Sell and replace with newer property?

[sdurand]

I purchased a 2-bed condo several years ago that is in a very well-managed complex. The place rents without issues, and I have had the same tenant now for over 4 years. The condo is now 12 years old. Plans for major repairs (is roof) are in about 6-7 years. Everything else is well looked after. reserve fund is strong, so there are no concerns there...



Given the current activity in the Calgary area, I could sell this condo for about $225,000 or so, which is $100,000 more than the current mortgage. I'm tempted to sell the property and take the cash, less capital gains tax, and re-invest in A newer property in another part of the province for better cashflow, like a newer suited house in Edmonton, for example (I already own one and I see the better returns). The condo is still providing me with a decent cash flow (about $400 monthly) since the rents are strong in the Calgary area.



Should I consider doing this or am I missing something? The thought keeps coming to me, and now that the current lease is coming due and my mortgage is also up for renewal, it might be a good time to think about this.



Give me your thoughts. Would appreciate hearing from your experience and wisdom!

 

[Matt Crowley]

What about a refinance and keep the solid asset?



Why did you decide to go legal suites in Edmonton? Just curious!

 

[Thomas Beyer]

Houses tend to appreciate more than condos. So that is one reason to do it. Or you could refi the condo at 2.6-3%, pull maybe $50,000 out and buy a smaller house elsewhere. What is the overall goal here ?

 

[sdurand]

I thought through the refi option again after I posted...



The goal is to continue to build my portfolio and increase cashflow.



The condo has been providing steady cashflow for the years I've owned it, but as it is getting older, I worry about the ability to rent it out compared to the hundreds of brand new condos being build with more modern floorplans, materials, etc... I know I could do some updating at some point to keep it more current and in line with what the new generation of renters may want.



I'm finding that the suited houses in Edmonton are providing a better cashflow and better ROI for my invested capital. And as Thomas commented, appreciation on houses will be better.



So in summary, I would say my reasons for doing it are:



1. get better cashflow and ROI for my capital

2. continue to build portfolio in Edmonton (where I see potential)

3. replace older condo with a newer property (easier to rent, less maintenance, etc...)



Appreciate the replies!

 

[Matt Crowley]

[quote user=sdurand]

1. get better cashflow and ROI for my capital

2. continue to build portfolio in Edmonton (where I see potential)



Okay, that's making more sense to me now...it sounds to me like you may end up investing ~$10k to maintain the current yield on the condo. That is starting to get in the neighborhood of the costs to pay a Realtor to sell. And, if you are investing the money anyway, why not secure an asset with greater income and capital growth potential?



For me personally, I have chosen not to purchase condos at this point simply because of the condo fees. They are ~$300 in Edmonton and crowd right into your income-qualifying space. They are a great turn-key investment.



From what I can see, you are pretty much at the ideal cash level to develop a legal suite. (~$70k for down payment, $25k for renovations, $3 k for appliances, $2 k reserve).



The development officers we have dealt with have been supportive and patient with the secondary suite development. The city's inspectors have a around a one-day turnaround to get your stickers as well. If you buy a home within the approved zoning you are immediately allowed to go develop (other communities like Leduc can require a neighbor survey before they will approve development).



We have found the greatest challenge is finding good tradespeople and sometimes creating solutions to unique problems in the renovations. Understanding what it takes to develop the suites legally is not overly difficult, but it has saved us a few thousand dollars by knowing how to educate some trades so they do not overdevelop.



Have you selected any neighborhoods in particular for the development?

 

[sdurand]

I purchased a suited property in the High Park area of Edmonton. Like that area, along with Grosvenor, etc... I also like the Capilano area just east of the river. I have been looking at turn-key suited houses, but I'm not finding much where I feel the value is there... there's always something that bothers me about what I'm looking at. I have not thought of purchasing a property then add a suite by sourcing trades to complete the work. That is certainly an option and with the right house, might be a good deal for me.



Must do a bit more research - I'm in no rush, but think it would be a good move for me.



Thanks again for your comments.

 

[Matt Crowley]

[quote user=sdurand]I purchased a suited property in the High Park area of Edmonton. Like that area, along with Grosvenor, etc... I also like the Capilano area just east of the river. I have been looking at turn-key suited houses, but I'm not finding much where I feel the value is there...



