How To Make Your Dream Home More Affordable

by Shannon
January 14, 2015

You’ve always thought about investing in real estate, you’re sick of paying rent and making someone else richer by the month while building no equity in yourself. So why haven’t you finally bought your own piece of real estate? If money is putting a stop to your real estate goals, let me show you the steps you can take to make your home more affordable.

Let’s start with experience: unless you are an professional in the field (think seasoned investor, experienced real estate agent, etc.) you may not have much. Luckily for you, using an agent to purchase a property is completely free for you as a buyer! An agent will help you locate the perfect property that has potential to suit the scenario in which we wish to purchase it. Find a good agent that knows the local market, has done investment deals before and that you get along with because they will be guiding you through much more than the home buying process.

So now you have your agent, what’s next? After you’ve met with a mortgage broker and been pre-qualified for a mortgage, you will need to figure out what kind of monthly payments you will be comfortable with.  As this post is about making your future home more affordable we will need to figure out what your target audience is and how much they will be willing to spend; enter rental potential. For those of you that aren’t keen on taking big risks, it is best to stick to buying a home that you can comfortably afford the mortgage payments without the help of rental income. This way should you run into an problems or have trouble renting out your unit, you won’t be struggling to make ends meet. However, some people like to take bigger risks that pay bigger rewards. If you can save up about three months of full carrying costs, are willing to stretch yourself and have confidence in your skills as a landlord and your agents skills as a local expert, you can reap bigger rewards as I will show in a later example.

But first, your agent will need to find you a property that has rental potential; the key to making your home more affordable. Not all homes are suited to have tenants and not all homes legally can house tenants. Your agent will figure out which areas are zoned to permit for legal basement apartments. If you are renting out the main floor, any home will work however you want to keep in mind what type of tenant you would like to deal with (i.e.; young professional, family, student, etc.) and buy the right type of home in a neighbourhood suited for that type of tenant. This will increase your rentability, increase your rent amount and keep your vacancy low. For example, if your target audience are young professionals, you wouldn’t want to purchase a home in the suburbs. Rather, you would want a modern home with close proximity to highways and transit, consider having it furnished and up-to-date with technology such as dimming lights, alarm system, energy efficient, etc. You can then demand a higher rent amount because you have a higher end product catered to your ‘clients’ needs. Think of yourself as a service provider and the tenant as your client.

Now that you have your target audience defined, figure out what the rental rates are in your chosen area for those types of homes. For example, the basement of a 1500 sq.ft home could rent out for $800-$1500 depending on the quality of the finishings, amount of natural light, number of bedrooms and bathrooms, etc. Let’s say your home cost you roughly $400,000 and you had monthly mortgage payments of about $1700 (not including your property taxes). If you could turn the basement into a two bedroom rental suite, you can max out the rental at $1500 per month which leaves you with a $200 monthly mortgage payment. Not convinced? Let’s say you purchased a $700,000 home that could be converted into a triplex (three rental units) – main floor, second floor and basement. This home would have a monthly mortgage payment of roughly $3000 (not including property taxes). If you could rent the second floor out for $1200-$1500 per month and the basement for $900-$1200 per month depending on the type of tenant you are attracting and finishes you use. This would leave you living on the main floor for anywhere between $300-$900. Very affordable!

So where do the rewards come in now that your home is more affordable? Well in the first example, if you could comfortably afford a $1700 mortgage, now you have $1500 that you would have spent on housing anyways. Put that away into a savings account and begin saving for your next investment. In the second example where it is a bit of a stretch for you, not only are you still saving your $1500 a month you could have afforded, but now you have a tenant paying down your larger mortgage, giving you more equity on a home which reaps bigger rewards should you choose to sell your home and take in the profits! Real estate can be a short or long term strategy, and finding a way to put as little of your own money into it for maximum results is the best way to play it.

Owning your own home does not have to be expensive. Keep in mind the renovations needed to convert a home into an income-producing investment add value to the home and increase your profit when it comes time to sell. A home that cash flows is seen as a positive investment and attracts a larger audience for resale; think first-time homebuyers looking to make their home more affordable such as yourself or first-time investors looking for a home that is turnkey to accept tenants. Always remember that making your home more affordable is a business strategy therefore you must clearly define what your goals are and what steps are needed to implement them and do your market research. Ensure your conversion fits the needs of your future ‘clients’ and conduct yourself professionally at all times to keep them paying top dollar.

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