If you’re not from Toronto, there’s one thing you have to know before this story starts.
Toronto is lousy with condos. We have so many of them.
It’s basically just one big condo.
So when it comes to thinking of them as an investment, they don’t exactly get me excited. Actually, if I’m completely honest, real estate doesn’t really get me that excited. That doesn’t mean it’s not a great thing to invest in (tons of people do) but it just doesn’t pump me up.
But my girlfriend has been bitten by the real estate bug. It’s something that really interests her, and for the last few years she’s been looking for an opportunity to get into the market.
Except that the Toronto market is … um… not super friendly to first time buyers these days. So after meetings with a great mortgage agent, running numbers, and exploring some possible situations, recently she accepted the fact that it wasn’t the time to buy and resigned herself to growing her nest egg.
Which is what makes what happened over the last week so unexpected.
It’s the story of our first foray into Toronto real estate… and man… nothing could quite prepare us for the ride. Seriously… things got weird.
Like all good stories this one begins with …coffee
It started on a Thursday, with a pretty classic morning. I was drinking my coffee, and Mimi (girlfriend) was looking at real estate listings. Even though she had given up on buying right now, she still had an addiction to the MLS listings that couldn’t be ignored. And so that morning while she was getting her daily fix, she turned her computer around and showed me a condo.
Now, we may have different feelings on real estate as an investment (and whether I should be allowed to eat peanut butter in bed) but we’re both on the same page about condos. We don’t get super excited about them, and so I was a bit surprised to see her crushing on sweet little condo.
It was a wee one. A junior one bedroom (which is a fancy name for a bachelor with a nook). But it was cool. A hard loft, in a live/work building, with sound-blocking brick walls and super high ceilings (and a murphy bed!!!). The hard loft was the thing that made it really interesting. We’d often talked about how if we would ever consider a condo it would be a hard loft type. They just have more character (which hopefully leads to better resale value) and also tend to have lower maintenance fees.
And it was actually an affordable price.
Like… not Toronto affordable… actual affordable. Especially considering it was in a great area (and only 5 minutes away from where we live now).
Serendipity steps in
There are moments when things just seem to fall into place.
A call was placed, she could see it that afternoon. It was in a building that she had walked by a hundred times and really liked. The real estate agent that showed up ended up being the exact same agent that had been highly recommended EARLIER THAT DAY, from our fabulous mortgage agent. And she took the time to talk through every thing in a very ‘not-hard-sell’ kind of way.
It looked… really interesting.
Now, it must be said, we weren’t planning to live in this place. The potential plan was to buy it as an income property, a rental unit. The costs would hopefully be low enough to cover the mortgage and other fees. And so there were lots of things to consider.
We got our broker to run a few numbers.
Crunching the Numbers
By the time I got home in the evening the idea of buying a condo had blossomed from ‘fun way to spend the afternoon’ to ‘full on possibility’. So we sat down and talked about some numbers.
The biggest question I had (and would have for anyone who wants to buy… well.. anything) was… do you have enough money?
So out came the pencil and paper. We looked at:
Upfront Costs
- Downpayment: Minimum 20% (in most cases the amount needed to avoid needing an insurance premium for a rental)
- Closing costs: We were told that would be about 1.5% of the total price.
- Renovation: There was a little work that we were thinking of doing. We took what we thought it would cost and doubled it.
- Transition Period: 2 and a half months of the full monthly costs, in case we couldn’t rent it right away
- Emergency Fund: Stuff goes wrong, so we made sure there was enough money for a few thousand to be there when/if it did.
- Land Transfer Tax: both Ontario AND Toronto (for a calculator check HERE)
Monthly Costs
In order to figure out how much we would have to rent it for (and whether that was a realistic number)
- Mortgage Payment
- Condo Fees
- Insurance Cost
- Property Taxes
- Hydro (other utilities were included)
It’s a lot of money. But it even in black and white it all looked really doable. I think the thing that really attracted us to this property in the first place was the fact that it was cheap enough to put a 20% downpayment on (and avoid having to get mortgage insurance premium), and that the monthly costs could be covered by a very reasonable rent (compared to other properties in the area).
We also gave some thought to the fact that interest rates probably won’t stay this low over the entire period of the mortgage. So we played a little ‘what-would-happen-if’ and ran the numbers if interest rates went up 5% (to a more normal historic level), and even then the monthly amounts weren’t terrifying.
