A couple has a duplex, lives in one of the units and enjoys it… but then a baby arrives and they now want to buy a house. The big question: is it better to keep the duplex and rent the apartments, or to sell it to buy the house?
Published at 7:00 a.m.
The situation
Émilie, 33, and Olivia, 37, bought a duplex in Montreal in 2020. They put all their savings into it and also received help from Émilie’s father. They will have to give him back $75,000 when the mortgage loan is renewed in 2025. They are also well aware that they will have to adjust to the increase in interest rates. However, the couple had a baby in January and want to buy a house in the same neighborhood near a park with a courtyard and parking in about five years. To get there, Émilie and Olivia look at different scenarios.
First, there is the option of buying another property at the next renewal to renovate it and resell it quickly to make a profit. “We are very manual, but Olivia is really not thrilled with the idea,” emphasizes Émilie.
They also plan to keep the duplex and buy the house in about five years, but their fear is not getting a big enough loan from the bank.
The other option would be to sell the duplex in five years to buy the house. “But we are afraid of losing a valuable investment that could later allow us to help our daughter buy her first property like my father did for us,” says Émilie. What do you think of all this? »
The financial portrait
Émilie’s annual income: $78,000 with retirement fund
Olivia’s annual income: $120,000 with retirement funds
Cost of purchasing a duplex in 2020: $750,000
Current value of the duplex: approximately $1,000,000
Mortgage due date: March 2025
Amount to refinance at the bank by reimbursing Émilie’s father: $677,000
Market cost of the desired type of house: $775,000
The advice
Instead of launching into several calculations, the first instinct of Simon Préfontaine, financial planner at Lafond Services Financiers, is to bring the reflection to the level of desires. It would immediately eliminate the first possibility, which is to buy a property to renovate it and resell it to make a profit. For what ?
“Because Olivia doesn’t want to,” he says. To embark on a big project like that, you really need to be excited about both. Otherwise, it will only create tension in the couple. We don’t want that, especially with a baby. »
Next, the financial planner has a big question to ask Émilie and Olivia: “Do you want to have this part-time job that involves managing a duplex and tenants? »
Basically, he wants to look beyond the financial aspect. “There are people who love doing this kind of work while others will be angry every time they have to go there,” he says. They need to think about it together. Because this also means that often, one of the two will have to take the car to go to the duplex while the other stays at home with the child. »
They must also think about the risk of having a bad tenant who does not pay their rent, or who does not take care of their accommodation.
PHOTO CHARLES WILLIAM PELLETIER, ARCHIVES SPECIAL COLLABORATION
Simon Préfontaine, financial planner at Lafond Services Financiers
Owning a rental property is like owning a small business. If that’s really what they want, let them do it! They can then even think about buying more buildings.
Simon Préfontaine, financial planner at Lafond Services Financiers
But, if it’s just to make money, he believes there are other avenues. “They can decide to sell the duplex and invest the amount received,” he says. Will it be as profitable as real estate? It depends on the market and their investor profile. If they are bold, we are talking about 6 or 7% per year on average without having to invest time as they should do with real estate. »
The calculations to make to keep the duplex
Let’s say that after careful consideration, Émilie and Olivia decide to keep the duplex to rent it; they will have to do their homework to assess the impact of this decision on their budget. First, since they no longer have savings, they will have to take their down payment for the house from the mortgage loan for their duplex. “The couple must also keep in mind that interest rates will fluctuate within five years,” says Simon Préfontaine.
Then, they will have to do a market study to see how much they can rent the apartment where they live now and try to estimate how much more it will be in five years.
“Then, they will have to see if, with their two rented apartments, they will be able to completely pay their monthly mortgage payment, or if they will have to pay an additional amount out of their own pocket,” explains Simon Préfontaine. As there are several elements that are uncertain at the moment, the ideal would be for them to run a few fairly conservative scenarios to evaluate the different possibilities. »
However, he is not worried about the idea of seeing them go to the bank when the duplex already has nearly $325,000 in equity and will have more in five years. In addition, their family income will exceed $200,000.
“Unless they are in huge debt elsewhere, or have very poor credit scores, I don’t think there will be a problem getting financing from the bank for the duplex and the house,” says the financial planner. To be certain, I still advise them to meet with a mortgage broker. »
Why wait five years?
Simon Préfontaine also questions the fact that they want to wait five years before buying their house. “Is it for financial reasons? Because if this is the case, I advise them to discuss it with their mortgage broker to see if the project is feasible now or a little before five years. So, if necessary, they could sign their next mortgage loan for a term less than five years, such as three years. »
Finally, if the couple decides to sell the duplex to buy the house, the financial planner advises them to opt, during the next refinancing, for a loan that will not have large penalties to pay if they break their contract before the end. .
When you have a project like selling your duplex to buy a house, you don’t just have to look at the interest rate. The penalty to pay is very important to look at, because it can be very high.
Simon Préfontaine, financial planner at Lafond Services Financiers
In closing, he can’t help but say a word about the importance of them protecting themselves in case something happens. “Emilie and Olivia would benefit from opening a registered education savings plan for their child,” he says. Then they must make a will, a protection mandate and probably also a cohabitation contract. They must also review their insurance. The arrival of a baby changes everything! »
*Although the case highlighted in this section is real, the first names used are fictitious.
