[CAllinson19]

We currently have a 2 bedroom condo in Toronto. Ideally, we would like to keep our condo as we purchase a home for our growing family. Our current condo mortgages, fees, and property taxes would be covered by renting it. What are some good resources when considering on getting a second home? What financial institution offers the best rate? Where should I start to really determine if this is the right choice?

 

[Just a Guy]

Whereas the rent may cover the current mortgage, condo fees and taxes, what about the dead equity portion of your condo?

for example, your condo may be worth $500k, but you’ve paid it down to $200k where it now cash flows. This leaves $300k as an interest free (if not negative) guarantee for the bank, earning you nothing.

Better investment would be to sell the property and buy two or more cash flowing rentals, probably not possible in Toronto, which is a good indicator that it’s not a good place to invest in real estate.

Think of investing in internet stocks at the height of the dot bomb phase.

 

[Longtimeago]

You have not provided anywhere near enough information on which anyone could try and give you a RELEVANT to your situation answer CAllinson19.

So what happens is people then make ASSUMPTIONS which may or may not be correct. If they get the assumptions wrong, guess what that can do the validity of the suggestions?

You need to start with providing info on what you bought the condo for, how much you still owe on it. What do you intend to spend to buy your second home, how much down payment will you put on it and how much interest you will pay on that new mortgage.

As you describe it, the condo rental is not going to earn you any income, so you are hoping for an increase in capital value. Condos may continue to go up in price or they may fall, no one here has a crystal ball.

As Just a Guy suggests, you may have capital stuck in the condo that could be realized and put against the purchase of a new home which would of course mean you would end up paying a lot less interest on the mortgage of that new home. The capital would still be there in the new home and IT might go up as much or more than it would in the condo. Who knows, again no one has a crystal ball that would tell them whether detached house prices are going to increase in value faster than condo values in the next say 10 years.

Then there is the whole other subject which you have not mentioned, of being a landlord. You don't just rent the condo and forget about it. What kind of value do you put on your own time in having to be a landlord? That's a cost that's hard to calculate.

 

[AltaRed]

LTA, better said that what I might have started with 'this looks like a really dumb idea'. Given the price of housing stock in the GTA, there is virtually no way an investment property can provide a rate of return on its own....beyond. perhaps presumptuous assumption of, capital appreciation. At the very least the investment property needs to be leveraged up as much as possible, with tax deductible interest, to avoid excessive dead equity. The equity is much better utilized in the primary residence where mortgage interest is not tax deductible. As LTA said, way too many unknowns in the original post.

For reference, it is suggested in https://www.avisonyoung.ca/document...ulti+Residential+Investment+Review+(Q1+2019)/ and also Page 18 of https://multifamilybc.cbrevancouver...9/07/Q12019-Canadian-Cap-Rate-Report_9PgR.pdf and also page 49 of https://www.cibcwg.com/c/document_l...517-4a12-4ced-9a64-50a932f7a9c5&groupId=39475 that the GTA Cap rate is in the order of 3-3.7% but of course, the OP's Cap rate could be a lot different depending on the market value of that specific condo. It wouldn't take a lot of effort to get a better return in the capital markets... or in the OP's case, throwing all the equity into the new principal residence.

 

[themortgageguy]

Consider refinancing the condo as a rental to the max allowable (i.e. max mortgage that qualifies on condo). Take those funds and use them for down payment on PR. Max expenses on income from rental property and less on your non-deductible expensesfor your PR. Numbers meed to be determined of course.

 

[The Black Wizard]

Why not seems like that is the Canadian thing to do these days, always plan for all the possible things that could go wrong though. Are you liquid enough?

We currently have a 2 bedroom condo in Toronto. Ideally, we would like to keep our condo as we purchase a home for our growing family. Our current condo mortgages, fees, and property taxes would be covered by renting it. What are some good resources when considering on getting a second home? What financial institution offers the best rate? Where should I start to really determine if this is the right choice?

 

[Mortgage u/w]

What's your intention with this condo and why do you want to hold on to it? Will it provide such good income that it becomes an 'ideal' investment?. If rent will only cover current expenses, its barely a good investment. If you can leverage max equity from it and still generate a healthy cash flow, then I would consider this a much better investment.

Given the limited info you provided, my immediate suggestion would be to sell the condo and apply the equity on a home that will satisfy your needs.

As for mortgage rates, all rates are fantastic these days. Pay attention to product benefits which are far more important. And focus on the exit rate rather than the initial rate.

 

[themortgageguy]

If he refinances to 80% LTV and it still covers itself and it provides a sufficient amount of down payment towards the residence purchase why not hang onto it? Possible future capital gains and mortgage is being paid down without affecting personal disposable income

 

[Mortgage u/w]

If he refinances to 80% LTV and it still covers itself and it provides a sufficient amount of down payment towards the residence purchase why not hang onto it? Possible future capital gains and mortgage is being paid down without affecting personal disposable income

Because you can obtain a much better return elsewhere. 'Breaking even' on a rental is not a great investment. What's your return when a repair is needed? Vacancy? Increase in expenses? And the one that no one ever considers; income taxes & eventual capital gains?

 

[themortgageguy]

I don't think there is one other investment out there that has provided a better return in recent memory than real estate or is as safe. As for taxes, you only pay them when you make money and capital gains are only taxed on 50% of the gain. And breaking even on a condo is fine because its reducing their expenses on disposable income with respect to the home purchase. Also, while you're "breaking even" principle balance is being decreased by some else so a monthly equity increase for them as well.

Also please tell us where the better returns are. I'm seriously interested.

