: Is this a good plan - help appreciated



casshyr
2012-07-11, 05:05 PM
Hello,
I am currently renting for 1900 per month. I want to get my own place so I can actually pay monthly payment on my mortgage without paying rent. I am in Vancouver (West end), and all the reports about housing price expects to drop is scaring me. I have currently locked onto a unit for 560K, which is a good price because all the other units sold in that apartment have been at 590K (the buyer is leaving the country and he needs to get rid of it real soon). I am expected to stay in this place for at least 2 years down the road, if not more.
My plan is: get this place, and if I do end up leaving town, I will rent it out (it seems that Vancouver's rental market remains very hot, and I know for a fact that the location I am picking and the unit is a magnet for renters). Based on current standard, the rental price for that unit is priced at 2100 per month.
But I wish to get a second opinion...what do you guys think? What are some risks that I should also consider?

Thanks in advance.

Potato
2012-07-12, 12:03 AM
Well, it's a half million dollar purchase. May be worth doing a few hours worth of reading first.

To get you started, you're starting from what looks to be a false premise: there's nothing wrong with paying rent, and it can be the better financial move if the rent is low relative to the cost of owning. I made a whole spreadsheet to do the calculation in detail (http://www.holypotato.net/?p=1073), but a quick rule of thumb is to take the purchase price and divide it by the monthly rent. Anything over 200X is in a range where you're almost always better off renting -- and certainly if you only have a 2-year time horizon. Your example is at 266X, so you would be throwing money away by owning, and the better financial move would be to rent that unit for the $2100 (or stay in your current place at $1900).

Risks? Plenty: risk that house prices crash; risk that house prices stay flat; risk that house prices go up but not fast enough; risk that you have to move within 2 years; risk that interest rates go up; risk that something breaks and there's a big repair bill or special assessment; risk that you can't find a tenant when you need one, or that your tenant is a bad one and you're not even in the same town to do anything about it. Many are purely financial risks (losing money, or at least doing less well than you would as a renter), but some can affect your lifestyle as well. For instance, if house prices go down and you end up underwater, you may not be able to sell and move, making it impossible to move up to a house if you want something bigger than an apartment 5 years from now.

Jay
2012-07-12, 12:40 AM
It sounds like you've already made up your mind and are just looking for someone to confirm it...that's unfortunate, as this has the potential to be one of the worst financial decisions you'll make in your life.

I think Potato summed things up very well. I think you are about to trade an almost risk-free/obligation-free rental for a condo in an overbought market that many are saying is headed for anything between a significant correction and a massive crash (it's already happening). You will be shackled to a massive mortgage, and pay thousands in mortgage interest, condo fees, property tax, insurance, realtor fees, lawyer fees, etc. (all money you'll never see again) that will almost certainly make your $1900/month seem pretty cheap in comparison. That's not even mentioning all of the time and stress you will have from buying/selling, the housing market and being a landlord. As for that bit of equity you begin to build up, if the housing market does correct (or continues on its current trend), you could lose much of that, including your downpayment.

To give you something to compare to - I could rent out a $420k condo in my area for $1800/month... and renting is still a better deal here. With your numbers, renting is a ridiculously better deal at the moment...

Causalien
2012-07-12, 02:11 AM
Ugh, You know that the monthly mortgage for that unit is $2800 right?
Since I just recently browsed downtown lofts because I have a serious case of RE loft fever, I know for sure that condo fees are $400 per month. Add, water, electricity, internet cable and phone. You are looking at 3500+. Why do you want to own again?

Plugging Along
2012-07-12, 11:48 AM
I like RE as an investment, but I think this plan is not an investment.

Your plan is very short term, 2 years, is NOT a good idea for Real estate. Even though you said 'or more', if you would have said 10 years or more, it would have been different. 2 years indicates that you are not sure on what you future plans are. A $540K condo is too much to lock in.
Your mortgage payments, condo fees, maintenance, taxes, insurance, etc (the things you are currently paying in your $1900), will be much closer to $3500 as Causalien mentioned. You will 'throw away' more than $1900/month in condo fees, maintenance, taxes, insurance, mortgage interests, fees, etc
Based on these two reason alone, it makes this a poor 'investment'

Also, you didn't mention your income or down payment, what's the rest of your financial situation like. If you are just in the building stage, then there are a lot of risks owning an illiquid asset.

dogcom
2012-07-12, 12:10 PM
Another point is they seem to be building condos like weeds in Vancouver and Toronto so oversupply is also an issue crash or no crash. If one wanted to buy at a higher price then the problem should be that under building for whatever reason has been going on for awhile and many people are moving to Vancouver. It takes time to get approval to and time to build a condo building so in the case of underdevelopment you would be ahead of the curve and have a better chance of price appreciation. Today it is the opposite problem so prices should fall and new permits and developments start to go on hold until underdevelopment becomes a problem again.

Cal
2012-07-12, 05:41 PM
Ugh, You know that the monthly mortgage for that unit is $2800 right?
Since I just recently browsed downtown lofts because I have a serious case of RE loft fever, I know for sure that condo fees are $400 per month. Add, water, electricity, internet cable and phone. You are looking at 3500+. Why do you want to own again?

A $1400 a month short fall does not sound like a good investment to me.

Be patient wait for prices to fall more, so that the numbers work. If they don't, continue to rent.

sprocket1200
2012-09-02, 02:27 PM
A $1400 a month short fall does not sound like a good investment to me.

Be patient wait for prices to fall more, so that the numbers work. If they don't, continue to rent.

Great advice here. Prices reductions can be actually negative or slow erosion. Either way you win by waiting...