66 replies to this topic

[MarkoJ]

I agree with most of this.  However, you really should apply another 2.2% to the downpayment as lost opportunity to use that money elsewhere: so add in another $53/mo cost there.  And of course your ppt and lawyer costs are amortized over the length of ownership. 

 

If I buy $40,000 worth of BMO shares that yield a 4.3% dividend do I apply 2.2% lost opportunity cost to dividend cash flow?

[MarkoJ]

Your numbers look like they work right now.

 

However, for long term:

What about once strata fees go up, and levies start happening? One levy will wipe out the years cash flow.

 

Long term, mortgage rates won't be at 2.2%. Maybe you'll average 4% over 25 years. Still low, but there goes the cash flow long term.

 

Your numbers don't include costs than many others may have, such as property management (6% of income?, which would wipe out all the cash flow by itself).

 

You are only looking at the negative future outcomes.

 

When I bought my Era unit in 2014 I ran my calculations based on $1,150 for rent and 3% for prime lending rate.  2015 brought $1,195 (very easily obtained) and a 2.7% prime lending rate and on completion the one bedroom units sold extremely quickly without the $2,500 pre-sale discount and with large floor differentials (going up).  Basically the value of the unit went up too.

 

Yes mortgages won't be 2% forever, but increases will likely be tied to some sort of inflation so it is possible that by the time mortgage rates are 4% the rents are $1,400-$1,500 per month.  

 

I don't pay "Uncle Bob's Investment Group" 2% MER to manage my RRSPs and TSFAs so not going to pay 10% of gross rent (going rate) to have my properties managed when I live in Victoria.

[spanky123]

Dumb question but to what extent to condo strata's limit rentals these days?

[MarkoJ]

Thanks for examples, but nothing in there for any repairs or potential vacancies... First 5 years you might be OK, but when you need to paint the unit the first time in 5 years time, or do some small repair (appliance breakdown, etc..) or have it empty 1 month between tenants, that will kill the cashflow for the previous number of years.

 

As someone with many rental apartments, I caution against some of the new small condos as investments.  I've often advised people to look at the older buildings with larger square footage units, such as 2 bedrooms with 2 bath and around 1000 sq.ft. that many 1990s buildings have, with insuite laundry, etc... and try to buy one at the best possible price. 

You can get decent rent from them and I believe tenants will remain longer in a large 2 bd than a small 500 sq.ft. 1 bedroom or studio.  One can easily get between $1300-1350 for large (1000 sq.ft.) 20 year old condo in good shape near downtown with parking.  (or maybe more, but I want to be realistic).

 

It may no thave the bling of the brand new units, and may have some maintenance ot do (and please make sure the envelope has been remediated!), but will likely cashflow better in the long run than a new unit where the square footage is very small and costs are under estimated as in your scenario.

 

But I agree with you that the older units/buildings may have some repairs, this is where one can get tired of owning rentals and some wish to avoid this headache.

 

Running the figures on two different investment type to see the net return is the best way to compare in the end.

 

1.  There is also nothing in my calculations for potential rent increases or potential appreciation; those factors could hypothetically offset a month between tenants or a new dishwasher.  

 

2.  Personally, the problem I have with buying older condos is you have to pay market value.  With pre-sales a few years out there is often an opportunity to buy a condo at below market value (the pre-sale is less in cost when compared to an equivalent existing condo).

 

The two bed, two bath older condo is usually in an inferior location and wood framed.  Location is extremely important.  A one bedroom without parking at the Era will fetch similar rent to a two bed two bath with parking at Bear Mountain.  

 

You have the issue of strata fees (based on square footage in 98% of buildings).  With a very small unit the strata fees are a very small percentage of building entitlement.  For example, at the Promontory my unit pays less than 1/10th of what the penthouse pays.  Can the penthouse really use to conceirage person or elevators more? Not really.  The bigger condo you go the fatter the strata fees, with near zero added value!

 

20 years old equals 20 year old elevators...good shape or not elevator will need to be changed out 20 years sooner compare to a new unit.  A decent elevator is around $200,000 to $250,000?

 

Finally, you are looking at a bigger capital investment.  A 2 bed, 2 bath, insuite laundry, with unresticted rentals, no age restrictions, pets and BBQs allowed, close to downtown will typically be north of $300,000 in a half decent building.

