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starting to doubt myself

dmo

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My wife and I have owned our current home for the past 5 years and are due to take possession of our new home in 2 weeks. The plan has been to rent out the old house. It`s present value is around 200K with the mortgage coming due in the next couple of months at 145K. I plan to rent it at 1400 with expenses at 1100 for a total monthly cash flow of 300. Should I continue on this course?? or should I sell to access the equity in order to reinvest in something more lucrative?
 
dmo,

What other lucrative investments are you speaking of? If you access equity will you be investing into an region that you have researched and know fairly well what return it will bring?

If you have analyzed your current situation correctly and have a cash flow of $300/m that is pretty good. Depending on where this property is, if it continues to appreciate on a normal level anywhere between 3-6% per year, you can easily wait a bit to increase the equity again while your tenant pays down the debt and you bank away the cash flow.

In the meantime, use this `waiting` time to learn about an area that may be more lucrative for when you do want to access the equity again through a re-finance or maybe an LOC on the current property.
 
QUOTE (dmo @ Jan 27 2010, 05:55 AM) My wife and I have owned our current home for the past 5 years and are due to take possession of our new home in 2 weeks. The plan has been to rent out the old house. It`s present value is around 200K with the mortgage coming due in the next couple of months at 145K. I plan to rent it at 1400 with expenses at 1100 for a total monthly cash flow of 300. Should I continue on this course?? or should I sell to access the equity in order to reinvest in something more lucrative?

Can you sleep at night if the rental is vacant?

This is the question you have to answer yourself - when the place is vacant you have to make two mortgage payments that month, do you have the financial strength to do that?

Could you keep that up if the place was vacant for three months?

If not, maybe you should first focus on your home base. Getting yourself on solid financial footing especially with a young family is the mosy important thing you can do. If you are tensed up because of your investments - no matter what they are - and that starts to come through in your private live, you are just not ready. Peace of mind is worth more than anything else.

Peace of mind is not the same as being so risk averse as not taking action. So plan out what you are going to do with the equity you would recover if you sold your old place and don`t forget to include the commission and legal fees.

If you sold and spend the money on a vacation to Hawaii - that would not be very smart.
Paying off your mortgage on your new residence ASAP and use the money saved from mortgage payments that you now no longer have to make on investments, that is the wise thing to do.

Add to that the extra money from pay raises - but don`t forget to pamper yourself and your family a bit from time to time - without incurring new debt.

You can invest in real estate for as little as $20 dollars (one share in Riocan - a real estate investment trust) or in other shares or bonds until you have enough for a down payment for a rental property and feel comfortable dealing with vacances.

Don`t invest in GICs, Canada Savingsbonds or any long term bonds (expiry dates of 5 yrs or longer). On an after tax and inflation basis these lose money. If you have no stock market experience, use the time it takes to pay of your mortgage on studying books and talk to a stock broker you like (not one that steamrolls you). In that case an ETF on a stock index based on e.g. the TSX is best, provided you won`t be ready to buy in the next three years. Put all your money in an RRSP; if there is more use a TSFA. If you don`t know what they are buy Gordon Pape`s books on these topics - he has many.

Hope this helps.
 
QUOTE (dmo @ Jan 27 2010, 05:55 AM) My wife and I have owned our current home for the past 5 years and are due to take possession of our new home in 2 weeks. The plan has been to rent out the old house. It`s present value is around 200K with the mortgage coming due in the next couple of months at 145K. I plan to rent it at 1400 with expenses at 1100 for a total monthly cash flow of 300. Should I continue on this course?? or should I sell to access the equity in order to reinvest in something more lucrative?

Decent positive cash flow, all else being equal, I`d say keep it. Depends on the type of property and if it fits your model, but I`d probably hang on to it.
 
Hi, sell because with the approximately 50K you can cash out by selling, you may be able to purchase a 4-plex generating $1,000 net/mo for you (depending on where you are!?). what`s better - $1,000/mo or $300/mo? However, if for whatever reason you will not do the above, don`t sell because $300/mo is still better than nothing. GL!
 
