# Third Rental Property?



## BJM (Apr 26, 2012)

Hi Everybody,

I was wondering if I would be able to get some help in determining what our next steps should be. First a little background:


Live in Vancouver BC area
My wife and I are 23 and 26, expecting our first child in a few months.
We currently own two rental properties and live in a rental apartment.
No debt


Rental Property #1
Mortgage = $138,000.00
Value = $200,000.00
Rent = $900.00
Interest/taxes/strata etc = $1,020.00
** Yes we realize this is operating at a loss, but needed to rent it out. We will be raising the rent at the end of their contact.**

Rental Property #2
Mortgage = $172,000.00
Value = $180,000.00
Rent = $975.00
Interest/taxes/strata etc = $900.00

We have been speaking with our mortgage broker, and he has advised us that based off of our income qualifications that we can qualify for a $420,000 mortgage. We anticipate having enough money as a down payment for this type of purchase ($30,000.00). The issue that we are having is that we are currently in a 2 bedroom apartment that we rent for $1,400.00. It is a great apartment, close to transit and can fit us comfortably. My wife is concerned that we should be looking at 3 bedroom units to purchase (for future kids etc). We definitely would like to purchase another property within the next few months, and we are capable of purchasing one once things fall into line, but the issue is whether or not we should purchase an investment property, or a property for us to live in for the long term.

Based in the Vancouver market, we do have the option to purchase most things - condo's, town-homes and even new houses. We have experience renting out condos (have two already), and I would prefer to purchase a property that we can rent out, and live in our apartment we are in now, and then deal with the three bedroom issue later on. However; we are concerned that in the future we may not be able to qualify for the purchase of a 3 bedroom unit once my wife does not work. So it has been a very stressed topic around the house the past while!

*Questions:*


Would you rather purchase a property and rent it out, or live in it?
Should we take equity out of out Rental Property #1 to finance Property #3 purchase (Re-Finance) to lower the cost of the mortgage?
Are we taking on too much risk having three rental properties to young?? My goal is to have 5 by the time we are 30.


Thanks in advance!

BJM


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## Just a Guy (Mar 27, 2012)

By my calculations you are losing money on both properties, or will in the future. I think you should avoid buying any more until you understand this type of investing more. You are going to get into trouble if you continue down this path.


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## Young&Ambitious (Aug 11, 2010)

Curious, where in Vancouver would you ever be able to find a house for $450k??

What are the rest of your savings like? With your wife not working, is your income sufficient to support your family? Do you have insurance in case of emergencies?


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## BJM (Apr 26, 2012)

*Third Property*

Hi,

What calculations are you using to make that assumption? 

BJM


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## BJM (Apr 26, 2012)

*Third Property*



Young&Ambitious said:


> Curious, where in Vancouver would you ever be able to find a house for $450k??
> 
> What are the rest of your savings like? With your wife not working, is your income sufficient to support your family? Do you have insurance in case of emergencies?


Hi Y&A,

You can purchase a new house (2008) in the Maple Ridge Area for under $400,000 (Not in Vancouver area, but Lower Mainland). I currently have a $500,000 life insurance policy on myself, and we have about $30,000 in savings spread out over various savings accounts.

I am in the accounting field and are able to support my family based off of my income. Once I become a designated accountant my income will be going up quite a bit with my company that I work for right now.



BJM


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## the-royal-mail (Dec 11, 2009)

Seems to be you are overexposed to this sector, almost to the point of obsession. 5 by 30? Seriously?

And you're not even making any money. You may be breaking even but if values plummet as happened in the US in the past 5 years you could be in trouble really fast.

I think taking on even one more property at this point is too much for you. Stop now. Please.


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## phrenk (Mar 14, 2011)

You do realize that property 2 has an LTV of 95% ? Did you just purchase it ?

I understand your goal of 5 properties within the next 4 years, but maybe you should prioritize your goals and put your family and financial stability first. When did you contract the 2 mortgage for properties 1 and 2 ? When do the rates reset ? When they do, i sure hope that the rents have increased by then, otherwise you will be further at loss.

