# To sell or to rent out



## fail2plan (Jun 7, 2016)

Hey Guys,

New to the forums and looking for some advice.

I purchased a 1 bedroom/1 bath condo 2 years ago for $169,900 with 40k down. 
Current mortgage: $129,000 left @ 2.3% and remaining amort of 15yrs 6months.
Monthly costs: $825 mortgage + $100 property taxes + $180 strata fees = $1105

This is my 2nd condo, which is currently my primary residence until September as I will be moving into a new residence. The plan all along was to eventually turn it into another rental property, but with the market being where it's at in the lower mainland in BC I have the opportunity to possibly sell if for $234-239k. If I were to rent it out I could get anywhere between $1100-1200/month.

My dilemma is do I sell it now and make approx. $39k or rent it out for the long haul. It would take slightly over 5 years for the principal to be paid down by the $39k that I could make today. 

Advice would be much appreciated.
Thanks


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## fail2plan (Jun 7, 2016)

I should also mention that all in the purchase was a total of $182k.


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## Just a Guy (Mar 27, 2012)

The cash flow doesn't justify it as a rental, especially at its current value. Sell it and buy something cheaper that cash flows better.


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## fail2plan (Jun 7, 2016)

I have the option of blending my mortgage and increasing the amort period, decreasing the mortgage payment and increasing cash flow.

Mortgage @ 
20 year amort: $670 p/month
25 year amort: $565 p/month


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## Just a Guy (Mar 27, 2012)

The price of the property, and the cash flow it generates don't add up to a good investment. You can cook the numbers to make them look better, but they still won't be a good investment. Add in maintenance, vacancy, rising interest rates, rising condo fees...there's no room. 

The equity you've earned is dead money, you're not making anything on it, it's just insurance for the bank.

There aren't many good investment properties on the market these days, ones that actually make money, this is just one more of those. Not something I'd want to own.


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## heyjude (May 16, 2009)

Selling the condo while it is still your primary residence means you will not pay capital gains tax on any profit. The alternative is, at best, a cash flow neutral investment that relies on future (taxable) capital gains. IMHO it's a no brainer. Sell it.


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## fail2plan (Jun 7, 2016)

I was originally leaning towards selling it prior to moving out as to avoid the capital gains tax, so the advice definitely helps. Appreciate it.

Why not keep an investment property at cash flow neutral if someone is paying down your principal?
My original investment property is currently cash flow neutral as over the years I've taken advantage of upping my mortgage payment once a year. I still have to pay taxes on the income earned, but it's a small prices to pay to be able to have someone else pay down my mortgage. In the course of 3 years I've gone from an amortization of 25 years to 16 years and as a result have paid the principal down by just over $21k. I eventually plan on using some of the equity to purchase another investment property.


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## Just a Guy (Mar 27, 2012)

Why would you want a revenue neutral property at a time of unpressidented low interest rates? This is also the time of historically high, many say overvalued home prices. If anything changes, you're basically guaranteed to lose money.

There is a big difference between a home and a revenue property. A home isn't designed to make you money, a revenue property on the other hand is supposed to generate money. Many people foolishly believe the two are interchangeable, they aren't for the most part.

Buy a property which will generate cash flow for you. In this low interest environment, if you're not making money you're setting yourself up for failure. I literally bought a three bedroom ($95k) and a two bedroom ($70k) in the last few months generating $1400 & $1250 respectively each month. Same equity tied up as your one bedroom, more than double your income.

Granted, these deals aren't common, and the places needed renovations, but I hope you can see the difference. 

On a side note, after the renovations (about $8000 in materials), they were appraised at around $250k combined so our equity is nearly the same as well. 

If you sold, you could afford 3 rentals similar to what I bought.


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## fail2plan (Jun 7, 2016)

My 1st property wasn't purchased as a rental property, but as my primary residence which was nearly 8 years ago. When we decided to purchase our current 1 bedroom, purchased pre-construction 3.5 years ago, it was to downsize in order to save money as I was planning on leaving my job shortly after we made the move. The market in the Vancouver area wasn't what it is today therefore it didn't make sense to me to sell the 1st property at a loss and as a result I decided to rent it out instead. In the first couple of months it was cash flow positive, but once I changed jobs I decided to up the payments on the mortgage to make the carrying costs equal to the rental income earned and it has been that way for almost 2 years. 

When we move to our townhouse, which will be our 3rd property and our primary residence in a few months, we plan on blending the mortgage on our 1st property in order to increase the amortization, making it cash flow positive, approx. $300/month, and covering a portion of our mortgage on the townhouse. 

If I could buy property in our area for the prices you pay then I definitely would. Unfortunately, prices in our area are nowhere near that low, 1 bedrooms starting in the $160's and 2 bedrooms in the $180 and these are older condo units with high strata fees. Newer condos, 1 bedrooms in the 200's and 2 bedrooms in the $280's.


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## hboy43 (May 10, 2009)

Just a Guy, I like you. You are a real estate guy that tells the truth about real estate. Many others essentially say "the greater fool theory has worked for the last 10 years and i am sticking with it. Sure price/household income ratio is now 10 when historically it was 3 to 5. No reason why can't it go to 20 or 50. Plus stocks are so risky, i mean really, why own part of a business that has been around since before confederation with a PE of 12 yielding over 4% when it surely could go to zero tomorrow? No real estate is always safe."

