Layth Matthews takes us through an example that shows the benefits of buying a home with a suite attached to generate income.
Mark Whaley (MW):
Welcome to the Rigden Financial YouTube channel. My name is Mark Whaley and today is March 25th, 2022. I'll be asking Layth Matthews, President and Lead Planner at Rigden Financial about investments, interest rates, and other helpful topics to assist in your financial planning. A lot of people are thinking about buying a house these days Layth and one of the questions that people have are whether to buy a single house or a house with an additional suite for more income, and maybe they're predicting that the housing market might be going down soon. I was wondering if you could give us your thoughts on that
Layth Mattews (LM): Sure, well it just so happens that Ihave created an example that shows some of the differences between buying a house and buying a house with a suite. Now the field of possibilities is unlimited because you don't know what price you might pay or so forth but what I've decided to do is is provide one example that could be modified to fit anybody's individual situation. The overall decision or the essence of the difference is that the house with the suite is going to be more expensive so you're buying, you're making a bigger investment in the real estate. On the other hand that risk is mitigated by the potential for income, so if you’re in a place with low vacancy rates which is much of Canada these days there's not that much risk that your apartment is going to be empty, so the assumption is that you're going to be able to keep your suite rented. I have prepared this little model that I put on to a worksheet and let me share that with you and I'll go over the assumptions and then show you what happens over five year and ten year progression.
Now this example is really fitting for somebody who’s fairly late in their career perhaps, or just somebody who wants to quickly get to a lower pressure, lower overhead scenario. I'll just mention that up front because it’s really oriented towards getting the mortgage payments down quickly, but you know, initiating the transaction. Here's the assumptions that I've made for this example of buying a home versus buying a home with a suite. The first assumption is that we're making the minimum down payment, and the purchase price that I have for the home with the suite is $850,000. Because we're only putting down less than 20 percent we would have to have a 25 year amortization which means the time it would take to pay off the mortgage altogether. Now if we're comparing this against a single family home purchase of $500,000 okay so that's substantially less just keep that in mind and and for the purposes of another example you could probably find a house with the same price that had a suite but it would be of a lower quality like we're talking about a pretty nice house depending on where you live. Mind you, in Victoria $850,000 would get you a pretty nice garage but you know in Prince George $850,000 will get you a really nice house. So, it depends on where you are and if somebody wants a customized example I'm happy to work with them. The assumption is that we make the minimum down payment which for $850,000 at this point is 7.05%. I haven't factored in CMHC fees into this example because it just gets too complicated, so that's your initial equity in the house that you buy. The property tax rate I'm assuming is 1.2 percent. That's normal probably back east, maybe some smaller communities tend to have higher property tax rates. On the west coast in Vancouver and in Victoria 1.2 is very high. Property taxes are closer to half of one percent around here.
The mortgage rate that I have I’m assuming is 3%. Now I would recommend a variable rate at least personally that's what I would take right now even though rates are going up but right now you could get a variable rate at 2%, but this example provides an assumption that the mortgage rate is 3% across the board the whole time just keep that in mind and the annual appreciation of the real estate I’m assuming that it will be 3% for the entire period of this example.
In recent years it’s been more than 3%. The real estate market can pull back it does occasionally, but I think 3% is not an aggressive assumption and the other assumption is that this suite income you're going to get whether it's a one bedroom or two bedroom is going to be $1200 a month but all of these things in this example can be changed easily that's why i have them in green I can change that quickly. Mortgage rate requires me to do a little more work but I can certainly do that.
Let's go and see what happens at the initial purchase stage so the initial purchase stage your purchase price is $850,000 on the house with the suite and $500,000 on the single family house your initial mortgage amount is this. Now remember I haven't put in CMHC fees which puts in a whole other dimension, but the principles apply it's still the same. So your property taxes are higher because you have a more valuable asset that you've acquired and your your mortgage payment on the house with the suite is going to be $3,739 a month. On the single family house it’s going to be $2,199.
The mortgage interest per month, so you're just multiplying the interest rate times the mortgage amount outstanding, this is a very simplistic analysis - I’m just multiplying it times the total mortgage amount. Actually it's going down
slowly, but these are all conservative assumptions but that's how much interest you're paying on this mortgage. Mind you, when if you own a house with a suite you will be able to write off some of that interest against your taxable income so that's something to keep in mind. Monthly appreciation, okay look at this the house with the suite appreciates at 3%. Its appreciation is going to be about $2,000 a month. Single family it's gonna be a little more than half that. But you can see the monthly net gain which is the rent that you earn - remember that was $1,200 a month plus appreciation minus the interest that you're paying is coming out you’re actually gaining $1,350 a month. Here's the downside, the first mortgage payment in the first five years you're paying almost $700 more a month so this as I said before is for somebody who's kind of at their higher stage of income. But you're going to see where we can bring this payment down, but you're paying a little bit more per month, but because you have a larger mortgage more of it is going into paying down the mortgage so the extra $700 a month you could say is just going straight against principle. It's sort of an aggressive savings moment in this scenario—this person's life.
At the end of five years where you basically build up $59,000 of equity. Your down payment had to be larger here so it's around $60,000 versus $35,000. So bigger down payment. Your initial equity difference is $24,000 so that's your extra investment initially. So now let's progress five years down the road. What I’m suggesting in this case, because this person I’m assuming is somebody who wants to get their payments down quickly - they’re looking into maybe a retirement scenario or they just want less pressure. Maybe one person is not going to be working or something like that so here's what has happened at the rate of appreciation. Remember that's 3% the more expensive house has appreciated to $985,000 the single family house has appreciated to $579,000. The mortgage amount has come down, these are the new mortgage amounts, this is the taxes this is 1.2 percent of the property value so the taxes have crept up a little bit the mortgage payment however in this case because we are doing a refinance at that point and we're going to put us into a 30-year amortization so we're getting our payment down fast. In this scenario that the goal is of these clients, so the payment can come down quite a bit when we make this change and so that's because the mortgage amount has been paid down and we’re pushing back out to a 30-year amortization. It's a much slower payoff progress scenario. Mortgage interest is the interest rate of 3% times the mortgage amount in both cases and then here's your monthly. So anyway, what's interesting about this example and you will be able to look at this after we're done is that the payment scenario is almost equal.
This is after five years so what happens is the monthly mortgage payment plus property taxes minus rent so this is your total cash flow comparison. Look what's happened here, if we do this scenario that i'm talking about, all of a sudden the mortgage payment net of rent is actually less than the single family house because the rent has actually taken over a bigger percentage of the of the total costs of the house. Your force savings becomes very similar but your force savings is really coming down because now we’re going to this longer amortization scenario - lower cost lower maintenance costs. Look what's happened to our home equity, our home equity in both cases has gone up but it's really gone up in the case of the the more expensive house so you have a differential you've made a $127,000 so you’ve gone $24,000 to $127,000 of equity that you’ve accumulated by going with the house with a suite. The way to understand it is that having a suite is like a small business. It's not a freebie scenario. You do have to understand that it's going to be a little bit of work but it is a very low maintenance kind of work. There are many different scenarios that can be worked out. Again these assumptions are what goes into this example.
MW: Great, that's super helpful. Thanks Layth.
LM: Yeah well I mean I think that when people have to make major financial decisions, it’s helpful to work out a model like this and we can change this around. I often will do it. I have a similar spreadsheet that I use for people trying to decide whether it's worthwhile to refinance and pay the penalty or not and sometimes it is and sometimes it isn’t. You have got to do the math.