Also, a mortgage broker is never on your side, he's there to make the highest commission he can by "qualifying" the Borrower (you) with a mortgage amount that is very stringent and requires strict budgeting. Do your own calculations, make a budget, track your expense, then you will have a clear picture of how much you can handle debt-wise. Don't rely on a mortgage broker to tell you how much you can borrow, you should know that. I do know that if i was going to buy a house, i would want to know how much i can borrow from my own calculations, otherwise i wouldn't be able to sleep at night.

Finally, if you're read this forum, the consensus is that the real estate market in Canada will have a correction eventually, and Vancouver will be hit the hardest. Get a control on the assets you have and the associated liabilities before jumping in anything else.


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## BJM (Apr 26, 2012)

*Third Property*

Hi Everybody,

Thanks for your input.

Y&A = You can purchase a new (2008) house in maple ridge for around 400k. I currently have a $500,000 life insurance policy on myself, as well as an income that can support my family once my wife is off work. As well, increased income once I become a designated accountant in a few years. Also, we have about $20,000 in savings etc.

Phrenk - Yes we purchased the second property last year before CHMC changed the rules on DP required for rental properties. We do complete a detailed budget each month, so we know exactly what we can afford. My wife wont let me go overboard on the amounts.

I don't know why everybody is hating on real estate investing in Vancouver. Yes prices are high, and are probably going to correct themselves but that is what people have been saying forever. When it goes down I will purchase more properties at cheaper prices as people will always need a place to rent. I understand that people are concerned about being over-levereged right now, but the risk for me currently outweighs the rewards, and I will hopefully keep purchasing properties for a very long time. BC is a great place to live, that's why its so expensive!

BJM


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## OhGreatGuru (May 24, 2009)

BJM said:


> ...
> *Questions:*
> 
> 
> ...


1. Wrong question. With a baby on the way, and plans for more, you need larger accommodation to live in. Whether you rent or buy a larger personal residence is a separate consideration from whether you should invest in another dubious income property. If you know your family income is going to drop, how will you even afford rent on a larger place, let alone a mortgage on another income property? 
2. Yes, but to apply towards buying your personal residence, not another money-losing investment property.
3. Yes. Adding 3 more money-losers is not going to make you better off, unless you are gambling all your financial eggs on a continuation of the real estate boom.

You need to make a decision about where you will live first, then see what you have left over to "invest". (Although I think the answer will become apparent once you crank the numbers)

I can understand why things are stressed at home. Your wife wants to build a secure nest for your future family; while you want to go on buying nests for other people.


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## Cal (Jun 17, 2009)

At best you are breaking even on your RE invstments, why wuold you want to add more to that. I prefer to make money on my invstments. Breaking even is dead money.

Get your own place first and use extra money to invest.

Second, do you have other investments. All of your investments in one sector is a risk, and I am unsure if you are aware of the ramifications.


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## TK.61 (Mar 27, 2012)

This reply is kind of a question for my own benefit, but also could apply to the OP:

Isn't buying rental property and breaking even or making a small profit each year an OK strategy as over time you will build equity while someone is paying down your mortgage? I realize the OP is in a risky situation, but I always thought a rental property, as long as your not loosing money is a good investment as someone is covering the monthly/yearly expenses for you, while you gain equity...I mean buying in 2002 and breaking even each year and selling in 2007 people could of had zero monthly CF but they would have built ALOT of equity...


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## Just a Guy (Mar 27, 2012)

Tk, yes you are technically correct, however you need to consider the long term. Right now the interest rates are not anywhere near the real levels. If you're barely breaking even today, what happens when you renew. I think for every 1% increase in interest, you monthly payment goes up by $100 for each $100,000 you owe. If interest rates go up by 2%, and you owe $200,000, are you going to be able to raise your rent $400/month (don't forget increased property taxes, maintenance, etc.).

Now, what happens if the market corrects and the bank wants you to come up with a lump sum payment or they won't renew you because the place is underwater? What happens if the rules for rental ownership change like the government is hinting?

Anyone who reads my posrts here knows I'm a fan of real estate investing, but you have to start with the right property. Done right, real estate investing is great, done wrong it can be devastating. I've got no problem investing in any province, but I do have issues with people who think they can invest in any property.