We have a suited home in Ottewell (directly south of Capilano). It a very attractive area for renters and has great access to downtown.



Buying in this area is a bit more of a capital play. Generally, there is three ways to make money in real estate: principal pay down, cash flow, and appreciation. The houses here are more expensive and the rental rates are not significantly higher than other areas of the city (for example, Mill Woods). You end up making a bit more on the capital appreciation on the property because of the location.



I research rental rates a lot in the city. When it comes to suited houses, there is practically zero difference for what you can collect for a well developed basement suite no matter where it is located (from what we have observed, NE Edmonton tends to be a bit lower). The big difference we see is on the main floor and garage rental value.



If the $400 k range is something you are finding works for your strategy, some really worthwhile neighborhoods that might be worth a look at are Avonmore and Strathearn which are located on the future Valley LRT line (fully funded).



Map of Valley Line LRT Stations: https://www.google.ca/maps/ms?msa=0&msid=214669649098836367948.0004ea8935e7649f9bf7a&hl=en&ie=UTF8&t=m&ll=53.511326,-113.530655&spn=0.204162,0.471039&z=11&source=embed



Congrats on the new purchase? Have you decided to go legal or non-conforming suite?

 

[sdurand]

[quote user=SweetZone]Congrats on the new purchase? Have you decided to go legal or non-conforming suite?


I like to have the zoning match the property I am looking at, but knowing how "friendly" Edmonton is with basement suites, I would consider looking at non-conforming units if the numbers made sense. I'd look at the area to see if there were any other properties with the proper zoning, to make sure the risk of not getting a change in zoning in the future was reduced.

 

[Matt Crowley]

[quote user=sdurand]I would consider looking at non-conforming units if the numbers made sense




Awesome! I think the most recent advice on the legal suite / non-conforming suite debate in the REIN group is to go ahead and build a portfolio of non-conforming and then if you get shut-down you just go legal. There are pros out there doing this successfully, I have no doubt.



There are lots of workable properties out there, but I'm definitely with you that it's worth waiting for the right one. Sellers certainly have a bit of an edge right now, so I'm searching the listings every day and I'm going to pull the trigger when I find the right one. (I'm waiting on the sidelines with my rate hold!)



Here are a few cautions about going non-conforming:



- Edmonton Safe Housing Committee is real and they will inspect your property with one complaint. I have been through this, and had a suite shut down this year.

- This task force is actively searching for non-conforming suites. The Development Officer told me they regularly search Kijiji ads. You can say he was bluffing, but that is what he told me. He said they want every suite in the city to be a legal suite.

- While the Edmonton Safe Housing Committee was established to make more reasonable standards for landlords to meet than is required by the current building code, this group has enormous power. If you do not comply with their orders they have the authority to fine you $400 per day.

- They expect vacancy of the unit. No exceptions. (You may have ~30 days after receiving the official letter)

- You will be waiting for a contractor to develop the suite legally...or you will be paying a premium. Waiting 1-2 months for a good renovation contractor is not unusual in Edmonton right now.

- They expect a development and building permit submitted to the city in around 60 days

- All permits and certifications are required for all trades

- You have to get the development officer through the suite once it is completed. This was a 3 week wait with our last suite. You cannot rent it out until the D.O. goes through and you obtain their approval

- If you build a portfolio of 3-5 houses and they are non-conforming in Edmonton, and you get a complaint for one, the city may inspect all of your properties! I knew a REIN member a few years ago who had (at least) three houses that got shut down at the same time. He was at the edge of bankruptcy as a result.

- The city does not have the capacity to just develop 3 legal suites immediately at a reasonable price. You will have long delays in renovations or pay a super-premium. If you can't refinance your properties, you will be selling suited houses where you will be required to disclose it is non-conforming and flagged by the city. Imagine coming up with $40-60k instantly - while also losing all of the cash flow from the properties and putting several families on the streets. That's not a portfolio I'm willing to hold.



Non-conforming suites can work very well. But be prepared to get called on all of them. It's worth the time to learn what it takes to develop a legal suite as well, just in case you ever do get called. This way you will be able to direct the contractor a little better and not be oversold on unnecessary things (like metal doors for mechanical rooms or 5/8 fire rated drywall). It's a legal suite. Not a duplex, and not an apartment.