M- at VREAA 18 Aug 2011 4:03pm writes -
“I have friends here who followed this path to riches in the Vancouver housing market…
1) Buy presale condo.
2) Eventually the builder completed the condo, and they moved in.
3) Condo went up in value!
4) 2-3 years after moving in, they got a HELOC against their condo’s rise in value, used it as a downpayment on a house, and the bank lent them the rest of the money to buy the house, as a HELOC on the house itself.
5) They took possession of the house, then did a mega-renovation (~$200-300K?), funded by more HELOC money secured against the house.
6) Relative moved into the condo (still there).
7) Couldn’t afford an amortizing mortgage, so they just made interest payments on the HELOCs. Couldn’t really afford the interest payments, so they committed tax fraud (deducted the HELOC interest from their income, trying to treat the house as an “investment”). Primary residences in Canada are not eligible for such tax treatment.
9) Bought a new car! (interest rates are low, it’s like free money!)
10) Realized the depth of the hole they’d dug, one parent divested most of their investment portfolio to give them their inheritance early. The path to riches!
11) They now have affordable payments on a very nice house, and have a proper, amortizing mortgage.
They bought the house at a peak in 2008– if they sold now, they’d probably recover 100% of what they put into the house, maybe even eke out a slight profit. But with the family money invested in their house, they’ve got to duke it out there for the long haul. At least their payments are reasonable…
I just wonder how many other people in the city have done the same thing, but without the benefit of an “early inheritance” to bail them out?”