Does it make sense to rent out my condo while renting for less, closer to work?

[NewbStache]

My condo costs me about $1650 a month (mortgage plus condo fees). I still have a way to go on the mortgage, and if I sold right now I'd be lucky to break even. I am about 30 mins drive from work right now, but I'd like to be close enough to bike. I could rent my condo out for about $1500 (based on other similar condos in my building), and find a smaller 1 bdr place closer to work for about $1000. I'd have to cover an extra $200 for my condo mortgage + fees since the rent wouldn't cover it. So total I'd be paying $1200 a month vs $1650 a month now, and I'd be closer to work, so I could bike and drive less.

Does this plan make sense, or am I missing something?

This is CAD by the way, not USD.

[PrairieBeardstache]

Simply, the difference between the two situations: $1650 - $1350 = $300 is likely less than what you're contributing to the principal on your mortgage. In effect, a worse situation.

Edit: distracted, my logic above isn't complete.

Still simple math but let's say that of your current $1650/m you're contributing $800 to your net worth in the form of paying down the principle on your mortgage (let's ignore potential asset value gain). That means it also costs you $850/m that doesn't go anywhere towards improving your net worth, but everyone needs a place to live!

In your proposed situation just looking at the condo itself you'd get $1500, but you still have all of the associated costs plus some additional (the $200 you mention). So your total cost for the condo is now $1850 (but you're not including property tax here, or are you?) So now to pay down the principle you've improved your situation by a little as your total cost for the estimated $800 gain is now $350 ($1850 cost - $1500 rent).

You still need a place to live, tack on $1000 of rent now you're at $1350/m for $800/m gain, you've improved the situation slightly by $300/m. There can be additional costs in the form of your commute, etc that could increase the delta. I imagine this doesn't actually capture all of the costs however so it's kind of a moot analysis but I'm bored and eating some tasty Indian food right now...

[Spitfire]

I think it makes sense, just keep in mind that being a landlord can come with some work and stress.

[NewbStache]

Simply, the difference between the two situations: $1650 - $1350 = $300 is likely less than what you're contributing to the principal on your mortgage. In effect, a worse situation.

Edit: distracted, my logic above isn't complete.

Still simple math but let's say that of your current $1650/m you're contributing $800 to your net worth in the form of paying down the principle on your mortgage (let's ignore potential asset value gain). That means it also costs you $850/m that doesn't go anywhere towards improving your net worth, but everyone needs a place to live!

In your proposed situation just looking at the condo itself you'd get $1500, but you still have all of the associated costs plus some additional (the $200 you mention). So your total cost for the condo is now $1850 (but you're not including property tax here, or are you?) So now to pay down the principle you've improved your situation by a little as your total cost for the estimated $800 gain is now $350 ($1850 cost - $1500 rent).

You still need a place to live, tack on $1000 of rent now you're at $1350/m for $800/m gain, you've improved the situation slightly by $300/m. There can be additional costs in the form of your commute, etc that could increase the delta. I imagine this doesn't actually capture all of the costs however so it's kind of a moot analysis but I'm bored and eating some tasty Indian food right now...

Hmm, I think you're right, once I factor it all in, plus unplanned costs (maintenance etc.), it's quite close anyway. Maybe a better option is to stay for now, try to find a family member to rent the spare room out to, or at least wait until it's viable to sell and buy somewhere closer to work.

[Seadog]

My condo costs me about $1650 a month (mortgage plus condo fees). I still have a way to go on the mortgage, and if I sold right now I'd be lucky to break even. I am about 30 mins drive from work right now, but I'd like to be close enough to bike. I could rent my condo out for about $1500 (based on other similar condos in my building), and find a smaller 1 bdr place closer to work for about $1000. I'd have to cover an extra $200 for my condo mortgage + fees since the rent wouldn't cover it. So total I'd be paying $1200 a month vs $1650 a month now, and I'd be closer to work, so I could bike and drive less.

Does this plan make sense, or am I missing something?

This is CAD by the way, not USD.

Also keep in mind you'll owe income tax most likely on the non interest, non condo fee part of the rental income, so depending on your marginal tax bracket, that could be another few hundred a month down the drain.

[NathanP]

Unless you have a good reason to keep your existing property I would sell it and move closer to work. Better to owe a bit of cash at closing than deal with a renter and still be cash-flow negative even in your ideal case (fully rented, rent paid on time, no damage to the property).

Rent or buy something closer to work once you complete the sale.

[GrayGhost]

Does your property meet the 1% rule for renting? Which is to say, is rent at least 1% of the potential sale value? Because if not, I'd sell immediately and leave the risk and stress behind.

