He also knew he was facing an expensive market and that he wouldn't be able to afford what he wanted where he wanted to live: downtown.

"I wouldn't have been able to afford much," says MacMillan, who asked that his name be changed to protect his privacy. "But if I bought a place that had one or two rental units then I could afford a nicer house."

He decided to buy a property with income potential.

Living in a building that he also rented to tenants was a good experience, he says, but it was no cakewalk and he had to do his homework.

MacMillan had about $80,000 saved for a down payment, but he had never been a landlord before. So he talked to his own landlord, who had been buying and renting properties for years, about getting into the business.

"He and his wife both heartily recommended it. They said it was a good way to help pay the mortgage," MacMillan recalls. His landlord introduced him to a lender and gave him valuable advice about getting started.

MacMillan hunted around and found a half duplex for sale in the Toronto neighborhood of Hillcrest for $425,000. After getting a quote on a mortgage rate from the lender, he went to another bank and got a competing quote. Going back and forth between the two banks with competing offers netted him a 75 basis point discount off the posted prime rate from both banks. MacMillan then decided on the mortgage with the better terms.

In considering him for the loan, the bank took into account a portion of the potential rental income, allowing him a bigger purchase than he would have been able to make based on his salary alone, MacMillan says.

Melanie McLister, a mortgage planner with online mortgage brokerage firm Mortgage Architects (www.myvirtualmortgagebroker.com) agreed income potential can mean a would-be buyer will qualify for a larger mortgage. However, she said lenders like to see a lease or market rent letter from an appraiser in order to assess the income potential of a property. Failing either of those sources of information, a real estate agent familiar with the area where the property is located can suffice.

Furthermore, she said lenders don't seem to perceive such purchases as being riskier than the purchase of a home without income potential.

"So far we haven't seen any negative ramifications of having a client purchase a property with rental income coming into the house assuming its legally zoned," said McLister, but she noted banks don't want to see individual rooms being made into apartments.

"Rooming houses are definitely a red flag in this business and are off the table," she said.

MacMillan purchased a house that was legally zoned as a duplex, but said he added a third unit in the basement, giving him two income generating units rather than one. His basement apartment went for $800 a month, while the apartment on the main level of the house went for $900. MacMillan said with the rental income, he was able to get help paying the mortgage and expenses of owning a home, while spending about the same amount out of his own pocket that he had as a renter.

Although he said he could have charged more, he noted the lower rents drew more applicants when a unit became available, allowing him to screen out tenants with which he didn't feel comfortable.

Even though MacMillan said he wouldn't recommend being a landlord to anyone who isn't handy and willing to do some maintenance work themselves, he explained the hardest part of being a landlord was showing the units when he had a vacancy, as well as interviewing tenants.

While not for everyone, purchasing a home with income potential can be a good option for first-time home buyers who want to punch above their weight in the real estate market, said John Pasalis, founder of the Toronto-based real estate information firm Realosophy (www.realosophy.com).

"I wouldn't say it's common; it takes a certain type of purchaser," he said, adding that one variation on the theme involves siblings or two couples pooling their resources to buy a duplex to build equity.

"For a couple of first-time buyers whose budget is $350,000 they may find that by pooling they can probably get a really nice duplex for $600,000 or $700,000. At $700,000 you can move into a nicer area than you could if your budget was $350,000," said Pasalis.

MacMillan, who says he made about $100,000 when he sold his rental property in 2006, recommends the experience to anyone considering it. Although he explains his housing needs are different now that he is married and is planning to have children, he says he would be a landlord again in the future.

"It's a great arrangement as long as you are willing to do the repairs that are occasionally needed and find the tenants that you need to," he says.

By Sean McKibbon, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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