Personal Finance

Hypothetical Q: Rental Condo vs Stocks

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  • Aug 1st, 2009 10:22 am
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[OP]
Newbie
Jul 29, 2009
5 posts
Toronto

Hypothetical Q: Rental Condo vs Stocks

Hi there,

I am beginning to start off my investment career and also to become a first time home buyer. I am interested in the 2 bedroom 'downsview' townhouse condo (http://www.hr-newhomes.com/westown) which is going to be built late next year. It is 868 sq. ft. on the main floor and only costs $204,900 and maintenance costs should be around the $200/month range. Mortgage will be at a fixed 4.25% and I currently qualify for $500,000 mortgage.

I was thinking on purchase 2 properties here: one as a principal and the other as a rental which I think I can get for $1200/month rented to a small family. I am thinking on putting 10% down payment on both.

In a hypothetical 5 year time, would my net worth and cash flow be better as opposed to dropping the $43,000 in stocks with the assumption I have $500 in rent to pay.

Or alternatively, I should drop the entire $43,000 down payment into the principal and then in a years time, take out the HELOC towards the same property assuming that it'll be similarly priced.

In which situation would I be better off?

Disclaimer: this is just at the brainstorming phase, i will definitely visit an advisory before i actually execute.
12 replies
[OP]
Newbie
Jul 29, 2009
5 posts
Toronto
If i'm missing any other info that is required, please let me know!
Sr. Member
May 24, 2007
509 posts
9 upvotes
HousePoor wrote:
Jul 30th, 2009 11:17 pm
It is 868 sq. ft. on the main floor and only costs $204,900 and maintenance costs should be around the $200/month range. Mortgage will be at a fixed 4.25% and I currently qualify for $500,000 mortgage.

I was thinking on purchase 2 properties here: one as a principal and the other as a rental which I think I can get for $1200/month rented to a small family. I am thinking on putting 10% down payment on both.
Can you show me your cashflow analysis?
Does the rent cover your debt service?
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
Using your basic numbers, you would be better off with the stocks. I'm just curious why you would try and compare living in a place you believe you could rent for $1200 vs living in a place you only pay $500 for.

Based on a 25 year amortization, your mortgage on that property would be $975.13 plus $200 in maintenance becomes $1175.13. Just based on your living space, you are $675.13 ahead by renting (using your numbers). Do you think your equity will grow by $675 a month through ownership?
Deal Addict
Oct 1, 2006
1901 posts
1061 upvotes
Montreal
1) Educate yourself about real estate investing for example by reading this thread in another forum:
http://forumserver.twoplustwo.com/30/bu ... ing-99351/

2) In general condos are very poor investments. It is hard to get them cash flow positive. It would be much better to buy a duplex/triplex.
[OP]
Newbie
Jul 29, 2009
5 posts
Toronto
peter_ross wrote:
Jul 31st, 2009 12:38 am
Can you show me your cashflow analysis?
Does the rent cover your debt service?
Mortgage amount = $193k on investment loan @ 4.25 monthly @ 35 years

$879.00 + $150 property taxes + $50 heating/utilities = $1079.. will be renting the property for $1200..

Will it matter if it doesn't build up cash flow, its improving my net worth because someone else is paying off a house for me plus the interest will be tax deductible?

Using a 5 years timeframe, with $43k split into a principal residence and an investment property, my net worth would be higher than if I simply rented at $500/month and put that $43k in stocks making 7%.
[OP]
Newbie
Jul 29, 2009
5 posts
Toronto
spf1971 wrote:
Jul 31st, 2009 4:50 am
Using your basic numbers, you would be better off with the stocks. I'm just curious why you would try and compare living in a place you believe you could rent for $1200 vs living in a place you only pay $500 for.
I feel real estate is less voltile and risky than stocks as it is tangible and I can control the outcome usually (w/tenants).
Sr. Member
Jul 27, 2006
678 posts
10 upvotes
Do not assume tenants have a low PITA factor.
Deal Addict
Oct 1, 2006
1901 posts
1061 upvotes
Montreal
HousePoor wrote:
Jul 31st, 2009 9:25 am
Mortgage amount = $193k on investment loan @ 4.25 monthly @ 35 years

$879.00 + $150 property taxes + $50 heating/utilities = $1079.. will be renting the property for $1200..