Check this article out: http://www.mrmoneymustache.com/2015/07/02/if-you-wouldnt-buy-it-you-should-probably-sell-it/

OP, you may be suffering from loss aversion!

[NewbStache]

My condo costs me about $1650 a month (mortgage plus condo fees). I still have a way to go on the mortgage, and if I sold right now I'd be lucky to break even. I am about 30 mins drive from work right now, but I'd like to be close enough to bike. I could rent my condo out for about $1500 (based on other similar condos in my building), and find a smaller 1 bdr place closer to work for about $1000. I'd have to cover an extra $200 for my condo mortgage + fees since the rent wouldn't cover it. So total I'd be paying $1200 a month vs $1650 a month now, and I'd be closer to work, so I could bike and drive less.

Does this plan make sense, or am I missing something?

This is CAD by the way, not USD.

Also keep in mind you'll owe income tax most likely on the non interest, non condo fee part of the rental income, so depending on your marginal tax bracket, that could be another few hundred a month down the drain.

Oh really? I figured the total would count as an expense, and since I'd be still paying in $200, I won't be paying taxes on a loss?

Unless you have a good reason to keep your existing property I would sell it and move closer to work. Better to owe a bit of cash at closing than deal with a renter and still be cash-flow negative even in your ideal case (fully rented, rent paid on time, no damage to the property).

Rent or buy something closer to work once you complete the sale.

Is it okay to not own a place though? What I got from reading through MMM is that you should own a place because you always need somewhere to live. Am I saving that much by moving closer to work? Why not just keep driving to work and wait it out a little?

Does your property meet the 1% rule for renting? Which is to say, is rent at least 1% of the potential sale value? Because if not, I'd sell immediately and leave the risk and stress behind.

Check this article out: http://www.mrmoneymustache.com/2015/07/02/if-you-wouldnt-buy-it-you-should-probably-sell-it/

OP, you may be suffering from loss aversion!

Damn I hadn't seen that article before. It's good. Too good. Makes a lot of sense. I think you are right. I will go back to the drawing board and work out if I would break even with selling. I may consider renting if that is that case - there are a lot of nice places near my work that are the right size for me and quite cheap, and at least there would be no condo fees!

That article also makes me re-consider a decision I just made on my car. I have a 2011 Sonata with 187,000KM on it. I was considering selling, since it's going to start having more maintenance issues probably, and the ride height is very low because the person who owned it previous to me had it lowered (which is really shitty in winter-Canada). There is quite a bit of things to fix to get it into sellable condition, and even then I'd only get around $7000 maybe only $6000 for it. Then I'd have to find something used and reliable for under that. So I made the decision to keep it since there are no payments or anything on it - however I have decided that since I am keeping it, I need to raise the ride height in order to make it through winter and prevent damage to the underside. I have gone through 2 winters with it at this height and I am always bottom out on the snow or even speed bumps in the summer. I have cracked the skid plate twice underneath because of this, and my bumper is all fucked. So for $1250 I am getting all springs replaced back to stock height. Then my plan is to drive the car until it dies.

The gas mileage is not amazing, but it's not the worst either. I think it's getting around 9.7L per 100KM (24MPG). But if I figure out my living situation, I'll be closer to work and can bike more often, so will be driving much less. Anyway, that's just my justification - but the part of the article that mentioned fear about transactions and putting in the work made me think - because that is part of the reason to keep my car. It's just easier.

[PrairieBeardstache]

Is it okay to not own a place though? What I got from reading through MMM is that you should own a place because you always need somewhere to live. Am I saving that much by moving closer to work? Why not just keep driving to work and wait it out a little?
 

I do not own a place and the costs for my rent are far cheaper than the non-principle payment costs of owning (interest on the mortgage + utilities + property tax + maintenance). I invest the difference (plus much more) and am well ahead financially than I would be if I had purchased something. In my opinion in most cases that I've witnessed for the average Joe, a mortgage and a house/condo are a lifestyle choice, not a financial one. This is especially true early in life.

[NewbStache]

Is it okay to not own a place though? What I got from reading through MMM is that you should own a place because you always need somewhere to live. Am I saving that much by moving closer to work? Why not just keep driving to work and wait it out a little?
 

I do not own a place and the costs for my rent are far cheaper than the non-principle payment costs of owning (interest on the mortgage + utilities + property tax + maintenance). I invest the difference (plus much more) and am well ahead financially than I would be if I had purchased something. In my opinion in most cases that I've witnessed for the average Joe, a mortgage and a house/condo are a lifestyle choice, not a financial one. This is especially true early in life.

