# Spreading myself too thin?



## Jwkm55 (Mar 16, 2014)

Hi all,

First post! Looking for some sound advice from you guys regarding my current financial situation.

My wife and I are 28 years old with 1 child and another on the way in 8 months and recently purchased a new home (2nd time) and also own a condo. We are living at my father-in-law's house while our house is being built and not being charged rent so we're able to save a good amount for the down payment and to furnish the new house. In the mean time we are renting out our condo and banking just over $100/month from that and ideally, we'd like to continue renting out without having to sell to use the equity for the new house. 

The money we're saving is going into a TFSA (3%) and in 6 months from now (time of occupancy), I anticipate we will have saved about $56,000 (excluding a $5k emergency fund). We have already put down $30k for the required deposit and plan to put down 10% (another $15k) with the remaining amount to furnish the place. It stings a little knowing that with 10% down, I will have to pay an insurance premium of $9,676 which is added to my mortgage (then pay 25 years on interest on that as well!). With 20% down, there is no premium - I just can't afford that though, unless I were to sell our condo. Our new mortgage will be about 30% of our net income, which I'm okay with but since my wife will be going on mat. leave almost immediately after we move in, I'm a little nervous.

I'm attracted to the idea of being mortgage free as soon as possible and as of now, this is the plan with the new house. We will have to do a 25 year AM to begin with, but I plan to use all additional income to pay it off as quickly as I can, then pay off the condo. Once I'm mortgage free, I will then look into long-term investing which I currently know little about, which is part of the reason why I feel so strongly about being mortgage free. 

Purchase price of new house: $448k
Household income: $125k (both at very early stages of career)
Equity in condo: $100k
No other debts
No other investments

I'm sure I've left out info. in order for you guys to be well informed about my situation, if so, please let me know. Curious to know if this is a sound plan or if there are other obvious things we should be doing with our money.

Thanks in advance.


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## thompsg4416 (Aug 18, 2010)

Calculate the money you'd earn by keeping the condo vs the money you'll save by selling it and avoiding the insurance premium and the extra interest by paying extra on the principal.

I was in a similar situation a few months ago and decided to sell the condo. For me this was less about needing the money to avoid the premium since I already had enough and more about not liking condo's as an RE investment. As condo's age condo fee's go higher and the resale value often declines. That's all besides the point I guess. 

Personally from the info you've provided I think you'd be better off selling the condo and avoiding the CHMC fee's and the extra interest costs. However we don't have to wonder - it's simple math. Crunch the numbers and see what you come up with. 

You may also want to consider the extra work it takes to be a landlord as well however if you're like me - its more about the money and less about the work.


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## heyjude (May 16, 2009)

I agree with the previous poster. 

Another way to look at this is to calculate your return on equity in the condo. $1200 profit per annum on equity of $100K is 1.2% ROE. Of course the mortgage interest is tax deductible because the condo is an investment. Let's be optimistic and arbitrarily say that the after tax return is 2%. Is that as good as the return you get from paying down your home mortgage principal and eliminating the mortgage insurance? Probably not. And when, not if, your condo fees go up faster than you can increase the rent, the return will be lower. A special assessment will further shrink or eliminate any returns. Special assessments are very common in older condos with insufficient reserve funds. How does the reserve fund compare to the recommendations in your condo's contingency fund study?

My experience with real estate investing is that, while it usually build equity for the long term, you must be prepared for periods of negative cash flow. This could be problematic when you are facing the expenses of establishing a family and servicing a big mortgage. The last thing you want to do is default on mortgage payments. 

My recommendation would be to sell the condo and put the proceeds into your new home. You will avoid paying mortgage insurance and be on the road to owning your home much sooner. A few years from now you can reevaluate the situation and consider whether real estate investment should have a place in your portfolio.


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## Just a Guy (Mar 27, 2012)

I think you are forgetting that half the mortgage payment (assuming the interest rate is around 3%) for the condo is also paying down the principle, so he "profit" on the condo is much better than $1200. 

That being said, $100/month isn't a very good profit on the rental. Plus, it's value is probably too high to ever make it a good investment. If you already have $100k in equity, but can only pull in $100/month in profit, it leads me to assume you've still got a heafty mortgage.

To me, a rental that costs more than $100k/door is often hard to be profitable.

With only $100/month profit, you could easily be underwater if you get a bad tenant (and you will eventually get a bad tenant). 

Personally, I'd sell the condo and buy a rental property. Rental properties are different than homes. You bought your condo as a home, not a rental. A rental property has to meet the criteria of being able to generate significant income.

Let me give you a dream scenario...

