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Discussion Starter #1
I have been following the forums for a long time but this is my first post here. As the title says, my wife and I own two condos in Calgary and we are debating whether we should sell or rent them, in advance of our move to one of BC's Gulf Islands where we plan to semi-retire on our small acreage (mortgage-free ), with the plan to build a small house and live there part of the year (April to October) with travel in winter, for the first ten to twenty years of retirement, then eventually full time when travel becomes too tedious due to age.

One of the condos was purchased in 2010 for $290K. It is a nice and bright 2-bed 2-bath unit in an older low-rise building centrally-located in Victoria Park. It is mortgage-free, with utilities, taxes and condo fees totaling $600/month. It is a well managed building with an underground parking spot for the unit. We currently occupy this apartment. I figure we could rent it for about $1.6K-1.8K, which would give us a positive cashflow of $1K-1.2K a month.

The other unit is a beautiful and unique loft located in a concrete low-rise building in East Village. We purchased it in 2010 for $226K, and we have a mortgage of $85K. We have been renting it without vacancy since day 1. Currently rented for $1.7 all inclusive, with an underground parking spot. All expenses taken into account (municipal tax, maintenance, condo fees, interests, etc.), it nets us around $1K per month (before income tax).

Our original plan was to sell both units, then move to our BC property and live in our RV while we build our little house ($90K max). We presently have enough cash to build our house without having to borrow, that is if we use all our cash savings which are in the form of taxable investments and TSFA. I have not looked at how much similar condos are going for -if they are selling at all, but in the current real estate market, we are no longer sure whether we should try to sell them now, or just become long-distance landlords (have them managed, with the added expense) and hope to keep a positive cashflow until the market rebounds. If we had to borrow to build the house, it would be no more than $50K.

My wife and I live a very frugal lifestyle and we have always been disciplined savers, but our knowledge and understanding of finances is admittedly very lacking. Any insight, explained as if I were a 6-year old, would be greatly appreciated.
 

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Welcome to the forum!

There's a lot of information that you haven't shared, such as age, other retirement assets, pension if any, detailed house plans on your BC island property, and projected date of retirement.

Your two condos sound lovely. You own your residence outright and the rented one is generating great cash flow. So far, so good. However, if you sell them now, you may take a significant loss, for which you won't get any tax credit. If you have claimed depreciation on your rental condo, that will be added back, so it's even possible that you might have to pay some capital gains tax. It may be a good idea to get an appraisal of their current market values. If you sell, you will also lose the cash flow from your rental property. The optimum financial solution would be to hold onto the condos till the Calgary market recovers. If you can stay in Calgary for a few more years, you can manage the rental property yourself. Property managers often charge 10% of total rent, and some of them do not do a good job. It might be a good idea to proceed with the construction of your island home while you are still working and have employment and rental income. House building costs have a way of ballooning above estimates. $90K seems very little, unless it is a Tiny House! Finally, remember that interest on money borrowed to build your own home is not tax deductible, whereas interest on money borrowed for investment purposes is tax deductible. Therefore, if you need to borrow, I recommend adding to your mortgage on the rental condo, and paying for your new home in cash.
 

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Discussion Starter #3
HeyJude, thank you for your good insights. Here is a bit more information about our situation.

I am 57, my wife is 41, both active and healthy. Our combined gross annual income from work is roughly $130K, plus an extra $20K gross from rental. I have a good job as an environmental scientist. It requires very little effort, but I find it soul-sucking as I approach retirement. Mind you, it is still better than digging trenches for a living. We have no pension, about $315K in RRSP investments, maxed out TSFAs accounts for both of us, and $50K cash savings.

Our current spending level is $2,000 a month, which I find high, and I can find ample room to cut a few hundred dollars here and there.

My plan was and still is to pull the plug on my full time job when I turn 58 in May 2016, then work part time on the island during the summer while the house is being built. It won't be a tiny house, but with a 500 square feet footprint, it is on the small side. I agree it would be wise to put an allowance for ballooning costs. In winter, I want to teach ESL overseas, and already have guaranteed jobs in Vietnam, Taiwan and Japan thanks to close friends who have their own ESL schools there. I am also a SCUBA divemaster and could work at another friend's dive school in Thailand in the winter if my health and physical condition stay stable.

Post-FIRE, with no debts and a paid-off property, our budget would probably not change and still have room for frugal travel part of the year. CPP estimated payment at 65 of around $1K but the advice I got was to take them at 60 ($600 or so per month). We would probably try to use up as much RRSPs as possible between 58 and 65 to finance an active lifestyle. Despite our strong desire to semi-retire next year, one important factor I always keep in mind and that worries me for the long run is the fact that my wife is 17 younger than I am, and from a particular region that produces the highest number of centenarians in the world so the probability she will outlive me by several decades is quite high.
 

