Personal Finance

Buy a condo and rent it out...is that still a good business?

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  • Jun 21st, 2005 12:03 pm
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Deal Fanatic
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Dec 31, 2001
8234 posts
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Toronto
The way that I look at it is as follows (other people will have their different/skeptical views):

If monthly rent payments are say $1,200 per month for a small 1 bedroom condo in downtown Toronto, after 2 years those payments would equal: $28,800.

If you did rent as per the above example, and if the market price of the condo that you rented went up by say 5% per year (assuming a $225,000 condo), that would equal $22,500 (property now worth approx. $248,063 after 2 years).

Therefore, as a renter 2 years later, not only did you not profit from buying a condo at $225,000 and seeing a 5% per yer increase, but now you're in the negative by $51,300!!! ($28,800 + $22,500). If you chose to buy after 2 years, the same condo in theory will cost you approx. $248,063.

Ownership means that the mortgage payments would have decreased the loan and you would have 5% more equity per year (again assuming the above scenario).

Get the minimum downpayment together and take the plunge. I do not know of anyone who has regretted making the decision to buy a place.

Good luck and don't let anyone discourage you or scare you that the market will crash. That day will come, but if you're in it for the long run, you'll be fine. In real estate, prices double approx. every 15 years.
Ryan wrote:I'll bring back this thread since my question is semirelated.

Do you guys think it makes sense to buy a condo, live in it for a couple of years, and then rent it once I move out (or sell depending on the market) as opposed to renting for a couple of years and then buying something?

I'm looking at something downtown Toronto and it seems that with interest rates as they are that the mortgage payments would actually be less than rent.

I'm currently 23 and don't have any equity if that impacts your advice.
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Mar 25, 2002
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consumerPI wrote: If monthly rent payments are say $1,200 per month for a small 1 bedroom condo in downtown Toronto, after 2 years those payments would equal: $57,600.
:?:

$1200*24=$28800

In your calculations, you forgot:

-property tax (~1.25% of assessed value) = ~$225/month
-mortgage interest (let's say 3.9% on $213750) = ~$695/month
-condo fees (let's say 750sq ft * $.39/sq ft = $292/month
-CHMC mortgage high ratio premium (let's say you were able to get a 5% down payment, so premium is 3.5% on $213750) = $623/month

approx expenses = $1835/month
Deal Fanatic
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Dec 31, 2001
8234 posts
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Toronto
Yep, corrected. Thanks. Still over $50,000 in the hole. I didn't forget the carrying costs, I just didn't know what his downpayment intentions were. Plus your CMHC fee is not right. It's built into the mortgage amount.

So what's your opinion, still better to buy or rent?
HighFlyer wrote: :?:

$1200*24=$28800

In your calculations, you forgot:

-property tax (~1.25% of assessed value) = ~$225/month
-mortgage interest (let's say 3.9% on $213750) = ~$695/month
-condo fees (let's say 750sq ft * $.39/sq ft = $292/month
-CHMC mortgage high ratio premium (let's say you were able to get a 5% down payment, so premium is 3.5% on $213750) = $623/month

approx expenses = $1835/month
Deal Addict
Dec 4, 2004
1982 posts
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Kingston
[QUOTE]CHMC mortgage high ratio premium (let's say you were able to get a 5% down payment, so premium is 3.5% on $213750) = $623/month[/QUOTE]
how do you figure this one? Maybe i'm misunderstanding you....but...3.5 percent on the total mortgage is approx 7 grand. this goes onto the full amount of your mortgage and you pay it off over term. seven grand extra on a mortgage of 213k is minimal...probably less than abouther 50-75 bucks a month. How are you getting 623 a month?
Deal Addict
Nov 26, 2004
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OTOH, some of you may think I'm on drugs or something, and I'm too lazy to do the calculation, but let's say if the market goes down by 10% from today prices in 2 years, when it is time to sell, will it be better off to buy or rent? Afterall, there could be a glut of condos in DT Toronto with all the new units that they are building right now.
Deal Addict
Dec 4, 2004
1982 posts
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Kingston
that can always happen, but you have to figure in the money you're throwing away on rent in the next two years. that money = out the window...so who cares if it goes down a few percent in value. unless you're selling, it means nothing....and even if you are selling, you're probably still going to leave with some equity. with renting, you don't.
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Mar 25, 2002
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dolphie wrote:how do you figure this one? Maybe i'm misunderstanding you....but...3.5 percent on the total mortgage is approx 7 grand. this goes onto the full amount of your mortgage and you pay it off over term. seven grand extra on a mortgage of 213k is minimal...probably less than abouther 50-75 bucks a month. How are you getting 623 a month?
I thought the CHMC was an annual premium. If not, I stand corrected.
Deal Addict
Dec 4, 2004
1982 posts
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Kingston
[QUOTE]I thought the CHMC was an annual premium[/QUOTE]
nope, it's a one time fee that can be added to the total amount of your mortgage. you only get away from it if you put more than 25 percent down. The fee is smaller the more you put down, but for a five percent down payment it is 3.25 percent of the total purchase price.
you are also charged a tax on this total amount (the 3.25 percent) -nice eh (it's either gst or pst, can't remember which) that has to be paid up front as part of your closing costs.
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Aug 7, 2003
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Toronto ON
Ryan wrote:I'll bring back this thread since my question is semirelated.

Do you guys think it makes sense to buy a condo, live in it for a couple of years, and then rent it once I move out (or sell depending on the market) as opposed to renting for a couple of years and then buying something?

I'm looking at something downtown Toronto and it seems that with interest rates as they are that the mortgage payments would actually be less than rent.

I'm currently 23 and don't have any equity if that impacts your advice.
Ryan,
I'm not a real estate expert, but this is what I learned recently during my own real estate escapades.

If you're a first time home buyer, you can borrow more if you are occupying the house you're purchasing.

If you buy it to rent out, then lenders reduce the ceiling of what they'll lend.

However, I also learned that the term "occupy" has no time value. So for instance, if you say you'll occupy a residence, you can do so....but who knows how long. There is no specific here. A day, a week, a year?

So, if it's cheaper to purchase than rent, and then you'll be building your own equity, you can then save up some money to potentially purchase another property down the line. Then you can rent out the property you're considering purchasing now.

The only downside is, should you chose to sell a property which ceases to become your primary residence, and you still own your primary residence, then capital gains taxes may apply.

If you can buy in Toronto now, I think you should. (incase you wanted my cheap advice!)

Tracy

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