# give me a reason to keep this rental property



## showmethemoney45 (Feb 27, 2015)

A little background: We have a rental that I would like to sell as I think its crap, my husband is attached and wants to keep it. I'd like to see some of your calculations and any opinions that would help my SO side. His argument is we'll just hold on to it till the mortgage is paid off and then we'll make $.

condo purchase price 136,000 (2007)
estimated value today 130,000 (2015)
estimated future value 175,000 (2032) obviously this is just a guess, its in alberta so who knows what the price will do.

our cash flow has been -1375/year so far for a total of $11,000 in NEGATIVE cash flow. Lets say the increase in rents is enough to cover the change in tax/condo fees and therefore it costs $1375 every year for 25 years= $34,375. Therefore:

175000 sale price
-34375 negative cash flow costs
-20000 closing costs
= roughly $120,000 (before tax)

If we sold today we would have roughly $40,000 cash to put into a TFSA as we are recouping our down payment.
My argument is if we put that 40k into our TFSA for the remaining 17 years at 6% we would have roughly 107k (tax free)

We aren't hurting for the cash and can hold onto it for a while. I'm wondering what you guys would do? I'm looking for some unbiased/constructive feedback about my calculations.

Thanks,


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## heyjude (May 16, 2009)

Have you played around with a rental property calculator? Here's one:

http://www.calculator.net/rental-pr...lding=20&csellcost=8&printit=0&ctype=&x=0&y=0

In general, a rental property should be cash flow positive or at least neutral to be a good investment. Otherwise you are relying on the increase in equity that you get from each mortgage payment. Meanwhile, the property value has fallen and will probably fall further in the short term. 

Have you taken into account the tax ramifications? Have you claimed depreciation each year? Your after tax cash flow may be different. Remember that depreciation is factored into capital gains when you sell. 

I have several rental properties and one property is similar to yours. I am not selling it because the mortgage is close to being paid off and then it will generate a stable income stream for as long as I want to own it. I see real estate as a very long term investment.

Also, some market forecasts are for equities to return ~4% in the next decade. Good luck getting 6% consistent annual return in your TFSA.


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## showmethemoney45 (Feb 27, 2015)

I have not claimed depreciation over the years. 
Geez I thought I was being conservative with the 6%.
Thank you for your online calculator and feedback


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## andrewf (Mar 1, 2010)

Given the state of the O&G sector, property values may be quite stagnant in Alberta. Same goes for rents. This sounds like a very poor 'investment' to me.


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## donald (Apr 18, 2011)

I don't really think you would have a 'easy' sale right now no matter what you want to do(not trying to be ***)
Prices have fallen 30 % already(since oil slide) and we have all heard every O&G company say 2106 is going to be just as tough
Condo's are even worse than single family homes
Who would this 'buyer' be exactly?
Everybody has the same info and it is clear things are bad and this is not a short term 'blip'(oil and real estate need to find a bottom)
You have 130,000.00 right now priced in at what discount from 18 mth ago?20-25-30%
In a round about way who are these people who would be bucking all the trends(days on market/inventory swelling) and scoop it up?
Your in a tough spot if you go to sell


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## Just a Guy (Mar 27, 2012)

Well, I would normally ask for more details on the property like size, number of bedrooms, etc. I'd then crunch the numbers, maybe even make some suggestions as to where you may increase revenues or decrease expenses...

However, there is a much bigger issue to this investment than any of that and that is you.

If both partners in the relationship are not on board, then any investment is in for a rough road. Every little dip will be a stress on the relationship, every growth may become an "I told you so" moment. Neither are good, and that's only the tip of the iceberg.

Your husband needs to realize the reality of the situation, no investment is worth your relationship. 

Remember though, getting out is your idea. Don't blame your husband for a downturn in prices, the costs of selling and any losses you take on this.real estate has a way of making up for mistakes if you wait long enough in a lot of cases, getting out early is the price of your education.


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## showmethemoney45 (Feb 27, 2015)

Yeah, I didn't say we were headed to divorce over it. We just disagree...that happens sometimes to people.


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## Just a Guy (Mar 27, 2012)

Divorce rarely happens over one item, rather a series of many items...

That being said, decisions over major items, which can have dramatic financial repercussions, need to have everyone onside. Marriage is a partnership, you wouldn't do business with someone who made major decisions without your approval, so why would you allow it in a marriage?


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## davidjean (Mar 27, 2014)

I tend to agree that real estate investing is for the long term. That being said, I would never buy a rental property that wasn't cash flow positive.

Are you actually losing $1,375 per year ? Remember the tenants are paying down the mortgage right !! 
Your cash flow should be increasing slightly with every monthly pay down of your mortgage. 

I don't invest in real estate for the profits of when I eventually sell. No, I invest in real estate to slowly get ahead every month.


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## heyjude (May 16, 2009)

davidjean said:


> Your *cash flow* should be increasing slightly with every monthly pay down of your mortgage.


Don't you mean to say that your *equity* should be increasing slightly with every monthly pay down of your mortgage?


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## Rusty O'Toole (Feb 1, 2012)

I would dump it and move on. You don't turn a losing investment into a winner by ignoring the facts. If you made a mistake learn from it and do better next time.


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## carverman (Nov 8, 2010)

Rusty O'Toole said:


> I would dump it and move on. You don't turn a losing investment into a winner by ignoring the facts. If you made a mistake learn from it and do better next time.


Tend to agree. Dump it while the goings good if it's just a rental condo and not your principle home.

