# Rent VS Sell



## Syntax_VI (Aug 21, 2015)

Hello all, seems a common question around here, but every situation is different, here is mine:

I purchased a condo in 2009 for 330,000, In Victoria BC. The condo market was on the way down at the time, but had not reached it's bottom. Current balance on the mortgage is 240,000. I got married in 2013, and my wife and i just purchased a new home for 731,000. We put 10% down, taking the mortgage to 673,000. The house has a downstairs suite that we rent out for $1375 a month + utilities (1 year lease). We tried to sell the condo while we were house hunting at 319,900. No offers. We've since lowered the price to 314,900, and again no offers.

The realtor thinks it will move at 299,900. We were wondering if it might not be better to hold onto the unit and rent it out. Here is our financial situation.

House 1 (where we live)
Purchase Price 731,000
Mortgage Remaining: 673,000 (5 yr term, 2.69%)
Mortgage Payment: 3,082
Property tax per Month: 400
Rent from Basement: 1375
Balance Monthly: 2,107

Condo
Purchase Price: 330,000
Estimated Current Value: 300,000
Mortgage Remaining: 240,000 (4 months left on term, 30 years left on the mortgage overall)
Estimated Mortgage Payment: 960 (if we sign a new 5yr mortgage at a fixed rate)
Property tax per Month: 130 (without principal residence grant)
Strata Fees: 250
Monthly Rent: 1500 (it is currently rented out short term for this price, tenant would like to stay and sign a 1yr lease)
Positive Cashflow: 160
** The condo also came with a 24,000 line of credit of prime plus 0.5%. currently I can borrow money at 3.2% interest. **

The condo has had it's depreciation report, and is estimated to have its condo fees cover all upcoming expenses with a healthy reserve. It is a newer building, built in 2008. One of the knocks on it is that they board passed a age restriction of 35+ on the building. A good chunk of the residents don't like this, but enough did. It has hurt the value of all the units in the building. I'm grandfathered in, so any restrictions passed on the building do not apply to me (ie rent or pet restrictions) as I was one of the initial buyers. Other than that it's a well built building (developers have a long history, and non of their buildings going back a few decades have had any major issues) with lots of green space, and close to shopping and transit (but a bit far out of downtown by Victoria standards - 15 minute drive). 10 Minute walk to a beach and 5 minutes to nature trails.

If we signed a new mortgage term we'd build up aprox 28,000 in equity over the 5 years. The positive cash flow would be earmarked for repairs, vacancy etc, and saved in separate account. Vacancy rates in Victoria are less than 2%, and rents have been increasing pretty rapidly lately. If we sold right now (at the realtors recommended price of 300,000), we'd walk away with about $48,000 in cash, losing about $17,000 of my cash investment and ALL of the monthly equity I've built up over the years. Money would likely be invested in stocks, etc, or used to pay down the existing mortgage on the new house.

Personal Finances
Husband: 70,000 a year Salary (Gross)
Wife: 60,000 a year Salary (Gross)
Rental Income from Basement suite: 1,375/month = 16,500 a year
Rental Income from Condo: 1,500/month = 18,000 a year
Small amount of student loan debt to be paid off in about 2-3 years. No other debt other than mortgages.
50,000 in the bank.
Some RRSPs (about 30,000 combined)
We are both 35.

Outlays:

Mortgage House: 3082 /month = 36,984 / year
Prop Tax House: 400 / Month = 4,800 / year
Mortgage Condo: 960 /month = 11,520 / year
Prop Tax Condo: 130 / Month = 1,560 / year
Strata Fees: 250 / Month = 2,800 / year

Our plan has been to pay down the HOUSE mortgage as quickly as we can in the first 5 years (at least 15,000 extra per year). We still think we can do that even if we decide to keep the condo and rent it out. After the 5 years is up we'd be able to lower our monthly payment on the HOUSE significantly. We'd then transition heavily into retirement investments and stocks. If we decided to keep the condo we know we'd need to keep a pretty healthy cash reserve of $30,000 to $50,000 on standby in case anything went sideways.

