Here is my Situation - Sell or Rent

[smack123]

Okay... here are the details:

I own a nicely updated (laminate floors, tile, new paint, trim, appliances, etc.) 1100 ft2 bungalow built in 1975 in Fort Saskatchewan. Large lot (62x110), double detached garage, finished basement, etc. New roof, hot water tank.

My wife and I lived in the house for 2 years and then moved to Montreal when I went back to school. We kept the house and rented it as the schooling was only 12 months and we felt we may come back to FS after school. As it turns out we have moved to BC after finishing in Montreal. We qualified for a new mortgage on our new home without having to sell the house in FS, which led us to consider holding on to the FS property as a revenue property.

Here are ny numbers:

1. $1122 Monthly Mortgage payment (Mortgage remaining - $167k) ($1122 per month @ 4.4%, 2 years left)
2. $ 80 Insurance
3. $ 145 Prioperty Taxes
4. $ 196 Property Management (11% of gross rent)
5. $ 140 Income Tax (Estimated)

Total monthly outlay: $1683

Rent: $1700 per month

18 months ago I could have sold the house for $380k, today I think it would sell for approx. $335k. I am trying to determine whether or not to hold on to it in the hopes that the market will rebound and swing up again in the next few years.

QUESTION #1
Given present value vs. remaining mortgage, that means there is approx. $155,000 in equity sitting there... part of which we used to put 20% down on the new house in BC. Should I consider those interest expenses as part of my monthly outlay on the FS house, or is that unfair... Should I stick to only the costs listed above? It`s difficult to reconcile all of this because if we sell the house in FS obviously we would use that equity to reduce our expenses on the new house.... Did that make any sense? If I include the carrying costs on the LOC my monthly outlay goes up by another $500 / month

QUESTION #2
It seems obvious that if there is positive cash flow and if I believe the market will rebound that it makes sense to hold it. But if I have to put money out each month (+/-$400 month) at what point does it no longer make sense? On the flip side.... of the $1122 mortgage payment, roughly $460 of that is going to pay down the principle on the mortgage... which is a benefit to me of course and not really a cost per se.

Bah! This is all very complex!

Ultimately, my question is with the limited information provided and knowing the current market conditions, does it make sense to hold or should I sell and look for a different opportunity. Obviously the past 12-18 months have not been great but it seems the underlying economics for the Edmonton region are TREMENDOUSLY strong... and that this move could pay off handsomely at some point down the road.

Any thoughts / suggestions etc. are very much appreciated. I am new to this game, so please do not hold back. Constructive criticism is welcome! Thanks!

S.

 

[samwei]

QUOTE (smack123 @ Sep 2 2008, 10:48 PM) Okay... here are the details:


Here are ny numbers:

1. $1122 Monthly Mortgage payment (Mortgage remaining - $167k) ($1122 per month @ 4.4%, 2 years left)
2. $ 80 Insurance
3. $ 145 Prioperty Taxes
4. $ 196 Property Management (11% of gross rent)
5. $ 140 Income Tax (Estimated)

Total monthly outlay: $1683

Rent: $1700 per month


Ultimately, my question is with the limited information provided and knowing the current market conditions, does it make sense to hold or should I sell and look for a different opportunity. Obviously the past 12-18 months have not been great but it seems the underlying economics for the Edmonton region are TREMENDOUSLY strong... and that this move could pay off handsomely at some point down the road.

S.

If you choose to hold onto it, you could try switching from a regular mortgage to a HELOC with interest only payments. At 4.75% interest rate, for $167,000, your monthly payment would then drop from $1122 to about $660.

BTW, your home may now be worth only about $320,000 given the nature of the pull back in the market.

 

[Jack]

Fort Saskatchewan was rated as the 10th best town in Alberta to invest. They have very strong underlying economics, and I guess it`s been said that if even one of the proposed refineries get built, demand for real estate/land will surge to new highs.

Given that it`s cash-flowing, and assuming that you have good tenants, and given that you don`t need the equity to finance your new home`s purchase, why not keep it? The market conditions stink, it`s never good to sell into a fear-stricken market.

I`d hang on to it.

 

[Shinto]

One thing to consider is that if you do decide to sell you will still need to find somewhere to put the money to keep it working for you. The only way I would sell is if I need to finance a deal with a better ROR.

I would keep the house and buy more houses using the equity.

B

 

[invst4profit]

To begin you are missing a number of expenses such as legal, advertising, evictions, vacancy, heat/hydro (when vacant) repairs, etc.

My usual assessment on this property if retained:

Rent: $1700/month
Expenses: $850/month
Mortgage: $1122/month
Income: $850-$1122 = -$272/month negative cash flow

I would sell now before the numbers catch up with you.

