Monthly Newsletter: July 2005

Happy Canada Day everyone!

We’re entering into the summer months where the real estate market slows down a notch and buyers, sellers and their agents can take a short break to enjoy the warm weather and spend time with family and friends.  Most folks that look to move over the summer to get their kids into their new schools in time have purchased already and I’m sure are now starting to feverishly pack.  The summer respite will likely carry into August and then the market will start to get busy again just after Labour Day.

I’d like to briefly mention the Live 8 concert this weekend that is raising awareness of the suffering in Africa and other third world nations.  We all live in the lap of luxury here in North America and take many, many things for granted –  I think that it’s important to remember how truly blessed we all are. I’m also proud to announce that Howard Esakov will be participating in the “TriForAfrica” event to raise money for the Stephen Lewis Foundation to fight AIDS in Africa.  The event runs August 19th, 20th and 21st, from Lake Couchiching and consists of a 4 km swim, 15km canoe and 140km bike ride.  Pledges over $10 are fully tax deductible.  Howard’s goal is to raise over $2000.  To sponsor Howard for this very worthwhile cause, please call or e-mail him at the Plex offices.

This month I’m excited to announce that our new interactive website is up and running.  Unlike other realtor websites that just link you to consumer MLS data, we now have a sophisticated publishing engine in place that allows us to upload selected properties on a regular basis.  When a Plex agent goes into the field and finds a great opportunity we post it to the site immediately. At the start of each work week, we review our feature properties and replace the ones that have sold with newer opportunities.  This way we keep the information fresh and you have even more reasons to keep coming back to the Plex website to see what’s new.  Click on income properties to find our picks for the best duplexes, triplexes and multi-residential apartments.  Click on profit properties to find homes in need of repairs that have some sort of capital gain potential.  We identify the urn-around properties that with a little time and energy can be improved upon to make profits in the short term.  Look here for vacant land, foreclosures, severely distressed properties and all others that we feel have the potential to make you money.  Remember that the best income properties always move quickly, so come back and check the site often.  If you ever need more information on a featured property on our website, contact us and we’ll send you all the details you require right away to make an informed purchase decision.  We’ve also added a “sold income properties” section where we post several relevant income property sales from the previous month.  This will be helpful if you need to determine the pricing and overall health of the income property market in certain neighbourhoods.

Our topic for this month is exploring the benefits of owning and living in an income property.  I feel that it’s important to periodically review the reasons why we’re in this business and why we still believe so strongly in this marketplace.  Given that we must put a roof over our heads, why not approach the home-buying process with financial goals in mind?  How can you minimize the amount of out-of-pocket dollars you spend without sacrificing the quality of your accommodations?  If you’re an absentee investor, how can you ensure that you are better off buying real estate than other types of paper investments?

When I first got started as a realtor, I wrote “Live for Free … to be free to live!” – a practical guide for purchasing owner-occupied income properties.  If you have never read Live for Free, it is available on our website as a free download.  It simply highlights the many benefits of reducing your monthly housing costs.  In it we talk about the steps to ensure your best chances for success, which includes looking at how to establish the right kind of deposit and financing.  We ask the purchaser to look inward and be honest about determining their housing needs vs. desires.  We look at the benefits of using a company like Plex which understands the income property market better than most other local realtors and we set guidelines for establishing a strong rapport with your lender.  Finally, we investigate how to develop a purchase strategy to find the right opportunities. Developing a strong plan of attack is an essential ingredient for any successful business venture so we dissect the many prudent ways to start searching. This information is as relevant today as it was when I wrote it several years ago so I strongly recommend it to those who haven’t read it as yet.

The following are further reasons why you may choose to own and live in a building with tenants.

Cash Flow: Rental incomes generate cash flow from other units in the building. That income can lower or completely offset property expenses and carrying costs.

Location: Income properties may allow individuals to live in neighbourhoods that they may otherwise not be able to afford by reducing the monthly carrying costs of mortgages.

Accommodations: Inhabiting an income property may allow individuals to live in a larger or more luxurious suite that costs less than if they were renting the same suite.

Mortgage Eligibility: A lender in assessing eligibility for a mortgage may use the income from a property.

Capital Appreciation: The potential for capital gains if the property can be sold for a profit

Tax Benefit Potential: Gained by writing off mortgage interest against income. When you sell, capital gains may be taxed at a lower rate than other forms of income and there may be tax exemptions if the property is the principal residence.

Beat Inflation: Land becomes more valuable every year. As your property appreciates it can provide a good hedge against inflation.

A story in the Toronto Star last week focused on the secrets of success for second suites.  They continue the argument that renting part of the house you live in to generate extra income is a powerful means of reducing the financial burden of home ownership. They tell the story of Douglas and Roberta who have rented the basement and second floor of their three-storey home in Toronto for the last three years.  They’re quick to recommend this approach for those willing to make the effort to do the job right.  “We depend on rental income to pay our mortgage” explains Douglas “and we work hard to keep our tenants happy. I see this as a valuable business relationship that allows us to complete renovations that would be impossible otherwise.”

Renting part of your house is a venture that receives the same tax treatment as any other home-based business and this is a big plus. Although the rental fees generated become part of your taxable income, the expenses of owning, financing and maintaining a second suite are also tax-deductible. This lets you deduct operational expenses you’d be paying anyway, with or without a tenant. It also means that the cost of upgrades and renovations can reduce your taxable income. This leads to people with second suites in their homes enjoying higher property values, greater resale potential, and a mortgage that’s substantially easier to carry.

Take a look at the following affordability matrix:

PURCHASE DETAILS

Single Family
Single Family
Live-in Duplex

no income
w bsmt suite
w bsmt suite

Property Analysis
Final Purchase Price (assumption)
400,000
400,000
400,000

Mortgage Deposit (90% Financing)
40,000
40,000
40,000

Land Transfer Cost
4,475
4,475
4,475

Legal Fees & Title Insurance
1,500
1,500
1,500

TOTAL CASH REQUIRED TO CLOSE
45,975
45,975
45,975

INCOME ANALYSIS

Expenses
Purchase Price
400,000
400,000
400,000

Mortgage Amount (90%)
360,000
360,000
360,000

Monthly Mortgage Payments (4% var.)
1,980
1,980
1,980

Monthly Property Taxes (assume)
175
175
175

Monthly Heat, Hydro & Insurance
400
400
400

Less Rental Income (if any)
0
650
1,500

TOTAL ESTIMATED MONTHLY COSTS
2,555
1,905
1,055

This shows how much your net payment is based on the amount of rental income you have. In the model above, the assumption is that if you purchase a single family home for $400,000 (an average sale price in the GTA), with a 10% down payment your average costs could be up to $1500 more per month than if you paid the same amount for a three-unit building. This could save you up to $18,000 per year. Just imagine the savings over the course of your entire mortgage. It sure is a nice feeling to know that your mortgage is being paid quicker and by someone else!

Stay cool everyone and we’ll see you next month!

P.A.