# Need some advise on if we should sell this investment or not.



## marina628 (Dec 14, 2010)

Guys ,
I would love some feedback from somebody better at math than me ,we have been looking over our investment portfolio and one house circumstance stands out to me that may be worth selling.
Here are numbers 
Purchase Price $184,000 purchase date Jan 2010
Mortgage $99518 @4.185% due Aug 2014 and tenant is leaving August 1 
Current market value $295,000
Currently renting for $1350 plus Utilities and property tax is $270 a month ,insurance $67.00 a month.
Last year our net income from the house on our taxes was $4411
Currently we are paying $660 bi-weekly including the property taxes so we put a small amount of cash in to pay the mortgage down.
We have 8 years and 40 weeks left to pay the house off.
So I need some help deciding if I should sell it rather than renting it out again.We would have to claim the full capital gains in 2014 and invest the funds in a non registered account .I will probably take the lazy
way and pay an agent the 4% to sell it for us so need to factor that in as well.


----------



## andrewf (Mar 1, 2010)

$295,000*(96% after commission) - $99,500 = $183,700 of equity. Your capital gain tax liability is somewhere in the neighbourhood of $23,000, depending on your income. So you would clear about $160,000 if you sold it.

Your house rents for $1350 less $270 + $67 = $1,013 net per month, or $12,150 per year. Your yield on current value is 4.12%, not including finance costs or property maintenance (should probably be budgeting at least a couple hundred per month for that). This sounds pretty standard for the GTA, and not very exciting in my book. If you include $3500 for interest expense (3.5% on remaining $100k mortgage) and $2000 per year for property maintenance, your net income is about $6,650 (before tax). That's also about 4.1% yield on the equity you have in the house ($160k after capital gains liability). Whether this is a good investment or not depends entirely on what your expectation is about future home price appreciation. If it continues to go up by 7-10% per year, you look like a genius (and you might as well leverage it up by readvancing the mortgage). If it appreciates and 1-2%, stays flat, or falls, the investment doesn't look very appealing.

I'm a fan of diversification. I'd rather own a portfolio of equities with similar or better return characteristics than one or a handful of houses located in the same region.

You can try splitting the difference by borrowing against the equity you have in the house to invest in other income generating assets, such as stocks. The interest on the money you borrow is tax deductible.


----------



## marina628 (Dec 14, 2010)

Andrew We spend less than $200 a year in maintenance the house is fairly new and we own three houses on same street which you hit nail on the head for our reason to sell one of them.TD offered us 2.79% for 4 years on renewal but think the ducks are all lined up maybe to sell.


----------



## Just a Guy (Mar 27, 2012)

I think real estate is pretty high right now and it looks like a good time to cash out. I had someone approach me about a place I bought at Christmas for $75k...they were talking an offer of $130k...I'd have accepted right away, but they were waffling and I had a renter lined up and 100% financing for the place all scheduled for today. I didn't want to screw up everything in case he backed out...but had he decided to go ahead, I'd have jumped on it.

This market is crazy. 

If the interest rates go up, you can repurchase the place in 5 years for less.


----------



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

If my math is correct, you are paying $1430 per month for the mortgage, $270 taxes and $67 insurance for a total of $1767 vs a rental income of $1350. You are -$417 per month. In my opinion, a rental that does not generate a positive cash flow after all expenses is not a good investment. Now, your mortgage payment seems high to me and it may be by choice since a $100k mortgage at todays rates on 25 yr amort should hover $480 per month. With that figure, your monthly cash flow would be +$500 which makes more sense.

What I would do:
Since your mortgage is coming to renewal, leverage your property and make use of your equity. Using a market value of $295000, you can finance up to $236000 (80% of market value is the max). Lets assume round figures of $200k @ 3% on 25yrs amort, your payment is no more than $950/mth. Including taxes and insurance = $1285. Given the rent you generate, you still have a positive cash flow!

Result: tenant pays all your expenses for the property; market value continues to climb; you have $100k to invest as you wish - either in the stock market or purchase another rental.