Alberta has gone through at least 2 (maybe 3?) of these boom and bust cycles by the black gold rush in the last 45 yrs. This time it is external influences that triggered the collapse of oil prices, and now with greenhouse gases and global warming being on everyone's mind these days, it may take more than a "few years" for the Alberta economy to recover to even half of what it was. before the world oil markets plunged. Seems that most provincial gov'ts are intending to reduce greenhouse gases, and burning more oil isn't part of their plan.
Ford will have 4 or 5 models of electric cars by 2020, and I'm sure that other auto manufacturers will have the same to offer consumer. Then there is the US shale oil.
cheaper to produce helping to drive down oil prices. Lots of wells in Alberta are shut down now, but not decommisioned because it costs the oil companies too much to do that.

Oil prices have fallen from $70 USD in November 2014 to $34USD now at the end of 2015. In just one year, oil prices have dropped $36...that's about 40%.

The slow economy affects prices, for real estate. Well for starters,there won't be any buyers trying to outbid each other for housing.

http://www.theglobeandmail.com/repo...rces/the-alberta-oil-squeeze/article23136731/



> But the frenzied greed of the Alberta oil boom would take its toll. By the early 1980s, too rapid expansion and a world-wide economic recession hit the industry hard.
> As unpredictably as it began, the Alberta oil boom was over.
> In 1982, Dome Petroleum, the country's largest oil company, avoided collapse with a last-minute bailout package with Ottawa and the banks.
> Within two years, mirroring trends elsewhere in the country, unemployment in the province rose from 4 to 10 per cent. For the first time in more than a decade, Alberta had more people leaving the province than coming in. The province led the nation in housing foreclosures, bankruptcies and suicides.
> ...


But now the Heritage fund is gone, it costs more to refine the crude than probably what it is worth on the oil spot market.

http://www.cbc.ca/history/EPISCONTENTSE1EP17CH3PA1LE.html


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## davidjean (Mar 27, 2014)

I'm going to disagree with selling the rental just because of a down turn in the market!

First of all everyone else is trying to sell right now and prices are too low to sell. 

It sounds like the unit is close to breaking even for monthly cash flow. 

Observe the masses and do the opposite.


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## tygrus (Mar 13, 2012)

davidjean said:


> I'm going to disagree with selling the rental just because of a down turn in the market!


This is not a downturn in the market, this is the peak of the market. Prices will never be this high again in a generation.

Sell, take what cash you can and put it toward another asset.

Your husband has made the worst mistake in investing - falling in love with an asset. When that happens, your bias steers you away from logic.


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## Karlhungus (Oct 4, 2013)

tygrus said:


> This is not a downturn in the market, this is the peak of the market. Prices will never be this high again in a generation.
> 
> Sell, take what cash you can and put it toward another asset.
> 
> Your husband has made the worst mistake in investing - falling in love with an asset. When that happens, your bias steers you away from logic.


Should probably bookmark this. Prices will never be this high again in a generation? That's a pretty bold statement. So edmonton prices average 7% a year growth, doubling every ten years, yet in 20 years prices still won't be this high? Even the most pessimistic forecasters (Schiller), say real estate will at least go up 3% a year.


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## carverman (Nov 8, 2010)

showmethemoney45 said:


> condo purchase price 136,000 (2007)
> estimated value today 130,000 (2015)
> estimated future value 175,000 (2032) obviously this is just a guess, its in alberta so who knows what the price will do.
> 
> our cash flow has been -1375/year so far for a total of $11,000 in NEGATIVE cash flow.


So it is costing you money to keep it. Not a good investment. 



> Lets say the increase in rents is enough to cover the change in tax/condo fees and therefore *it costs $1375 every year for 25 years= $34,375.*
> Therefore:
> 175000 sale price
> -34375 negative cash flow costs
> ...





> It's the 34,475 in negative cash flow costs that work against keeping it. What makes you think it will be worth $175K in 20 or 25 years?
> 
> Lets assume a highly futuristic scenario here:
> Assuming you can even ask $175K for it, 20 or 25 years down the road, and lets say it sells for $170K...
> ...


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## showmethemoney45 (Feb 27, 2015)

we are going to look at dumping it...I think it just helps hearing others opinions.


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## carverman (Nov 8, 2010)

showmethemoney45 said:


> we are going to look at dumping it...I think it just helps hearing others opinions.


20 years is a long time to wait for it to appreciate. By then if you are at age 60 plus, you could have major health issues ( like me) to deal with. The last thing you need then
is to have a condo that is a drain on your money, even if the principal on the mortgage is going down slightly each year. 

The mortgage companies will always make money, unless the economy goes bust, like it did in the US in 2008/2009 with the subprime mortgages.
Many owners lost their homes with foreclosures because they couldn't pay the mortgage or even rent if out to pay the mortgage. 

Condos in a "oil bust economy" are not going to appreciate on the real estate market that much (depending on location and supply and demand). 

Sell now, or wait 10 or 20 years down the line, hoping it will recover...... when, and IF it will recover, nobody has a crystal ball to predict that.

OPEC can pump their oil out of the ground much cheaper than Alberta, so can the US shale oil fields. That could leave crude oil prices hitting the low end of the trough, and the keystone pipeline is having a hard time with approval, so that should tell us something.


You can have peace of mind, not something that may or may not appreciate in value.


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## Numbersman61 (Jan 26, 2015)

showmethemoney45 said:


> we are going to look at dumping it...I think it just helps hearing others opinions.


Here is an article today's Calgary Herald about the poor Calgary rental market. Sell now
http://calgaryherald.com/business/l...-incentives-as-vacancy-rates-continue-to-rise


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