 

[smack123]

QUOTE (samwei @ Sep 3 2008, 03:29 AM) If you choose to hold onto it, you could try switching from a regular mortgage to a HELOC with interest only payments. At 4.75% interest rate, for $167,000, your monthly payment would then drop from $1122 to about $660.

BTW, your home may now be worth only about $320,000 given the nature of the pull back in the market.


Okay.... I see your point in terms of reducing cash outlay... but that extra $460-480 is going to pay down the principle on the mortgage, so am I not smarter to be paying down the debt rather than simply servicing it by paying interest-only?

Yes.... you may be right. I am reasonably comfortable that the value is still $335k upon close analysis of comparables, but no doubt it has declined significantly (and dissapointingly) over the past 18 months.

 

[smack123]

QUOTE (Shinto @ Sep 3 2008, 04:54 AM) One thing to consider is that if you do decide to sell you will still need to find somewhere to put the money to keep it working for you. The only way I would sell is if I need to finance a deal with a better ROR.

I would keep the house and buy more houses using the equity.

B


Shinto,

You make an excellent point, no question that I need to put that money to work for me somewhere!

It seems to me that in spite of the negative cashflow, the outlay is minimal and worth it in comparison to the potential gain. The Edmonton region (overall) is arguably the best place in Canada to be invested in real estate so it seems silly to pull out now, while the market is on a down cycle and invest in another market (say vancouver Island where I now live) when there is not nearly as much potential for growth here. The only potentials avings is the ability (if I bought a revenue property local) to save on proeprty management by doing it myself.

I do feel this is the best place to put my money right now... just hoping to get some reassurance from others who have done this before.

 

[smack123]

QUOTE (invst4profit @ Sep 3 2008, 05:25 AM) To begin you are missing a number of expenses such as legal, advertising, evictions, vacancy, heat/hydro (when vacant) repairs, etc.

My usual assessment on this property if retained:

Rent: $1700/month
Expenses: $850/month
Mortgage: $1122/month
Income: $850-$1122 = -$272/month negative cash flow

I would sell now before the numbers catch up with you.


Invst4profit,

You are correct, I have neglected to include some additional potential expenses. some of them are obviously an unknown but I do need to account for those realities.

But let`s assume for second that your -$272 cash flow assessment is accurate.. so it`s costing me $3200 annually to continue owning this investment. First off in those expenses listed above $460 of that mortgage payment is going towards principle which is knocking down my mortgage... so at the end of Year 1 I`m out $3200 cash, but the mortgage is $5200 less than it was at the start of the year. Assuming no change in market value, I`m already ahead $2000. Where else can someone invest $3200 and get $5200 at the end of the first year?

Next, Edmonton property values rose 200% over the past 10 years. Canadian property values rose 100% over the past. Let`s assume for second that Edmonton prerty values rise only 50% over the next 10 years.... meaning the property is now worth roughly $510,000. Over 10 years I`ve invested $32,000 (assuming cashflow remains unchanged), the mortgage is down by probably close to $60,000... all of which means I now have close to $400,000 in equity vs. today`s equity at $155,000.

So how does that add up to me getting out before the numbers catch up to me?

Again.. just trying to understand, I appreciate the feedback and suggestions! Thanks!

 

[Thomas Beyer]

keep it if you do not need the cash .. assuming you can find a property manager that takes care of it .. and you have no headaches ..

next 2-3 years will be flatish in MOST Canadian markets .. incl. AB .. so hard to replace this property with another and make more money .. plus selling has huge fees: realtors, taxes, legal fees, mortgage payout penalty (totaling 15 - 20K or more ..).. plus more legal fees on buying .. tremendous switching costs in real estate !

Consider, now or in the future, switching the mortgage to a higher mortgage amount @ prime - 0.6% with a 35 year amortization or better: a LOC as you pay interest only !

Consider getting one LOC on this home and the one you live in ..

 

[smack123]

QUOTE (thomasbeyer2000 @ Sep 3 2008, 02:25 PM) keep it if you do not need the cash .. assuming you can find a property manager that takes care of it .. and you have no headaches ..

next 2-3 years will be flatish in MOST Canadian markets .. incl. AB .. so hard to replace this property with another and make more money .. plus selling has huge fees: realtors, taxes, legal fees, mortgage payout penalty (totaling 15 - 20K or more ..).. plus more legal fees on buying .. tremendous switching costs in real estate !

Consider, now or in the future, switching the mortgage to a higher mortgage amount @ prime - 0.6% with a 35 year amortization or better: a LOC as you pay interest only !

Consider getting one LOC on this home and the one you live in ..

