Today’s question is a beginner question coming from Gord in Hamilton Ontario. He writes:

We’re guiding our kids into adulthood in the context of real estate and investment.  My kids are 20 and 22, one living at home working an HVAC apprenticeship and the other in university for teaching, living in another city and working part time.  They are both very responsible with their money and are saving for their futures.  I want to guide them as to how they should save or invest now so that one day they can own a home (it is looking less and less affordable).  My son (HVAC) wants to buy a two unit and live in one eventually to start out, but I am having difficulty knowing how to guide him correctly.

Gord, this is a great question.

I’ve often said that if you can’t afford to buy a house you should buy two.

The structure of that deal will depend a little on the base income of your kids. But as a first time buyer, they should qualify for a high ratio insured loan. The structure we’re talking about in Canada is a CMHC insured loan. You will pay an insurance premium on the loan which means a higher rate, but you will also get a high ratio loan. Typically these loans max out at 95% loan to cost. The specifics of the program allow for the first $500,000 to have a 5% downpayment and then a 10% downpayment for anything above $500,000 up to a maximum purchase price of $1M.

For those listeners in the US, you can do the same thing with an FHA 203B loan. The FHA loan will max out at 97% loan to cost. The max loan amount of the FHA program varies depending on the community.

Generally speaking the name of the game here is to get the rental income from the second unit in a duplex to subsidize the cost of ownership of your principal residence. At two units, the lender is going to look at the property in the same way as they would look at a residential property. The high ratio loan program qualifies for a single owner occupied home or a duplex where one half is owner occupied. It would not apply to a triplex or a 4-plex.

You would likely want a duplex like this to be self managed by the owner. As a first taste of being a landlord, this is a great way to start. The owner is always onsite and can monitor what is happening at the property. But you don’t want to do all the work yourself without the guidance of someone more experienced looking over their shoulder in an advisory capacity.

The biggest mistake that rookie landlords make is in knowing how to qualify the prospective tenants and then knowing the rules under the landlord tenant regulations.

The key for properties like this is to choose a property that is going to attract the right quality of tenant. If you choose a property that is at the lower end of the income spectrum, you run the risk of attracting tenants that can’t afford your property.

Get yourself a property that is going to attract the kind of tenant that you ultimately want living there for a long time.

A Duplex can be a great house hack. The market in Hamilton has become an extension of the Greater Toronto area. The overall Toronto area sports a population of 6.1M people and historically has added about 125,000 residents a year.

Your son may not have the income to qualify for a single family home at $720,000, but may qualify for a duplex at $750,000. The addition of the rental income when added to your son’s employment income may be enough to make the project viable. Later down the road, that first investment could act as a stepping stone to bigger and better properties.

It is from these modest beginnings buying their first property in their 20’s can grow to having a vibrant portfolio which can provide financial independence later in life. The message here is one of encouragement.

Thank you Gord for a great question. For the listeners at home, if you can’t afford to buy a house, perhaps you should buy two.