Will it matter if it doesn't build up cash flow, its improving my net worth because someone else is paying off a house for me plus the interest will be tax deductible?

Using a 5 years timeframe, with $43k split into a principal residence and an investment property, my net worth would be higher than if I simply rented at $500/month and put that $43k in stocks making 7%.
A mistake I see novice investor making all the time is underestimating costs.

Annual rent 12*$1200 = 14400
NOI=Rent Minus expenses (~40%) = $8640
CAP Rate: $8640/$204900=4.2%

CAP rate of 4.2% is very low therefore it would be a poor investment. You should have a CAP rate of at least >6%
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
HousePoor wrote:
Jul 31st, 2009 9:25 am
Mortgage amount = $193k on investment loan @ 4.25 monthly @ 35 years

$879.00 + $150 property taxes + $50 heating/utilities = $1079.. will be renting the property for $1200..

Will it matter if it doesn't build up cash flow, its improving my net worth because someone else is paying off a house for me plus the interest will be tax deductible?

Using a 5 years timeframe, with $43k split into a principal residence and an investment property, my net worth would be higher than if I simply rented at $500/month and put that $43k in stocks making 7%.
1. Housing values traditionally increase by around 4% per year, if you can get 7% through stocks, you've already lost by buying a home.

2. You're planning on renting $121 above cost? That works out to $1452 per year. That's less than a 1% return on your investment. The upkeep on the place alone (not including anything breaking)will put you into a negative return.

3. If you can rent for $500, then your purchased property costing you $1079 will need to appreciate by $579 each month plus whatever that $579 would earn in investments.

All in all, I think as an investment this is a horrible idea. As far as owning your own home, that is generally less a financial decision as it is an emotional one. That doesn't mean finances don't play a role, but traditionally it's not the best bang for your buck.
Deal Addict
User avatar
Nov 2, 2007
1246 posts
210 upvotes
GVRD
HousePoor wrote:
Jul 31st, 2009 9:25 am
Mortgage amount = $193k on investment loan @ 4.25 monthly @ 35 years

$879.00 + $150 property taxes + $50 heating/utilities = $1079.. will be renting the property for $1200..

Will it matter if it doesn't build up cash flow, its improving my net worth because someone else is paying off a house for me plus the interest will be tax deductible?

Using a 5 years timeframe, with $43k split into a principal residence and an investment property, my net worth would be higher than if I simply rented at $500/month and put that $43k in stocks making 7%.
something wrong with this calculation ($193k on investment loan @ 4.25 monthly @ 35 years) Where are you going to get a 35 year mortgage??? :confused: You may want to consider the impact of higher rates in the future and a higher maintence costs
Newbie
Jan 22, 2009
63 posts
14 upvotes
Vancouver
HousePoor wrote:
Jul 30th, 2009 11:17 pm
Hi there,

I am beginning to start off my investment career and also to become a first time home buyer. I am interested in the 2 bedroom 'downsview' townhouse condo (http://www.hr-newhomes.com/westown) which is going to be built late next year. It is 868 sq. ft. on the main floor and only costs $204,900 and maintenance costs should be around the $200/month range. Mortgage will be at a fixed 4.25% and I currently qualify for $500,000 mortgage.

I was thinking on purchase 2 properties here: one as a principal and the other as a rental which I think I can get for $1200/month rented to a small family. I am thinking on putting 10% down payment on both.

In a hypothetical 5 year time, would my net worth and cash flow be better as opposed to dropping the $43,000 in stocks with the assumption I have $500 in rent to pay.

Or alternatively, I should drop the entire $43,000 down payment into the principal and then in a years time, take out the HELOC towards the same property assuming that it'll be similarly priced.

In which situation would I be better off?

Disclaimer: this is just at the brainstorming phase, i will definitely visit an advisory before i actually execute.
I would do half in real estate and half in stocks. Just buy dividend paying stocks so you do have a stream of income.
Deal Expert
Feb 29, 2008
21220 posts
2343 upvotes
Montreal
83_gemini wrote:
Jul 31st, 2009 9:36 am
Do not assume tenants have a low PITA factor.
This can't be stressed enough. SLoppy hygiene, incompetent maintenance, damaged property, calls at 3am to come fix a damn fuse... Lord forbid one them should not pay rent. The process of actually extracting the money is more trouble than it's worth.

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