Thomas,

I have analyzed the numbers over and over and I am very comfortable that we can afford the potential cost, even factoring in some worst case options (ie can`t find a tenant). We have a very good property manager in Fort Saskatchewan, they ahve been great thus far.

I wouldn`t have a mortgage payout pentalty due to the fact that the mortgage on the new property was set up such that if we sell the FS property we can pay out one segment of this mortgage with no penalty and then port the FS to this porperty in Nanaimo, but yes, still many costs, $15k+ on real estate commission right off the bat.

Can you explain to me further the benefit of switching to an interst only loan (LOC).

I do have a LOC on both homes, half of the FS house LOC was used to put 20% down on our new house, the other half is tied up in personal debt.

 

[Dan_Eisenhauer]

A general rule when buying investment real estate is that you keep the mortgage principle as large as possible, and repay the loan over as long a time frame as you can find. Cash flow is the name of the game.

Going with interest only loans respects that rule. You get to keep that portion of the debt service that would normally go to principle repayment. Just make certain that the difference goes into an investment account, and not into your daily living expenses... unless living on that excess is your goal.

Higher interest payments are accompanied by higher tax write offs. Using an amortized loan, interest payments decrease over time.

Having said that, following this rule is offset by not paying down the principle and the build up of equity over the long term.

 

[Dan_Eisenhauer]

Sorry. This was a double post.

 

[Thomas Beyer]

QUOTE (smack123 @ Sep 3 2008, 03:47 PM)
Can you explain to me further the benefit of switching to an interst only loan (LOC).

...




read this here and associated link !



http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



or this:



http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2302-What_is_better_a_mortgage_or_a_line-of-credit_.html

 

[invst4profit]

smack123

Sorry I can not relate to your justification for retaining this property. As a investor I rely on positive cash flow to pay my bills. I am not in a position to take money out of my own pocket each month to support a negative investment. As far as you being ahead $2000 at the end of the year in reality you are ahead $0 until you pull the money out of the property. Being ahead and feeling you are ahead are two different things.
Your justification for retaining this property is based entirely on speculation of increasing property values.
How much are you comfortable gambling (losing) on that speculation.
If you are holding this property because the price has dropped, having negative cash flow, then hang on because you may be in for a very stressful ride.
At the moment in time you chose to sell (or are forced to sell) the value may not be greater than the costs to retain the property over time.
You may be right you may be wrong.
The trials and tribulations of being a landlord are not worth the gamble of financial speculation in my opinion.

 

[Thomas Beyer]

QUOTE (invst4profit @ Sep 4 2008, 07:17 AM) smack123

Sorry I can not relate to your justification for retaining this property. As a investor I rely on positive cash flow to pay my bills. I am not in a position to take money out of my own pocket each month to support a negative investment. As far as you being ahead $2000 at the end of the year in reality you are ahead $0 until you pull the money out of the property. Being ahead and feeling you are ahead are two different things.
Your justification for retaining this property is based entirely on speculation of increasing property values.
How much are you comfortable gambling (losing) on that speculation.
If you are holding this property because the price has dropped, having negative cash flow, then hang on because you may be in for a very stressful ride.
At the moment in time you chose to sell (or are forced to sell) the value may not be greater than the costs to retain the property over time.
You may be right you may be wrong.
The trials and tribulations of being a landlord are not worth the gamble of financial speculation in my opinion.
I do NOT see negative cash-flow here !

He also does NOT gamble / speculate .. as you must assume, in time, that any decent (or even average) real estate goes up in value WITH INFLATION .. that is not speculation .. that is a prudent assumption .. so if he is able to hold the property another 5 years or even 20 years .. it will be worth more than today .. and he paying down the mortgage !

Can you do better in other markets ? maybe ? Ft. Sask. is as good as it gets for value upside in Canada .. plus he has high switching costs .. plus little time invested going forward .. so any new deal elsewhere costs $s and a large time commitment ... so all in all he is better off keeping than selling if he doesn`t need the equity and if he has a good property manager that allows him a good night`s sleep (for 5 or 10 or 20 years) !

 

[smack123]

Hi everyone,

Thanks for the input (sorry for delayed response as I have just started a new job and have been focussed on that for the past few weeks).

I have decided that I will keep the house. I have had my property management company re-advertise (previous tenants moved out August 31st) and the house was rented within days of the ad being placed in the local newspaper by the property manager for the same $1700 rent.

I am still confused as to what should be included in calculating my cash-flow situation. I have removed the principal portion of my mortgage payment from my outlay calculation as this is simply going to pay down the principle, however I am still not sure whether or not to include the interest on my LOC. The LOC is not REQUIRED in order to finance this house, however, I would be able to pay if off if I sold the house, so I`m not sure if that should be considered a `personal` expense or an `investment` expense. I lean towards personal because the reality is that if I sold the house I would need to invest that money somewhere so that it was working for me.

