Showing posts with label Our home. Show all posts
Showing posts with label Our home. Show all posts
Wednesday, 5 September 2012
Beating The 50% Rule
Our rental suite is so close to being done. It's been a pretty long slog, particularly for Mr. Hutch. We have only a few things left on the to-do list: hanging closet doors, building a few shelving units, hanging the towel holders in the bathroom. Finishing-type stuff.
There is an aptly-named theory in real estate investing (The 50% Rule) that states that your monthly mortgage payment (principle + interest) on any rental unit should be no more than 50% of the monthly rent you receive. In our expensive city, there is no way this is achievable by buying new properties. But by building a rental suite within our existing home, we blew The 50% Rule out of the water.
So how about some numbers? We've got a few outstanding payments to make, but all told we should be in to this sucker for just north of $70,000. We added approximately $500 to our monthly mortgage payment in order to finance the building of our suite, but we expect to collect somewhere in the neighborhood of $1300 per month, plus we will enjoy some decent tax deductions. A pretty decent trade-off if you ask us, especially if you measure it by The 50% Rule.
Saturday, 18 August 2012
How Did We Decide To Renovate?
We took a long time reaching our decision to add a rental suite to our home. Having an income suite in your home is pretty common in our city, especially for first-time buyers. Real estate is so expensive here that many people simply can't afford to buy a home without one.
Yet when Mr. Hutch and I bought this house, our first together, we were particularly happy to not have to be landlords. My brother and sister-in-law had done it, and we'd seen them have to deal with some major headaches (a basement suite that flooded with backed-up sewage while they were on holiday in Europe, for instance). We Hutches looked at each other and said, "glad we don't have to deal with that shit!".
Sigh, we were so young and stupid.
Fast-forward four years and two kids: it was suddenly apparent that our cute little house wasn't going to cut it much longer. We started discussing our options.
The first was to sell our house and buy a new one that was better suited for our family. We had a couple of realtors come by and give us an estimate of the market value of our house. They were pretty much in agreement: one came in at $470,000-$480,000 and the other at $475,000 to $485,000. Using a valuation of $475,000, I ran some numbers. I figured that if we sold our house at that price, once we paid the realtor's commission, paid out our line of credit, our mortgage and other various fees, we'd walk away with around $80,000. We agreed that to buy a new house with the kind of space we wanted, we were looking at paying at least $550,000. Once we paid property transfer tax on a house at that price, we would have only about $70,000 to put down. That's a high-ratio mortgage, so cue the extra CMHC insurance premiums (to the tune of nearly $10,000). That meant a mortgage of around $500,000. I think I vomited then. If I recall, my exact words were, "no f***ing way am I taking on a mortgage of a half-a-mil". Never mind that a house in that price range was still going to need work. That option died a pretty quick death soon after.
The next option was to price out finishing our basement. We brought in the big guns to give us an estimate; the kind of company that specializes in basement renovations and have all kinds of fancy ideas about digging them out, raising them up, pouring new foundations and the like. They told us that to get our basement structurally sound, to able to start building something would cost around $80,000. Again: I think I vomited.
I remember those being some pretty dark days. I felt totally trapped by our home. It was made doubly worse by the fact that I blamed myself. It was me who really pushed to buy this house, and for no better reason that I thought it was pretty. Now we had no viable options to get out and raise our family in the kind of home that we had hoped.
Some time passed and we decided to get a second, and even a third, opinion. We have a couple of friends who are contractors and both told us we could do something with our basement for less than the first company estimated. It wouldn't have ceilings quite as high, or as much usable square footage, but it would still work. One estimated we could finish a suite for around $70,000 and the other said we could do it for closer to $50,000 or $60,000. While still a lot of money, we figured these were numbers we could manage. Turns out the first contractor friend was just about spot on. At the end of all this, we will have sunk around $70,000 into the basement, and the additional workshop Mr. Hutch built in the backyard to house all his tools and things that could no longer live in the basement.
So did we make the right decision? I'm still not really sure. At the end of the day though, we own a house in a neighborhood that we love. We'll have some extra income for as long as we decide to rent out the suite. And having uncovered nearly every square inch of this place, we feel safe knowing that we've found and fixed all the problems. We wouldn't have that confidence in a new place, even if it had been renovated by someone else. Which probably wouldn't have happened anyway. We couldn't have afforded a home that had already been renovated!
So whether it was the right choice or not, we feel like we made a great decision for our family.
Yet when Mr. Hutch and I bought this house, our first together, we were particularly happy to not have to be landlords. My brother and sister-in-law had done it, and we'd seen them have to deal with some major headaches (a basement suite that flooded with backed-up sewage while they were on holiday in Europe, for instance). We Hutches looked at each other and said, "glad we don't have to deal with that shit!".
Sigh, we were so young and stupid.
Fast-forward four years and two kids: it was suddenly apparent that our cute little house wasn't going to cut it much longer. We started discussing our options.