Personal single family homes do not make the best choice for rentals. $1400 is low for a $200,000 investment.

Can you be certain you will infact have a positive cash flow. What are you basing the numbers on, how much have you included for such things as vacancies, advertising, insurance, legal, evictions, vacancies, utilities while vacant, maintenance, major repairs etc.

More importantly, in my opinion, are you prepared to live with the damage and deterioration that tenants do to your property.
Renters generally do not respect and care for a property to the same level as owners. They use it and move on.
You must then invest time and money to resell to a new owner unless it is sold as a rental unit. Selling as a rental unit means the rental income will determine the resale value.

Do you know what is involved in being a landlord. Are you prepared for the late night calls and difficult tenants crazy demands.

Turning your present home into a rental property because it is convenient is not the same as investing in a income property.
They are not necessarily the same animal.
 
If it`s nice house...maybe rent to own?
I did this last year, and had an appraisal first before deciding on what to do .

Kir.
 
Based on the figures you provided, you will be cash-flowing for sure. The only concern I would have is the switch from having the property become your personal (capital gain tax free) to a revenue earning property (taxable). I haven’t had this scenario before, but wouldn’t this be something you will need to justify? …Having the two parts of non taxable to taxable portions would make things complicated? Would it be better to just make it clean and sell, and use all the proceed towards the new home. Then refinance or do a HELOC to loan to your business to purchase a revenue prop!?
 
QUOTE (JNB @ Jan 30 2010, 07:59 PM) Based on the figures you provided, you will be cash-flowing for sure. The only concern I would have is the switch from having the property become your personal (capital gain tax free) to a revenue earning property (taxable). I haven`t had this scenario before, but wouldn`t this be something you will need to justify? …Having the two parts of non taxable to taxable portions would make things complicated? Would it be better to just make it clean and sell, and use all the proceed towards the new home. Then refinance or do a HELOC to loan to your business to purchase a revenue prop!?

Get a professional appraisal for the time you plan to convert your old residence into an income property while you and your family move into a new personal residence. All cap gains up to that moment are tax free. After that the now converted income property is treated exactly as all other investment properties. Check with your accountant that this is the correct approach.
 
QUOTE (JNB @ Jan 30 2010, 09:59 PM) Based on the figures you provided, you will be cash-flowing for sure. The only concern I would have is the switch from having the property become your personal (capital gain tax free) to a revenue earning property (taxable). I haven`t had this scenario before, but wouldn`t this be something you will need to justify? …Having the two parts of non taxable to taxable portions would make things complicated? Would it be better to just make it clean and sell, and use all the proceed towards the new home. Then refinance or do a HELOC to loan to your business to purchase a revenue prop!?


The key to that statement is "based on the figures provided" which are very sketchy. The missing numbers point to far less cash flow and in my opinion likely negative cash flow. But that`s only an educated guess.
 
QUOTE (invst4profit @ Jan 31 2010, 05:46 PM) The key to that statement is "based on the figures provided" which are very sketchy. The missing numbers point to far less cash flow and in my opinion likely negative cash flow. But that`s only an educated guess.

At a quick glance just basing from the 10% rule...If he is renewing his mortgage (better reate I hope) at $145,000 and able to rent it for $1400 per month then wouldn’t he takes home approximately $190 a month!?
 
QUOTE (gwasser @ Jan 31 2010, 04:05 PM) Get a professional appraisal for the time you plan to convert your old residence into an income property while you and your family move into a new personal residence. All cap gains up to that moment are tax free. After that the now converted income property is treated exactly as all other investment properties. Check with your accountant that this is the correct approach.


Thanks... I have always wondered how this work!
 
QUOTE (JNB @ Feb 1 2010, 12:11 AM) At a quick glance just basing from the 10% rule...If he is renewing his mortgage (better rate I hope) at $145,000 and able to rent it for $1400 per month then wouldn`t he takes home approximately $190 a month!?


