How Investing in Real Estate Early Can Pay for Your Wedding and Babies

We’ve spoken in depth about how real estate investing can be an important part of your retirement investment portfolio (Check out our Buy and Hold and BRRRR Investing Strategy posts for more info on that). But what about your other expenses today? Can investing in real estate really benefit your life right now? Today we’re walking through a case study of how investing in real estate early and having a little patience can set you up for years to come.

Please note that this is a fictional case study for demonstrative purposes only. All numbers (income, price of home, interest rates) have been selected based on current realistic numbers to demonstrate the potential difference between buying a single vs a multi-family property. There are also numbers left out of calculations (repairs, maintenance, vacancy, taxes, etc) to keep the calculations simple enough to provide value. Please speak to your financial planner, mortgage broker, accountant and real estate agent to see if investing in real estate is right for your situation.

Meet David and Anne. They are a young couple who are looking to get married and start a family within the next 3 years. They make $100,000/year combined and are currently renting a small 1-bedroom place downtown for $2,000/mo.

David and Anne have been pre-approved for $500,000 and have saved up a 20% down payment ($100,000). They have been looking at detached, single family homes, but are unsure how they are going to afford their housing costs while also saving for a wedding and eventually, a baby.

Their current living situation looks like this:

Net take home monthly: $6,000
Rent: $2,000
Utilities: $150
Tenant’s Insurance: $25
Total: $2,175

That means that 36.25% of net pay goes towards their housing expenses. (Meaning they have $3,825 leftover for all other living expenses & savings).

Option 1: Buy a Single Family Detached Home

They have figured out what their budget would look like if they were able to find a single family detached home that they are looking for. If they buy a home for $500,000 with $100,000 downpayment, that means they will have a $400,000 mortgage. With a 2.79% 5-year fixed mortgage (a reasonable mortgage rate currently) their monthly mortgage payment would be $1,850 per month. Add in annual property taxes around $3,600 for a home at their price point in their desired neighbourhood, and their housing expense portion of their budget looks like this:

Net take home monthly: $6,000
Mortgage: $1,850
Utilities: $250
Property Tax: $300
House Insurance: $125
Total: $2,525

Which brings them up to 42.1% of their net pay ($3,475 leftover for all other expenses & savings)

Buying a detached single family home will make their budget a lot tighter in a time when they will be taking on a bunch of expenses (wedding, baby, etc).

Option 2: Buy a Multi-Unit Property

What if, instead, they choose a different path and purchased a duplex in their desired neighbourhood? Lucky for them, there’s one available at their $500,000 budget. It’s in rougher shape than their single-family options and has a lot of quirks, but if they were willing to put up with it for a little while, could it put them ahead? Let’s play out the numbers:

Let’s say they purchase the duplex for $500,000 with a $100,000 downpayment, and same as above, they will have a $400,000 mortgage. Because it’s a multifamily property, the interest rate on their mortgage is slightly higher (3.79%), so with a 5-year fixed mortgage their monthly mortgage payment would be $2,059. So now:

Net take home monthly: $6,000
Mortgage: $2,059
Utilities: $250
Property Tax: $300
House Insurance: $150

But, by renting out the other unit, they were able to bring in $1,500/mo, bringing their total housing cost down to:
Total: $1,259

This would mean they are only spending 20.9% of their take home pay on their housing costs, leaving them with $4,741 for other expenses.

Note: By choosing the duplex, it would give them $916 dollars more a month in their budget than they currently have and $1,500 more a month than they would have if they purchased a single family home.

So let’s play this scenario out a little further down the line.

Because they were prepared to budget for the single family home, they are able to put the full $1,500/mo away to saving for their wedding. After a year and half, they have $27,000 saved up and get married (their family and friends are very generous and gift them $13,000). They are eager to get started on a family, but know they want to move into a new home when they have a baby, so they start putting the $1,500/mo toward a “New Home” Fund.

Nine months after the wedding, they find out they are pregnant, yay! The countdown is on, and now they have 9 months to keep saving and to find a new home. Again they are able to save $27,000 over the last year and a half and received $13,000 in wedding presents. They also have been able to save an extra $10,000 over the past year which brings their total savings to $50,000. A good start, but nowhere near enough to put 20% on their next home in their desired neighbourhood.

