New rules and first time home buyer with Co signer

[czapskibusinessgroup]

Hi, this is a bit of a general question.

As a first time home buyer and the new rules qualifying me for a lower total value property; can I purchase a 4 Plex as a primary residence with the intent to rent out the other 3 units with 5% down?

My father would co-sign with 200 000+ in equity on his two properties.

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[Martin1968]

Wouldn't know how the new mtg rules starting Jan 1 will affect this, however at current it definetly is possible. Just went through this helping a young person purchase his first 4 plex on that basis.
(after purchase was completed he decided to stay in his current rental and rent out all 4 units. Made more sense)

 

[Matt Crowley]

Yes, but make sure you run the financials closely. With 5% down, you will be feeding the property money. There is a good chance that the property yield will be lower than the debt on the property.

Remember the costs involved with buying at 5% down:
Your equity position: = 5% minus...
- 3.6% CMHC fee
- Closing costs (0.25%)
= 1.15% equity invested in property

Flat market trying to sell?
= 1.15% equity minus...
- 6% Realtor fees
- 0.0025 closing costs
= - 5.1% equity owing

Absolutely critical to have a business plan for the property before you purchase. What hold period are you comfortable with? In bare costs, you have 10.1% of the value of asset to trade in and out of your position, so you need a very, very good reason why you are going to be able to overcome those costs then give yourself a return on your capital.

 

[Thomas Beyer]

CMHC rules were changed last year. With 5% down you must get loan insurance from CMHC. The new OSFI rules now apply only to non-insured mortgages.

As Matt stated, run the math. A 4-plex certainly makes sense if the DCR is well above 1.3 or better 1.5 and of you own at least five years, better ten.


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[Martin1968]

All the above info is excellent info. I did forgot to say that with the small down payment (cmhc added as well) the prop cash flows 350 a month. In case he occupied unit himself it would have been negative cash flow with the notion that ofcourse he would occupy a unit for himself.

It might appear not to be a whole lot, however we are talking about a 22 yr old with good employment, that wants to get in the real estate game, has a realistic possibility to raise the cash flow to 800 a month and in it for the next 8 yr saving money by paying down mortgage. Property very likely won’t appreciate much but nonetheless it’s an excellent start at that age.

In the end it will all depend what your long term goal is. Good luck!

 

[Alvaro Sanchez]

Please note that in order for the younger investor to qualify as first time buyer to get the 5% down and Ontario land transfer tax refund, lawyer need an affidavit stating that ownership split is 99% son and 1% father, owner use as primary residence, etc. If father co-sings mortgage then you need the affidavit as he will be on title. I would contact a RE lawyer (or competent mortgage broker) for this as a 4plex might add noise to the bank and CMHC. --- Now the rules might have change since I did the same with one of my kids so make sure to check with professionals ---

As others suggested, you might sleep better at night if you put 25% down with the added benefit to the bank that it will be your primary residence. With the cash flow, payback your Dad the 25% and make sure to have a few cold ones every time you give him a cheque.

 

[Thomas Beyer]

Please note that in order for the younger investor to qualify as first time buyer to get the 5% down and Ontario land transfer tax refund, lawyer need an affidavit stating that ownership split is 99% son and 1% father, owner use as primary residence, etc. If father co-sings mortgage then you need the affidavit as he will be on title. I would contact a RE lawyer (or competent mortgage broker) for this as a 4plex might add noise to the bank and CMHC. --- Now the rules might have change since I did the same with one of my kids so make sure to check with professionals ---

As others suggested, you might sleep better at night if you put 25% down with the added benefit to the bank that it will be your primary residence. With the cash flow, payback your Dad the 25% and make sure to have a few cold ones every time you give him a cheque.

The only advantage to putting 25% down is slightly better cash flow. If you can get a 95% mortgage THEN ABSOLUTELY should get that as money is cheap and your return on cash will be substantially higher. Run the math on various assumptions say +4%, +2%, flat or -2% annual value growth and you will see substantial difference in ROI over a 5 or ten year period.

Rather keep the extra 20% and buy more properties or keep as a reserve for upgrades or the odd vacancies.


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[czapskibusinessgroup]

Maybe I should clarify my plan. I plan to use it for a principal residence only for the required period of time needed to qualify for 5% down. Once that term is up I would move to my own home and rent the 4th unit.

I would do everything legally and not be trying to just say it's my principal residence.

I do renovations so the plan is to start with that 4 Plex and then continue on with either the same or sfh and convert then to legal 2nd suites.

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[czapskibusinessgroup]

I'm also not young. I'm 33 and have been traveling on and off for the last two years. One of the main reasons for a co-signer being my t4's show low income.

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[Martin1968]

Nothing wrong with having a co-signer or a guarantor added IMO, especially when it's close family.
As long as they understand what co signing or guaranteeing would mean for them personally and the process of qualification for them and what it could mean for their future personal borrowing position

Doing everything legal is what's always needed, however nothing stops you from changing your position the day after you take possession of the property.
I do believe you have to inform your insurance company about the property changing from owner occupied to non owner occupied.

The biggest thing I would think you want to look at is what others already mentioned; Will the prop cash flow after the 95% LTV. If it does, I would push ahead with it. If it ends up costing you money per month, maybe rethink, work for another year to have your T4s show as well as saving together the 20% DP. You are after all ONLY 33! Time is in your favour. (-:

 

[Thomas Beyer]

There is no legal minimum. Once you get the mortgage and you pay monthly no one cares. But you have to move in and actually reside there to prove intent. Of course you should not state in a public blog that you WILL move out. You should say that you are open to moving later or that your plans are unclear. Perhaps edit your blog entry.

Also bank and certainly CMHC will get suspicious if you apply for a new mortgage in 3-6 months again for yet another personal residence. As such, do not use CMHC or the same bank then. Perhaps even a different mortgage broker.

 

[Vine Group]

You can owner occupy a 4 plex as a primary residence. Technically 5% is available, but normally 10% is what the insurer will request. As for qualifying, keep in mind, you need to be employed. Both you and your guarantor’s income need to service both your credit, your fathers existing house plus the subject property. Remember, only 50% of the rental income will be used when qualifying. Your fathers guarantee is only as good as debit servicing regardless net worth. TDS needs to be in line and income needs to be verified for both of you.