The first was to sell our house and buy a new one that was better suited for our family. We had a couple of realtors come by and give us an estimate of the market value of our house. They were pretty much in agreement: one came in at $470,000-$480,000 and the other at $475,000 to $485,000. Using a valuation of $475,000, I ran some numbers. I figured that if we sold our house at that price, once we paid the realtor's commission, paid out our line of credit, our mortgage and other various fees, we'd walk away with around $80,000. We agreed that to buy a new house with the kind of space we wanted, we were looking at paying at least $550,000. Once we paid property transfer tax on a house at that price, we would have only about $70,000 to put down. That's a high-ratio mortgage, so cue the extra CMHC insurance premiums (to the tune of nearly $10,000). That meant a mortgage of around $500,000. I think I vomited then. If I recall, my exact words were, "no f***ing way am I taking on a mortgage of a half-a-mil". Never mind that a house in that price range was still going to need work. That option died a pretty quick death soon after.
The next option was to price out finishing our basement. We brought in the big guns to give us an estimate; the kind of company that specializes in basement renovations and have all kinds of fancy ideas about digging them out, raising them up, pouring new foundations and the like. They told us that to get our basement structurally sound, to able to start building something would cost around $80,000. Again: I think I vomited.
I remember those being some pretty dark days. I felt totally trapped by our home. It was made doubly worse by the fact that I blamed myself. It was me who really pushed to buy this house, and for no better reason that I thought it was pretty. Now we had no viable options to get out and raise our family in the kind of home that we had hoped.
Some time passed and we decided to get a second, and even a third, opinion. We have a couple of friends who are contractors and both told us we could do something with our basement for less than the first company estimated. It wouldn't have ceilings quite as high, or as much usable square footage, but it would still work. One estimated we could finish a suite for around $70,000 and the other said we could do it for closer to $50,000 or $60,000. While still a lot of money, we figured these were numbers we could manage. Turns out the first contractor friend was just about spot on. At the end of all this, we will have sunk around $70,000 into the basement, and the additional workshop Mr. Hutch built in the backyard to house all his tools and things that could no longer live in the basement.
So did we make the right decision? I'm still not really sure. At the end of the day though, we own a house in a neighborhood that we love. We'll have some extra income for as long as we decide to rent out the suite. And having uncovered nearly every square inch of this place, we feel safe knowing that we've found and fixed all the problems. We wouldn't have that confidence in a new place, even if it had been renovated by someone else. Which probably wouldn't have happened anyway. We couldn't have afforded a home that had already been renovated!
So whether it was the right choice or not, we feel like we made a great decision for our family.
Friday, 17 August 2012
Renovation and Financial Update
Mr. Hutch and I are on the home stretch with our rental suite. The drywall is up and is being mudded and taped this week. Next week it will be painted and then we can lay the flooring. After that we can install the kitchen and bathroom fixtures and button up all the finishing work. We may just reach our deadline of the end of this month.
We're also on the home stretch financially. We financed this renovation by remortgaging our home and pulling out our equity. We knew all along that the amount we could access would make a really good dent in our renovation, but it wouldn't fund the whole thing. The plan was to remortgage again once everything was complete, in effect accessing the equity we'd just added to our home by building the suite.
We're now at the point where the total bill for all the work left to be done outweighs the cash we have on hand. It's not the most comfortable spot to be in. We're playing the long game though, and trying to keep everything in perspective. We chose to put ourselves in this risky position but we're banking on a big payoff, long-term.
Before we started this renovation, our house was appraised at $513,000. Now we have to cross our fingers that the new appraisal will come in at $560,000 in order to get the equity we need to pay the final bill. We'll have sunk in the neighborhood of $70,000 into this renovation, so on paper it seems like it should work. But it's a risk. In reality, I'm not sure we would have got $513,000 for our house had we decided to sell it. Just the same, I don't know that we'd get $560,000 for it now that it has a suite. It's a game though, the appraisal business. It's has an aspect of correlation to market values but at the end of the day, it's just someone's opinion. And opinions can be subjective. We'll just have to wait and see where the final numbers fall.
We're also on the home stretch financially. We financed this renovation by remortgaging our home and pulling out our equity. We knew all along that the amount we could access would make a really good dent in our renovation, but it wouldn't fund the whole thing. The plan was to remortgage again once everything was complete, in effect accessing the equity we'd just added to our home by building the suite.
We're now at the point where the total bill for all the work left to be done outweighs the cash we have on hand. It's not the most comfortable spot to be in. We're playing the long game though, and trying to keep everything in perspective. We chose to put ourselves in this risky position but we're banking on a big payoff, long-term.
Before we started this renovation, our house was appraised at $513,000. Now we have to cross our fingers that the new appraisal will come in at $560,000 in order to get the equity we need to pay the final bill. We'll have sunk in the neighborhood of $70,000 into this renovation, so on paper it seems like it should work. But it's a risk. In reality, I'm not sure we would have got $513,000 for our house had we decided to sell it. Just the same, I don't know that we'd get $560,000 for it now that it has a suite. It's a game though, the appraisal business. It's has an aspect of correlation to market values but at the end of the day, it's just someone's opinion. And opinions can be subjective. We'll just have to wait and see where the final numbers fall.