To give a real world example, I recently picked up a property. Three years ago an "investor" bought it for $180,000. The market had a slight correction shortly thereafter, the place couldn't be rented to cover the costs and the place eventually went into foreclosure and I picked it up for $72,000. It's currently rented for $1,100/month and is making money. Same place, different "investors".


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## Causalien (Apr 4, 2009)

I am guessing the two condos are in the Maple Ridge area as well? Otherwise, I don't see where in Vancouver you are able to get <200k condos (Heck, you can't even get sub 200k condos in Montreal anymore). So since I am not familiar with that area, I am assuming it is true. 

As for whether or not to buy more condos. The answer is no. Since everyone else is giving you good reasons, I'll just give you my instinct as a trader. Heck no. You are an accountant, you should know better than this that it is a lose-lose deal. Are you taking future earnings and marking it as this quarter's net income?


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## Potato (Apr 3, 2009)

TK.61 said:


> Isn't buying rental property and breaking even or making a small profit each year an OK strategy as over time you will build equity while someone is paying down your mortgage? I realize the OP is in a risky situation, but I always thought a rental property, as long as your not loosing money is a good investment as someone is covering the monthly/yearly expenses for you, while you gain equity...


You need to first off distinguish between breaking even in cash flow terms or income terms. If you've done your accounting right and are breaking even on income terms then that _includes _the "building equity" factor, and breaking even is not a good outcome. It's possible to break even on a cash flow basis, but have income in the form of paying down the principal on the mortgage, but even that isn't ideal. After all, with a 30-year mortgage, simply paying it off is only some low single-digit return -- that's not getting paid to take on the risk of being a landlord. 

On to the OP:

Now, I say this with kindness and a spirit of helpfulness, but it's going to be even harsher than the other responses: under no circumstances should you buy more Vancouver properties at this time. 

As the others have pointed out, you have too much exposure to real estate already, and on top of that, you're not actually making any money at it anyway. Plus with a kid on the way, are you really going to have the free time to play landlord?



BJM said:


> Rent = $900.00
> Interest/taxes/strata etc = $1,020.00
> ** Yes we realize this is operating at a loss, but needed to rent it out. We will be raising the rent at the end of their contact.**


So it's a loss, but how much will you be able to raise the rent? Remember that rents are constrained by the market, so if all you could get for it was $900 before, will you really be able to get much more than $1000 now? Even that ~11% increase still has you running at a loss with your own numbers.



> Rental Property #2
> Value = $180,000.00
> Rent = $975.00
> Interest/taxes/strata etc = $900.00


There's a quick rule-of-thumb known as price-to-rent for evaluating property. Just divide the price by the rent: anything over 200X is run-don't-walk-away territory, and anything over ~150-175X is not going to make you money as an investment. This one is 184X, which is actually pretty good for Vancouver. Unfortunately, it's still high enough that you're unlikely to make money as a landlord. So with your numbers, you have $900 for various costs, and $975 for the rent. That leaves you with $900 at the end of the year -- pre-tax -- on your $180,000 property. That's not much of a return, and more importantly, not much of a margin-of-safety. 

So what's the interest rate that goes into the interest portion of your $900 monthly cost? What happens if your rate goes up to 5 or 6%? (The level rates were at just 5 years ago). What's included in the "etc" part? Are you including a maintenance budget? What about vacancy -- just one vacant month per year wipes out your entire cash flow. How much are you being compensated for the time you have to put in to being a landlord, and for the risk you're taking on?



> I don't know why everybody is hating on real estate investing in Vancouver. Yes prices are high, and are probably going to correct themselves but that is what people have been saying forever. When it goes down I will purchase more properties at cheaper prices as people will always need a place to rent. I understand that people are concerned about being over-levereged right now, but the risk for me currently outweighs the rewards


If people have been saying that prices are high forever, perhaps you should listen. There's a lot of good data out there that would urge one towards caution and careful consideration. I certainly wouldn't dismiss it as "hating". 