You sell your condo, collect $100k of equity. Then go out and find 4 rental properties for $100k each, put $25k down on each and rent them for $1000/month each. You should probably generate at least $1000/month in profit. 

In 9 months, you've paid off the CMHC insurance on your home, and continue to generate $1000/month afterwards...

Now, finding 4 rental isn't going to be easy in this market, and getting mortgages for them, even with 25% down, will be even tougher...but you'll be way further ahead financially and a lot faster than selling and paying down your mortgage.

Notice, I said it would be difficult, but it's not impossible...you may not find places in downtown Toronto or vancouver, but the rewards of doing it this way will probably outweigh the work involved.


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## Eder (Feb 16, 2011)

Jwkm55 said:


> Hi all,
> 
> Once I'm mortgage free, I will then look into long-term investing which I currently know little about, which is part of the reason why I feel so strongly about being mortgage free.
> 
> ...


Wow...over 1/2 mill leveraged to Canadian real estate , I would say you are long term invested already, too late to look into it. Best of luck!


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## Charlie (May 20, 2011)

if you're adamant about keeping the condo long term, consider tapping into its' equity to avoid the CHMC insurance on your home.


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## heyjude (May 16, 2009)

Just a Guy said:


> I think you are forgetting that half the mortgage payment (assuming the interest rate is around 3%) for the condo is also paying down the principle, so he "profit" on the condo is much better than $1200.
> 
> *True, I was just looking at the cash flow.*
> 
> ...


.....


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## Just a Guy (Mar 27, 2012)

Even accredited investors have issues these days...most banks will give you 5 mortgages total. 

I would say though, that it's a very doable scenario, I was quite conservative with all the numbers. 

It used to be you could put 10% down and get 10 places, but that would be dreaming these days.

I'd be interested in which companies you were referring to heyjude, I'm always looking for new sources for mortgages...maybe you know ones I haven't hit up.


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## heyjude (May 16, 2009)

Just a Guy said:


> Even accredited investors have issues these days...most banks will give you 5 mortgages total.
> 
> I would say though, that it's a very doable scenario, I was quite conservative with all the numbers.
> 
> ...


Here are a couple (no endorsement implied):

http://www.viproperties.com/real-estate-investment/track-record

http://www.ppgcorp.ca


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## Just a Guy (Mar 27, 2012)

Ahh, those guys do the owning, not the lending...there's a lot more money in the owning side of real estate. I'm looking for the lending side, as I want to own and make the money.


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## Mortgage u/w (Feb 6, 2014)

Jwkm55 said:


> Hi all,
> 
> First post! Looking for some sound advice from you guys regarding my current financial situation.
> 
> ...


Just calculate how many years you will need in order to recuperate the CMHC premium with the $100 mthly profit you are making from your condo. That should give you an idea.....that its not worth keeping the condo and paying an insurance premium (+ interest) on your new purchase. 

Sell the condo and get a conventional mortgage. You'll have a lower mortgage payment enabling you to save more, become mortgage free sooner, save on borrowing costs and have no tenant headaches - let alone financial stress should you lose a few months rent. Later on, re-evaluate your situation and look into buying a multi-unit rental if real estate investing is what you want to do.


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## Jwkm55 (Mar 16, 2014)

thompsg4416 said:


> Calculate the money you'd earn by keeping the condo vs the money you'll save by selling it and avoiding the insurance premium and the extra interest by paying extra on the principal.
> 
> I was in a similar situation a few months ago and decided to sell the condo. For me this was less about needing the money to avoid the premium since I already had enough and more about not liking condo's as an RE investment. As condo's age condo fee's go higher and the resale value often declines. That's all besides the point I guess.
> 
> ...





heyjude said:


> I agree with the previous poster.
> 
> Another way to look at this is to calculate your return on equity in the condo. $1200 profit per annum on equity of $100K is 1.2% ROE. Of course the mortgage interest is tax deductible because the condo is an investment. Let's be optimistic and arbitrarily say that the after tax return is 2%. Is that as good as the return you get from paying down your home mortgage principal and eliminating the mortgage insurance? Probably not. And when, not if, your condo fees go up faster than you can increase the rent, the return will be lower. A special assessment will further shrink or eliminate any returns. Special assessments are very common in older condos with insufficient reserve funds. How does the reserve fund compare to the recommendations in your condo's contingency fund study?
> 
> ...


You guys brought up some valid points that I never did consider.

I'm certainly less concerned about extra work involved being a landlord, I'm basing this decision completely on numbers. With that said, I also need to consider that every month that goes by without a renter, I'm completely eating all of the expenses that month which I'm assuming is likely to happen throughout the years of renting it out. Scary and stressful to think about that. However, once we have paid off the mortgage in ~22 years, the rate of return will be substantially more. 

