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Why not buy the downsizing home long before you ready to Down size???
Being in the Home Equity financing business for over 19 years, I have lived a lifetime with my clients! From clients buying their very first home to expanding family needs and eventually clients needing to downsize. As I start seeing more grey hair on my head than brown it seems more of the downsizing clients come my way!! Both my parents and In-laws have gone down that path in the last 2 years!
The downsizing conversation is always very similar from client to client. Less stairs and no yard work!! Often this property lines up with an apartment style condo or bungalow style townhouse as the primary choices for the new “Lock it and Leave it” generation! There is a unique opportunity that we are seeing arise in Saskatoon that has not been available for many years. A sharp decline in selling price in the condo/townhouse resale market along coupled with a strong rental market. This creates the ability to consider buying the downsizing property years before you actually plan to retire!! Every market investor will always say to buy low and sell high. Real estate is the same but just a different asset class. When you have the opportunity to buy a depreciated asset with the expectation for growth it is always a good idea.
Why Buy Now?
- While your working you have the ability to qualify for the new investor mortgage vs buying when you retire. if there is a mortgage required when you downsize then it may be more difficult to purchase on retirement income.
- With the pricing at a 10-15% discount based on market conditions it reflects a very strong buyers’ market
- As the market turn you take advantage of the upside. Based on a $220,000 purchase, if we see in market uptick of 2% annually the asset grows $4400/year while a renter pays the bills.
- With the new Stress Test put in place by the Federal Government it has taken many home buyers out of the market. This has created a strong rental market so it is enabling the property to rent for enough to cover all the expenses associated with the new purchase.
How to buy?
- You always want to consider the interest rates when looking as real estate investing. The lowest cost of interest is always mortgage interest.
- If you currently own a home you can place a home equity product against your current home to account for the min down payment of 20% required to put down on a rental.
- We would then place a mortgage for 80% on the new property so in essence you have 100% financed the rental property
- Because it is a rental property it is easier to qualify as we are using not only your employment income at its peak, but also the anticipated rental income on the new property as well to qualify.
Save Income Tax!
- Because the purpose of this property at this point is an investment property, both mortgage segments are tax deductible!
- During your higher income years you can reduce your personal income tax with the injection of an investment property in your overall portfolio.
| Purchase price of new condo |
$220,000.00 |
| 20% down payment required |
$44,000.00 |
| Mortgage |
$176000.00 |
| Monthly mortgage payment |
$744.02 |
| Property taxes |
$150.00 |
| Condo fee |
$220.00 |
| Insurance |
$20.00 |
| total expenses (new condo) |
$1134.02 |
| monthly payment on down payment ($50k) |
$186.01 |
| Total investment cost monthly |
$1320.03 |
| Rent to cover all the expenses required is only |
$1350/mth |
As you can see by the following CMHC report below the rental rates are expecting to increase as the economy picks up.
CMHC Source: https://rentals.ca/blog/2019-
Goodson Mwale, a CMHC senior market analyst in Saskatoon, is seeing less of a decline in vacancy rate than expected. The decline this year went from a start of 9.6 per cent to 8.3 per cent, a significant drop but not nearly as large as the projected 7 per cent. CMHC is projecting to reach a 7 per cent vacancy rate by 2019 and 6.5 per cent by 2020. Mwale attributes this continued drop in vacancy rate to continued employment growth and more favorable net migration. Even though vacancy rate came down to 8.3 per cent, it’s comparatively still high.
As with any investment category it always needs to be part of your overall financial plan. If you are not currently working with a financial planner then that is something to strongly consider as there are a number of discussion points that you want to consider when proceeding with any investment.
I would be happy to get together and discuss the future Down Sizing dream!!!!
