Financial Channel

Well I'm about to undertake a pretty significant financial investment (investment property) and was hoping to have a few of the financial guru's on here critique my current situation to see if my plan is viable.

Just as a little background info, I am 22 and just graduated from University and am working full time. I am living at home with my parents and will be doing so for most likely the next 2 years.

Currently I am contributing $210/pay ($420/mth) to RRSPs and $294/pay ($588/mth) to my company Pension plan.

My GF is moving up to Edmonton for school for the next 2 years and is looking to rent a place with her friend. I am looking to purchase a condo up there and rent it to her and her roomate. The condo is for $180k and I should be able to put $50k down. From the ING un-mortgage calculator, my monthly mortgage payments at 5.2% ammortized over 25 years is just below $800/mth. Condo fees for the place I am looking at works out to $250/mth and property taxes works out to about $100/mth.

So in total the monthly expenses would work out to $1150/mth. I am thinking of charging them both $450/mth and they would split phone, internet, electricity. So basically, $250/mth would be coming out of my pocket. In two years after they are both done school, I am planning on selling the place (hopefully it would have appreciated in value), and using the proceeds to put a down payment on a house for myself and my gf(most likely fiance at that time).


Questions

Am I able to expense the interest portion of my mortgage payments for taxes? Since I am only holding the place for 2 years, I'd assume the majority of my mortgage payments will mainly just cover the interest.

What other expenses can I deduct off the rental income?

Since this will not be a principal residence, am I still eligible to use $20k of RRSP towards my downpayment in 2 years under the New Home Buyers plan? Would this even be advisable? I've heard mixed feedback regarding this program.

Would it make more sense to make it a principal residence just before selling it so I don't have to pay capital gains taxes? What would I need to do to be able to claim it as a principal residence?

On the side I've been doing freelance programming work which has been generating decent income. Can I expense things against this income? I get paid through freelancing sites and paypal etc.

Should I always attempt to contribute the max % to RRSP each year? Or would it make any sense to save some of my limit to carry forward if I am anticipating a jump in tax brackets?

Thanks a lot for taking the time to read this all. I probably have a few more questions that I can't remember at the moment.

Good initiative and good planning. I would offer to help but I think you're just a few steps ahead of me in this case.

Why woudl you buy a condo and rent it out at a loss? What happens in the summer when schools out?

Is this a real question? First, do you expect to rent out the condo at a higher price than his mortgage payment? Secondly, did you even read the question? He'll be renting to his girlfriend and the roommate for two years continuously, at which point he would sell.

Am I missing something?

Wow congrats on the good work its good to see young people plan..

I will anser to the best of my knowlege

On a side note if you will be running a loss on the property there is a chance the gov't will not see it as a profitable/viable business and will not allow you to claim the expenses.

I'm not a financial guru, but this is what I think.

1) No, since you're renting the place out at a loss, "you don't have reasonable expectation to earn income". Thus the interest charges on the mortgage are not deductable. Ref: Faucher (G.) v. Canada, [1994] 2 C.T.C. 2001, 94 D.T.C. 1581 (TCC).

2) I don't know

3) Yes, RevCan makes no mention of requiring that the Home Buyer's plan be used to buy a home that you yourself have to live in. As for whether or not it makes sense.. I'd say so, since you build more equity in the condo.

4) Yes, if you can live there for a while it'll make more sense so you don't have to pay taxes. Principle residence is defined in the Income Tax Act as:
"... the housing unit was ordinarily inhabited in the year by the taxpayer, by the taxpayer's spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer ... " (s. 54 - Definitions)

You'll have to consult an expert as to what "ordinarily inhabited" means.

5) freelance... paypal.. expense.. huh?

6) If you know that you are going to have a big jump in taxes (i.e. you went from earning below 32K to somewhere between 32K and 72K - the next bracket), then yes, having RRSP room will definately help. If not, then max out your RRSPs and use the refund to put a larger downpayment down.

Disclaimer: All of this is IMO, and I am not a financial guru by any means of the word.

First of all, my knowledge is not the most current on taxes, but I think it is still accurate (so I'd check it out more thoroughly before you act on it). You can call Canada Revenue Agency to get answers on tax questions.

Regarding the condo purchase, you have to report the rental income and you can claim the interest and even depreciation on the building. However, most of your mortgage payments are going to be interest so it sounds like the rental payments won't even cover the interest you're paying. I don't think you can claim the loss against employment income. You are also losing investment income on the $50,000 (although it is possible to make it up through real estate appreciation).

I expect the Edmonton condo market is relatively hot right now, which may mean you would be buying at a market peak. Might go higher, but condo prices tend to be pretty volatile. Also be careful of additional condo maintenance since you would likely have to pay for part of mtce of all units, not just yours (not sure of the age of the unit you are looking at).

If you aren't claiming any other property as principle residence AND you stay at least one day a year in the condo you can claim it as your principle residence and therefore not pay tax on any capital gain. But if you are having rental income from it the principle residence rules may not apply.

At the end of 2 years your net cash outlay would have been roughly $50K + $6K ($250 * 12 * 2) you would need to get about $193K (+ legal, transfer taxes etc) out of the place in 2 years to recoup your cash investment and earn a 7% return on your cash.

I have never been a fan of couples buying something together before they are married. In your case since you will largely be apart for 2 years it could be an additional stressor you just don't need.

