Hacks for homebuyers

Buying real estate is for many one of the biggest investments they’ll ever make. And in the city of Toronto, it comes with challenges. Especially now. The recent U.S. election has roiled economic outlooks and Canadians are heading to the polls later this year, all of which spells uncertainty in the market. And although there has been a dip in Toronto home prices, RBC estimates that the carrying costs on a benchmark home in the city amount to a 75 percent share of the median household income.

But here’s a hot take: despite all the uncertainty, now could still be a good time to wade into the market. In fact, that uncertainty might even present an opportunity for savvy investors who are willing to get creative.

The suite life

Whether you’re an end user or purely in it for the investment, Patrick Francey, CEO of Real Estate Investment Network Canada, recommends looking at properties that include more than one unit. It could be a multiplex, a detached home with a finished basement and a separate entrance, or a house with a garden or laneway suite in the back.

“If you really want to accelerate your ability to grow wealth and grow into the next property, that additional dwelling unit is the answer,” he says.

Besides being a great way to pull in extra cash, this strategy — sometimes known as a “mortgage helper” — could actually be the key to getting into the market, since the rent collected from a secondary suite can help a buyer qualify for a mortgage that could’ve been out of reach based on their income alone.

Sean Cooper, a mortgage broker and author of Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians (BurnYourMortgage.ca), took the idea one step further and made the ultimate sacrifice. When he purchased his first house in 2012, he rented out the main floor and moved into the basement. This allowed him to charge more rent, although he admits it wasn’t the most ideal situation.

“Living in the basement makes you feel like you’re still renting, but I just saw it as short-term pain for long-term gain,” he says. “It was definitely a humbling experience.” It worked out, though, as he was able to pay off his mortgage in three years, at the age of 30 no less.

While real estate values have soared since then, Cooper believes his approach is still relevant today — at least to those willing to make the sacrifice. A secondary suite is also a convenient way to begin building your long-term real estate investment portfolio while paying down your first mortgage.

“If you’ve got an investment mentality, you would then maybe live in that unit five, seven, even 10 years, get your finances under control, manage your costs, and then you may move out of that unit but keep it,” Francey says. “It becomes an asset that you hold.”

Put the real in real estate

New investors and first-time homebuyers alike tend to make the same mistake again and again when buying real estate: they end up overleveraged. “They’re buying emotionally for today without looking five years down the road,” Francey says. “My cautionary note is to live below your means in terms of what you buy for a home.”

For example, if your dream is a three-bedroom, move-in ready house with a two-car garage, you might want to set your sights considerably lower. Remember that the property you buy today doesn’t have to be your forever home, Cooper says. It’s important to keep an open mind in terms of location, housing type and quality of home when searching for that elusive first piece of real estate.

“Buying a house for the first time and expecting to buy a detached house in the city of Toronto —  it’s not really a realistic expectation unless you’re a couple of lawyers or you have help from parents,” he says. In fact, according to analysis from National Bank of Canada, as of Q3 2024 the qualifying annual income to purchase a single-family home in Toronto is $243,078.

While many homebuyers prefer turnkey properties, purchasing a home that requires some TLC can be a smart move. “If you’ve got the skill set or you’ve got access to it, that is a great strategy,” Francey says. Anything from DIYing hardwood floors to painting can help.

“If you’re going to buy a rental property, we’ve got lots of members of the community who work nights, they work weekends, and they ultimately get a rental unit that they put a bunch of sweat equity into.”

However, he also stresses the importance of including a property inspection contingency to ensure the inspection is satisfactory to you, the buyer.

“An inspection helps gauge what renovations fall within [your] skills and competency,” when it comes to DIY fixes. In addition, he advises to “bring in an experienced renovation contractor to assess the scope and cost of renovations.”

How does rent-to-own work?

You’ve probably heard the phrase rent-to-own before, but what does it mean? It’s when a homebuyer lacks a full down payment, or doesn’t have high enough credit to qualify for a mortgage.

“People think either you rent or you own — this is that bridge in between,” says Alfonso Salemi, a real estate investor who has facilitated these agreements in Canada and the U.S.

In a rent-to-own scenario, a tenant agrees to purchase a home at a later date for a predetermined price, often assuming an agreed upon three- to five-percent annual appreciation over a three-year period. As they pay monthly rent, a portion is credited to them for the future down payment. An initial deposit is typically required, but it’s less than a down payment at a bank.

If the tenant can’t qualify for a mortgage at the end of the term, there is a risk of penalties, such as forfeiting the deposit, but agreements are often flexible. “The best rent-to-own companies will work out an additional plan as long as the payments are being made and being made on time,” Salemi says.

The friends and family discount

You might have envisioned your first home as a way to escape living with family or with roommates, but it would behoove you to rethink that. Co-buying a property, which is when you buy real estate with a non-romantic partner (or partners) could be the answer, says Parimal Gosai, realtor and co-founder of Husmates, an app that matches buyers with co-buyers.

By pooling resources, co-buyers are often able to step onto the property ladder — both faster and higher. A combined down payment opens the door for a first-time buyer to move into a more expensive single-family home or small-scale multiplex, rather than starting with a condo.

“On average, I’m seeing each party come to the table with anywhere from $50,000 to $100,000,” says Gosai, who notes he’s seen at least one arrangement where a co-buyer put zero down.

When co-buying, the parties involved obtain a single mortgage and split up the monthly costs depending on the written agreement, which is essential. In the case of the co-buyer with zero down, they had a high income but no savings, so they paid the lion’s share of the mortgage to build up equity.

Similar to a shareholder agreement, co-buyers sign a legally binding contract that outlines their rights and responsibilities, as well as how to deal with a variety of scenarios that may arise, from repairs to cashing out. If one party wants to sell, the others typically have the option to buy them out, or else the seller’s share — or the entire home — is put on the market, per the co-buying agreement.

“Each party should also have independent legal advice that’s outside of the lawyer who’s drafting the agreement,” Gosai says. That way nobody can later try to break the contract by claiming they didn’t know what they were signing.

While Husmates facilitates co-buying among complete strangers, Gosai notes that many co-buyers choose to enter agreements with parents, siblings and friends. The option has become especially popular with buyers on the younger and on the much older side.

“I would say this is super attractive for people under the age of 40 who really can’t get into the housing market. [Similarly], it’s also highly attractive for seniors who do not want to leave their homes…and would perhaps try to sell half their home to a younger family member.”

As it turns out, despite the daunting projections, getting a foothold in the Toronto real estate market isn’t impossible. In fact, with some creative thinking and strategic planning, it could just be your most achievable goal this year. - Josh Sherman