 

[jgg123]

QUOTE (invst4profit @ Sep 4 2008, 07:17 AM) smack123

Sorry I can not relate to your justification for retaining this property. As a investor I rely on positive cash flow to pay my bills. I am not in a position to take money out of my own pocket each month to support a negative investment. As far as you being ahead $2000 at the end of the year in reality you are ahead $0 until you pull the money out of the property. Being ahead and feeling you are ahead are two different things.
Your justification for retaining this property is based entirely on speculation of increasing property values.
How much are you comfortable gambling (losing) on that speculation.
If you are holding this property because the price has dropped, having negative cash flow, then hang on because you may be in for a very stressful ride.
At the moment in time you chose to sell (or are forced to sell) the value may not be greater than the costs to retain the property over time.
You may be right you may be wrong.
The trials and tribulations of being a landlord are not worth the gamble of financial speculation in my opinion.

I realize that the 50% rule is a quick and easy way to calculate whether or not a property will cash flow or not but it definitely is not the end all be all.

Take a look at the property in a different way: 167K mortgage, refinanced @ a 35 year term at lets say 5.5% fixed (conservative amount) = 896.82 mortgage month

So, this house will cost him 850+896 or about -46 a month "true" cashflow at rents right *now*. Just because the house isn`t cash flowing doesn`t mean that it`s not making money (paying down the mortgage). And I agree that you can`t buy on appreciation alone, but if RE investors didn`t think that rents and values were going to go up over time not a lot of us would be investing in real estate.

Another thing to decide when getting rid of a property as mentioned above is the costs of selling. How many years of negative cash flow is it worth to take the hit selling in a down market + closing costs. I`d ride out the ~$600 bucks a year for as long as I could and sell WHEN the market comes back.

At first glance maybe this wouldn`t be a deal that you would buy but the story changes when you actually own the property and have to involve the costs of getting rid of it.

Just my opinion, others have been at this longer than I have and may have different opinions.

 

[smack123]

QUOTE (jgg123 @ Sep 25 2008, 03:46 AM) I realize that the 50% rule is a quick and easy way to calculate whether or not a property will cash flow or not but it definitely is not the end all be all.

Take a look at the property in a different way: 167K mortgage, refinanced @ a 35 year term at lets say 5.5% fixed (conservative amount) = 896.82 mortgage month

So, this house will cost him 850+896 or about -46 a month "true" cashflow at rents right *now*. Just because the house isn`t cash flowing doesn`t mean that it`s not making money (paying down the mortgage). And I agree that you can`t buy on appreciation alone, but if RE investors didn`t think that rents and values were going to go up over time not a lot of us would be investing in real estate.

Another thing to decide when getting rid of a property as mentioned above is the costs of selling. How many years of negative cash flow is it worth to take the hit selling in a down market + closing costs. I`d ride out the ~$600 bucks a year for as long as I could and sell WHEN the market comes back.

At first glance maybe this wouldn`t be a deal that you would buy but the story changes when you actually own the property and have to involve the costs of getting rid of it.

Just my opinion, others have been at this longer than I have and may have different opinions.

jgg123 - Thanks for your comments. I agree - the cost to sell right now just makes things worse. It`d be plus/minus $20,000 to get out by the time I pay commission, legal, etc.

I like your suggestion of refinancing at a longer term but still paying down the principle. I understand where some are coming from with the idea of an interest only mortgage (essentially a HELOC), but I think it`s better in the long run to be paying down that mortgage especially given that I can justify the expense and don`t NEED this house to be in a positive cash-flow in order to own it. Paying down the mortgage also opens up additional equity with which I can then look to do something else as well.

I agree that I likely wouldn`t look to do this if I was starting out, but already owing the house makes it an entirely different situation. The biggest problem I have is the concept of selling in a soft / declining market. If I can ride it out for a few years and see some positive appreciation and sell on an upswing obviously that would be preferable.

Thanks for your input.

 

[smack123]

Perhpas most importantly, I work in the urban planning and land development field and have a great deal of knowledge and ability with respect to the industry and I would very much like to build and land development / real estate portfolio. I feel this is a good place to start that venture.

 

[smack123]

QUOTE (jgg123 @ Sep 25 2008, 03:46 AM) I realize that the 50% rule is a quick and easy way to calculate whether or not a property will cash flow or not but it definitely is not the end all be all.

I am ssusming that the 50% rule is that expenses will equal mortgage payment plus roughly 50% of whatever rent the property is generating?