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Thanks for the background info. Without a pension, this plan seems very tight to me, especially for your wife's projected lifespan. Have you run it through any retirement calculators?

Jim Otar is a Canadian engineer who has modeled retirement finances. Take a look.

http://www.retirementoptimizer.com/
 

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Discussion Starter #5
Thanks for the link to the calculator. I will give it a try with my numbers. I used a few calculators, the latest being cfiresim which under a couple of scenario with retirement age of 58, CPP at 60, a end-year of 2074 (when my wife will be 100 years old and me likely long gone), and either the rental income for the two condos or the addition to my investments of the proceeds from the sale of our condos using a conservative sale price of $300K each, gave me a 100% success rate in both cases, without adding additional part-time income after 58 and my wife's number (CPP/OAS/GIS) when she becomes eligible.
 

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In response to your most recent post, I would remind you that American calculators use historical US market returns, which few are predicting will be matched in the next decade or so, especially in Canada. Also, (and I hope I am wrong) your estimates of the market value of your properties may be somewhat optimistic. I repeat my suggestion that you get current appraisals.
 

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Calgary is going to be a shell of itself for a long time so dont expect any price appreciation on those units. And managing properties from that far away can be a tricky thing. I would sell.
 

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I think you may be fooling yourself as to how healthy a cash flow you are getting from your rentals. Some of the "expenses" you may be forgetting are property taxes, maintenance (just because you haven't had to spend it yet, doesn't mean you don't have a bigger bill for this later), and insurance for example. I'm not saying you're losing money, but you're probably not making as much as you think.

Next, as a rental, the price you paid was very high for the rents they generate. Because they are paid off, you've basically locked your money into a, currently depreciating illiquid asset. The trick to making money in real estate is to get other people to buy you the property.

For example, if I buy a place for $100k and rent it for $1000/month, the property pays for itself over time (maybe 17.5 years). If the price of the property drops, no real worries as it didn't cost you anything. However, if you buy a place and pay it off right away, still charge $1000/month about half of that may be profit. However, if the market corrects, as it has in Calgary, you lose actual money out of pocket, plus, with a correction, it may be hard to sell.

You've got a lot of cash locked up in assets but, compared to a bank account, your making a small, fairly safe, return as long as you don't sell and lock in some losses.

As to what you should do...it's hard to say now as your timing is bad. I can't see a good scenario short term where it doesn't cost you a lot of money. You may be best off holding them and hoping oil prices recover. Then again, maybe talk to a realtor, maybe you can get out without to big a loss if you sell quickly.
 

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Like Just_a_guy said, your timing isn't the greatest and I don't think there are any clear-cut optimal paths to take. You can stay neutral (selling vs renting) by just selling 1 of the 2 homes and wait until the market rebounds. The only problem is the rebound can take a decade as the oil industry is very cyclical. You can get have an agent evaluate both properties to see which unit would be worth keeping.

If you chose to turn your current place into a rental, you will have to have it appraised and take a mortgage less 20% on the home. This will allow you to take advantage of tax-savings from rental income due to interest payments. Your unit may not cashflow positively especially if you hire a property manager. This method will allow you to take the maximum equity out to build your home and finance your retirement as well as reduce your income tax. Do check with a tax expert to see if this plan is a valid strategy. I believe this is a valid strategy according to a local lawyer.
 

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Timing is never perfect in life but here is some quick back of the envelope math.

For argument's sake, let's say you net $450k after selling both properties and covering your capital gains.

That money in a taxable account, churning out dividends would yield at least $18,000 per year (at 4% yield) and you wouldn't need to touch the capital. You could own a collection of stocks or a dividend ETF - both are tax-friendly.

You have $315k in RRSP. Over time, in Thailand, you could move this registered money (withdraw it) to non-registered money; make it tax-friendly.

Keep your TFSAs as long as possible.

You could leave your (as you put it) "soul-sucking" job, work part-time in Thailand, and given the cost of living there, semi-retire there for a few years; keeping your taxable account intact and TFSA intact, churning out income, and living off some RRSP withdrawals as you move that money to non-registered. Sounds like you are quite bright, rather frugal and have some great hobbies to keep you busy!!
 

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Discussion Starter #11 (Edited)
Like Just_a_guy said, your timing isn't the greatest and I don't think there are any clear-cut optimal paths to take. You can stay neutral (selling vs renting) by just selling 1 of the 2 homes and wait until the market rebounds. The only problem is the rebound can take a decade as the oil industry is very cyclical. You can get have an agent evaluate both properties to see which unit would be worth keeping.

