Friday, July 27, 2007

Reader Question #7

Alex from Montreal is in a bit of housing problem and sent me an email on it.

Q: I read one of your blog posts titled "Living in a hot housing market" and it brought up some questions. I'll give you a brief resume first:

I currently own a rental property in Montreal that is definitely in a hot sector. I was lucky to purchase it 2 years ago for under 110k even though it's evaluated at $250k. Add the mortgage cost, condo fees and taxes and it comes up to roughly $800/mo. It is currently being rented
for $1000/mo, which means I actually make profit from this (that's a good thing, right?).

My questions:
- Would it be a *waste* of money to rent an apartment (for myself) at $650/mo?

I ask this because everyone has to live somewhere. I understand that my *real* cost of owning would actually be $450/mo, but doesn't that defeat the purpose of having a rental property in the first place? If i'm renting for $650/mo, then i'm not making any profit, anymore.

I hope that makes sense because the $250k evaluation seems rather interesting.

A: Ah yes that wonderful question of should I cash out in a hot house market. It does get bloody tempting to do it. I should know it's crossed my mind as well recently.

The answer really depends on do you view the condo as an investment or a home. If you think of it as an investment selling it becomes an obvious choice. After all if you sell it at market price of $250,000 less fees (~8%) should easily have $230,000 left over. Assuming you have a 100% mortgage of $110,000, you could clear $230,000-$110,000 = $120,000. If you took that and invested it, you could skim off around 4% a year leaving the capital mostly in tact and you could have an extra $400/month which you could apply against your rent. Leaving you with a $250/month true cost for a place to live. Lets face it you don't get much cheaper than that and it would be providing more income than your condo currently does.

Yet if you view as the condo as a home, you might want to consider hanging onto it. Since you are going to need a place to live somewhere and if you sell and try to move in somewhere else in the same market you new place is likely to be just as overpriced. Leaving you with no real gain by moving. When looking at your primary residence there is a significant advantage of owning your own home in retirement. Any future house value increases become meaningless beyond your property tax bill, unlike renting where it tends to follow the market a bit closer for costs.

In the end it depends on your viewpoint and personal situation. For example, my wife is currently sick of moving, so regardless of my house value, I'm very unlikely to sell it. So that's my ideas on the topic, I wish you the best and let me know what you decide.

Have a good weekend,


Mr. Cheap said...

I struggled with a similar issue when I bought my condo then continued to rent. Part of me felt weird being a landlord and a tenant at the same time. The best way to look at it is to compare what you're earning vs what you're paying. My situation was like yours, I was getting a lot more rent for my condo then I was paying in rent, so it was a good deal.

In terms of keeping the condo rented out or selling it, I think CD makes a good point but there are a couple of things to keep in mind:

1) If property prices stay high, it should drive up rents (in which case after a year or two the rental income might be looking better then whatever investment returns you're getting from the 100K sale profit)

2) There will be capital gains taxes you'll have to pay on the sale, and you'll be losing a bunch of deductions. Make sure to factor that into your decision of what to do.

The Financial Blogger said...

I tend to recommend to keep the condo and keep renting your apartment if you like where you live. It does not cost a penny to own this condo, it actually increases your cash flow while your asset is increasing in value.

If you move into your condo, would you not be paying the $800 mortgage + condo fees? Therefore, you cost of living would increase from $450 to $800... not sure it is a good deal!

However, CD suggestion of selling the condo is pretty interesting as well as you could easily double your monthly income from your investment. As Mr. Cheap says, you will surely hit by capital gain and pay about 20% of your profit in taxes...


Canadian Dream said...


Thanks for the additional feedback.