 

[AltaRed]

The national average growth in RE prices does not match capital market growth over long periods of time. That has been proven by a number of studies. The only reason RE can come out ahead (if there is not major downturn and foreclosures) is high LTV ratios.

 

[themortgageguy]

The national average growth in RE prices does not match capital market growth over long periods of time. That has been proven by a number of studies. The only reason RE can come out ahead (if there is not major downturn and foreclosures) is high LTV ratios.

National average growth is irrelevant. Condo is in Toronto. As an example: home purchase is 1998 for $175K now worth $775K

 

[AltaRed]

National average growth is irrelevant. Condo is in Toronto. As an example: home purchase is 1998 for $175K now worth $775K

You made a blanket statement without qualification as to location.

 

[themortgageguy]

You made a blanket statement without qualification as to location.

No the conversation was always about a condo in Toronto so location was never in doubt and need not be referred to. You didn't read the content and made a blanket statement without the facts of location.

 

[marina628]

Many times people fail to include repair bills ,missed rental income with bad tenants who do damage to their home ,cost to sell ,taxes and lost opportunities elsewhere with the cash deposits of 20% when running numbers.If you want to do this I would recommend you do finance existing condo to max amount you qualify for and use the equity to buy your new home as interest will be a write off on the condo.The market rental rates change day by day I think today's rate are probably close to what the markets can handle , I actually seen one drop $100 plus offer 1 month free in the building I have been watching as a possible investment.

 

[AltaRed]

No the conversation was always about a condo in Toronto so location was never in doubt and need not be referred to. You didn't read the content and made a blanket statement without the facts of location.

Thread drift happens all the time so stand alone statements CAN be taken out of context. That be what it may, have it your way........

RE prices don't always go up in GTA, or anywhere for that matter. It also depends on one's time frame. Per https://precondo.ca/toronto-real-estate-prices it took 10 years for the 1989 peak to get back to that peak. GTA will go through another one of those.... the only question is when.

 

[Mortgage u/w]

I don't think there is one other investment out there that has provided a better return in recent memory than real estate or is as safe. As for taxes, you only pay them when you make money and capital gains are only taxed on 50% of the gain. And breaking even on a condo is fine because its reducing their expenses on disposable income with respect to the home purchase. Also, while you're "breaking even" principle balance is being decreased by some else so a monthly equity increase for them as well.

Also please tell us where the better returns are. I'm seriously interested.

All theories are "fine" as long as you are satisfied with the return you are aiming for. To be honest, you have just repeated what the majority of inexperienced and/or wannabe RE investors say. Breaking even is surely one risky way of building wealth.

While breaking even, why invest in RE then? Why not borrow money at say 3%, invest in the stock market and be content with a 3% return? You're breaking even.....and balance is being decreased by someone else's money. To be honest, I'd rather do the latter since I avoid the headaches of managing tenants and could potentially increase my return. (I still wouldn't do it, just trying to illustrate an example).

I personally own real estate and its been cash positive since day 1. I've been able to recuperate my initial investment and remain cash positive. My return is basically infinite since I have 0 dollars of my own money invested. So this is one example of a better return which you have asked for.

Just to be clear, I am not saying there are better investments than RE. I am saying there are better ways to make money in RE. So in the OP's situation, I would personally sell the condo and place the money in a more profitable property.

 

[marina628]

I think as long as the OP has the means to go through the bad times they can keep for 5-10 years pay down the principle with the rent and come out on top.A few years ago my friend asked me to buy a house in Georgia with her for $40,000 ,she wanted to pay cash and do work then six month later do mortgage to get all money out .It was suppose to be a one time loan from me to her but today we have 14 homes in Georgia she does all the work I have never seen any of them and trust her to do all work.One burned down 2 years ago but was still vacant as we were renovating ,apparently some kids broke in and caused a fire and we got $100,000 from insurance plus was able to sell the land and bought 3 for the money.It is amazing what you can do in the right markets $800 a month covers all expenses and it is such a small amount of money .

 

[themortgageguy]

Thread drift happens all the time so stand alone statements CAN be taken out of context. That be what it may, have it your way........

RE prices don't always go up in GTA, or anywhere for that matter. It also depends on one's time frame. Per https://precondo.ca/toronto-real-estate-prices it took 10 years for the 1989 peak to get back to that peak. GTA will go through another one of those.... the only question is when.

Happy you could acknowledge your thread drift. And you're sounding like Garth Turner...grasping at 10 year history to prove your point.

 

[themortgageguy]

All theories are "fine" as long as you are satisfied with the return you are aiming for. To be honest, you have just repeated what the majority of inexperienced and/or wannabe RE investors say. Breaking even is surely one risky way of building wealth.

While breaking even, why invest in RE then? Why not borrow money at say 3%, invest in the stock market and be content with a 3% return? You're breaking even.....and balance is being decreased by someone else's money. To be honest, I'd rather do the latter since I avoid the headaches of managing tenants and could potentially increase my return. (I still wouldn't do it, just trying to illustrate an example).

I personally own real estate and its been cash positive since day 1. I've been able to recuperate my initial investment and remain cash positive. My return is basically infinite since I have 0 dollars of my own money invested. So this is one example of a better return which you have asked for.

Just to be clear, I am not saying there are better investments than RE. I am saying there are better ways to make money in RE. So in the OP's situation, I would personally sell the condo and place the money in a more profitable property.

First of all we don't know if its a break even situation I suspect its not but maybe close. Also I deal with these situations all day everyday. Many people have done very very well taking this course of action. And you're speaking like an investor that doesn't take financing into account. Its much harder to refinance a rental as the subject property than it is as your principle residence so much so that if this is their first rental it might not even be possible as a rental refi. Higher rates as well