If you chose to turn your current place into a rental, you will have to have it appraised and take a mortgage less 20% on the home. This will allow you to take advantage of tax-savings from rental income due to interest payments. Your unit may not cashflow positively especially if you hire a property manager. This method will allow you to take the maximum equity out to build your home and finance your retirement as well as reduce your income tax. Do check with a tax expert to see if this plan is a valid strategy. I believe this is a valid strategy according to a local lawyer.
A lot of excellent advice from all replies, that will give me very good guidance for a concrete plan of action instead of trying to guess what I don't know. First order of business, have our own residence appraised and turned into a rental. As suggested by Gerogisin, I will talk to a tax lawyer to see how I can take a mortgage on it to free up some cash to build our BC house, fund part of our retirement, and equally as important, deduct the interests when it is converted into a rental.

But I still want to put it for sale in the spring or summer, or at least before we leave Calgary. It is an older unit that requires more care than the other newer unit, so I'd like to get rid of it because managing it from far would be a bit of a headache. There are no major issues with it, mostly minor plumbing leaks within the unit that have always been addressed immediately, but I don't feel comfortable keeping it as a rental for very long, especially after we move to BC. On the other hand, the newer unit is practically maintenance-free and quasi-indestructible by tenants because its structure and finishes are concrete and steel (no flooring, drywall, wood, etc.) that do not require care and maintenance whatsoever, except eventually replacing some of the appliances, so I am much more comfortable keeping it as a rental until the economic situation improves. Our long-term tenant is also in the market for a condo in the same area, and when I mentioned our plans to move to BC next year, he showed a serious interest in buying it. Similar sized condos he is looking at in the same neighborhood are currently offered between $350-$500K and are pretty much cookie-cutter units of lower quality and aesthetic appeal, so I am hoping we can come to a price around $300Ks that will make us both happy, especially if I can avoid paying Realtor fees. If I can't get what I am hoping to get, we will continue renting it for a year or two or until the market rebounds.

Long story short, I realize it was a poor decision to lock our cash into non-liquid assets instead of investing it properly in taxable and tax-deferred accounts. At the very least, we should have borrowed for a mortgage, and invest the cash. But we had just moved from Yellowknife to Calgary, I was starting a new job that involved flying every single week, so it was easier and simpler to pay cash. At the time, we were also planning to stay in Calgary forever, and we bought the second condo with the intention of having my mother, who lives alone in Montreal, move in our apartment with another family member, and us moving to the smaller one a few blocks away. But a few months before her planned move, my mom finally found an opening in a well-managed senior residence in her neighborhood that had all the amenities and care she needed, and never made it here. So we just kept the tenant until now. Hindsight is always 20/ 20.

I will keep everyone posted here and will probably seek further advice as I progress though the plan.
 

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If you're going to sell the primary condo when you leave Calgary, why would you turn it into a rental between now and then? You'll have to then rent somewhere for yourselves, and go through all the hassle and paperwork of getting an appraisal, finding a good tenant (who's happy to only stay a few months), etc. I would just stay in the primary condo if you don't want to manage it from afar, then sell it when you're going to leave. Upon closing date, you move into your RV and off you go.
 

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Yes, renting it puts the value at risk. Tenants can be very hard on a place in a short period of time. Also, at that price, your target market is a home owner, not an investor. The two are designed differently. The colours, finishings and expectations are different. If I ever sell one of my rentals, I redo the entire interior if I plan to sell it to an owner.

People have to stop assuming a home (personal) and an investment (business) can be thought of in the same way. This is the biggest mistake people make in real estate. They are not the same at all, if you do t learn this, you'll probably pay for it in multiple ways.
 

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You might want to re check your numbers on the rental rates in Calgary. We sold our home three years ago and now rent a condo.

2BR, 1 1/2 baths, heated underground parking (1 spot), open plan 1300 sq. feet. Community room, guest suite that can be rented, and a small gym. Built in 2007. Located in Spruce Grove. Our condo and both of our verandahs overlook Shaganappi Golf course. Walking distance to the C Train (Westbrook station) rapid transit. We have been paying $1800. plus approx. $60. month for electrics. Takes about 8 minutes to drive downtown via Bow Trail.

We were planning to buy something else but the market became overheated-too silly. Now our excuse is that it is too weak (and we are getting more selective). Don't want to buy just yet. We will revisit in April.