Another way of looking at this whole thing: Is this the best investment choice for the $50,000 you have, considering all investment opportunities? Pretty unlikely, and relatively high-risk at a minimum. Keep your GF's situation separate from your investment decision. If you want to subsidise here rent (and not her roommate's), just do that directly.

You should seek out a financial planner - if your pension plan is similar to that of LAPP then you are actually losing money with RRSPs.
Get a secured line of credit for your mortgage. That way, you ONLY pay the interest.

Legally, you need to claim capital gains for whatever period it is a rental unit. If it's for one year, you need an appraisal before and an appraisal after. Then you pay capital gains on that amount.

Yes - you should be able to as a "sole proprietorship".

Without knowing your pension plan details, there is no definete answer. However, there is a good chance that with your pension plan already, RRSPs are not the best method of savings.

I'm gonna be harsh, but that's because you risk a lot.
First off, how serious are you with your gf (who's at school, meeting new people, while you are maintaining a long distance relationship)? Because fact is, two years is a long time and it's great and all to be positive, but you can really screw up badly (i.e. forced to sell, or playing landlord to ppl you don't know from far way) if things don't work out between you and the gf.

Next off, there's love and there's love. why exactly won't you charge them market rate for the condo? If you want to save her some cash, then charge her full rate and simply send money.

Sorry to say this but with these kinds of decisions, treat it like a business and your gf (or whoever) as a stranger. Might seem unromantic but fact is, emotions are bad in these situation.

mind pointing out the word continously in the OP? My dealings with student renters is they go home 4 months of the year, sure pehaps the GF will help out with the rent during the summer months but if anyone expects a student to pay rent for non-school months is pretty crazy. Perhaps this has been arranged.

And whats wrong with renting out a unit for more then the mortage value? It would one thing if it was a 5% down mortage but this is over 25% down I'd bump the rent, or increase the DP.

I was just looking at comparable rental units in the city, and based on the location I thought $900/mth was fair. Although I did see a 1 bedroom condo in the same area going for $585/mth. Would $475 or even $500 per person per month seem unreasonable?

The point regarding summer is a very valid point. There is a pretty good chance they will be staying there during summer; however, I was just prepared to take a loss over the summer if they did not stay.

I don't think I was really clear with this question. I do not intend to use the New Home Buyers plan for this rental condo. I understand it can only be used on your first home purchase. Since this condo purchase isn't a principle residence, when I do move to my own place in 2 years time, would I be eligible to participate in the New Home Buyers plan even though I would have technically purchased a place before as an investment?

This is exactly the kind of information I was looking for. It sounds like I'm better off just getting taxed on the capital gains and not bother with trying to make it appear as a principle residence.

Would I need to get a business license or anything like that?

This point here has me concerned. Does this mean the rental income will be taxed and I will not be able to deduct any of the expenses? Since this is being run somewhat as a sole proprietorship, could that mean a loss here can be used to offset income generated from the freelance work I do on the side?

Does this mean most people rent it out more than their mortgage payments? Or do they just put a larger downpayment down? Would it maybe make sense then to claim more income than I actually get off the rental property? Just so that there is a small profit.

Here's what I was thinking

Scenario 1:
Rental Income: $900/mth
Related Expenses: $1150/mth
Net Loss: $250

Since there's no profit I can't deduct the expenses so the full $900 is applied as income.

Scenario 2:
Claimed Rental Income $1200/mth
Related Expenses: $1150/mth
Fake Profit: $50

I'd only be taxed on the $50/mth of income?

Is this considered tax fraud?


If at work I have a stock option type of bonus that vests until next year, and it's expected to bump me to the next bracket, then it I should save some RRSP room right?

I was hoping to capitalize on real estate appreciation.

I'm from Calgary where the real estate market has appreciated close to 50% in the past year. I guess this purchase in Edmonton is a speculative one as I expect the increased investment in the oil sands in Fort Mac will place additional pressure on the Edmonton housing market for the next few years. Also, it is my understanding that a few of the companies working in FortMac are looking at housing their employees in Edmonton and flying them to FortMac as opposed to paying the inflated prices in FortMac.

The condo that I am looking at was built in the early 90's so I'm hoping maintenance won't be a big issue. Also, isn't building maintenance covered in condo fees?


I've heard that a lot actually. I don't see this as really subsidizing her rent though.

Could you point me to a site that has more information on LAPP?


This wasn't really meant to help my GF out. The purpose of this was to purchase an investment property and rent it out to someone that is responsible and that I can trust. The housing market in Calgary is nuts and I can't afford a place here which is why I am looking in Edmonton.




Thank you everyone for your feedback. It has helped a lot. From this I have gathered that

1) I should look for more rental properties to find out what kind of rent I can get away with charging.

2) I should consider utilizing my Pension plan more than RRSP.

3) I shouldn't bother trying to claim the condo as a principal residence before selling it, as the capital gains taxes are unavoidable.

It doesn't work half and half.

Either you'll pay tax on the rental income and be able to claim expenses or you will not pay tax on the rental income and not pay expenses.


If you are charging a reasonable, fair market amount for rent you are fine in claiming it.

As for expectation of profit - that will come when you sell it. Provided the amount of rent you charge is reasonable, you can claim your expenses.

http://www.lapp.ab.ca

I might be mistaking but I think that the federal Home Buyer's Plan can only be used once every 5 years

so beware if you're planning on reusing it in 2

You are mistaken. The HBP can be used if you have not owned a home for the 5 year priors (including current calendar year). In addition, if you were once a home owner, there must be $0 outstanding from the original loan.