If we sell, we would have enough to put down 20% to avoid CHMC fees as well as maxing out our TFSA and be in a far better position to pay off our house much faster than 25 years.

I'll crunch some numbers within the next couple of days as best as I can but after reading everyone's thoughts, I'm leaning more towards selling the condo. I tend to take the more conservative approach in life so I'll probably end up selling based on that. There's also a warm and cozy feeling about carrying just the one mortgage that I can pay off quickly while maintaining a comfortable cushion, too. 




Just a Guy said:


> I think you are forgetting that half the mortgage payment (assuming the interest rate is around 3%) for the condo is also paying down the principle, so he "profit" on the condo is much better than $1200.
> 
> That being said, $100/month isn't a very good profit on the rental. Plus, it's value is probably too high to ever make it a good investment. If you already have $100k in equity, but can only pull in $100/month in profit, it leads me to assume you've still got a heafty mortgage.
> 
> ...


That certainly is a dream scenario and a situation I'm not willing to put myself in anytime soon since we are at the beginning stages of building our family. Sounds tempting, though.




Charlie said:


> if you're adamant about keeping the condo long term, consider tapping into its' equity to avoid the CHMC insurance on your home.


That's a thought. Thank you.


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## Jagt Mirage (Sep 29, 2014)

I'm of the same opinion as a number of others on this topic. The income from the condo isn't worth the hit from CMHC. Also, as others have said rental income isn't guaranteed, and further, capital gain on Condos are flaky, particularly if the market goes south you could actually loose money.


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## Mechanic (Oct 29, 2013)

I would either tap the equity for the difference in downpayment, to avoid the extra insurance, or more likely sell the condo. It's going to take over 8 years at $100/mth just to get that insurance fee back. Like someone else mentioned, get after that mortgage on the new house and re-evaluate the income property in a few more years. You will pay a lot less interest.


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## Just a Guy (Mar 27, 2012)

I find those who try to dip their feet in real estate investing usually get burned once and then flee. If you only own one place (which is not a good value and has a poor cash return), have a bad tenant, lose money for a bit, you'll probably react strongly and say that real estate is a terrible way to make money. 

First off, you need several properties before CRA considers you to be an investor and thus get the full tax benefits. Next, when you own multiple doors, your risks actually go down as the odds of having multiple places vacant at the same time is unlikely (though it does happen) and the others can cover the costs while one is down.

Another point is, when you have multiple, you have to start treating them like a business or you go insane. With one, it's very easy to become emotionally involved. If you don't want to jump into multiple units, then you're probably smart to avoid real estate investing.


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## Jwkm55 (Mar 16, 2014)

Mortgage u/w said:


> Just calculate how many years you will need in order to recuperate the CMHC premium with the $100 mthly profit you are making from your condo. That should give you an idea.....that its not worth keeping the condo and paying an insurance premium (+ interest) on your new purchase.
> 
> Sell the condo and get a conventional mortgage. You'll have a lower mortgage payment enabling you to save more, become mortgage free sooner, save on borrowing costs and have no tenant headaches - let alone financial stress should you lose a few months rent. Later on, re-evaluate your situation and look into buying a multi-unit rental if real estate investing is what you want to do.


That is some sound advice. Thank you.


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## My Own Advisor (Sep 24, 2012)

"I'll crunch some numbers within the next couple of days as best as I can but after reading everyone's thoughts, I'm leaning more towards selling the condo."

I think this is a great call.

Have one mortgage, kill it, invest along the way and have less stress. RE investments are not the be-all, end-all. 

If you really want more RE, then you can own RE buy investing in REITs with no landlord headaches and still get some cash flow  Put REITs in your TFSA and get TAX-FREE cash flow!

http://www.myownadvisor.ca/looking-income-dont-want-landlord-try-reits-101/


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## Jwkm55 (Mar 16, 2014)

Finally decided to sell. 

After running the numbers, found out it was a terrible return and unfortunately I wouldn't be confident or comfortable increasing the rent anymore than it is now. Initially I thought it was a good investment but it's worse than the mortgage rate for the new house so I will just dump the money from the sale into the new house's mortgage.

Thanks all.


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## lonewolf (Jun 12, 2012)

JWKM55

I think it was a good idea to sell. I think some money should also go to the father in law for letting you guys stay there as well as the house mortgage. If the father in law has enough money for retirement maybe pay him back some other way. Parents often struggle financially to help their kids out I do not think this is right.


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