It’s honestly the first time that I’ve sat down with real estate numbers and not had a huge surge of panic. Mimi could afford this without putting a huge stretch on her daily finances, or more importantly on the flexibility she needs to run her business.
Going for Broke(r)
This whole situation was begging for a night’s sleep. This morning it hadn’t even been on the radar, so no decisions were going to be made tonight. But before we headed off to bed Mimi, who had been in touch with our mortgage gal all day, sent over some documents that the brokerage needed to get an idea of how much of a mortgage she could qualify for.
So after some fun with the scanner, it was good night and sweet dreams of property ownership and the horrors of landlord life!
The Bubble Bursts
There are many unpleasant ways to wake up, I’m sure you’ve experienced a few, but getting an
email first thing in the morning from your mortgage agent saying the papers you sent in CHANGE EVERYTHING…. Is not great.
In case you didn’t guess… it’s not a good 
‘change everything’.. It’s bad.
Turns out that even though Mimi showed plenty of GROSS income to support the purchase, her NET income after a reassessment came just shy of what she needed to qualify. #gross
So what happened?
How you file your taxes has a HUGE effect on your life when you’re applying for a mortgage.
When you look at those tax documents you see two income numbers: gross income (line 162) and net income (line 150).
Your gross includes all your business income before anything happens to it, and your net is that number after all of your deductions.
In a lot of ways deductions are great. You pay less taxes, you get more back… but here’s where it hurts you a little bit. The more things that you deduct the lower your net income is. And when you’re buying a rental property… that’s the number that they use 9 times out of 10.
Here’s the thing: the lenders can only react to the story that your documents are telling them, and things get really tricky whenever you’re self-employed. Even though they could look up and see that Mimi’s gross income is more than enough to handle the mortgage… in this case they were only allowed to consider her net income.
It’s insane, but basically in looking at her tax documents, instead of seeing her healthy-fully-able-to-support-a-condo income, they could only consider a tiny fraction of that.
And based on that fraction they weren’t going to lend her anything.
The condo dream was dead before it began…
Or was it….. *Cue music*
Next time on the Mortgage Files: an unexpected bystander is pulled into the fray. Don’t miss PART TWO: YOU JUST LOVE ME FOR MY CREDIT
***Just for the record, let me make clear that this is just a story of our experiences with ONE MORTGAGE SITUATION. If there’s anything that I’ve learned about this crazy world is that every person and property brings up a whole new set of circumstances. If you have questions talk to a mortgage professional (I know a great one). ***
Err… did you forget some costs in what you need the rent to cover in the article write-up, or in your business case calculations? (hint: what’s going to happen at the end of your first tenant’s residency?) Did you compare your calculation to the actual market rent? Also, the closing costs amount is either too low, or there’s a line missing for LTT (on a ~$300k condo, LTT alone is ~1.9%). If your broker crunched the numbers be exceptionally wary — they have a strong bias towards painting a rosy picture and getting you to jump in.
As for gross income vs net income, it makes perfect sense — it would be crazy to use gross income. If I’m selling books and take in $500 in gross sales, there is no way I can use $500 to support buying a condo because $250 of that is going to printing costs and $125 to postage. Claiming those expenses is not just about reducing my taxes — they’re actual expenses I have to pay. I only have a small fraction of my gross sales left to support paying for something else, and a lender would be insane to use my gross sales to qualify me on anything. There are a few self-employed expenses that might be an exception, the biggest being the business use of home expenses, where you can argue that you’d be paying those costs out of your disposable income whether you were self-employed or an employee — but in that case it still indicates that the income isn’t there to support a second property.
Yikes, I did forget to add LLT to my list (we definitely included it in our calculations), I have added it in now. Thanks for that.
As for renting, yes, we compared it to the actual market rent. I’ll talk more about it later, but one of the reasons we felt comfortable is how well we know this area. We’ve been renting here for the last 5 years and have a good idea of what a fair price is (and what accounts for crazy gouging).
And yes, in the world of gross vs net I completely agree that it makes sense, and I may have written my reaction a touch more dramatic than it was (I am an artist after all). In my experience people can be a touch… shall I say ‘liberal’ in what they choose to deduct… so I wanted to illustrate that just because you think you’re making XXXX dollars a year, that’s not actually what lenders might be looking at.