Back to Blog
15 Jun

CREATING A PENSION PLAN PART 2

General

Posted by: Mike Hattim

Every good plan starts with building a foundation, the plan will rely on the foundation for years to come. Now that you have decided to pursue the acquisition of real estate (property #1 purchased and successfully rented…check!) as your vehicle to build wealth it’s time to stay the course and add the next layer. We will continue on from Part 1 and build upon it. The information here can be duplicated for property #3, 4…and so on.

For this scenario we are considering the acquisition of property #2 at the end of year 3. Based on the estimated market value, the subject property will cost $245,863 to purchase and (in the perfect world) we are buying another one in the same building. Sticking with a simplistic scenario the current market value of property #1 is $245,863. The plan that had been laid out in the beginning comprised the combination of leveraging equity from other rental properties and savings to acquire the ‘next’ property.

End of Year 3

Estimated market value $245,863
Outstanding mortgage balance $167,227
Access to equity $49,172 (*80% of the market value of the subject property must remain unleveraged, determined by an appraisal)

New mortgage amount on P#1 $196,690
Funds leveraged from P#1 $29,463
Balance from own resources $19,710
20% down payment for P#2 $49,173

Early prepayment penalty P#1 $1,104 (3 months interest)

The balance of funds required were available because instead of making extra payments against your principal residence (up to a maximum of 20%) you were directing that amount into a ‘rental property purchase’ savings account. Over the past 3 years the account has ballooned to over $20,000.

Through the necessary qualifying process we have now established the new (re-financed) term on property #1 for $196,690 to assist with acquiring property #2. We will also utilize an economic rent letter to help service the debt unless there is an existing renter (and rental/lease agreement ) currently in place.

Purchase Price: $245,863
Down Payment: $49,172 (20% minimum, lender may request more)
Mortgage Amount: $196,690

Variable at 2.40% (P-0.30%) 5 year term CLOSED 30 year amortization
Monthly Mtg Payment: $765.77
Est. Monthly Strata: $250 (costs to operate have increased)
Est. Monthly Property Tax: $117 ($1,400/year)

TOTAL Monthly Payment: $1,132.77

Property Transfer Tax:
$2,917.26 (paid at completion, cannot be rolled into the mortgaged. It is calculated based on 1% of the 1st $200,000 and 2% on the remaining balance.) To calculate Property Transfer Tax use this calculator.

Appraisal:
$300 (required to validate the purchase price because there is no mortgage insurer involved; CMHC, Genworth or Canada Guaranty).

Home Inspection:
$400 (highly recommended)

Title Insurance:
$200 (In short, title insurance is an assurance as to the state of title of a given property. In practical terms, it protects lenders and purchasers against loss or damage suffered due to survey problems, defects in title and other matters relating to title as specified in the policy.

Approx lawyer fees:
$1,500

The cost to acquire the property was $5,317.26

The act of buying rental properties should be treated as a business transaction. The thought of falling in LOVE with a potential property should be purged from your mind completely. When you are search for a desirable property do your homework; look into the Official Community Plan with the city, if you have a higher budget you might want to consider a 2 bedroom unit vs 1 bedroom, know what the rental restrictions are within the strata prior to buying and most importantly contact your Mortgage Broker prior to meeting with Realtor so that he/she can assist with the structuring as all lenders employ different ways of underwriting rental mortgage applications. The numbers have to make sense to give yourself a chance to build your real estate empire.

*Based on today’s re-financing guidelines. Please check with your Dominion Lending Centres Mortgage Professional before executing your plan.