Expert Tips That Will Help You Become a Homeowner Before 40
Accelerate your journey to homeownership.
Volition was featured on HGTV.ca to share our top tips for becoming a homeowner before 40 – you can check it out here.
As usual, we have more to say. Read on for the extended version!
We are going to steer clear of the typical stuff you often hear like start saving early, live frugally, don’t spend more when you get a raise, don’t order that avocado toast, etc. We want to broaden your thinking – especially because the traditional methods of getting into home ownership may not work in more competitive and more expensive markets. These 10 expert tips will accelerate your journey to homeownership before you’re 40.
To help provide a frame of reference for the article, we’ve grouped the 10 tips into 3 groups:
- Tips #1-4 are Real Estate Strategies
- Tips #5-7 are How To Get The Money
- Tips #8-10 are Think Differently About Real Estate
1. House Hacking
Turn your biggest liability into your greatest asset – earn money from your home. If you were thinking of a 1 bedroom condo, consider buying a 2 bedroom condo. If you were thinking of a 2 bedroom or 2 bedroom + den condo, consider buying a small house. This might seem counterintuitive, but the idea here is to buy MORE than what you need, rent part of it out, and lower your living expenses – including utilities and even wifi! For example, let’s say that the difference between buying a 1bdrm condo and 2bdrm condo is $150,000, which equates to a $425 increase in monthly mortgage payments. But consider this: if you could rent out your 2nd bedroom for $1200, you’re effectively ahead by $775 per month (even after the increased mortgage payment) and now you’re building equity on a larger asset! Similarly, let’s say that you were able to buy a small house where your monthly costs including mortgage are $4200, you could live in the basement and rent the upstairs unit for $3000, then your monthly living costs would be only $1200 (and you would own a house instead of a condo!). A larger purchase also provides you with more versatility as your needs change, i.e. you could move into the upper unit later.
2. Purchase a Triplex (or Convert a House into a Triplex)
A triplex is a 3 unit house: you could live in one unit and rent out the other two. This is taking house-hacking to the next level… the price tag is high, but the reward is even higher! Even though you’ll be spending more up front, the flip side is that you’ll be making significant rental income which helps immensely with the carry costs, and you’ll own a much more valuable house with much larger growth potential. It is also more versatile since you can move between units as your needs change, or you can even combine two units if your family grows. Typically with a triplex, your living costs would come down even further than in a smaller property: let’s say that you were able to buy a triplex and your monthly costs including mortgage are $5000, you could live in the basement and rent main floor unit for $2200 and the upper unit for $2200, then your monthly carry costs would be only $600!
3. Buy a Property with Laneway / Garden Suite / Coach House Potential
A laneway house is a separate building that is located at the rear of your lot, and replaces where a laneway garage would normally go. Enjoy the perks of having tenants without the downside of sharing walls! No shared entrances, no shared laundry, no shared space. In order to build this, you need a property that can accommodate a laneway suite (there are very specific requirements, so not all lots can), and the property needs to be located in a municipality such as Toronto and Vancouver that allows them to be built. The price tag is steep: the cost of building one starts at about $400,000. But the rental income that you get for that investment more than makes up for it; you could rent out a laneway house in Toronto for $3000+ per month, much more than a condo of the same amount! The key here is to have the foresight and to consider futureproofing yourself – you may not have enough funds now, but over time as laneway suites become more popular and more attention is paid to them, lots that can accommodate laneway housing will carry a bigger premium.
4. Furnished Rental
Currently there are headwinds for the Short Term Rental (AirBnb) or Medium Term Rental market, but chances are that it won’t stay this way forever. If you have available rooms/units and want a way to boost your rental income, employing a non-traditional approach to your rental strategy could provide you with what you need. It is not for everyone: it is very hands-on, some municipalities have licensing restrictions on what you are allowed to rent out short term, and demand for STRs is relatively low right now due to Covid. Employing this rental strategy, however, may actually allow you to reduce your cost of living down to $0 (or even make you cashflow positive while living there)! The cost of furniture adds to the initial outlay, but can pay dividends in the future since it can help immensely with the cost of carrying the property and there is flexibility on how often (or not) you rent it out.
5. Turn Your Parents into Real Estate Investors
If your parents want to help you out in getting started with your house purchase, they don’t have to act like your personal piggy bank. Oftentimes, the better way to structure it is a win-win scenario, so it’s not a handout! If they have a Line of Credit, or (even better) a Home Equity Line of Credit, they could lend funds to you for your down payment, and in return, you would pay their interest on the borrowed funds. To structure it as win-win, you could pay them a premium on top of their own interest payments. For example, if they borrow at Prime, you could pay them back Prime + 0.5% or Prime + 1%. Or you can structure it in a Joint Venture model (more on this below) whereby they help with the purchase, you do all the work and manage the property as a rental, and you both share in the equity upside. If you are creative and resourceful enough, there are countless ways to make this work. But make sure it’s all in writing!