What do you think? Many thanks in advance!


----------



## heyjude (May 16, 2009)

Good job summarizing the relevant facts! 

If I read this correctly, your deposit on the condo in 2009 was $17,000. Assuming a consistent positive cash flow of $160 per month, that works out to an ROI of over 11%. Allowing for vacancies, bad tenants, special assessments, etc, let's conservatively estimate ROI as 5%. It's good that you have a decent reserve fund, and wise for any investment property owner to maintain a cash buffer in case sh1t happens. 

A buyer considering investing in the condo today would have to put down 20% or more, let's say $60,000 on $299,900. The ROI for such an investor, with other numbers unchanged, would be more like 3%. So I can see why the condo is not selling (at least to investors) at 319,900. 

I see the condo as a decent investment for you. Selling it has a significant frictional cost and you would not be much further ahead than you are now. As a general rule, I try to reduce and ultimately eliminate all debt that is not making me money. That, for you, is your home mortgage. 

In your situation I would keep the condo, screen tenants very carefully, maintain a cash buffer, and work on paying down debt on your principal residence while mortgage rates are low. You have a lot of debt considering your annual earnings. Of course, if you have children, and become a single income family, you may not be able to accelerate your home mortgage payments.


----------



## Syntax_VI (Aug 21, 2015)

heyjude said:


> Good job summarizing the relevant facts!
> 
> If I read this correctly, your deposit on the condo in 2009 was $17,000. Assuming a consistent positive cash flow of $160 per month, that works out to an ROI of over 11%. Allowing for vacancies, bad tenants, special assessments, etc, let's conservatively estimate ROI as 5%. It's good that you have a decent reserve fund, and wise for any investment property owner to maintain a cash buffer in case sh1t happens.
> 
> ...


Hi Heyjude,

Thanks! Yes, I took a private mortgage at first (from the developer) with 5% down at a higher interest rate to avoid the CMHC premium, after one year I contributed another 15% down payment and took the loan to a bank for a traditional mortgage and avoided the insurance premium all together. 

I should note that both of our Annual incomes do not include the rent from either the basement suite (16,500 per year) or the condo (18,000 per year) and are just the salaries that we make from our regular jobs. I'll see if I can edit that.


----------



## Ottawa Realtor (Aug 16, 2015)

heyjude said:


> Good job summarizing the relevant facts!
> 
> If I read this correctly, your deposit on the condo in 2009 was $17,000. Assuming a consistent positive cash flow of $160 per month, that works out to an ROI of over 11%. Allowing for vacancies, bad tenants, special assessments, etc, let's conservatively estimate ROI as 5%. It's good that you have a decent reserve fund, and wise for any investment property owner to maintain a cash buffer in case sh1t happens.
> 
> ...


Just like Syntax said. Keep the condo unless you have reason to believe the market will drop considerably in the area. If you were in Ottawa I would tell you the market is not going to drop significantly or at all but in BC, it's not a market I know. Basically if the economy is stable so will housing. The numbers you need to look at is for the condo only. Don't complicate the picture by inserting your other home or your finances. The condo numbers stand on their own.


----------



## Just a Guy (Mar 27, 2012)

First off, I hope you realize that your condo isn't a very good investment. There is a big difference between investment grade real estate and real estate. 

That being said, if you can afford it, many "bad" real estate investment can bail themselves out given enough time. Since you have enough income, you could probably keep this property and maybe hope that the market doesn't have a major correction, even then as long as the rental market remains relatively strong you won't suffer much. 

If you sell now, and any time in the next several years, you'll probably wind up taking a significant hit financially. When you start getting into the 10/15+ years of holding the property (probably more since it's a 30 year amortization) you may start to see the "investment" turn around.


----------



## londoncalling (Sep 17, 2011)

I am by no means an expert but from what you've stated I would keep the condo. 

