Toronto house prices got you down? Find out how you can become a homeowner...
The average price for a semi-detached home in Toronto is now $649,599. With home prices on the rise in Toronto, the dream of owning one close to the city (semi-detached or detached) is becoming increasingly difficult, leaving potential homebuyers forced to live in smaller condo units or the need to relocate to the suburbs where affordability can be made easier. Are there any other options for home buyers who want the backyard, garden and all the other fixings that a house would allow for?
The answer is YES, there are options to help you with purchasing a house in Toronto - even at current prices!
Before we continue let’s look at a very common scenario:
Michael and Emily are looking at a condo in a “hip” neighbourhood near the downtown core with a “well laid-out” floorplan covering 650 square feet. The condo doesn't allow pets, so Emily would leave her dog Toto in the care of her parents. Both Michael and Emily are young professionals in their mid 20’s they like to host dinners at home and are planning to get married and start a family soon. They love being in Toronto and can’t imagine moving to the suburbs at this time, but aren’t comfortable taking on a very large mortgage to purchase a bigger house in the city.
- Condo purchase price is $350,000
- Down payment $70,000
- Mortgage balance: $280,000 ($1,285/month mortgage payment with 25 year amortization)
- Condo maintenance fees: $500/month
- Annual property taxes: $2,500
- Total monthly expenses: $1,994
What can Michael and Emily do to move into a bigger house in the city without significantly increasing their current expenses?
One option is purchasing a home with a rental unit component, these are normally referred to as owner-occupied rentals. The income of the rental unit(s) will assist in covering household expenses and allow Michael and Emily to realize their dream of owning a house.
Here are the revised numbers:
- Purchase price of the home is: $650,000 (using the current Toronto average)
- Down payment of $70,000
- Property downpayment + mortgage insurer fee $593,920 ($580,000 + $13,920)*: (estimated $2,715/month mortgage payment over 25 years)
- Annual property taxes: $4,000
- Monthly rental income from the rental unit: $1,200
- Total monthly expenses: $1,850
*A minimum 5% down payment can be made, but will be subject to a 3.60% default insurer fee (provided by CMHC, Genworth, etc.). In this example clients are making just over a 10% downpayment with their savings resulting in a mandatory mortgage insurance premium of 2.40% of the balance.
Larger down payments will reduce premium cost and 20% down payments or greater will avoid premium charge all together. For more information click here.
In this simplified example, Michael and Emily's monthly expenses are reduced by $144 and clients are now able to afford a house and enjoy all the perks that come with it - including having Toto back at home where he belongs!
If they had purchased a home with two rental units, then their monthly expenses could potentially be further decreased, putting them in an even stronger cashflow position than when living in the condo.
Downsides: Of course there are disadvantages to being a landlord. You have to deal with someone else living in the same house (not that much different than sharing a condo building). You also have to deal with potential repairs, missed rent payments and bad tenants. There is also the risk of a vacant unit, meaning you would have to cover the full monthly mortgage payment while finding a tenant...
Upsides: Having a tenant will assist in reducing your mortgage balance much faster and increase your net worth substantially when compared to a smaller condo property. 'Pride of Ownership', the home is yours allowing you to implement your own rules. Having a backyard and some land is a big plus for many who have kids or pets. Larger space. The ability to write-off the expenses associated with renting (part of your mortgage interest cost, property taxes, utilities, etc.).
Purchasing an owner-occupied rental unit isn’t the best option for everyone, but it is certainly an option worth considering for many.
For additional information on how this strategy might work for you give me a call to schedule a complimentary review.
Thanks for reading.