Written by Elisa Krovblit
With the average price of a detached home out of most first-time buyers' reach, those with less than $1 million to spend have a few options. Most choose one of three routes:
- Stay in the city and buy a condo within budget, hoping to build equity and climb the property ladder
- Stay in the city and rent. It usually means being able to afford to live in an area that would be unaffordable to buy
- Leave the city and buy in a suburb or nearby city that is within price range
But for many, those three options just don't fit. A lot of people are becoming creative with their buying power and choosing to utilize more unusual or unconventional options to solve the issue of affordability.
Sharing
Recently, The Toronto Star reported a home in Leslieville, Toronto, was purchased by two families. Longtime friends and past roommates, the two couples, each with one child, wanted a home in the family friendly neighbourhood. Having little success getting into the housing market individually, their combined buying power landed them in a family home they could share -- one family taking the basement and main floor, the other taking the second floor and third-floor loft. An equitable split, the families have created a way to share the home that works for them. They are heavily relying on goodwill between their families to make the situation work.
Making it work:
If you're going to share a home, you have to decide parameters. Will you share the whole home and live communally, or divide the home up into units and each live in one. Do you need to create a slush fund for mutual expenses or will you each pay up as shared expenses arise. One home means one mortgage -- the bank won't let each family mortgage half a house -- so your combined income and credit are shared. Who pays for renovations? If you want to improve the space in which you live, is this a capital improvement that will benefit the value of the house or is it an individual expense because one resident wants to customize their own space for their own benefit? What is the exit strategy? If one wants to sell and the other doesn't, can the exiting family sell their share? What effect does this have on the mortgage? Does the remaining family get to approve or veto potential incoming buyers?
There are a lot of variables to sharing, and while it may provide a solution in the immediate, it could have longterm effects on each buyer's finances.
Converting a single-family home to condo units
It's not uncommon in some cities, like Montreal and Boston, to find that, what looks like a single-family home is actually individually owned units in one property. There are some houses in Toronto's market that have gone condo successfully. Duplexes and triplexes can actually be condos. It doesn't seem to be prevalent in some cities because condo fees and development charges can be overwhelming, making the resulting homes economically unfeasible, but the idea has great potential.
Making it work:
To go condo requires a lot of design submission and code updates. It may even require a zone variance if a single-family home is being converted to a multi-family property. Like sharing, several parties could buy into one home, independently. The expenses -- from real estate to property tax and maintenance -- is shared, making the property more affordable. The benefit of going condo is that each unit holds its own mortgage. There is no reliance on 'goodwill' other than to create a reserved fund for capital repairs and expenses. That's legislated by each province, like Ontario's Condominium Act.
Going condo is a lot like sharing -- without the intertwined finances. Each buyer is independent of the other. But the shared condo fees can be a showstopper. These can create affordability issues as maintenance expenses for a roof, furnace or other foundation system can be exorbitant. With only two or three purchasers to share the costs, the assessed fees in addition to the mortgage payment need to be addressed.
Borrow and borrow some more
For some, covering the monthly mortgage isn't the problem, but the downpayment is. Coming up with $80,000, $100,000 or more can be an issue when getting into the game. It may mean that, on top of a mortgage, you've got a loan to pay.
Making it work:
Hello Bank-of-Mom-and-Dad. Those lucky enough to have family with money or equity may be able to talk parents into a living inheritance. Parents may have a paid-off home with $1million-plus in equity. The interest rates on a mortgage being so low, the cost of borrowing against that property is minimal. Even arranging a line of credit may be the way to go. Buyers may be able to cover the cost of the second loan to cover the downpayment.
This scenario involves taking on a lot of debt. It also involves having family with money or equity -- not something that everyone has at the ready. Trust plays a big factor as mom and dad likely don't want to postpone retirement or go back to work to pick up the tab if the kids can't pay. Taking on this level of debt can mean living with a very high level of risk. According to a Parliamentary Budget Report released early in 2016, Canadians debt ratio is an average of 170 per cent. This means that Canadians make $100 for every $171 they spend. It's a heavy load and can quickly crumble if there's a life crisis like one of the earners becoming unemployed or unable to work. As long as the asset remains above the borrowing value, the exit strategy is easy: Sell. And with the steady rise in housing prices, as long as the sale doesn't happen within the first few years (to offset closing costs) there's likely to be a nice profit.
Become a landlord
Much like sharing, the home being purchased is divided into individual units. Unlike sharing, the entire house is purchased by one buyer and the owner rents out part of the house. The rental payments will go towards expenses and mortgage payments. CMHC now permits 100 per cent of rental income to be considered income when applying for mortgage insurance. Mortgage companies also consider rental income when negotiating a mortgage.
Making it work:
Many municipalities allow a secondary suite -- a basement apartment, a coach house over the garage, a duplex or a triplex. Going over four units usually makes the property a commercial asset, not a private residence. The homeowner may need to do some renovations to bring the space up to code and create comfortable living spaces. The homeowner needs to set the rent, decide whether utilities will be included in the price, decide whether there will be parking available, what common areas the tenants can use (like the backyard, the garage, etc.) and how much of their house will be rented out versus reserved for the owner. There are tax implications and many tax benefits (like writing of a portion of mortgage interest, capital expenses, utilities, etc.) requiring an accountant.
There is a lot of added responsibility, and a steep learning curve. Landlords must follow the rules and make sure tenants' needs are met. The income generated can greatly offset the expense of owning a home, but the utility expenses and home insurance will be increased. Second units must be divulged to insurance companies. There should also be a back-up plan in case a tenant is late or doesn't pay rent, as eviction is a long process and the mortgage payment is still due.
REITS, rent-to-own arrangements, airbnb rentals and supplementing income with boarders, there are numerous ways to get creative with financing. While home ownership, especially in the big cities can seem extremely unattainable because of the steep housing prices, a little bit of creativity and fresh perspective can create great opportunity to get into the market.
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