Not sure if your first home purchase should be to live in or as an investment property? In this episode, we discuss the pros and cons of buying a home as an investment property as well as explore the financial implications of moving into your investment property.
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What we discussed:
Hi everyone. I'm Karl. Welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics, and tips from home buying experts. Remember, if this is your first time on this channel and you want to get the latest strategies from the experts, hit [00:00:30] the subscription button below. Hit the little notification bell so you don't miss anything.
So today, I'm joined by Kevin French, Realtor with RE/MAX, and the question we're going to answer is:
Buying your first home versus an investment property
Kevin, which ... I guess my first question is,
Does an investment property actually count as your first home? Maybe from a financial sense?
Well, the only advantage to buying to a first time home buyer financially would be [00:01:00] the first time home buyers plan where you can withdraw your RRSPs tax free. That would not apply.
You would need to occupy the property and then if you are purchasing the property for rental purposes, you have to put down 20% at a minimum.
The lenders might require different, it all varies from person to person, but it's going to be 20% as a minimum if you're not occupying the property or have a family member occupying the property.
I never knew that because I thought that even if you bought a home, you just have to pay a minimum of 5% down regardless. [00:01:30]
But if you don't actually plan to live there, you have to pay the full 20%?
Yes. There's going to be ... yeah, the lender's taking on more risk, is their position, so then you're going to put in more for them to take on that risk.
First home as an investment property?
In your opinion, should your first home maybe be an investment property if you can actually afford it?
In Calgary, it's kind of difficult to find a property that cash flow positively from day one [00:02:00] .
I would, if somebody is looking for investment potential, but also considering owning a property themselves so they don't have to pay rent anymore, I would just encourage them to buy a property that has rental potential as well.
So that could be a carriage suite in the backyard, it could be a basement suite with a side entrance, private, everything's completely separate.
That would be the best bet to give them the opportunity to build equity on the property.
Have the investment income coming in as well, but stop wasting money renting.
From investment property to home occupation
Is there an opportunity ... so let's say you set up your, the first home, your purchase, regardless if it's a first home or not, [00:02:30] as an investment property. Can midway through, can you go and say, "Hey, you know what, it's no longer investment property. I want to move in there." Is there financial implications or any kind of implications on that?
You can do that, of course. It's just that if there's an increase or decrease in value, then you would want to get it appraised for tax purposes.
So basically, if it's not your principal residence, then you're going to be taxed on capital gains.
So if you buy the property for 200, you sell it for 300, then you have a hundred thousand dollar gain, you'd be taxed on 50% [00:03:00] of that.
So if you're going to move into the property, you have to get it appraised at that time and then essentially pretend like you've sold it and pay taxes on the gain.
You can't turn an investment property that's been investment for 10 years into a principal residence for a year to avoid taxes.
Does your appraisal then ... not that I was thinking of doing that ... but does your appraisal impact if you live there or not?
The appraisal would be done when you decide to occupy the property[00:03:30] .
So if you just, you know, you buy it and you never move in and it's continuously an investment property, you have to disclose it in your taxes every year whether or not you've sold property.
So when that year comes that you do sell the investment property, you pay capital gains at that time from the difference in the purchase to the sell price.
Is it, would it be then better to I guess buy an investment property before you buy your first home?
Mm, I don't see the advantage of doing it unless you're living for free otherwise. [00:04:00]
It'd be better to purchase a property that you have investment potential in, or sorry, rental potential in, using it as your own principal residence and then as an investment property as well, rather than just paying rent and then renting that out.
In Calgary, it's difficult to positive cash flow a property right after purchasing it. That's assuming that you're not putting down more than 20%.
If you put down the minimum, it's hard to make a profit every month and not pay out of your pocket, and then you'd be paying out of your pocket in addition to the rent. But it's [00:04:30] better to purchase a property than rent on the whole in Calgary, if we consider the detached market specifically, and then we go over the last five years when it was, you purchase at the peak, let's say you bought a home at 550, which I have a client right now that's in this boat, bought at 550, probably sell it around 490. So it's a $60,000 loss, but they lived in the home for approximately 60 months.
So to rent a comparable home would be about $2,500 a month, then you pay utilities and whatnot on there on top of that, let's take that out of the mix and go with the $2,500 rent ....
Karl Yeh: [00:05:00] Times of by 60 ...
Times of by 60, $150,000.
Then if we say that your mortgage on a $500,000 property with, on a $500,000 mortgage, let's just say that that's, or it's about $500 for every $100,000 borrowed.
So you're about the $2,500 mark anyway, half of that we'll go to principal every month. So you're still at about a $75,000 paid in principal, $75,000 loss in interest.
And then you've lost over, since the peak of the 2014 market till now, you've [00:05:30] lost $60,000, you're still 15 ahead.
You've lived in your own home the entire time, you've had control over what happened, and there was also strong potential that the value could have increased or not gone down as much.
You got to also remember that the assumption is the rent will continue at that price, right?
Kevin French: Yeah.
Karl Yeh: Right? And I've never seen rent for 10 years stay at that price.
And it depends on your landlord as well. They might not call you back, they might not fix things as you need to. And if you wanted things changed, you wanted the larger deck, you wanted a nicer bathroom, any improvements [00:06:00] that you made to the property would stay with it and you would get no ...
Karl Yeh: Yes.
Kevin French: No return on them.
Remember, if you want to know more about the advantages of owning a home versus renting, check out our video above and description below.
Question of the day
Karl Yeh: So the question of the day I have for you is
Did you buy a property as an investment and how did that work out?
Let us know in the comment section below.
If you want to know more about buying house as your first investment property, check out this video as well as other home buying videos here.
Don't forget to subscribe and hit the notification bell [00:06:30] so you keep learning from the experts. Thanks for watching and we'll catch you in the next video.
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About Kevin French:
Kevin French is a Calgary and area based realtor with a client focus. He specializes in a stress free home selling process that is built on customer service. Understanding that your home is one of your largest investments, Kevin employs a marketing mix that ensures you will maximize returns on your home sale. Diligent market research coupled with an in-depth understanding of the Calgary and area markets, allows Kevin to pinpoint the perfect price for your home.
In addition to perfect pricing, Kevin offers a suite of additional services such as professional photography and an interior designer to ensure your home shows its best. Kevin French has become a trusted name in real estate because he is results driven and works closely with his clients to produce the best results.