Rent in the city, own in small towns: Canada’s new real estate trend

Terri McCulloch rents the house where she lives in Halifax (left). The property she owns is in Parrsboro, N.S. (right). Courtesy of Terri McCulloch

With prices sky-high in some of Canada’s largest cities and real estate markets softening across the country, many city dwellers are choosing to rent the home where they live and buy properties — especially in smaller towns — as an investment.

Renting in Toronto, hoping to buy in Guelph or Hamilton

When Allison Humphries started working from home three years ago and realized her tiny Toronto condo couldn’t be both her home and her office, she decided to try to rent it out.

The city’s real estate prices were “astronomical,” and Humphries didn’t want to sell her home with two years still to go on the mortgage.

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After some searching, she found a two-storey row house in Corktown, in Toronto’s historical downtown, that even had a backyard.

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“It’s got that house feel, but isn’t so large that I’d feel lost in it,” said Humphries, a vice-president of strategy at a digital marketing company who lives alone.

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Renting out her condo allowed her to cover the rent at her new Corktown residence, meaning the move essentially allowed her to upgrade to a larger home at no additional cost.

Humphries sold her condo in May once the mortgage was paid off, and is looking to buy another investment property — just not in Toronto.

“The Toronto market has peaked,” she said. “Prices have gone so high that they aren’t going to continue to accelerate.”

Instead, Humphries is looking at Hamilton and Guelph, where real estate analysts see lots of potential for price appreciation.

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Renting in Halifax, owning in Parrsboro

Terri McCulloch has a similar story. When her job took her to Halifax nine years ago, she initially moved to a condo she owns on the outskirts of the city. But the commute to her new gig in downtown Halifax was 40 minutes each way, something most Nova Scotians wouldn’t put up with, she joked.

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Homes for sale anywhere close to her office in the coveted Halifax Peninsula were pricey, so she decided to give renting a try.

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Today, she has no regrets. She now lives on the second floor of a heritage home. Work is a short walk away that features beautiful views of the waterfront. And she doesn’t have to worry about noisy neighbours, as the first floor of the house is occupied by a law office.

“I live here as if it were my own home,” she said.

In the meantime, McCulloch has been renting out her old home in Parrsboro, two hours north of Halifax.

The real estate market in Nova Scotia was quite soft when she moved to Halifax. There were several potential buyers interested in the property, but the price they were offering was barely above what she’d paid for it.

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Instead, McCullough started renting out the house for $750 a month, which is enough to cover all expenses related to the property, including gardening.

Holding on to the house means she could go back to it in retirement, or sell it when prices climb back up again, she said.

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Her Halifax condo also has tenants, whose rent is enough to cover the mortgage and generate a little extra cash.

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Buying to rent: tips from a seasoned real estate investor

For Canadians who can’t afford to buy a home in the city they live in, purchasing real estate in more affordable markets can be a way to get on the property ladder.

Buying to rent is also a way to ride out the ups and downs of the real estate market and the economy, said Ann Kaplan, president and CEO of national consumer finance company iFinance Canada. (Kaplan also appeared on The Real Housewives of Toronto, a show run by Slice, one of the brands owned by Corus Entertainment, which also owns Global Television and Global News.)

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Kaplan, who gradually built a portfolio of  seven residential and commercial properties in Vancouver, Victoria and Toronto, has some advice for those buying investment properties as a means to enter the market:

Decide what price you want to pay and be prepared to walk away if you don’t get it. When you’re buying investment property, you’re not in a rush to find a place to live. So do you research, get your paperwork in order so you won’t have to go back to the bank if your offer is accepted, and then put forth the price you want to pay, Kaplan said. If you don’t get it, be prepared to walk away. This strategy has helped Kaplan get very good prices for her properties, she said.

Take baby steps. Kaplan started small, by renting out a single property in Vancouver when she and her husband weren’t sure yet whether they would settle there or in Toronto. “We got a bit of a taste of how renting properties works,” Kaplan noted. After that, she proceeded slowly and asked a lot of questions. She often turned to more experienced real estate investors, asking for an hour of their time to share their advice and experiences.

Find good tenants and don’t raise their rent. “A very good tenant is key,” said Kaplan. Once you find one, make sure to keep her or him very happy, she added. That means keeping their rent stagnant as long as possible. Kaplan also allows her tenants to address small repairs without checking in with her and to just dock any expenses from their rent cheques.

If you’re buying in a condo, get on the board. When considering a condo purchases, check the building bylaws to make sure renting is allowed and has never been an issue, said Kaplan. Still, bylaws can change quickly, as do the wants and needs of a building you don’t live in. So make sure you’re on the condo board, so you have a hand at the table to make decisions and to stay in the know about updated legislation.

Play the long game. You buy investment property so that it generates income later on. Don’t worry about fluctuations in the market along the way, Kaplan said. Every year, use the rental income you’re collecting to make the maximum advance payment on the mortgage that won’t incur a penalty (usually between 10 per cent and 20 per cent). Once you have paid off the mortgage, you can use that equity to buy another investment property.

Consider commercial property, too. “Think a little bit outside the box of investment properties,” said Kaplan. Small commercial buildings that can accommodate three or four tenants generate a lot of income. And when you’re applying for a mortgage to buy a commercial building, banks are more concerned about how much you’ll earn in rents than the size of your down payment. If your rental income can cover your mortgage payments, you can buy with very little money down, according to Kaplan.

If you do choose to live in the home you purchase, seriously consider renting out part of it. Not only does it help you pay off your mortgage faster, but if you are planning to move a lot, this is a great way to build equity. Just remember to factor in property transfer taxes and real estate agent fees in your move-out budget.

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