Author Topic: Sell condo in a high demand area or continue renting it out? [CANADA]  (Read 1128 times)

Freedomin5

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Hi all,

I'm facing an interesting dilemma and thought I would ask all you knowledgeable real estate investors what you would do in my situation.

Background
We purchased a 1-bedroom condo for $240K (~$250K if you include closing costs) about five years ago in a HCOL city. The condo is located in a high demand area of town, literally right on top of a subway station. We are currently renting out the condo for $1500 per month, which is more than enough to cover mortgage, condo fees, and taxes. Mortgage is at 2.85%. Recent comparables suggest that the condo is currently worth ~$400K.

We have almost paid off the mortgage (only $20K remaining on the mortgage, and we're paying the minimum amount because 2.85% is a very good mortgage rate). We do not qualify for a line of credit because we are non-residents, and so we cannot borrow against the property.

The Dilemma
Our renter recently asked us if we were interested in selling to them. I'm intrigued with the idea of locking in the gains, but don't know what I would do with the money.

A new build, 1-bedroom condo in a similar area of town would currently cost approx. $350K and may not be move-in ready until 2018/2019. The real estate market has been softening over the past several months. While property values haven't gone down, they also haven't gone up quite as quickly. Also, the government recently introduced more stringent stress-testing for mortgages. Given our income levels, we shouldn't have any trouble qualifying for a small mortgage, but this stress-testing may impact other potential buyers, further softening the market next year.

I've been toying with the following ideas:

1) Keep the status quo. Keep the condo. Slowly save up the rent once the mortgage is paid off, and save up for a downpayment on another 1-bedroom condo.
2) Sell the condo for ~$400K. Split the proceeds and use as downpayments for two 1-bedroom condos. Non-resident taxes for two condos would be a nightmare for our tax accountant, unless we create a holding company and have the business purchase the condos.
3) Sell the condo for ~$400K. Dump the money into index ETFs in our taxable account. The tax situation would be a lot simpler.

Is there another option I haven't thought of? What would you do in my situation? What factors would you consider when making a decision?

Thanks!

joonifloofeefloo

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #1 on: November 12, 2017, 08:28:27 PM »
I would do (3), because I prefer having my money not in one basket, and instead across lots and lots of baskets. That's a security thing for me. I don't trust any one basket to be infallible. Mortgage laws, rental laws, sales laws, natural disaster, type of building that goes in next door can change up a home's value quickly. I like index funds diversified by sector, geography, etc.

GrayGhost

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #2 on: November 12, 2017, 09:41:50 PM »
For me, this is an easy 3.

You shouldn't keep renting because your rental totally fails the 1% rule.
You shouldn't sell and buy other properties that don't meet the 1% rule.
If the property has appreciated a lot, odds are that this will not be sustained for much longer. Remember, on average, real estate as an investment barely beats inflation.

Not to mention, there is no investment less troublesome than a wad of index funds. You seem to have had good fortune with renting so far and that's great, but all it takes is one POS tenant or serious problem to eat up years' worth of income.

I'd take the approx $350k out of this investment and put it straight in the bank.

tralfamadorian

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #3 on: November 13, 2017, 07:39:53 AM »
I also vote 3 or possibly a long tail 2. You gave several reason why your market appears to be at or near its peak.  Sell now to lock in those gains. If the new laws do impact the market as you suspect, you can always buy those additional properties in a few years. 

Dee18

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #4 on: November 13, 2017, 08:14:15 AM »
You don't say how long you lived in the condo.  One of the proposals in the new tax bill concerns taxation of proceeds from home sales.  I believe the proposal extends the time you need to have lived in the home from 2 years to 5 years to avoid taxes on the gains.  You might want to keeep an eye on this.

tralfamadorian

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #5 on: November 13, 2017, 10:53:45 AM »
You don't say how long you lived in the condo.  One of the proposals in the new tax bill concerns taxation of proceeds from home sales.  I believe the proposal extends the time you need to have lived in the home from 2 years to 5 years to avoid taxes on the gains.  You might want to keeep an eye on this.

OP is in Canada.

Dee18

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #6 on: November 13, 2017, 09:04:28 PM »
Oops! Thanks

Freedomin5

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #7 on: November 14, 2017, 06:15:08 AM »
Thanks for the responses! Looks like it's a unanimous vote for option 3. In a hot real estate market, it's sometimes easy to get caught up in the hype, so it's good to hear from all you levelheaded folks.