There is only so much you can do and you have done it.

Hboy43


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## Just a Guy (Mar 27, 2012)

Those two places I bought are in a city where the average price per home is nearly $450k. Both places appraised, by the banks who are notoriously conservative, at double what I paid (still inline with the numbers you quote as starting prices in your city). The difference was, I found despirate sellers and was willing to wait for them instead of trying to fudge my numbers and lie to myself about what is going on in the market.

As hboy43 pointed out though, I've lead you to the water, I can't make you drink. Go ahead and do what you want...the results can be chalked up to the price of education for you.


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## fail2plan (Jun 7, 2016)

The two places I own are in a city where the average price per home is $830K. Maybe you didn't read what I wrote so I'll repeat it. Neither of my properties were purchased as a rental property, but as my own primary residence.

I never asked advice on a purchasing a rental property, not sure what numbers I'm trying to fudge and I can see very clearly what's going on in the market in my area.. Can't go back and change what happened in the past so I'm also not sure what you're getting at or what the point of your comment is?

I asked advice on whether to rent or sell one particular unit. I gave you my numbers, you gave your advice. How do you know I didn't take it?

Didn't realize asking for advice meant receiving a lecture and being told that I'm lying to myself. Awesome.


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## Nerd Investor (Nov 3, 2015)

Even forgetting the mortgage: rent - property taxes - condo fees is going to result in a little over 4% yield (on a value of say $235K).
Factor in any maintenance and repairs and that can drop substantially. 

I'd personally rather have a basket of stocks yielding something similar where I don't have to worry about collecting rent, vacancy repairs etc. But at the end of the day, it's a personal preference. 

None of this of course factors in ongoing appreciation of the real-estate value, which is going to be a big X factor. 
It's just tough to know if the growth can continue at the pace it's been on.


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## FinancialFreedom (Aug 18, 2015)

JaG, out of curiosity what cash flow are you looking for on your properties? I'm renting out the basement of my primary residence to save a bit of money for now, but looking to buy more properties in the future. Would you say $200 positive cashflow per month is good after all expenses? Do you take 25 year mortgages on them or extend them to increase cashflow? Are your properties set up in a 'corporation' (would that lower your personal risk if there was to ever be a big crash?)?

Thanks, sorry if questions are too personal, just trying to learn


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## fail2plan (Jun 7, 2016)

Thanks Nerd. We decided yesterday that it would be in our best interest to put our primary residence up for sale. I honestly can't see the prices, of condos especially, continuing to rise for much longer at the pace they have been in the past year, therefor selling our 1 bedroom condo and taking the profits now rather than paying capital gains tax on it later made sense. We'll either sit on the money we get from the sale for now and wait till the market cools off before purchasing in our area or purchase a little east of Vancouver, Abbotsford/Chilliwack area, where prices per bedrooms are cheaper.


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## heyjude (May 16, 2009)

Stephen Poloz agrees with you!

http://www.theglobeandmail.com/repo...nada-financial-system-review/article30363984/


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## Just a Guy (Mar 27, 2012)

FinancialFreedom said:


> JaG, out of curiosity what cash flow are you looking for on your properties? I'm renting out the basement of my primary residence to save a bit of money for now, but looking to buy more properties in the future. Would you say $200 positive cashflow per month is good after all expenses? Do you take 25 year mortgages on them or extend them to increase cashflow? Are your properties set up in a 'corporation' (would that lower your personal risk if there was to ever be a big crash?)?
> 
> Thanks, sorry if questions are too personal, just trying to learn


In this market, with low interest rates, I'm looking for as much profit as possible. It also depends on how many properties you own. If you own only one, your $2400/year "profit" will be quickly eaten up by a bad tenat who trashes your place and forces you to keep it vacant a month or two while you do repairs. If you have 10 places, making $24000/year your odds are better, but still not great considering how many properties you're exposed to.

Next you have to consider how things will change. As interest rates rise, your costs will increase about $100/month for every 1% interest rate increase for every $100k you've borrowed. Considering the historical average mortgage interest rate is 8%, and it's currently 3% or less, you'd better have a good cushion, because rents don't go up just because you need money...

Some of my properties are owned personally (since this is how I started) and most are in a corporation. Nothing lowers your risk as the banks will require a personal guarantee on any owned by the corporation anyway. I could flip my personal ones into the corporation (file a section 85), but there really isn't much benefit to it in my case. There are some complicated corporate structures that can be set up, but I really have never heard of a case in Canada where it was required.

Personally, I've lowered my amortizations down and increased the frequency of payments to take advantage of these low rates and pay off the properties fairly quickly. I'm expecting a crash sometime in the future, so it's best to plan for it now and avoid the effects of the crash later.

Of course, at higher interest rates, where they are unlikely to increase, taking longer amortizations makes more sense. 


Fail2plan, 

Don't take my comments personally, there are many others who read these threads and remain silent. Sometimes I'm just blunt to make a point in general to the readers. There are plenty of people out there who can't see the obvious and insist on making mistakes. 

As I said, it's not personal.


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## Durise (May 16, 2016)

I think the pressure is increasing day by day. If you are unable or unfit to pay, you should sell it and buy a different one. Remember if you really buy another one, keep in mind that new one must be in cheap rate.


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