Turning personal residence into a rental property

[tkjca]

Hello All:



We are considering buying another house and renting the one we currently live in. What do we need to do in order to get this done the right way and what are the consequences if steps are missed? I know we need to change the insurance policy to reflect a rental property policy. However, do we need to inform the bank of this new change of use? Would the bank care? Do we need to have 20% equity in the property before we can rent it out? Any and all advise would be greatly appreciated.



TJ.

 

[Thomas Beyer]

You should get an appraisal or realtor opinion on the current house as any gain over and above the current price will be taxable on sale.



You should also educate yourself on the rules and regulations regarding rental properties in your province.



Yes, the bank will assess your current networth and income for the next, and any subsequent, mortgage.

 

[tkjca]

Hi Thomas, Thanks. However, we are not selling the house, we are just moving out into a new one, and renting the old one. We are in Ontario. For the first house (the one we are moving from, and therefore renting out), will the bank care that we are now renting it out? Will they want to renew the mortgage, let's say, at the going investment property rate? Do we need to say anything to them at all about us moving out and renting it out? Just need to know if the bank will care about who is living in the first house after we move into the second house.



Thanks!

 

[Thomas Beyer]

[quote user=tkjca] However, we are not selling the house, we are just moving out into a new one, and renting the old one.
that's why you need a value, so when you sell it in 20 years you pay taxes on a (likely) gain from that value forward . In Canada there is no tax payable on a personal home, but on investment properties.



[quote user=tkjca] Just need to know if the bank will care about who is living in the first house after we move into the second house.
No they won't when you move out, but they do when you renew the mortgage.

 

[tkjca]

Hi Thomas. Thank you very much! And yes, we are aware of the tax issue, which is already taken care of; thanks again for stressing that issue as it is indeed very important. BTW, I really appreciate your answers to all questions on the forums. I have learned a lot just from reading them. I really appreciate your dedication.



TJ.

 

[durhamhome]

You owned and lived in the home in good faith. You did not commit any form of mortgage fraud by stating you were intending to live there, but in fact did not. It is all about intent. Was your personal mail forwarded there? Did you change your driver's license? etc.



If circumstances changed and now you intend to move somewhere else, you can again purchase a home, where you will be occupying it. (ie. 5% down). As for the first home, you can speak to your mortgage broker for verification, however, there should be no need to contact the lender.



BTW, I agree with Thomas about the potential capital gains implications.



Your lender should be able to secure you a 2nd CMHC backed mortgage as long as there is no intent to fraudulently represent yourself.



Hope that helps,

Michael Dominguez

 

[kfort]

Don't forget to adjust insurance accordingly. and bank accounts also.

 

[invst4profit]

I would strongly advise you research market rents for your area before you proceed. It is very rare that the rental income on a single family home actually covers the costs. Be prepared to put some of your own money into the property monthly to carry the mortgage, repairs, evictions, vacancies, taxes, etc.

 

[DonCampbell]

TJ,



I cannot stress too much the importance of getting a REAL value appraisal done BEFORE you begin renting it out. This is critical!



I have seen and heard too many people say "I got that all figured out" only to find out years down the road that you are about to pay tax even on the value increase while you lived in it.



The ONLY way to ensure you get to keep the gain tax free is a real and defensible professional appraisal. All other "options" leave you open to a potential big tax hit.





Don

 

[tkjca]

Don:



Thank you very much. I must admit, it is very humbling to see you reply to this question personally. A client of mine asked me if I knew what they should do about the house they are now renting. Never having done it this way myself, I decided to post their question here. The professional appraisal was the learning point for them, and they are thankful for this knowledge!



I just emailed my application to become a member of the REIN family. I have been watching and reading these forums for about a year now and have been evaluating the responses that have been provided and I am very happy with my decision to join. I am a Canadian CPA/CA, have one rental property for almost 3 years, purchased a new build, and looking for my third. I needed a solid system that worked and decided to buy 3 of your books. Finished reading them all very quickly and have learned a lot. I am using your methods as we speak. Looking forward to my first REIN meeting at the ACRE meeting next week on Ontario.



TJ.