One question to ask is how are they defining high? For many people such as myself, "high" is defined as prices that are so high relative to rents that you can't profit as a landlord. Your experience also seems to show that you can't profit right now. And if you can't profit as a landlord at current prices, why try to buy more? It may take a long time to correct, it may happen later this year, or it may stay at an irrational plateau for decades... but whatever the solution is, it doesn't make sense to buy investment properties where you don't have a high expectation of making a profit, that's just not good investing. As for purchasing more if prices go down: you won't be able to. You'll have already blown your capital with what you've bought already, and lenders won't be writing new mortgages when you already have two (or three!) that are underwater. If you want to buy more after prices go down, then don't buy now: marshal your capital, pack away more savings, and be patient.

Now the underlined part may have been a Freudian slip, but the risk right now does outweigh the rewards.


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## Young&Ambitious (Aug 11, 2010)

OP, I would recommend disability and critical illness insurance. If something were to happen to you, you would have no income coming except EI since your wife will be leaving the work force. This costs a little every month, but if something goes wrong this can make a big difference to your family's comfort and well being. 

I agree you need to diversify. Have a mix of real estate and stocks that make up your "investment portfolio". Work on the stock part of your investment portfolio for the time being (max out your TFSA's first of course). Later (and preferably after a crash, if it ever happens) re-assess buying more properties.

At this moment, I think your best option to get everything you are looking for is to buy a house _with _a rental suite. This way you get a place with room for your growing family but still have rental options. Maybe get one that needs cosmetic fixes so you can save a few bucks by putting in sweat equity. You could also start off living in the rental suite and as your family grows move into the larger portion of the house to save some money. This is also a better option considering the new CMHC rules as you won't require the 20% down you would need on a rental.


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## Cal (Jun 17, 2009)

http://www.milliondollarjourney.com/criteria-for-purchasing-rental-property.htm


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## Chris L (Nov 16, 2011)

a) Move into one of the properties and sell the other. b) Sell both and buy something more suitable. c) Sell both and rent.

You simply are not making enough of a profit to justify the exposure.


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## sharbit (Apr 26, 2012)

Potato gave an awsome answer.

The reason why this isn't the best stragegy is your not getting paid while you wait. This means any averse risk that arrises from market or bad tenants must be paid for out of your current income. If all your income is going to holding up these properties then you cant absorb any unexpected events or handle any financial distress costs.

To put this in a more simplified rule: In RE, an investment isn't an investsment if the only expectation of profit is capital gains which cannot be quantified in terms of any earnings; simply speculation. Given your buying when prices are at an all time RE high on a 0 net CF investment this just seems like a ton of risk for cashflow that basically matches an unlevered GIC.


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## Berubeland (Sep 6, 2009)

It's not a good idea for you to buy more condos. 

I love real estate too but your business model is really faulty. To extrapolate...imagine having 100 of these rental properties. You'd have to sell your soul to the devil to make the payments. 

Also no where in your accounting do you predict serious problems such as an increase in condo fees or even a special levy for capital expenditures which are both common risks of owning condo. 

Then there's landlording related risks such as severe damage, non payment of rent.

Then there's known expenditures related to time such as upgrading the inside of the condo to be marketable to tenants. Your kitchen looks fine now but in 10-15 years will it still look fine? Probably not. The better tenants will want that kind of upgrade. What about the bathroom? The countertops and on and on. Obviously the place will need paint and probably new flooring several times.


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## kcowan (Jul 1, 2010)

OP
As an accountant, you should have good spreadsheet skills. Take the exisiting budget documents and add a sheet in which you do a sensitivity analysis. Project the 2 properties out 10 years. Make assumptions about the following
- mortage interest rates upon renewal
- possible demands for equity for various reasons (higher interest rates, price meltdown...)
- condo fee increases, special assessments
- maintenance expenses - 2 categories, likely (paint, repairs...) and possible (appliance repair/replace, new windows...)
- occupancy - a minimum of vacant one month per year
- salary - assuming various events take place (loss of one income due to pregnancy, loss of 2nd income due to illness)

You get the idea. This will replace hope with a realistic plan.

Now you can play with various assumptions and see when you can afford to take on more financial risk.

Good luck!
Keith


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