Buying a second house as rental property?

[Tik-Tok]

We have the opportunity to buy my parents house for a family price, I'd rather us buy it, then see someone else turn it into a rental and watch it degrade. Lots of memories there, and sentimental value.

When applying for a 2nd mortgage, would we have to prove we can carry both, even though one house would be rented out? Even if it's empty a couple of months of the year, we could certainly afford it, but probably not if we had to prove we could carry it 12 months of the year.

[Rarasaurus]

With new rules i believe you will be 20% down. For rental property you cannot use 5% and CMHC anymore. As far as how much you have to prove to carry it is 50% of the mortgage a month.

When we got approved that is how it was calculated. They consider it as if you have the house empty half of the time. Your salary(ies) have to be able to carry yours and another half of the other mortgage. 1.5 mortgages a month and still be within the required salary to debt ratio.

[lint]

Typically they will add 50% of the expected rent to your income(s) and use that total to determine if you can carry the additional mortgage. Easier if you have a rental/lease agreement already in place. If not, make sure the monthly rent estimate is reasonable for the area and market conditions, to get realistic numbers.

[Kloubek]

I thought CMHC and 5% down *never* applied to rental properties in the first place?

[Rarasaurus]

^ This rule changed April 19th of 2010. 5% was allowed before.

[Tik-Tok]

Originally posted by Kloubek
I thought CMHC and 5% down *never* applied to rental properties in the first place?

This is off the CMHC website, referring to buying property of 1-4 units, for rental purposes


Borrowers must have a strong history of managing credit for certain Loan-To-Values, repayment
options, downpayment sources and debt service flexibilities. Guidelines for this requirement are
generally considered to be:
Loan-To-Values/Repayment Options Beacon Score (or Equivalent)
Down Payment Sources/Debt Service
Flexibilities
90.01% -95% (Refinance) 650
90.01% - 95% (non-traditional sources of downpayment) 650
95.01% - 100% 680
Line of Credit/Interest Only 650
Total Debt Service 42.01-44% 680

Not sure if that means you could get up to 100% of the price mortgaged, with a high enough beacon score, or if that is talking about the assessed value, and not the buying price. In our case the assessed value is higher than the buying price anyways.

[Toma]

680 is high?? Eesh, housing burst, here we come lol...

You are better off getting a line of credit, or borrowing 25% of the downpayment from family or whatever and avoiding CMHC all together.

Why? If its CMHC backed, they will only accept 50% of rent as 'income', where if there is no CMHC, 100% counts.

Plus you avoid the fee.

[Tik-Tok]

Originally posted by Toma
680 is high?? Eesh, housing burst, here we come lol...

You are better off getting a line of credit, or borrowing 25% of the downpayment from family or whatever and avoiding CMHC all together.

Why? If its CMHC backed, they will only accept 50% of rent as 'income', where if there is no CMHC, 100% counts.

Plus you avoid the fee.

That's what I was thinking about, but was more answering Kloubek, then saying I was going to do that. There's also insane premium fees, on top of the normal CMHC fees for doing that.

[lint]

Originally posted by Toma
680 is high?? Eesh, housing burst, here we come lol...

You are better off getting a line of credit, or borrowing 25% of the downpayment from family or whatever and avoiding CMHC all together.

Why? If its CMHC backed, they will only accept 50% of rent as 'income', where if there is no CMHC, 100% counts.

Plus you avoid the fee.

Depends on the lender what portion of rent they will count as income.

[Tik-Tok]

Originally posted by lint
Typically they will add 50% of the expected rent to your income(s) and use that total to determine if you can carry the additional mortgage. Easier if you have a rental/lease agreement already in place. If not, make sure the monthly rent estimate is reasonable for the area and market conditions, to get realistic numbers.

Wouldn't be hard to make a lease up, my brother would be more than willing to rent it (he doesn't have the resources/credit to buy it himself, and am NOT getting into a mortgage with him on the name).

Not sure if the lender would think I'm just bullshitting though. "Oh yeah, my brother is totally willing to rent, yeah, that's it..."

[el-nino]

If you are buying your parents home and using it as a principle residence while renting your existing then all you need to put down is 5%.
If you are buying your parents house as a rental then you will have to put down 20%.
Some lenders out there will allow up to 80% of the rental income to help approve for the mortgage.

I hope this helps.
Matt

[Xtrema]

Rental market is pretty soft right now. Do your math right. Last thing u want is negative cash flow.

And if u are renting it out, it will degrade. Some tenants more than others. So if you are sentimental about your childhood home, be prepared that it may be trashed.

[Tik-Tok]

Originally posted by Xtrema
Rental market is pretty soft right now. Do your math right. Last thing u want is negative cash flow.

And if u are renting it out, it will degrade. Some tenants more than others. So if you are sentimental about your childhood home, be prepared that it may be trashed.

I don't think it would be too bad if we were putting in a few hundred of our own money for a few years. The other choice is as el-nino suggested, we move in there, and rent out our house, which would fetch a higher premium.

As for the "trashing", if my brother didn't want to rent it, wouldn't be hard to be a little selective about the renters. 2 doors from it is a house that's only rented out to Mormon missionaries, they never cause a ruckuss.

[broken_legs]

Since this is your parents house, can you assume their mortgage and pay them out with existing equity?