Will this strategy work? Rental Properties and Primary Residence

[andrewf]

The risk/reward of Vancouver real estate is pretty unappealing. Sure, maybe real estate will be flat over the next 5-6 years, but there is a good chance of a correction. Look into REITs, or perhaps a condo in a different, less insane, market like Calgary.

[Sampson]

or perhaps a condo in a different, less insane, market like Calgary.

They just recently announced predictions that vacancy rates will drop from a staggering 1.9% to 1.5% by the end of the year. As an aside, I listed my unit a while ago and got over 450 hits in less than 3 days. contacted by about 100+ of those.

[alexei]

The risk/reward of Vancouver real estate is pretty unappealing. Sure, maybe real estate will be flat over the next 5-6 years, but there is a good chance of a correction. Look into REITs, or perhaps a condo in a different, less insane, market like Calgary.

Wouldn't REITs fall in value as well if the forecasted market correction takes place in Vancouver/Toronto? I definitely like the idea of REITs and will investigate more.

My worry is that the predictions about housing market in Vancouver are more of a wishful thinking. It's a supply/demand game and I don't see much supply here for the detached houses. In Vancouver specifically (not suburbs), there is simply not that much land to build on. Vancouver's population increases at a faster rate than in most of the other parts of Canada - hence the increased demand. I'm not seeing new detached houses built in Burnaby and West/East Vancouver at all (one or two doesn't count). There are many condos going up in Burnaby but so is the immigration influx that continues. Last time I checked the housing prices in Vancouver increased by 2% over the year.

Also I'm not sure how it is in other cities in Canada but I simply don't see any new rental apartment building projects going up. The building that I live in currently is owned by a corporation that rents out all apartments in the building. There are a few other building like that around but they were all built 20-30 years ago. All the new buildings are condos with investors renting out individual units. So I would say the market for renters is getting worse since there is less and less choice.

Even if the TD Bank is correct and a 15% correction will take place, it's not enough to make the housing affordable. 15% of a 350K condo is roughly 50K. If I were to guess the odds of the prices staying flat are much higher than going down but that's purely an opinion. I definitely agree that the market is very shaky at the moment and I'll be waiting until the end of the year to see how it goes.

[crazyjackcsa]

Don't listen to them... I think you should go for it! The only way this could go better is if you investing another city, or better yet, another country!

[sharbit]

3. To mortgage a rental property and meanwhile live a rental property as well. Monthly expenses: -700 from the rental property and -800 from my own rent. That is a total expense of $1500 per month, with a saving of 500 over the second scenario. At the same time the tenant will pay of 60 months * 1200 dollars/ month = $72000 of the mortgage over next 5 years.

These posts regarding real estate are getting more awsome each week.

You're leaving one thing out which is that you'll also pay 40,000 in interest for renting that money (mortgage). It's difficult to make the numbers work from a financial sense in Vancouver right now. I'm a math guy so:

Interest Rate 0.03
Cost 350000
Downpayment 70000

Revenues
Rent 1200 x 12 14400

Expenses
Condo + Prop (400 x 12) 4800

Earnings Before Interest and Tax 9600

Interest 8400
Tax (34%) 408

Net Income (Annual) 792

ROR on Downpayment 0.011314286

So if you can find an investment that returns 1.1% you're ahead from an accounting perspective unless your property appreciates which is very "speculative" at this point. I'd also say you're not including all your expenses, plus any room for error. For instance if you don't collect rent for one month your return is negative.

Cashflow wise your simply subsidising renters for crappy future return (thanks!). This place has a cap rate of 2.4% which is hilarious.

Also, your leaving one thing out of your cashflow negative situation which is you have to pay back the HBP plan after you've purchased your place.

[Berubeland]

I would like to ask veterans on this forum if the following is a solid strategy to pay off the primary residence. Here is my situation.

My wife and I currently rent an apartment for $800 per month in Burnaby, a Vancouver suburb. Our dream, of course, is to live in our own residence. If we withdraw money from our RRSPs' via the Home Buyer's Plan then we'll have a 20% down payment for a condo in the 300-400K range and can become first-time home owners by the end of the year. However, I'm wondering if it would be more beneficial to wait and do the following:

1. Use the 20% down payment to buy a condo in Burnaby and rent it out for 5-6 years. The condo would have to be pre-owned already. By going through various classifieds, the rental rate for 1 bedroom seems to be in 1100-1300 range for a one-bedroom condo, and 1500-1800 for a two-bedroom condo.
2. Assuming the price of 350K for a one-bedroom condo, the monthly mortgage payments would be around $1500 per month. The typical maintenance fees and property taxes are $400 per month.
3. This gives a negative cash flow of 1200 - 1900 = -$700 dollars per month.
4. Then we would maximize the mortgage payments for 5-6 years to pay off the majority of the mortgage.
5. We would also have to pay back the RRSP money.
6. In 5-6 years we would sell the rental condo and use the home buyer's plan again to buy a new apartment, or better a house, as a primary residence.

I've seen in many threads that investors insist on having a positive cash flow but I'm wondering if this principle still applies in this case since the goal is not to have a reliable return on capital but to rent out an apartment to help us save enough cash for our own dwelling. What are the weaknesses of this approach? Also for rental purposes, is it better to buy a 2-bedroom apartment since it's more family friendly?

1. I guess what you've noticed is that there is a ridiculous premium to buy a property rather than rent.
2. You've been listening to too many people tell you that real estate is a road to riches when in reality past returns are no guarantee of future returns.
3. You want to pay someone else to live at your expense.
4. I think this is possibly the most speculative scheme I've ever heard of... ever.

I should send this thread to http://vreaa.wordpress.com/ and http://www.greaterfool.ca/ <read these websites for your own good please...

I hereby order you to stop yourself from even thinking about this for even one more second. People who have bought Vancouver condos are still underwater, in fact if you do the math on this idea without the speculation of increasing capital gains, it will cost you, if nothing goes wrong, if the market doesn't tank, almost exactly $700 per month because once you do the math on how much equity you make after five years of payments, its enough to pay the realtor commissions.

As a professional property manager who deals with people in very similar situations to you every day, I can assure you that you will not like it. If you want to save money for a future purchase for your own home, put the $700 per month in a bank account of TFSA or anything at all except this venture.