I like the idea of option 3 + a long tail 2. I think this would also soothe my SO who is worried if we don't have a foot in the real estate market, we will end up homeless when we return to Canada. This way, I can invest in ETFs, and keep an eye on the real estate market.

BTW, I thought in HCOL areas, it might be reasonable to go with a 0.5% rule, as one would also expect to gain from increases in property values. However, I'll continue keeping my eye out for properties that meet the 1% rule.

Another Reader

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #8 on: November 14, 2017, 06:21:55 AM »

BTW, I thought in HCOL areas, it might be reasonable to go with a 0.5% rule, as one would also expect to gain from increases in property values. However, I'll continue keeping my eye out for properties that meet the 1% rule.

Yes, if you want negative cash flow and to speculate on appreciation.  Occasionally that works out.  Usually that happens when the market is depressed and the economy is recovering from a severe recession.  Now?  I'm piling up cash to buy your distressed property in a few years at 50 percent off.  Or maybe a bit less of a discount in the highest COL areas.  You may be able to carry your property when things go south.  A lot of other people won't.

Freedomin5

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #9 on: November 14, 2017, 06:38:10 AM »

BTW, I thought in HCOL areas, it might be reasonable to go with a 0.5% rule, as one would also expect to gain from increases in property values. However, I'll continue keeping my eye out for properties that meet the 1% rule.

Yes, if you want negative cash flow and to speculate on appreciation.  Occasionally that works out.  Usually that happens when the market is depressed and the economy is recovering from a severe recession.  Now?  I'm piling up cash to buy your distressed property in a few years at 50 percent off.  Or maybe a bit less of a discount in the highest COL areas.  You may be able to carry your property when things go south.  A lot of other people won't.

Sigh...I'd love to find a property at 50% off in Toronto. Heck, I'd even take one that's only 30% off.

joonifloofeefloo

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #10 on: November 14, 2017, 06:39:27 AM »
...my SO who is worried if we don't have a foot in the real estate market, we will end up homeless when we return to Canada.

This can happen (ask me how I know ha!) if you're committed to living in a specific location. If you're willing to live outside the areas not experiencing extremes in housing stats, you can easily grab something cheap.

Yes, if you want negative cash flow and to speculate on appreciation..

+1. It's fine to pick a stock/house on spec, but it is a gamble, and we don't generally recommend gambling money you need.

Freedomin5

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #11 on: November 15, 2017, 02:36:55 AM »
Thanks all, for your comments and input!  We've asked our realtor to send us comparables and are planning to list the unit, likely within the next month.

@jooniFLORisploo With two sets of aging parents and close relatives with mental illness who will need caretaking, we will need to stay in the Toronto area, so thanks for the warning about being priced out of the market being a real possibility. That means we will be looking to use the smallest portion of the proceeds possible as a downpayment, but will also wait until the market softens further and properties are at a discount to purchase. Actually, there may be evidence of that happening already. There are resale units for $600K from a new development of townhouses that sold out in one day with average prices of $800K.

@trafalmadorian Thank you for the idea of a long tail 2.

@GrayGhost and Another Reader Thank you for the reminder re: 1% rule and negative cash flow. We will run the numbers to ensure positive cash flow before purchasing.


Linea_Norway

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #12 on: November 15, 2017, 05:15:33 AM »
Here in Norway the government introduced more strict rules for taking up mortgages, that particularly affected investors. Since then, prices have dropped with 10% and the drop seems to be connected to the stricter rules.
It sounds like a good moment to sell now as long as the prices are still high, if you feel like selling anyway.

As mentioned above, do you really need to live on top of a train station when you return to Canada after FIRE? Or can you find a cheaper place?

Freedomin5

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #13 on: November 15, 2017, 06:27:59 AM »
Here in Norway the government introduced more strict rules for taking up mortgages, that particularly affected investors. Since then, prices have dropped with 10% and the drop seems to be connected to the stricter rules.
It sounds like a good moment to sell now as long as the prices are still high, if you feel like selling anyway.

As mentioned above, do you really need to live on top of a train station when you return to Canada after FIRE? Or can you find a cheaper place?

