Is Holding onto Your Old Property When You Buy New a Good Idea?

Keeping your former home as an income property(1)

If you’ve just closed on a brand new home, you may automatically plan on selling your current residence as you prepare for your fresh start. After all, many buyers may see owning two properties as unaffordable or simply too difficult or stressful. But whether you live in one of the country’s hottest housing markets or you’re located in a downward market, there may be plenty of benefits to holding on to your current place and turning it into an investment property.

In Toronto, the average selling price for all home types combined came in at $762,975 last month – up more than 21 per cent from October 2015.  Meantime, in Calgary, October’s average price came in at $462,101 – a mere 0.99 per cent increase year over year. Though different in price point, both scenarios lend themselves to keeping two properties – one to use as your principal residence and the other to rent out to tenants.

Related read: The costs of buying a home

Why Does this Strategy Work?

For a market like Toronto’s, rental condos and homes are in high demand. Many would-be buyers have been forced out of the market because they simply can’t afford it. And now, the brand-new mortgage rules introduced last month make it harder for homebuyers to secure a mortgage with less than 20 per cent down. Therefore, it’s getting more and more difficult for buyers just to get a foot in the door.

Also read: The new mortgage rules: one month later

In a slower market such as Calgary’s, renting your current property bides your time until the market appreciates and you can sell for a significantly higher price than you bought it for. This strategy is of even greater importance if the value of the property has gone down over that time because it allows you to wait out the tide.

Ultimately whether you’re in Toronto or Calgary, the best case scenario when hanging onto your home is that it drastically goes up in price. And that’s still the reality in hot markets, where the value of some homes has increased by close to 50 per cent in just a few years’ time. It’s not guaranteed but it’s certainly worth betting on – if you can afford it.

Additionally, you may reap some short term savings from not selling your home. Real estate transaction costs are now removed from the equation, as well as other costs associated with the process such as cleaning and staging.

Is This the Right Move for Me?

Of course, it all depends on your budget and how much wiggle room you have. Up until a few months ago, owning two properties was an option available to more Canadians. However, now buyers are facing the aforementioned new mortgage rules and resulting fixed and variable mortgage rate hikes at some of the big five banks.

Taking this into consideration, if having an investment property is still of interest, it’s important to be aware of the pattern in your local real estate market at the current time and match it with your own timeline. For example, if you live in Vancouver and plan to hold onto your home for a period of three to six months – putting it on Airbnb in the meantime – keep in mind it may become increasingly difficult to sell later on based on the present conditions of plummeting sales figures.

If the local conditions are right for an investment property, you must ensure you are currently cash-flow positive. You’ll also want to factor in a jump in interest rates to make sure you have all your bases covered.

Also read: RBC second of the big banks to hike mortgage rates

Then, consider the real reason why you’d like to hold onto your current property. If it’s simply based on convenience or emotional attachment, remember that tenants may not only alter the look and feel of the home, but there is always a risk of property damage.

Furthermore, not every home makes a good investment property. Some require a great deal of work in order to meet municipal regulations and stay current – and that’s extra money that you may not have. You’ll also have to factor in capital gains tax costs down the road if and when you do decide to sell one of your properties.

You’re more likely to reap the benefits if the mortgage on your current property has been paid off in full, or there’s a large price differential between your current and new home – such as moving up from a one-bedroom condo to a three-bedroom home. Personally, if I think about the purchase price of my tiny condominium in 2013 versus what I would have to pay for a detached home in the same area now, it would make perfect sense to keep my unit and rent it out once I move to a larger place. However, my building – like many others – strictly forbids Airbnb which means I couldn’t rent it out for extra income on a short-term basis.

In the End …

The decision to sell or hold onto your current residence after you move out all depends on your comfort level. Even if you have positive cash flow and all the conditions are ripe, it’s still a big undertaking to keep an investment property and it’s not for everyone. But if you’re ready to take a risk and all your finances in order, it could be the best decision you ever make.

Related Topics

Buying A Home / Growing Your Money / Home Ownership / Lifestyle / Lifestyle News / Mortgages / Mortgages 101 / Personal Finance / Personal Finance News / RSM News / Savings / Selling Your Home / Taxes / Your Budget

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