Profile: Sunny and Mia (names have been changed) are 38, have kids that are 7 and 9 years old, own their Regina home, have no debt, have healthy retirement savings (RRSPs, pensions, investments), RESPs for their children, and live frugally.Situation: Sunny’s parents are retiring and ready to downsize from their house in a small-town so they can move into a city condo to be near their grandkids. Sunny’s parents want to rent so they can keep as much money as possible invested for their retirement. Sunny and Mia are planning to purchase the condo for Sunny’s parents, who will then pay rent to Sunny and Mia. This will allow Sunny and Mia to diversify their portfolio of investments. Together both couples have picked out a condo and estimate that Sunny’s parents will be healthy enough and happy to stay there for at least 20 years.Sunny and Mia ask:Q: How much should we pay as the down payment vs. keep in our mutual funds?A: According to banking guidelines, if you own more than one property in Canada, you must put down at least 20% of the value of the home. If you put down more, then it’s simply going to reduce your payments and interest on the home. This is a low risk strategy. Given your ages, I would recommend however, that rather than a large down payment, you direct that money towards continuing to aggressively grow your RRSPs a TFSAs for retirement. If you’ve invested wisely you should earn a greater rate of return on those investments than the cost of carrying a larger mortgage.Q: What should the mortgage structure be? Length, term, fixed/variable?A: I would ensure that the length of your mortgage doesn’t go past your planned retirement date. So if you plan on retiring at 55, this would mean your mortgage length would be 17 years given that you are 38 years old. Given that rates are still hyper low, I would recommend locking in for 5 years and fixed. This will protect your rate. Plus there simply isn’t much difference anymore between fixed and variable.Q: What are the income tax implications of an investment property?A: Anytime you earn extra income, whether from rent, investments or a second job, you pay taxes. But, you can write off any expenses related to the condo as well as depreciation on the asset. Then when you sell this property, because it is not your primary residence, you will eventually pay capital gains tax. I would recommend consulting a tax professional prior to making the purchase.Q: What are the realtor/purchase process considerations with a condo, buying from a developer rather than a private sale?A: If you purchase from a developer you are buying the blueprints and can’t see the final product. There are a lot of “plus, plus, plus” additions to the price as you choose finishings, parking, and storage so be mindful of this. Buying something that already exists is one “all in” price. Anytime there is a realtor involved they will make commission. If you find a private deal, however, there are no realtors involved (and no commission), but you will need to prepare all the documents yourself with a lawyer (legal fees) and perform your own due diligence.Q: What’s the best approach in dealing with the condo board to ensure the property is managed appropriately, with an adequate reserve fund?A: First off, you and your lawyer should review the condo documents before purchase to see if there are any lawsuits, maintenance issues and problems with the building. You can also review the reserve fund and the condo corporation’s spending and maintenance schedule for the next five to ten years. It can also help to volunteer with the condo corporation board to understand all of the issues and take a leadership role in planning the future of the condo.Q: What is a fair rental price for all of us?A: I would not recommend that the rent is less than your costs. In fact, try to earn at least a 5% return on your cash every month. The rate of return formula works like this:

(Rental Income – costs (fees, utilities, taxes, insurance, mortgage, emergency fund contribution etc.)------------------------------------------------------CostsAnswer * 100 = % rate of return

If the result of this formula is less than 5% rate of return, the real estate investment is not worth the risk. We encourage you to use this formula with all of your real estate investments. If you have a significantly high rate of return you may wish to consider double-up or lump sum payments towards the mortgage.

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