Ask any older generation about housing, and you get similar advice: buy a home to live in, pay it off and then live mortgage free. But in today's sharing and gig economies, along with astronomical housing prices, does this advice still apply?
Potential homeowners who find themselves getting priced out of big urban centres are considering alternative strategies. Some are buying an investment property in the suburbs or a smaller city or town outside of a big metropolitan area. According to Benjamin Sammut, 28, a mortgage broker with Mortgage Architects, the idea is to "buy where you can make money and rent where you want to live."
A Way into Today's Market
He admits it's an unorthodox concept, but feels today's market conditions require more creative solutions. "If you're holding out until you can afford a home you're going to live in for the next 10 years, you may be waiting so long that you'll price yourself out of the market. When rents are going up, it eats into your budget further and further, and when house prices are going up faster than wages, it's a terrible idea to wait. Instead, just get into the market and rent where you want to live," explains Sammut.
Finding an Investment Property
If you want to enter the housing market, don't let the fact that you can't buy the lifestyle you want be a deterrent to getting into real estate. "If you want that 2 bedroom penthouse loft in the city, you can probably afford to rent it with a roommate," says Sammut. "You probably can't afford to buy it, but that doesn't mean you can't afford to buy anything."
If you want to live and rent in Toronto, for example, consider buying real estate just outside of the Greater Toronto Area, like Peterborough, Oshawa or Hamilton. But keep in mind that for an investment property, you have to have at least a 20% down payment, whereas for an owner-occupied property, you only need to put down 5% of the purchase price.
Running the Numbers
Make sure to run the numbers carefully. First, consider all of the closing costs, such as a home inspection, land transfer tax, legal fees and disbursements, to name a few. Second, use a spreadsheet to create a detailed budget, erring on the conservative side. Property ownership often entails unexpected costs, from minor repairs to major expenditures, like replacing appliances or a roof. As a landlord, you're responsible for the property, even if you live many kilometres away in another city. If you don't think you'll be able to manage the property yourself, don't forget to add the cost of a local property manager. Finally, do your own due diligence to feel confident that this is the right time for you to buy.
An investment property gives you a stake in the real estate market and lets you build equity when you pay down the mortgage and prices appreciate. After a few years, you may get tired of big city life and decide to move into the property. Or, you could refinance the mortgage and use the proceeds to buy another investment property or a home to live in.
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