Percentage rules are based on the value of the property not the size of the mortgage. If it were based on the mortgage then paying cash for a property would turn every deal into a good deal. This is of course not the case.

Investors must always remember an income investment property has two sources of income, one generated by the cash invested the other from the property itself. These income streams must be separated to see the true value of a investment. Cash must earn it`s keep otherwise it is poorly invested.

That being the case we must consider the owner has $55,000 tied up in the property. Considering a modest return of 5% on his investment that would be $229 per month attributed not to the property but strictly the cash investment.

$190-$229= -$39/month based only on ball park guesstimates.

Definitely negative cash flow in my opinion but again we have no idea what numbers make up his estimate of expenses. I would expect his loses to be somewhat greater.
 
QUOTE (invst4profit @ Feb 1 2010, 06:51 AM) Percentage rules are based on the value of the property not the size of the mortgage. If it were based on the mortgage then paying cash for a property would turn every deal into a good deal. This is of course not the case.

Investors must always remember an income investment property has two sources of income, one generated by the cash invested the other from the property itself. These income streams must be separated to see the true value of a investment. Cash must earn it`s keep otherwise it is poorly invested.

That being the case we must consider the owner has $55,000 tied up in the property. Considering a modest return of 5% on his investment that would be $229 per month attributed not to the property but strictly the cash investment.

$190-$229= -$39/month based only on ball park guesstimates.

Definitely negative cash flow in my opinion but again we have no idea what numbers make up his estimate of expenses. I would expect his loses to be somewhat greater.

Greg I think you have also to look at the market you`re in. In 2007, Don pointed this already out. Some markets tend to provide more cashflow while others deliver (from time to time) higher appreciation. I know you consider appreciation speculative, I don`t quite agree - it depends on how `reasonable` your expected appreciation is. In Calgary cap rates are typically 3 to 4% and you really have to dig to get 6 to 7%. My favorite target but... you must be in rental pools which are difficult to finance to do so (or large multi-family properties). On the otherhand, appreciation with some exceptions is quite good and consistent. If that was not the case, why would REIN consider Calgary and Edmonton the top 1 and 2 places in Alberta if not Canada to invest? I agree you want positive cashflow, but demanding 5% ROI on your cashflow is not everywhere realistic.
 
QUOTE (gwasser @ Feb 1 2010, 11:07 AM) Greg I think you have also to look at the market you`re in. In 2007, Don pointed this already out. Some markets tend to provide more cashflow while others deliver (from time to time) higher appreciation. I know you consider appreciation speculative, I don`t quite agree - it depends on how `reasonable` your expected appreciation is. In Calgary cap rates are typically 3 to 4% and you really have to dig to get 6 to 7%. My favorite target but... you must be in rental pools which are difficult to finance to do so (or large multi-family properties). On the otherhand, appreciation with some exceptions is quite good and consistent. If that was not the case, why would REIN consider Calgary and Edmonton the top 1 and 2 places in Alberta if not Canada to invest? I agree you want positive cashflow, but demanding 5% ROI on your cashflow is not everywhere realistic.


Great points! I think I`ll pile on with a few more!

Every market is different and single family homes can be great investments as they are very liquid and their "worth" is not dependant on a cap rate.

A few questions I would have are.
1. Where is the property? (Tough to know if its a good or bad investment with out at least asking this. There are so many factors that a location brings into the mix)

2. How have you chosen your monthly rent number? (Is this fair market ie you have done some research)

3. Whats your risk tolerence? (You may want to look at refinancing the property and pulling out enough to put 10% down on another property.)

At the end of the day, this property should more than cash flow with 10% down! (Even after having factored in BOTH vacancy and maintainence. Vacancy will of course depend on the market and the location of the house, so its really tough to make a call without knowing)

This home WOULD cash flow if purchase in KWC for example (Even with a 5 year fixed!!!!)

If you need any help, let me know and I`b be happy to share with you what I do, have done, and will be doing in 2010.

Good Luck!

James
 
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