Nope, we have no intention of living in the condo when we return, but a condo located on top of a subway station is very attractive as a rental. It's even better if your building is connected to the subway station and you don't need to walk outside in -30C weather (-50C with windchill) in the middle of winter when it's pitch black outside at 8:00 AM. Yes, I realize I'm thinking like a wussy non-Mustachian and catering to the non-Mustachian masses. :)

Good to hear of the effect mortgage rules had in Norway. I'll try to sell now and then hold off on buying until the rules have had their intended effect. I won't take less than a 10% dip in prices, because that's what Linda_Norway said would happen! And I always trust internet strangers! ;)

Seriously though, it's good to hear what happened in Norway. It gives me an anchor point and some sort of expectation for my city. Thanks for sharing!

Linea_Norway

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #14 on: November 16, 2017, 11:19:11 AM »
Here in Norway the government introduced more strict rules for taking up mortgages, that particularly affected investors. Since then, prices have dropped with 10% and the drop seems to be connected to the stricter rules.
It sounds like a good moment to sell now as long as the prices are still high, if you feel like selling anyway.

As mentioned above, do you really need to live on top of a train station when you return to Canada after FIRE? Or can you find a cheaper place?

Nope, we have no intention of living in the condo when we return, but a condo located on top of a subway station is very attractive as a rental. It's even better if your building is connected to the subway station and you don't need to walk outside in -30C weather (-50C with windchill) in the middle of winter when it's pitch black outside at 8:00 AM. Yes, I realize I'm thinking like a wussy non-Mustachian and catering to the non-Mustachian masses. :)

Good to hear of the effect mortgage rules had in Norway. I'll try to sell now and then hold off on buying until the rules have had their intended effect. I won't take less than a 10% dip in prices, because that's what Linda_Norway said would happen! And I always trust internet strangers! ;)

Seriously though, it's good to hear what happened in Norway. It gives me an anchor point and some sort of expectation for my city. Thanks for sharing!

I made a little mistake by not specifying enough. The prices dropped 10% in Oslo, where many investors have rentals. The rest of the country was not equally affected.

Freedomin5

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #15 on: November 17, 2017, 07:05:25 AM »
Here in Norway the government introduced more strict rules for taking up mortgages, that particularly affected investors. Since then, prices have dropped with 10% and the drop seems to be connected to the stricter rules.
It sounds like a good moment to sell now as long as the prices are still high, if you feel like selling anyway.

As mentioned above, do you really need to live on top of a train station when you return to Canada after FIRE? Or can you find a cheaper place?

Nope, we have no intention of living in the condo when we return, but a condo located on top of a subway station is very attractive as a rental. It's even better if your building is connected to the subway station and you don't need to walk outside in -30C weather (-50C with windchill) in the middle of winter when it's pitch black outside at 8:00 AM. Yes, I realize I'm thinking like a wussy non-Mustachian and catering to the non-Mustachian masses. :)

Good to hear of the effect mortgage rules had in Norway. I'll try to sell now and then hold off on buying until the rules have had their intended effect. I won't take less than a 10% dip in prices, because that's what Linda_Norway said would happen! And I always trust internet strangers! ;)

Seriously though, it's good to hear what happened in Norway. It gives me an anchor point and some sort of expectation for my city. Thanks for sharing!

I made a little mistake by not specifying enough. The prices dropped 10% in Oslo, where many investors have rentals. The rest of the country was not equally affected.

That still applies in my case. My condo is in one of the highest HCOL cities in Canada.

Lews Therin

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Re: Sell condo in a high demand area or continue renting it out? [CANADA]
« Reply #16 on: November 17, 2017, 07:10:26 AM »

1) Keep the status quo. Keep the condo. Slowly save up the rent once the mortgage is paid off, and save up for a downpayment on another 1-bedroom condo.
2) Sell the condo for ~$400K. Split the proceeds and use as downpayments for two 1-bedroom condos. Non-resident taxes for two condos would be a nightmare for our tax accountant, unless we create a holding company and have the business purchase the condos.
3) Sell the condo for ~$400K. Dump the money into index ETFs in our taxable account. The tax situation would be a lot simpler.

Is there another option I haven't thought of? What would you do in my situation? What factors would you consider when making a decision?

Thanks!

Would you buy the condo today? Renting for 1500 a month, but purchase price of 400k? Of course not, that's a crazy bad investment. You can immediately make much more with ETF or REIT (7% returns, still in real estate) Invested in REIT, you will get ATLEAST 2000 per month, (including all sale costs). No brainer #3.
If you are buying new condos, chances are they have had the same price appreciation as yours if they are in the same general region. (If you are taking about moving to a recessed area/region, then it could make sense)