There are risks here. There are mortgages on both properties. The carrying cost of the furnished condo is $2400, and the $2700 rent looks vulnerable (30% vacancy rate after Jan 2011 will put it chronically cash flow negative). The house has a headline rent:price ratio of 1:265, and, by the landlord’s own admission, is a ‘moneypit’. We can think of a third alternative here that is not being considered… -vreaa
xslandlord at RE Talks 3 Nov 2010 10.48am lays out their position and chews over a decision – “I bought a downtown condo (for $500k with all the expense included) few months ago so far everything works out nicely (fully furnished and getting $2700 per month until end of Jan.2011). I also have a rental house in east Van that is worth $750-800k by now with monthly rental income of $2850. My question is since my $500k condo can generate similar income with less market value, is it a good idea to sell the rental house and re-invest to another condo or other opportunities? I understand there is capital gain involved, my wife has lots of RRSP room available so we could minimize the tax payout. On the other hand, this east Van house has always been fully rented to long term tenants, they are just so good.”
And later adds:
“The condo is only 868 sft, and it is practically 100% financed, and with the low interest rate I am getting positive cash flow. The east van house was bought 6 yrs ago and re-mortgaged (to finance the condo purchase) and still produce positive cash flow. I don’t need to sell anything but just have a doubt of untapped potential of this capital appreciation.”
And still later, in response to advice to “make sure you allow for a 30% vacancy allowance for furnished rentals”:
“Yes this will be a big concern when the current lease ended. I don’t have much experience on furnished rental. In addition to the usual Craigslist rental posting, I may have to utilize some leasing agents to find tenant, thus will for sure eat up at least 10% income. Based on my mortgage rate my break-even point is $2400 per month (fully furnished, hydro, cable/internet/telephone included).”
And, in a series of posts thereafter, xslandlord adds the following info:
“Recently the old drain tile got plugged and the the whole basement suite got flooded. I spent more than $4000 on the repair and new laminate flooring. Last month I also replaced new garage door (supposed to be a $150 quick fix but at the end replaced the whole door). 3 years ago I replaced new roof… My point is the house has been money pit.”
“The strength of the house:
1) It is located on 5800 block of Prince Albert, easy comute to everywhere;
2) Directly facing a huge park, even basement bedrooms have park view;
3) Lot is 42′ wide and there is potential to build a lane-way house;
4) Basement suite is “legal suite” approved by city, and all mechanical condition is very good.
The weakness:
1) House is only 2300 sft. So a typical small house on big lot situation;
2) Main floor has only two bedrooms thus make it less appeal for family upgrade from condo;
3) Being an old house, there is alway more maintenance.
If/when Vancouver have real estate correction/crash, I think this house would be slow to sell, but on the other hand, because of such low rent, it will be always easier to rent out too. I am really 50-50 [regarding the decision] now.”
“There are LOTS of condos in downtown, but the whole downtown is almost built up already, also there would be much more broader buyers/renters group for downtown condos: first timers, empty nesters, offshore buyers, secondary resident buyers, ESL student renters, short term vacationeer, temp foreign workers, etc. East van will always be a homogenous market as local wage earner’s home. If economy is bad, people just put off upgrade from condo to house.”
Regarding interest rates on mortgages “both places have fixed rate (below 4%) for another 4 years. I think vacancy rate and rent fluctuation might be bigger factors [than interest rate fluctuation].”
The old tune chimes again. Guy gets comfortable with rental property, makes a lot of the equity, tries luck on a presale/new condo. Outsources rental and is disappointed. Tries short term rentals and believes the management firms promising 15-20% returns. Strikes out. Now has repairs creeping up on the detached property. Guy is thinking about hunkering down for the long haul and, obviously, is praying to God his mortgage rates don’t increase any time soon.
What’s so insidious about real estate is how much lower returns are when all costs are properly accounted for, and how few amateur investors truly do the accounting properly. This guy’s time aside, he’s finding all sorts of hidden costs around vacancy and maintenance costs. If we account for his time, his returns are likely way less.
This is a very common story in Vancouver. Very common. I give most recently minted amateur landlords 1-2 years before the majority of them start finding out it’s not for them. Take away cap gains and it’s curtains.
If the house is a money pit and he is worried about a vacant condo (which is 100% financed) then the answer is clear. Liquidate both. Houses don’t “stop” being money pits. It gets worse as the house gets older.
As for the condo, he “bought” at the top of the market, with the 5% down and furnishing cost taken out of the house. Does anyone else not see how this is a house of cards?
How many landlords out there are like this?
I’d say for him to sell both.
But that said, let’s look at a few scenarios:
A) Sell the Condo, Keep the House:
The condo basically doesn’t have any capital appreciation on it. If anything, it’s probably sitting on a loss (realtor’s fees, furnishings, etc.). If he sells and eats the loss, he has a capital loss that he can apply against a capital gain in future years. I presume, after accounting for strata fees and city taxes and minor maintenance, he’s cashflow positive $5-10K per year. This disappears if he goes without a tenant for 2-4 months every year. He’s also got to budget for updating the furniture every few years, depending on the style and quality of the furniture he originally bought. Mind you, that doesn’t mean he’s operating at a loss– he’s still paying down the mortgage, but it’s a somewhat risky proposition, given that he could end up cashflow negative, or interest rates could rise. However, he still keeps his money-pit house…
B) Sell the House, Keep the Condo:
If he sells the house, he’s got capital gains ever since it was used as a rental. If he sells the house, he can’t write off the furniture in the condo, but he’s still got that debt. He push some of the profits into his wife’s RRSP (which is protected from creditors in the unlikely event of a bankruptcy) to limit his tax load. In any case, he pulls out some good cash from the capital gains, which he can use to pay down his home mortgage, or keep as a buffer against vacancies in the condo. Thankfully, his money-pit house will be gone. But you know, condos can also become money-pits; leaky condos, special assessments, renovations to keep it updated for his high-end rental clients…
C) Move his family into the rental & sell the condo.
He hasn’t said where he currently lives, but should it necessarily be off the table? Sell or rent the primary residence. This way there’s no immediate tax hit from capital gains on the house. He gets to live in the house, and it sounds like he really likes the neighbourhood/location/lot. He still keeps his legal basement suite. The condo and its risks are gone. If he’s got the cash/credit, he could build a new house and laneway house– if done together, some of the costs will be minimized. If he rents his primary residence, it could later become eligible for capital losses if the market tanks, since the market value is very high right now. Or take the cash and build a nice house on the East Van lot. Minimizing his debt risks, he maximizes his freedom!
I’d go with 2 houses! They will cost a bit more, but the higher rental return and higher lift will be well worth it in the long run.