Hmm, yea I think I am leaning toward going back to renting. I didn't mention further up, but I will have to pay a penalty for ending the mortgage early. Around $7000 if I ended it now. I have 2 years left on it, so at the very least I will give some time to thinking about this. Even if I waited about one year, the penalty would be much less, but I guess the extra savings could offset that - so I have some math to do.

[Embok]

I’d price out the option of taking in a roommate also, before deciding.

[Prairie Stash]

Its $1500-1000=$500 or $6,000/year. Thats all the math there is until you can sell the place.

You are taking someone elses money ($1500 or $18,000/year) to pay for a place to live ($1000 or $12,000/year). You currently have all the other expenses and will continue to do so up until you sell the property. You are only adding 2 numbers to the entire analysis, its not like you don't currently pay property tax or maintenance...Although saying that, you are also reducing transportation costs which is an unknown amount (negligible/large?).

The consideration about taxes, maintenance etc. is just noise; you ALREADY pay it and will always pay it.

Skipping out on extra money because you might pay income taxes is always a face punch. Thats the same as telling your employer to skip giving you a raise, cause of the taxes. You only pay tax on the profit in Canada, paying taxes means you're making money.

[MommyCake]

I'm not sure I agree with Prairie Stash.  Income tax is a huge factor, at least in the US.

It really depends on what % of the rental income is for expenses, and what your income tax bracket would be.  Here's how I am looking at it. You stand to gain $5400 a year by renting (450 x 12 months) if the condo brings $1500 per month.  In the US, you will pay tax on the rent minus expenses, which do not include principal repayment.  So say your expenses are $500 per month.  You will need to pay taxes on $1000 x 12 month, or $12000.  This could be over $2000.  Say you need to pay 18% - that would be 2160.  That reduces your total savings from 5400 to 3240 over the course of the year. 

For 3240 a year, I am not sure I would 1) lose my enjoyment of my condo and 2) take on the responsibility of a tenant.  Further, there is the possibility of the rent rising annually while your mortgage likely would not if you've got a fixed rate.  Another point I didn't see noted yet is utilities.  Where I live, utilities like electric and heat are not usually included in the rent.  If your new rent price of $1000 doesn't include everything, that also makes the move less attractive.

[Prairie Stash]

I'm not sure I agree with Prairie Stash.  Income tax is a huge factor, at least in the US.

It really depends on what % of the rental income is for expenses, and what your income tax bracket would be.  Here's how I am looking at it. You stand to gain $5400 a year by renting (450 x 12 months) if the condo brings $1500 per month.  In the US, you will pay tax on the rent minus expenses, which do not include principal repayment.  So say your expenses are $500 per month.  You will need to pay taxes on $1000 x 12 month, or $12000.  This could be over $2000.  Say you need to pay 18% - that would be 2160.  That reduces your total savings from 5400 to 3240 over the course of the year. 

For 3240 a year, I am not sure I would 1) lose my enjoyment of my condo and 2) take on the responsibility of a tenant.  Further, there is the possibility of the rent rising annually while your mortgage likely would not if you've got a fixed rate.  Another point I didn't see noted yet is utilities.  Where I live, utilities like electric and heat are not usually included in the rent.  If your new rent price of $1000 doesn't include everything, that also makes the move less attractive.

Except interest on the mortgage is 100% deductible...the only time in Canada you can deduct interest is rentals. The interest on the property far exceeds $500/month.

The biggest problem with my analysis is breaking out the interest/condo fees/priciple the OP summed up together as $1650/month (condo is $250, interest is $1000, principle is $400?). Thats over $1250 in expenses/month prior to insurance, advertising, travel, professional services (plumber, painter etc.), so its well under $3000 in net rental gains (since thats what left after interest and condo fees). But wait, the $400 in priciple repayment...its tax free upon selling. Don't forget it also skips a $7,000 mortgage penalty, keeping selling off the table for 2 years.

Plus lets hope the condo appreciates by 1%/year; theres $5000. Or perhaps negative if the market collapses...who knows.

Done well, it can still be the primary residence and when its time to sell; the capital gains is excluded. Designate it your primary residence until you sell; while you rent (you can't buy another place). The rule is allowed for people doing exactly what the OP proposes.

As a new rental, its terrible.

In fairness, the marginal tax rate is likely around 32%. To get a condo like that I suspect income over $50,000, putting them in the mid tier. That puts the taxes roughlyy, $500/year (assuming I missed $1500 in expenses such as insurance, advertising fees and professional maintenance - painters etc.)

Taxes aren't that onerous, $500/year isn't a deal breaker.