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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: YK-Phil on December 07, 2013, 09:12:33 PM

Title: Buying another condo or paying off the mortgage...
Post by: YK-Phil on December 07, 2013, 09:12:33 PM
My wife and I are thinking of getting a small condo in Nanaimo (Vancouver Island), which we plan to rent until we are ready to move there when we are FI, likely in August 2016. Until that time, we plan to rent it out. We've seen a nice 2-bedroom place for about $100,000, which we could pay cash, but it would deplete our cash savings. It is currently rented for $850/month. Condo fees are about $150 monthly, and municipal taxes are just under $1,000. We also own a rental condo in Calgary that has a $96,000 mortgage, rented for $1,700, with $350 condo fees and $1,800 annual taxes. What is our best option to purchase the new condo? Pay cash? Put a good down-payment and finance the balance? Are there tools to help me decide what is the best use of our cash savings?
Title: Re: Buying another condo or paying off the mortgage...
Post by: _JT on December 07, 2013, 09:24:39 PM
If you buy it with cash, you get your best cash flow, but it's somewhat specious because your cash on cash return is awful in this case. For instance, you buy it with cash, it needs zero work, and you pay 100k. Your income is 850/mo (10,200/yr). Let's assume 10% vacancy and another 10% PM costs. Then we have 1k taxes, condo fees (1800/yr), insurance and maintenance expenses (easily another 10%), and your net profit per year is ~4k. COC return of 4%, which I'd imagine you can easily beat with another investment.

Now, of course, this isn't strictly an investment, since you want to live there, so maybe you'd prefer to just purchase in cash, not really get great returns, and then sell your current place to move in there in '16. Alternatively, you could finance it. This keeps more of your cash free for use somewhere it can hopefully do more work for you, but it probably also makes the property cash flow negative. Since it would only be for a short time, if I were me I'd probably do that. Except that I can't imagine ever buying a condo, since I hate HOA fees.