The CREB site list stats. Just be aware that these stats are NOT especially accurate, nor are those of many other real estate boards. CREB caters to the industry not to buyers and sellers. OUr impression is that the condo market is soft and that it will become even softer in the New Year. The full impact of oil has not been felt and there is more bad news coming down the pike. I would be temped to sell. Either that, or be prepared to hold for two plus years. Just one man's opinion....I am far from being an expert.
 

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Discussion Starter #15 (Edited)
You might want to re check your numbers on the rental rates in Calgary. We sold our home three years ago and now rent a condo.
Thanks for your insights Fraser. As much as I like Calgary, we made our decision to move to our little corner of paradise in the gulf islands where we can live simply and cheaply, grow our food, harvest fish and seafood, and do all the things we love practically for free, without even having to use a car, and almost year-round: kayaking, hiking, gardening, sailing, biking, etc. Last February, the weather there was nice enough to go kayaking every day, and I even surfed at Tofino. We still hope to sell our primary condo next summer but if we can't get our bottom line, we are prepared to hold off a couple of years until the market improves. Right now in our building, similar units are listed at $360K so I hope I can at least get $300K, which in this market would make me relatively happy. If not, we'll reluctantly rent it for two years, then re-evaluate. I haven't checked rentals in the neighborhood lately but similar units in our building were renting well above $2000 + power before the economic downturn a year ago. At this point, I'd rather cut a good deal to a little old lady and her cat and break even, rather than rent it for $2K+ to a couple of party animals who'd punch holes in the walls and pass out in the jacuzzi tub with the water running.
 

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I believe in the simple life. Get rid of the condos before leaving Calgary. When you get remote, it will be more difficult to manage those properties remotely. Then there is the bookkeeping. Could you make more money by hanging onto them? Maybe. But maybe not!

Why would you tie up that kind of capital when any gains are risky, and getting there is also risky. Did you hear about oil below $38? That means less than $20 for Alberta oil. Sure it seems easy to just hang on. Easy is not always good.

My 2 cents.
 

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Also don't be fooled by the "little old lady" story. I know one landlord who had a "nice little old lady", she wound up trashing the place then calling the city and saying she was forced to live in squalor. My buddy was forced to move her somewhere else, rent free, then repair the place she was in so she could move back. While she was in the other place, she did the same thing and tried to get the city to make him pay her for having to stay in a pit. Fortunately, he had before and after pictures to prove what she'd done this time and was able to get her out.

It turns out, she had quite the history of pulling off this little stunt when the incident was investigated...not sure if she was charged with mischief and fraud (I know there was the chance, but I think my buddy just let her off, as she had nothing worth going after and it's a lot of work). Still, he was left with two trashed places which came out of his pocket, not to mention the lost income while he had to prove the real victim of the scam.

Bad tenants come in all shapes and sizes.
 

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I would sell for all the reasons mentioned above. There has been negative growth in condo prices in Calgary for the past year. As much as 8 percent in some areas of the city and in some buildings. The trend will definitely continue well into next year. Count on another 8-10 percent. The other issue that comes with this is increased vacancy rates. If a tenant moves and you need to rent, you may have a month or so with no rent. That lobs of anther 8 points off your top line revenue plus perhaps some money for painting.

Keep in mind that asking prices do not count in this market. You need to follow actual sale prices in your building and other comparables , days on market, and the units for sale, units sold stats. We viewed a condo one year ago. Priced at 629K, reduced to $609. It was taken off the market in the summer. The comparable unit beside it was listed for $525K this past summer and took three months to sell at what I assume was something less than $525K

We looked at buying a condo after we sold our home. It made absolutely no financial sense. Our landlord was getting a 2.5 percent return on our condo. That was before two assessments of 35K and 5K respectively. Plus, she had four months of no rent because of building remediation issues. Now she is in negative territory for several years...assuming condo prices remain constant. Which they are not. We have done far better financially over the past three years by investing the sale proceeds of our home and renting.
 

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I'd sell the rental immediately and even consider selling your primary and living in a rental yourself for the next little while until you move out of Calgary.

Even if oil magically jumps to $80 tomorrow the real estate market in Alberta is still going to drop for another 6 months to a year...

In Fort Mac here I've been watching this townhouse condo complex for the past couple years. Had a friend own and live in one of the units. In 2011-2013 they were selling in the 470-500k range, in 2014 my friend sold for ~450k, now I see two units listed for 399k and 369k. :hopelessness:

The best time to get out of Alberta real estate was 1.5 years ago. The second best time is immediately, right now, like this week!
 

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ABSOLUTELY agree with that advice.

Get your money and run. We plan to remain in Calgary...but we still decided to cash out and move our financial resources into other, more productive, areas.
 
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