But good news! Since they bought in a great location, their property has appreciated in value! (Ottawa residential properties have increased 7.6% on average over the past year, but let’s be conservative and say the property appreciates 6% each year over the 3 years they have owned the property.) The cumulative effect of appreciation now means their property is worth $595,508.

This also means that the single family home they were planning on buying three years ago is now in the $600,000 range as well. At this point, most people would choose to sell the property and use the proceeds to buy the home they will raise their family in. So let’s see how that plays out:

Option 1: Sell the Duplex

The market is hot and they get full asking price of $595,000 for their property. They pay off the remainder of the mortgage ($368,579), realtor fees +HST ($29,750 + 3,867), and closing costs ($18,000), leaving them with $175,312 (their inital $100,000 downpayment + $75,312 equity). Added to their $50,000, they would have $225,312 to put down on their next home.

If they stick to their $600,000 budget, they will put down 37.5% bringing their mortgage payments to a really reasonable amount each month (just $1,735 at the above 2.79%, 5-year fixed rate).

Net take home monthly: $6,000
Mortgage: $1,735
Utilities: $250
Property Tax: $300
House Insurance: $125

Which brings them up to 40.1% of their net pay ($3,590 leftover for all other expenses & savings). This is just slightly lower than if they had purchased a single family home 3 years ago for $500,000 (albeit with a lot more equity in the house $225,000 vs $100,000).

But, what if there was another option?

Option 2: Hold on to the duplex and cash out refinance

They speak to their mortgage broker about a cash-out refinance. They are told they can cash-out up to 80% of the value of their home. With their home appraised at $595,000, that means they are able to mortgage up to $476,000. Their mortgage currently sits are $368,579, so they refinance and pull out an additional $70,000. Added to their $50,000, they now have $120,000 to put down on their next home.

Note: They choose to only take out $70,000 vs the whole $108,000 because they only needed $120,000 for a 20% down payment on a $600,000 home. Taking more money out would have allowed them to put a larger downpayment on their new home, but because the interest rate is higher on their multi-unit property, it makes more financial sense to only take out what is necessary.

They find their dream home for $600,000. At the 2.79%, 5-year fixed rate mortgage, their monthly payment would be $2,220.

Mortgage: $2220
Utilities: $250
Property Tax: $300
House Insurance: $125
Total: $2,895

Now on top of that, the re-mortgaged duplex has a higher monthly mortgage payment (due to pulling the $70,000 out). With a total mortgage of $438,579 ($368,579 + $70,000) and a 3.79%, 5-year fixed mortgage their monthly mortgage payment would be $2,257. However, they now rent out both sides of the duplex. With the tenants paying for their own utilities, their total expenses come to:

Mortgage: $2,257
Utilities: $0
Property Tax: $300
House Insurance: $150

Being in a desirable location has also benefited them as rental rates have increased. They’re now getting $1,750 per month for their 1 bedroom unit and are able to rent out the 3 bedroom unit that they have been living in for $2,500 per month. This means they are collecting $4,250/mo in revenue from their duplex.

After subtracting the mortgage, property tax and insurance from their revenue, they clear $1,543/mo in income from the duplex.

As newlyweds with a baby on the way, they’re very busy and don’t want the hassle of managing a rental property. They decide to contract a property management company for a fee of 6% of gross income. This costs them $255/mo, but allows them to move into their new home and welcome a new baby stress-free.

They now have $1,288 leftover each month that they put towards their own mortgage payment. This brings their out of pocket cost to $969 while paying down mortgages on two properties.

Mortgage: $969
Utilities: $250
Property Tax: $300
House Insurance: $125

27.4% of net pay or $4,356 leftover for other living expenses and savings.

At slightly over half the cost of their mortgage if they were to sell the duplex, this option affords them the savings they need while Anne is on maternity leave with their new baby.

The Takeaway Lesson:

Many people think about real estate investing as an important part of their retirement plan. But investing in real estate when you are young can provide some serious benefits when you are just starting out. By delaying the purchase of a single family home by just 3 years, David and Anne would be able to pay for their wedding and buy the house they wanted while preparing for a new baby and maternity leave.

I was planning on showing you how this single investment property will also pay for their children’s education and their retirement, but since we’re already 1,800 words in, I think we’ll save that for another post.

Tell me, would you delay getting the house you wanted to buy for 3 years so you could get ahead?

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Michael Murphy, Ottawa Realtor

Hi, I'm Michael

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