Shared ownership with family or friends to buy something bigger to accommodate everyone’s living needs can be a great solution. We have clients who have purchased together in groups of 2-6. It can be trickier, and everything needs to be well defined and documented beforehand (sharing of expenses, major repairs, upside capital appreciation, decision making / voting rights), but done right, this can provide an excellent opportunity for younger individuals to get into a bigger and more valuable house, with more upside potential. This comes with the added complexity (and risk) of owning with other people, so clear, direct, and regular communication is key (e.g. scheduled regular meetings to review living arrangements, rules of the house, deciding on who gets which bedroom, what happens if one person wants out, etc.). Note that buying in groups of more than 4 can get tricky from a mortgage perspective, so make sure you speak with your mortgage professional early.
7. Joint Ventures
Joint Ventures are a way of using OPM (Other People’s Money) to buy real estate. When purchasing real estate, you need all of the 4 M’s: Money (downpayment), Mortgage, Mastery, and Management (Asset Management, not just Property Management). Whereas in a normal real estate purchase where one individual (or a couple) brings all of these things in order to buy a house, the reality is that these things can come from different people. In a traditional JV, if you are willing to provide the Mastery and Management, then your co-venturer would provide the Money and Mortgage, and you would both share 50/50 in cashflow, mortgage paydown, and equity upside of the property. Often, this does require you to have a proven track record so that you can demonstrate you know what you’re doing, but there are many investors who used JV money when purchasing their very first property – these people spent all of their time & energy learning about how to invest in real estate by joining real estate investment groups like the Toronto Real Estate Mastermind, the largest & most active real estate meetup group in Toronto with over 3,000 members.
8. Stepping Stone Approach
The biggest advantage that young people have is that they have time on their side. Buying property early, even something smaller like a condo, has a compounding growth effect that will work in your favour. Just as an example, buying a $500,000 condo now can potentially mean it being worth $700,000 in 5 years. This compounding growth effect, which Einstein himself described as “the most powerful force in the universe”, builds tremendous equity which makes it much easier to upgrade to a house by the time you are 40. Jumping straight into buying your dream home might not be a reality when you are starting out; consider a stepping stone approach instead, rather than waiting and waiting. This is not a call to arms over FOMO – this is to demonstrate that taking action and getting in early is generally the best strategy. The Toronto market has grown 7-10% every year, so that $500,000 townhouse you were eyeballing 7 years ago is now $1,000,000… while your $100,000 downpayment that you had ready 7 years ago but didn’t use is now worth $115,000 while sitting in your savings account. The rest of Einstein’s quote: “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.
9. Build an Expert Team
You are the CEO of your house. Your job as CEO is to ensure that you have the absolute best team. This is probably going to be the biggest purchase you will ever make in your life – don’t settle for second-rate team members. Do you really want to entrust the fate of your financial future on using Uncle Joe as your Realtor? You pay the same amount to most Realtors, so why not go with the best… or the one who truly offers the most value? If you are considering a house with a basement unit, work with a Realtor who knows what to look for to ensure that it’s a legal basement unit. Similarly, if you are considering a laneway house, work with a Realtor who knows the requirements and criteria for laneways so that you won’t be unpleasantly surprised later. Demand this level of excellence and value-add from all of your service providers: Realtor, mortgage broker, insurance broker, accountant, real estate lawyer, contractor, etc. When you start thinking about it in this way, you start realizing that home ownership isn’t a one-person show; the team that you surround yourself with can help you ensure that your purchase goes smoothly, and more importantly, ensure that it’s a well-considered part of your overall plan and financial future.
10. Invest In Real Estate, Even If You Stay As A Renter
Real estate investing can be one of the most lucrative ways to grow your wealth. If you don’t necessarily NEED to live in the property that you purchase, then you can continue to be a renter – there is nothing wrong with that! In fact, several of our clients have purchased investment properties in downtown Toronto, but continue to live as renters because they have apartments with very reasonable rents and financially, it just makes more sense to not live in their own property! Keep in mind that your own home is a luxury, not a necessity (and as such, it is often a liability, not an asset). With your equity growing in your investment properties and with renters paying your mortgage, you may eventually reach a point where that equity can help you purchase your own home by the time you’re 40… in a way that is sustainable and not a major financial burden!
It’s hard for young people to buy real estate, especially with rising prices, escalating uncertainty in the market, and not knowing what you don’t know.
Volition Properties sets out to demystify the real estate process. We get it – buying real estate is daunting. It has many more zeros than your typical retail store purchase. Volition is unique in that we aren’t just Realtors, we provide Advisory Services on your home purchase, which is immeasurably valuable when dealing with the biggest purchase in your life. We can advise on your real estate needs and how it fits into your overall lifestyle, investment, and financial goals… beyond just the single transaction you will make with us.” One great way to get started is to join a real estate meetup, such as the Toronto Real Estate Mastermind.