So, you’re ready to move out of your starter home and into a larger residence. The thing is, your first home is so well-located that you’d love to hold onto it for a little longer – and maybe use it as a tool to launch you into the rental market. Before you make the commitment, however, here are a few things to consider:
1. Will you need to refinance?
Chances are, in the time you’ve owned your primary residence, you’ve had an opportunity to build up equity. The question is, will you need some of this equity to use towards a down payment on a second home – or do you have a separate down payment fund saved up?
If you need to tap into your home’s equity, you’re going to have to refinance – and you can only do so up to 85% of the value of your home. You’ll also have to consider that, with a refinance, you’ll likely have to take on a new mortgage term, rate and amortization – and, depending on the details of your mortgage, this may come with some hefty fees. It should also be noted that keeping that 35-year amortization with less than 20% equity can prove difficult since it’s been phased out under new government rules.
2. Ensuring positive cash flow.
If you have to pull out some equity in your home for a second down payment, your mortgage payments are going to increase on your primary residence. For a rental property to make sense, you’re going to have to make sure that you have positive cash flow – which means the going rental rate can cover your mortgage payments, property taxes and maintenance costs. Check out similar rental properties in your area either through viewit.ca, craigslist.com or kijiji.ca.
To keep your costs as low as possible, it’s best to go with the longest amortization you can get your hands on – and the lowest mortgage rate.
3. Tax implications.
If you end up using the money from your refinanced first property as a down payment for your second, you’re going to find it difficult to legally take advantage of the tax deductibility of your new rental property. This is because borrowed funds are only tax deductible if they’re used to fund a rental property – and you’ll be using them to fund a new primary residence. This article at Million Dollar Journey does a great job of explaining the issue, and ways to get around it:
4. Are you really ready to be a landlord?
Becoming a landlord brings on its own new set of responsibilities – and potential late-night emergencies. Before you pull the trigger, really think about if you’re ready to take care of the maintenance needs of two residences – and if you’re prepared to carry the costs of two residences if you can’t rent your first one out for a month or two.