 

The 2 bed 2 bath bigger unit makes "more sense," I guess...why not buy double the size of condo for only 50% more; however, I just don't see the actual numbers supporting it.

 

$1,300-$1,350 month rent, strata fees of close to $300/month, taxes probably $160-$180/month, and purchase price of approximately $300,000 equals negative cash flow.

 

Excellent discussion...keep in mind these are my personal opinions.  An older condo may be a better investment for some.

Edited by MarkoJ, 16 July 2015 - 05:14 PM.

[MarkoJ]

Dumb question but to what extent to condo strata's limit rentals these days?

 

Newer buildings are almost exclusively unrestricted rentals.

[spanky123]

Newer buildings are almost exclusively unrestricted rentals.

Is that in perpetuity or can a new strata council amend that after a set period of time?

[spanky123]

You are only looking at the negative future outcomes.[/size]
 
 [/size]
When I bought my Era unit in 2014 I ran my calculations based on $1,150 for rent and 3% for prime lending rate.  2015 brought $1,195 (very easily obtained) and a 2.7% prime lending rate and on completion the one bedroom units sold extremely quickly without the $2,500 pre-sale discount and with large floor differentials (going up).  Basically the value of the unit went up too.[/size]
 
 [/size]
Yes mortgages won't be 2% forever, but increases will likely be tied to some sort of inflation so it is possible that by the time mortgage rates are 4% the rents are $1,400-$1,500 per month.  [/size]
 
 [/size]
I don't pay "Uncle Bob's Investment Group" 2% MER to manage my RRSPs and TSFAs so not going to pay 10% of gross rent (going rate) to have my properties managed when I live in Victoria.[/size]

So lets run the math on your ERA unit.

If you bought the least expensive unit at $200K then your mortgage at 3% is $760 a month. If condo fees are $250, tax is $200, insurance is $100 and misc is another $100 then I don't see how you net anything let alone $100 - $300 a month on even a $1,200 rent. And that of course assumes that you pay no management fees and your condo is rented 12 months a year.

[MarkoJ]

So lets run the math on your ERA unit.

If you bought the least expensive unit at $200K then your mortgage at 3% is $760 a month. If condo fees are $250, tax is $200, insurance is $100 and misc is another $100 then I don't see how you net anything let alone $100 - $300 a month on even a $1,200 rent. And that of course assumes that you pay no management fees and your condo is rented 12 months a year.

 

^I posted the numbers on the Era earlier in the thread.  It is about $100 cash flow positive on 25 year amort, you can get it up using a 30 or 35 year amort.

[spanky123]

^I posted the numbers on the Era earlier in the thread.  It is about $100 cash flow positive on 25 year amort, you can get it up using a 30 or 35 year amort.

 

Thanks. Missed the figures. Surprised that your taxes and insurance are so low. Did you furnish it for $1,200 a month?

[kirk]

Obviously limited condo restrictions is best for resale value.  

 

Would you guys not buy a condo because there were too many rentals in the building? 

[Mixed365]

Is that in perpetuity or can a new strata council amend that after a set period of time?

The strata can amend, but you are often grandfathered through. 

[jklymak]

If I buy $40,000 worth of BMO shares that yield a 4.3% dividend do I apply 2.2% lost opportunity cost to dividend cash flow?

Yeah if I was leveraging to buy the bmo shares its easier to compare the return rate compared the the rate of borrowing the money. Then you don't need to compare how much principal has been paid down which is where it's easy to get confused. cash flow is a strange way to value an investment because it really depends on the balance of your mortgage.

[pherthyl]

1.  There is also nothing in my calculations for potential rent increases or potential appreciation; those factors could hypothetically offset a month between tenants or a new dishwasher.

There are lots of tools out there for projecting returns that do take into account all the factors that apply.

Probably better than hoping one unaccounted for factor cancels out the other (I know you've thought through it in detail, but for a new buyer).

http://www.nolo.com/...y-worth-it.html
http://www.rentalpro...perty-analyzer/
http://www.ultimatec...e_property.html

[lanforod]

Loving this discussion! It is threads like this that I learn a lot. Helps me see things at different angles. Everyone's situation is different of course. Marko's situation is probably rather unique - he has early access to pricing data, is a Realtor (tm... yada), can manage his own properties effective but is short on time, so targets new builds to minimize management time, and has a specific location in mind (near downtown).

[Mike K.]