The final decision lies with you....do you want to generate more money or not hassle with tenants anymore?


----------



## Cal (Jun 17, 2009)

As a rough comparison, I would compare the $4400 net income from the property to the roughly $6000 you could earn if you sold and invested the $150,000 (after Re agent fees) in a dividend equity paying 4%. And mind you the $6000 is before taxes, I don't know what your tax bracket is.

I compare the cash flow, as technically the house, and equity would both appreciate in value. How much is anyones guess.


----------



## My Own Advisor (Sep 24, 2012)

I also think this real estate market is pretty high....so I would get out.

Invest the money, like you have already, like off income from various REITs if you want to keep your eye on RE.

Take the 5% yield from REITs, maybe a bit of capital appreciation every year, and live the good life - although I know you already do.

An excellent problem to have :encouragement:


----------



## marina628 (Dec 14, 2010)

We only do 15 year or less mortgages , we do not need the cash flow , we could pay $483 a month on mortgage payments based on bank calculations.I do not need to plan to leverage more  We look at the pay down as a positive and more focused on that. Anyway my neighbour with no finished basement listed today for $279,900 so going to see what they get before making the final decision.


----------



## andrewf (Mar 1, 2010)

Marina,

I understand cash expenses for maintenance can be low for the first few years, but the house is still depreciating. The roof, the floors, the furnace/AC/appliances, fences, windows, etc. all have varying replacement cycles. The depreciation is probably a lot closer to $2k than $200 per year.


----------



## marina628 (Dec 14, 2010)

I agree Andrew and that is something we think of as well ,not wise to keep a rental beyond 10-13 years because builders tend to put on cheap shingles ,windows etc.Our oldest rental property is 10 years old now but we have great tenants and better cap rate than this one but we offered the tenants to move to another property in 2-3 years because we will sell before having to deal with major mechanical issues.


----------



## Charlie (May 20, 2011)

$1350/mo less $350/mo expenses on a $300K property doesn't seem so bad. Of course I'm jaded by Vancouver returns. 

Selling and tax would reduce capital (before debt) to $260K ish. So the basic cap rate is about 4%, and, adjusted for the selling costs and tax hit you'd have to earn just north of 4.5% to be equivalent.

This ignores repairs, vacancy and hassle. I've purposely ignored debt as Marina has the means to repay the mortgage at any time, or to get equivalent debt at similar rates on other investments.

The tax income of $4K seems low.....I would have thought $12K less interest of $4-$5K. Perhaps there are other expenses.

Marina has lots of other investments, so real estate is part of her diversification.

If real estate is her thing, then the buying and selling costs to switch properties may negate the savings from dodging pending repairs. 

So I think it comes down to the particulars of this specific property. Is the return comparatively low (even considering the cost to switch properties), or does this property have lots of negatives. Also...is she looking to rebalance her investment to have less real estate overall, in which case this may be the one to cull from the herd.


----------



## marina628 (Dec 14, 2010)

Hi guys we do not plan to invest in real estate in Ontario with this money ,we have found much better value and less risk elsewhere.We are buying homes in Georgia for under $55,000 and renting for $800+ a month ,since we sold the biz the only income we have now is the rental incomes and the dividend income the cash from business is generating.So probably we will sell this one and buy 3 houses for cash in Georgia.


----------



## andrewf (Mar 1, 2010)

That sounds like a far better investment, marina. $800 per month on $55k house is a 17.5% cap rate. Why do you own any real estate (investments) in the GTA?


----------



## marina628 (Dec 14, 2010)

andrewf said:


> That sounds like a far better investment, marina. $800 per month on $55k house is a 17.5% cap rate. Why do you own any real estate (investments) in the GTA?


Andrew I live in GTA that is why we own rental here , it is only last couple years we considered purchasing international properties.Also my husband is quite handy and he has done the basements ,decks fences on all the properties we bought and added value which gave him a way to earn some money.He left his day job few years ago.I think he has one more basement job in him then he will be done with that sort of work .


----------

