Don’t break this rental property rule

Circumventing the required 20% down payment is risky

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From the January 2015 issue of the magazine.

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(iStock)

(iStock)

Q: I want to buy a rental property, but don’t have enough for the 20% down payment required. If I buy it for personal use with a 5% down payment, how long do I have to live in it before I can rent it out?

A: Allowing a child to play with matches is a really bad idea. This plan is also a really bad idea. The 5% down option is intended for people who plan to reside in their home and “should never be used as a way to circumvent the required 20% down payment for a rental property” says Sue Pimento of Mortgage Alliance. She goes on to say that moving in just temporarily “could constitute this mortgage transaction as fraudulent” in the eyes of your lender and insurer. A relocation for work or a marriage breakup might require that you rent out your existing home, but it comes down to your intention at the time of purchasing the home. There is no period of residency that will suffice. If you intend on renting it out, you need to come up with the required down payment, and if you flout the rules you risk getting burned.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal finance question? Write to us at ask@moneysense.ca

 

One comment on “Don’t break this rental property rule

  1. This is actually an excellent strategy to build up a real estate portfolio.

    You can buy a place at 5% down and live in it for a year or so while you clean, paint and fix it up. If you’ve improved the place and the value has gone up you could actually refinance and pull out some money after a year.

    Then buy another place at 5% down and live in it for a year. Keep the first place and rent it out.

    Do this for a few years and you’ll build up a nice real estate portfolio. As you pull out money from refinancing (and you increase your renovation skills) you’ll be able to buy properties that need more work at more of a discount and realize further profits by updating them.

    Reply

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