Do any of you operate your rentals through holding companies or corporations? What costs does that add to the fray?

And I always thought a bank would give you a higher interest rate if purchasing a property not for personal use as a primary residence. Is that not the case?

[lanforod]

And I always thought a bank would give you a higher interest rate if purchasing a property not for personal use as a primary residence. Is that not the case?

 

I believe this is still the case, and usually needing a larger down payment. I don't think its regulated that way, its just the banks building in higher costs due to higher risk.

[Mike K.]

Ok I getcha. So let's add that to the cost, especially if the lender has no or limited history with the purchaser. I can't see many people getting extra competitive rates on investment condos given the risks and costs described here.

Marko is in a good position to be a condo rental landlord. Knows the industry, has insights on pricing and ROI's, has a system in place to avoid unnecessary costs and doesn't incur the sorts of transaction fees a typical buyer would when selling and can assume the full value of the transaction commission when buying, I would think?

Marko's got it going on

[Castera]

Oh I would advise that all people planning on being a landlord should be part of the LandlordBc.ca association (formerly the ROMS BC from Victoria and BCAOMA which merged a few years back).

Excellent forms, cheap credit check on new tenants, free advice for difficult tenants, and many more benefits. 

If you hire a management company, this is redundant, but if you self manage.. even with 1 or 2 units.

[Castera]

1.  There is also nothing in my calculations for potential rent increases or potential appreciation; those factors could hypothetically offset a month between tenants or a new dishwasher.  

 

2.  Personally, the problem I have with buying older condos is you have to pay market value.  With pre-sales a few years out there is often an opportunity to buy a condo at below market value (the pre-sale is less in cost when compared to an equivalent existing condo).

 

The two bed, two bath older condo is usually in an inferior location and wood framed.  Location is extremely important.  A one bedroom without parking at the Era will fetch similar rent to a two bed two bath with parking at Bear Mountain.  

 

You have the issue of strata fees (based on square footage in 98% of buildings).  With a very small unit the strata fees are a very small percentage of building entitlement.  For example, at the Promontory my unit pays less than 1/10th of what the penthouse pays.  Can the penthouse really use to conceirage person or elevators more? Not really.  The bigger condo you go the fatter the strata fees, with near zero added value!

 

20 years old equals 20 year old elevators...good shape or not elevator will need to be changed out 20 years sooner compare to a new unit.  A decent elevator is around $200,000 to $250,000?

 

Finally, you are looking at a bigger capital investment.  A 2 bed, 2 bath, insuite laundry, with unresticted rentals, no age restrictions, pets and BBQs allowed, close to downtown will typically be north of $300,000 in a half decent building.

 

The 2 bed 2 bath bigger unit makes "more sense," I guess...why not buy double the size of condo for only 50% more; however, I just don't see the actual numbers supporting it.

 

$1,300-$1,350 month rent, strata fees of close to $300/month, taxes probably $160-$180/month, and purchase price of approximately $300,000 equals negative cash flow.

 

Excellent discussion...keep in mind these are my personal opinions.  An older condo may be a better investment for some.

 

1) I totally agree that the rents can go up as can expenses.  Each building/unit is different so one would have to include these factors in their projections.

 

2) I agree that paying "full market value" makes the investment less interesting.  I am out of the condo rental market now but 10+ years ago there were more deals so my experience is somewhat dated.  One unit I purchased, was one whose MLS listing was close to expiring, so I low balled and the listing agent took a cut on their commission to make the sale happen (he would have been double ending the deal) so between my low ball offer and agent cutting their piece of the pie, it was close to a 20% reduction compared to the listing price for a 5-6 year year old condo unit.  Granted this may be a one off, but in terms of hours spent looking and visiting units, it was an easy way to make money.

The money most easily gained is a the time of purchase.

Also if it is for an investment, do not fall in love with the condo, if vendor wont budge on price, move on and find a more motivated vendor... easier said than done I agree but can be worth while.  An investor's goal should be to make money, not collect nice condos which do not cash flow.

 

New elevators are like $60-70k and should last 50+ years.  So not a large concern. 

 

Again, just my opinion.

[kirk]

Obviously not having condo (age/rental) restrictions is best for resale value.  

 

Would you guys not buy a condo because there were too many rentals in the building?

 

(Hard to tell if this is a negative because tenants may not care about the building long term - or if it is a plus because the place is apparently easy to rent out?