bedroom Unit (Condo) for our personal use and build equity, take advantage of the 5% Downpayment for 1st Time Home Buyers Program, eventually rent it out, we end up moving again after a few years? This only takes care of the space issue and will probably not be able to invest in a cash flowing property until such a time. Or:

2. Purchase a Rental Unit (most likely also a Condo, with the very limited funds we have), have it rented out and just stick it out with the current space we have? Will have to come up with 20% Downpayment though and might also take the same amount of time to build equity and possibly be able to invest in another property but at least if the numbers makes sense, Cashflow is the highlight of this option. I guess the only disadvantage with this option is the space issue.

I also thought of just renting a bigger space while we increase our capital which may entail a longer time, but honestly I feel I'm already having tunnel vision and not being objective anymore.

Any thoughts will be greatly appreciated, I'm sure I'm missing a ton of things with this picture and I'm not even sure if I am asking the right questions...

Thanks in advance everyone!

David Faulkner · Answer

House hack ... 2 birds, one stone. Force some appreciation on it via sweat equity regardless of whether you are going for appreciation or cash flow. Hands on and local like this is the best, lowest risk, and in most cases highest return way to learn the business IMO.

Account Closed · Answer

@Ronaldo Reyes

I am in the same market and at the same crossroads. Myself and gf are trying to figure out if we should buy a live in investment (rent out a room), or continue renting and buy a rental in a more favorable market. In order to come up with a solution I made a spreadsheet (and upgraded) based on a screenshot of a spreadsheet I saw here.

The below screenshot is off a potential live-in situation in the market we are looking at. The spreadsheet works through all the expenses and spits out a summary in orange basically outlining where we would stand in 1 and 3 years along with the outlay required. The rent reflects us renting out a single room, so the cashflow would show negative.  After 3 years we expect to be ahead a whopping $1084, however we have saved on a years rental and included our bills.

In the second scenario we stay renting but buy an investment property. As you notice the expenses and financing assumptions change as we now have PM fees and 20% down. from this example after 3 years we would be in the hole for -$13268 and a larger cash outlay, not ideal. In this comparison it would make sense to go with the first option.

Now these are just two of many comparisons I have done, but it certainly is the best way to start figuring out different scenarios, which will ultimately give you a more accurate framework to make decisions, like; at which threshold does a rental make more sense than a home and vice-versa.

Happy to answer any questions if you have any.

T

Ali Boone · Answer

Well I'm always in favor of buying investment properties over primary houses, but you'll have a hard time finding cash flow in Canada with rentals. So unless you are willing to buy in the US or can find some cash flow somewhere, it's hard to say.

If it helps with things to consider, check out-

https://www.biggerpockets.com/renewsblog/2014/01/1...

Hope that helps!

Billie Miller · Answer

House hack! We were in the exact same position you are a couple years ago. We bought a duplex with owner-occupied financing, which is a very cheap way to finance. The rent from one side paid the mortgage for the 2 years that we lived there. We are going to be moving out in a month or so, and get to collect over $500/month in cash flow (this is even after expenses!). We were able to count this as income to qualify for a larger mortgage for our next house as well. It's a great way to live cheaply and also learn then ins and outs of land lording.

Tanya Braun · Answer

Hi Ronaldo,

I am from Vancouver and know how tough it is to get started in this area! It is extremely hard to find cash flowing properties and multiplexes are out of the question for regular working families.

My suggestion would be to start with something for your family to live in for a few years and to build equity. Something that allows rentals and is close to transit so when you do have more equity you can pull it out, buy something else and rent your first place out. Grow your portfolio slowly. In my experience the key is to get into the market. You have to buy into a good building though.

Another option for living in is cooperative housing. It is such a great alternative for families! Many people are not familiar with what it is or think it is low income housing but it isn't. It is affordable housing for anyone. In fact now most require you to have a minimum income. It can take quite a while to get into but there are hundreds of co ops in the lower mainland. We lived in one in False Creek. It was a two bedroom condo and our rent was $1000 a month. Another family who lived there moved into a co operative town house complex in Richmond when we were there. They're everywhere. You could have a bigger place for your growing family and buy an investment property.

We are actually considering moving back to a co op and renting out our townhouse because our experience was so good there and it's such an affordable option.

Good luck to you and your soon to be family of 4!

Thomas S. · Answer

Renting will always be less expensive than owning a home. A home is a life style decision not a investment so keep that in mind when making decisions. Most personal homes will cost more to buy and maintain during your ownership than they will ever be worth. They are nothing more than forced savings via a mortgage payment.

I would rent a larger place if necessary and keep saving to invest.

I would never invest in a condo as they are very poor cash flow often due to HOA fees and not a good investment.

Investing in a condo because it is affordable is not a good reason to invest. If saving to invest in a multi unit is beyond your vision it may simply be time to buy a home and put investing on the back burner. Remember it takes a lot of money to make money.

Ronaldo Reyes · Answer

Thanks so much for taking the time for this Tristan! These are numbers I would not have thought about myself. End of the day, we don't know what we don't know and it is really up to us to equip ourselves with knowledge (and a downpayment!) and make the numbers work if they make sense. Thanks again and I wish all of us luck in finding those "deals" here in BC! Cheers!

David Faulkner · Answer

Don't know your market, but from where did you pull the annual revenue and annual appreciation rates from? Are they appropriate in comparison to the long term historical averages (over, say 20+ years, spanning multiple RE cycles, not just last year, for example) for your market? Is the appreciation factored into your ROI, or just used for property tax expense? No CapEx? No forced appreciation? No credit for mortgage pay down? Are you calculating IRR?

Account Closed · Answer

@David Faulkner, the spreadsheet is alot larger than screen shot suggests and captures equity incurred from mortgage pay down, appreciation and cash flow into a total ROI. When comparing two equally valued properties, appreciation rates etc don't affect relative results.

Both are apartments so no Cap Ex required.

The point is that if Ronaldo has a 'fork in the road' question, he should run both scenarios and get a grasp of which will net better.

@Chris Walters

In our market a fourplex would cost the equivalent of NHL's draft 1st years salary, so the best you can hope for is to biy a 2-3 bed condo or townhouse and rent the rooms out to subsidies the mortgage

Newbie looking into buying: 1st Home or 1st Rental Property?

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