Tuesday, 7 August 2012
Will This Be Our Forever Home?
I don't think there's one square inch of our home that Mr. Hutch has not had his hands on. Consequently, he has a different sort of emotional attachment to this house than I do. Don't get me wrong, I love our home. When we first walked through it when it was for sale, I took one step inside and decided that I we should buy it. I still don't know if buying this house was a good decision. We ended up sinking a lot of money into it to fix so much bullshit that the various owners over the last century have done to it. Regardless, it's our home now and once the basment is completed, there should literally be nothing left to do for a good while. We're here now, and we're here for the long haul.
Problem is, I can see us outgrowing the space. I'm all for living simply, and with less. I don't want lots of space and lots of rooms that I have to spend lots of time cleaning. But I have visions of literally stuffing two teenaged boys into our tiny second bedroom, arms and legs sticking out of the door. And really, don't teenaged boys deserve a bit of privacy?
One option in the future is to take over our basement suite. Each of the boys can have their own bedroom, plus their own bathroom and rec room space. This would require a third renovation, however. There is currently no interior staircase between our two floors. We'd have to find a way to tag on a staircase, probably to the back of the house where there is currently a deck. It wouldn't be cheap or easy, and would require a variance from the city. I don't know that's it worth the money, or the hassle.
Mr. Hutch has come up with a second option. He said to me recently that he will never sell this house, now that he's spent so much of his time and our money getting it up to standard. He's also called in a lot of favours from his tradesman friends and he can't see letting it go. His idea is to keep our current home as a two-unit rental property and we buy another home for our family. I like this idea, but I don't know if we can swing it financially.
To buy a new home, we'd be looking at a $100,000 down payment minimum, and quite possibly a good deal more than that. In order to save that amount, I have considered stopping our monthly RRSP contributions and instead putting that money (plus a bit more - courtesy of the basement suite) aside in a short-term low-risk investment. After five years we could have around $60,000. We also could consider remortgaging our current home to the maximum, or 80% of it's value. Depending on the value of the house in five years I figure this could give us at least another $50,000 but maybe $75,000. I think I'm being realistic with these numbers.
Assuming the 2-unit rental carries itself, i.e. the rental income from the two units pays the mortgage, taxes and leaves a bit left over for repairs (which we expect to be minimal for the forseeable future), I think this could be a sound investment. Even if we do have to drop money into it every month, it could still be worth is as we'll end up with a paid-off home in 25 years. We then have the option to keep the second home as a rental and reap the monthly income in retirement, or sell the sucker and add to our nest egg. It's anyone's guess what the house will be worth in 25 years.
I'd love to hear some feedback on this plan. This is just the way I look at it, but I know others will have a different take on it. What do you think?
Problem is, I can see us outgrowing the space. I'm all for living simply, and with less. I don't want lots of space and lots of rooms that I have to spend lots of time cleaning. But I have visions of literally stuffing two teenaged boys into our tiny second bedroom, arms and legs sticking out of the door. And really, don't teenaged boys deserve a bit of privacy?
One option in the future is to take over our basement suite. Each of the boys can have their own bedroom, plus their own bathroom and rec room space. This would require a third renovation, however. There is currently no interior staircase between our two floors. We'd have to find a way to tag on a staircase, probably to the back of the house where there is currently a deck. It wouldn't be cheap or easy, and would require a variance from the city. I don't know that's it worth the money, or the hassle.
Mr. Hutch has come up with a second option. He said to me recently that he will never sell this house, now that he's spent so much of his time and our money getting it up to standard. He's also called in a lot of favours from his tradesman friends and he can't see letting it go. His idea is to keep our current home as a two-unit rental property and we buy another home for our family. I like this idea, but I don't know if we can swing it financially.
To buy a new home, we'd be looking at a $100,000 down payment minimum, and quite possibly a good deal more than that. In order to save that amount, I have considered stopping our monthly RRSP contributions and instead putting that money (plus a bit more - courtesy of the basement suite) aside in a short-term low-risk investment. After five years we could have around $60,000. We also could consider remortgaging our current home to the maximum, or 80% of it's value. Depending on the value of the house in five years I figure this could give us at least another $50,000 but maybe $75,000. I think I'm being realistic with these numbers.
Assuming the 2-unit rental carries itself, i.e. the rental income from the two units pays the mortgage, taxes and leaves a bit left over for repairs (which we expect to be minimal for the forseeable future), I think this could be a sound investment. Even if we do have to drop money into it every month, it could still be worth is as we'll end up with a paid-off home in 25 years. We then have the option to keep the second home as a rental and reap the monthly income in retirement, or sell the sucker and add to our nest egg. It's anyone's guess what the house will be worth in 25 years.
I'd love to hear some feedback on this plan. This is just the way I look at it, but I know others will have a different take on it. What do you think?
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