If you view the condo in isolation it is cash flow positive which is always a good thing. If it was cash flow negative the decision to sell would already have been made.
I would assume you both don't mind being landlords because that also must be taken into account.
You mentioned you have a tenant willing to sign a one year lease. General consensus is interest rates are not going to rise in the next year. I would say hold onto it for a minimum of at least that time frame and reassess. 
You could also run the numbers on different sale prices for your condo and see how much effect that may have on eliminating your house mortgage. That may aid you in your decision. 
Has an increase of approximately $2000 a month made any significant impact on your lifestyle? I don't get the sense from your post that it has but just pointing it out for consideration to those who may be in a similar spot. 
It may easier to find ways to generate more income or trim expenses than to sell in certain markets.
If purchasing the new home was only affordable based on selling the condo than you may have to view this differently. 
Lastly how tied are you and your spouse to your 5 year plan? 
All in all, you seem to be in a good spot with the current interest rate environment. You also seem to know what you are doing based on how you handled the financing of your condo purchase. Hope whatever you decide it works out in your favour.

Cheers


----------



## Syntax_VI (Aug 21, 2015)

Just a Guy said:


> First off, I hope you realize that your condo isn't a very good investment. There is a big difference between investment grade real estate and real estate.
> 
> That being said, if you can afford it, many "bad" real estate investment can bail themselves out given enough time. Since you have enough income, you could probably keep this property and maybe hope that the market doesn't have a major correction, even then as long as the rental market remains relatively strong you won't suffer much.
> 
> If you sell now, and any time in the next several years, you'll probably wind up taking a significant hit financially. When you start getting into the 10/15+ years of holding the property (probably more since it's a 30 year amortization) you may start to see the "investment" turn around.


Hi, Yes I do! I bought it as a future home for me, as I was single, and no plans to be married. When I bought it I thought I'd live there a good long while. Running the numbers I also get the sense that it may take a while to pay off. If real estate grows 2% or more I'd be in great shape after 5 years (appreciation 30k, Equity 30k,). If it stayed stagnant, I'd still be doing pretty well (30k equity). Of course if the market went down -2% per year, I'd be in the same boat as I am now, with little to show for parking it for that length. Any more deprecation that that and then I'd be losing money for sure. 10 years out things look pretty good.



victorharvey said:


> Reply about mortgage
> You should consult with an expert regarding this !!


Who are the best people to talk to about this? My realtor and mortgage broker both think its a good idea, but I'm concerned about bias. My next step was to run it by my accountant. Most of the financial advisers in Victoria are mainly involved with stocks etc.



londoncalling said:


> I am by no means an expert but from what you've stated I would keep the condo.
> 
> If you view the condo in isolation it is cash flow positive which is always a good thing. If it was cash flow negative the decision to sell would already have been made.
> I would assume you both don't mind being landlords because that also must be taken into account.
> ...


Thanks Londoncalling,

Yes, we are comfortable with the $2000 a month, we initially rented a house out for that price (for a year) to see how we did with the payments (while renting the condo out). It was no trouble so we decided to buy. We hoped to sell the condo first, but that didn't happen. Because of the money generated from the suite in the house we decided to move forward, as it was highly unlikely it would be around if we waited for the condo to sell. Even with the condo money we were just short of the 20% downpayment, so calculated the best place to be was 10% (as the savings for putting down 15% wasn't worth committing our cash reserves).

As far as our 5 year plan goes, we'd like to stick to it. It is a pretty big mortgage (on the house), and as others have mentioned, it doesn't make us any money perse. If we stick to our plan and pay the mortgage as if we had to pay the whole thing (the suite income goes into overpayments) We'd be able to cut our mortgage payments by about a third after 5 years.


----------



## RCB (Jan 11, 2014)

Before deciding if you are cashflow positive on the condo, have you considered the tax you will pay on your rental income?


----------

