A client of mine is purchasing a Bloor West home and it seemed like she would follow the natural course and sell her condominium.
But I was amazed when she told me that she wanted to find a way to keep her condominium and rent it out!
I’m sure she has her reasons, but my first instinct was that she is severely emotionally attached…
Yeah, I know…
But how hard is it to find a photo that screams “emotional attachment?”
Well, at least I hit a new benchmark today. That is the very first nipple to ever appear on the Toronto Realty Blog.
“Candice” is one of my most favourite clients. She first leased a condominium from me back in 2007, and then purchased a condo in 2009. I’m blessed with a lot of clients that are truly fun to work with, and I felt that whenever Candice and I went out looking at condos, we always talked about our lives more than we always talked about real estate.
Candice purchased her condo for $290,000 in early 2009 during what I call “those magical four months” where real estate prices were depressed; about the only period in the seven years I’ve been in the business when the market was actually down.
Only six short months later, the exact same model condo two floors above Candice sold in multiple offers for $63,000 more than she had purchased her unit for. It was absolutely uncanny. Did she get an absolute steal? Was the market six months later over-priced? Or was it some combination of both?
But six months after that, another exact same model suite sold for $10,900 higher than the previous one! That meant that Candice’s condo had appreciated in value 25% inside of one year!
When Candice purchased her condo, she had a vision of her “dream home” in mind, and we desperately tried to make that dream a reality while working within her significantly conservative budget.
Candice ended up getting exactly what she wanted: a hard loft in an old converted space, complete with all the typical hard loft features such as exposed brick, timber beams, large picture windows, high ceilings, and hardwood floors.
If Jennifer Garner was in a movie where she played a young girl living in New York trying to balance a career and love, while coping with her quirky yet supportive neighbour played by a younger version of Kathy Griffin – this is exactly the kind of place she would live in. In reality, the girl in the movie would never be able to afford the place she’s living in. But Candice lucked out in that the unit had a bizarre “first come, first serve” parking rule that saved her $30,000 for the parking space, and that the market was in a lull at the time of purchase.
The unit was perfect, and I think Candice has had two amazing years living in this unique loft.
But life moves on, and Candice and her boyfriend are preparing to purchase a house.
To my surprise, Candice informed me in an email that she “wanted to find a way to keep the condo and rent it out.”
I wasn’t quite sure what to make of this, but rather than jump right into a frenetic email and list off reasons why Candice shouldn’t do this, I decided to hear her out when we met in person.
What was I going to tell Candice?
Well, I suppose I would ask her, “Candice, why do you want to keep this condo?”
I’m not sure what she would say.
The issue that I have is that this particular condo is more of a “home” and less of an “investment.”
It would cost Candice about $2,100 per month to keep this condo – factoring in the mortgage interest, maintenance fees, heat/hydro, and property taxes.
It goes without saying that Candice would NOT be able to rent the unit out for $2,100 per month.
A conservative estimate of the rental value for this condo, which is a 1-bedroom, 1-bathroom hard loft of 900 square feet with no parking, would be about $1,600 per month.
This puts Candice in a negative cash flow position – and not exactly a small one either! Candice would be paying $500 per month out of her pocket to hang on to this condo.
To put this into a yearly perspective, Candice would be paying $6,000 each year in after-tax dollars (although she could write off the loss) just to keep her name on this property.
So back to my original question: WHY?
The only reason could be this: what if the unit continues to appreciate?
Well, that’s not a terrible assumption. There are very few hard lofts like this in Toronto, and the market has done nothing but go up since she purchased. (Right now my regular reader with the handle “buk” is having a heart-attack…)
But even if the market, this unit, or both continued to appreciate, she would have to see at least $6,000 in appreciation each year in order to break even! And once she purchases a new house and starts to rent out this condo, it’s considered an investment property and the capital gains are taxable.
There are so many condos in this city that could be cash-flow positive, and often I think that buyers fail to look around enough in order to find them.
Let’s say you purchased a bachelor condo in my building at 230 King Street for $230,000. Putting down 20% would give you a mortgage of $184,000 or $778/month as long as we can get that glorious 35-year amortization!
The maintenance fees are $263/month and that includes all utilities. Property taxes are $124/month.
Assuming you could rent this bachelor condo for $1300 per month, you’d be cash flow positive $135/month.
Add in the $220 per month of principal that you’re paying down, and suddenly your return is about 9.3% per year on your original downpayment.
So why would anybody carry a property with negative cash flow?
Also consider that Candice has never been a landlord before, and the experience might not be exactly what she signed up for! I always ask my clients, “What if your tenant complains that the hot water isn’t hot enough? What if she wants Bell instead of Rogers and it’s not a Bell-building? What if go over to ‘fix’ her dryer and you realize that she just didn’t know how to turn it on?”
These are all issues I’ve had before, and they’re not even the worst things that can happen!
What if your tenant is late on a rent cheque? Are you going to initiate steps to evict her? Or are you going to accept her ‘promise’ that it will never happen again?
What if your stove breaks and it’s either $400 to fix or $1100 to purchase a new one? Suddenly, that $6,000 negative cash flow position each year just got a whole lot larger!
And what if maintenance fees go up in the building?
What if the cost of heat and hydro continue to spiral out of control?
What is the end game here?
You’re going to keep this property because you think the market will continue to increase and that you can see a $25,000 increase in value on your condo each year?
Or maybe it’s something else.
Maybe Candice just can’t stomach the thought of somebody else in “her” condo.
You know that feeling in the pit of your stomach when you think about your ex-girlfriend’s new beau? You know how awful it feels to think that she’s smiling with him, laughing with him, and god knows what else?
Well some of us go through these same motions when it comes to parting with our “home.”
Imagine what I went through when I saw this:
Turned into this:
To say that I was emotionally attached to my childhood home was an understatement.
But to say that I was “hurt” when they tore it down and left a giant hole in the ground is something that words simply cannot describe.
I understood what Candice was going through, but it was going to be my job to set her straight.
So as we sat in the living room of the Bloor West home that will soon be hers, I asked her, “So Candice, why do you want to keep your condo?”
And you know what? She completely changed her tune.
“David, I’ve been thinking about it,” she said with the utmost confidence and poise, “And I’ve realized that it makes no sense for us to carry this condo and lose $400 – $600 per month, every month, just because I think there’s a chance that the market could go up.”
Wow. That was exactly what I was going to tell her!
And she continued, “We need the equity from my condo in order to buy this house, and even though we make two incomes and can comfortably pay the mortgage here no matter how little a downpayment we make, I just don’t think it’s a smart investment decision.”
Sometimes I think I’m blessed with some of the smartest, most sensible, rational clients out there.
I was actually worried about how Candice would feel if I were to burst her emotional bubble, but in the end, she made the decision on her own – and it was the right one!
Now let’s just hope we “win” in multiple offers this week when Candice’s newest dream home goes up for auction…