He earns $90,000 a year and rents out half his home for additional income. Can this 27-year-old buy a second property?

A homeowner at 27, Ben is looking ahead to the future, already considering how he could upgrade to a larger home when it comes time to start a family.

But with a mortgage rate of 1.84 per cent, he’s concerned about what might happen in three years’ time when his rate is up for renewal.

Ben purchased his house in London, Ont., and rents the front of the house to a tenant for $1,800 per month, while he lives in the back, splitting expenses such as internet.

He was able to save for his current home as he had no student loan debt, he says, and lived with his parents until he was 25 while he saved.

In addition to his salaried income of $90,000 working as an architectural technologist, Ben brings in $21,600 per year in rental income.

On work days, Ben typically brings his lunch, but every other week he’ll buy a burrito or other fast food, spending around $20.

“I almost always eat at home for breakfast and dinner, but go out with friends every other week, spending $35 for dinner and drinks,” he adds.

On weekends, Ben works on home renovation projects, which can add up: he spent $800 in one weekend at Home Depot buying supplies. Sometimes he’ll play a round of golf or head to the movies.

Short term, Ben wants to build his emergency fund. He’s also wants to make tracks on his mortgage and save for an additional property or bigger home. “I hope to keep my property as long-term rental income,” Ben says.

And while he isn’t starting a family just yet, he’s preparing for the possibility. “I’m happy here for now, but if I start a family in the future, the half I live in will be too small,” he explains.

Saving $100,000 for another down payment feels like it could take “forever,” he says. “I wonder if I should continue saving and investing $1,600 a month, or if that money is better spent on lump-sum mortgage payments.”

Can he achieve his goal of saving $100,000 for a second property? We asked Ben to share a week of spending to get an idea of his finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc.

Ben has become a homeowner in London, Ont., and has financial help with a tenant. He owns a duplex and receives monthly rent that more than covers his mortgage payment.

His short-term goal is to build up an emergency fund. If he does not already have a secured line of credit on his home, he may want to consider putting one in place. This can come in handy for unexpected home or car expenses as long as homeowners avoid the temptation to use it.

Depending on his mortgage rate, he may want to limit how much of an emergency fund he builds. If he has a savings account rate of one per cent and a mortgage rate of three per cent, for example, he may be better off making extra payments against his mortgage. If his line of credit increases with his mortgage principal repayment, he can always borrow back in the event he needs to, but at least he will avoid interest in the interim.

I question his goal to save up for another rental property. As a 27-year-old in Ontario, Ben’s experience with real estate has been that real estate goes up. That has changed in recent months, and higher interest rates may continue to weigh on real estate prices for the balance of 2022 and into 2023. It seems pretty unlikely that the eight per cent annualized growth rate for the London/St. Thomas composite home price index over the past 10 years will continue over the next decade. In fact, prices are down more than 16 per cent over the past three months.

If Ben does not have an emergency fund, I am guessing most or all of his net worth is made up of his London duplex. He may want to consider diversifying to build some other investments. He has a high tax rate of 43 per cent, and can save 43 cents for every dollar he contributes to his Registered Retirement Savings Plan (RRSP).

Something Ben could consider so he can boost his cash flow is pushing out his mortgage amortization to 25 years again at renewal. This may reduce his mortgage payments and allow him to contribute more to his RRSP. It may take him longer to repay his mortgage, but he is only 27, and a 25-year amortization only takes him to age 52. His interest is also partially tax deductible because his rents out part of his home, and his tax rate is high, so RRSP contributions can be beneficial.

Results: He spent less. Spending in week one: $760. Spending in week two: $365.

How he thinks he did: Ben feels like he behaved the same way he usually does during week two. He had some spending on his home renovations, “which I can’t really avoid,” he says. He cut back on dining out, which is a goal he’s been working toward for a while.

Take-aways: Ben has already implemented some of the advice that Heath provided, he says, and he plans to keep a close eye on the housing market going forward.

“As for investing in real estate in the future, I will watch the markets and interest rates and make a decision when/if the time comes,” Ben says. He’s also interested in the suggestion to extend his mortgage back to 25 years after his term comes to an end.

“Perhaps I can utilize this if I do purchase another property,” he says.

His final takeaway? Time is on his side, “but there may be no quick solution to saving down payments for properties.”

Jenna Moon is a Toronto-based business reporter, focused on personal finance and affordability. Follow her on Twitter: @_jennamoon


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