Please evaluate my "deal"

[GMasterAres]

Originally Posted by Laniatus

Note: I am not an expert, this is just my thought process in how I would evaluate the purchase if I were in your shoes.

Purchase Price/Assumed Value: $233,900
Down Payment/equity: $46,780
Mortgage Principle: $187,120

year 1 Costs
Mortgage: $13,060 (5% interest)
Strata Fees: $1,854 (~$0.30/sqft)
Taxes: ~$1000
Misc: ~$300+++ (unit maintenance fund)
Total: $16,214

Year 1 Gains
Rent: $12,000
Equity Gained: $3887
Total: $15,887

Year 1 Net: -$327

Assuming no gaps in rental occupancy, you will be hovering around breaking even depending on interest rates. Realistically, there will probably be some gaps in rental which would for sure put you in the red. You should also consider income tax on rental income, albeit you say to assume it is ~0 through a "flexible" T4.

However, by investing in the Greater Vancouver Real Estate market you are banking everything on the Property Value Annual Growth Rate (PVAGR). The big difference maker will be in the equity you gain. Every year the amount of equity you gain will increase as your mortgage principle goes down. Increasing property value will further increase this.

I used this calculator to play with some numbers:http://www.ultimatecalculators.com/h...alculator.html

Equity Gain, year 1
-2% PVAGR: Home Value: $229,222
Equity Gain: -$791

-1% PVAGR: Home Value: $231,561
Equity Gain: $1,548

0% PVAGR: Home Value: $233,900
Equity Gain: $3,887

1% PVAGR: Home Value: $236,239
Equity Gain: $6,226

2% PVAGR: Home Value: $238,578
Equity Gain: $8,565

Also, don't forget Realtor fees when selling your property.

Questions to consider:

• Is $233,900 a fair price for a 1bdrm condo in Surrey? Will it still be a fair price at completion date?
• How do you predict property values will change, in your area, over the next 2, 5, 10+ years?
• How difficult will it be to find a good, reliable, long-term tenant? or will you make it your primary residence?

Concluding Thoughts

• Personally I think $454/sqft in surrey is asking a bit too much.
• I believe in the next 2 years we may see prices go down or stay the same
• However, over 5 years I believe prices will begin to rise again.
  
• If I were paying rent and planning to move in, I would consider the purchase (again though, I think I could find a better deal than $454/sqft)
• Otherwise, I think you are better off either investing your Down Payment money/savings at a modest return as others have suggested, or, wait 2 years, save your money for a Down Payment on a newly completed/resale unit in 2016

$3887 equity gained will not happen. I've lived in Park Place for 2 full years now going on 3, and the assessments have been fairly flat. Gained $3,000 first year, gained $0 second year, lost $1000 this year based on assessment. Yes you can sell for more than assessments but for investment you have to go based on that or you're just asking for trouble.

So given the market is more flat here due to it being not mature and there being a lot of units coming onto the market, I would say first year equity would be better off around $1500 maximum.

The rest is well said even the advice about simply pulling out and continuing to save. There will be more units available so I'd strongly suggest that as an option to consider. Pull out of the contract, stick your money in the bank, and save $1500 a month until Summer of 2016. When the building is complete there will be units available probably at or around the same price. Even if they are a bit more then you will know the market by then better and have $50,000 in the bank!

I really think investment properties aren't completely worth it unless you can put at least 50% down and get that mortgage down so low that you compensate for the price to rent difference in Metro Vancouver that has been pointed out. Say you put 50% down on a $233,900 unit even if you think that is a bit high (which I don't actually).

That's now a mortgage of $116,950 or $680.19 a month @ 5%. $1005 a month with costs so you're now breaking even with rent or making a bit of money thus not starting in the black right away.

[Laniatus]

Originally Posted by jhausner

$3887 equity gained will not happen. I've lived in Park Place for 2 full years now going on 3, and the assessments have been fairly flat. Gained $3,000 first year, gained $0 second year, lost $1000 this year based on assessment. Yes you can sell for more than assessments but for investment you have to go based on that or you're just asking for trouble.

So given the market is more flat here due to it being not mature and there being a lot of units coming onto the market, I would say first year equity would be better off around $1500 maximum.

The rest is well said even the advice about simply pulling out and continuing to save. There will be more units available so I'd strongly suggest that as an option to consider. Pull out of the contract, stick your money in the bank, and save $1500 a month until Summer of 2016. When the building is complete there will be units available probably at or around the same price. Even if they are a bit more then you will know the market by then better and have $50,000 in the bank!

I really think investment properties aren't completely worth it unless you can put at least 50% down and get that mortgage down so low that you compensate for the price to rent difference in Metro Vancouver that has been pointed out. Say you put 50% down on a $233,900 unit even if you think that is a bit high (which I don't actually).

That's now a mortgage of $116,950 or $680.19 a month @ 5%. $1005 a month with costs so you're now breaking even with rent or making a bit of money thus not starting in the black right away.

Completely agree with you on both points - the assessment value should be used when calculating equity, not the purchase price. For purely investment purposes, I also feel a 35-50%+ down payment is necessary, otherwise you are eating too many costs and relying solely on equity gains.

[rofina]

Originally Posted by Laniatus

Completely agree with you on both points - the assessment value should be used when calculating equity, not the purchase price. For purely investment purposes, I also feel a 35-50%+ down payment is necessary, otherwise you are eating too many costs and relying solely on equity gains.

I would humbly suggest that if you have to put down as much as 35-50% than the deal is definitely not in the buyers favour.

[Laniatus]

Originally Posted by rofina

I would humbly suggest that if you have to put down as much as 35-50% than the deal is definitely not in the buyers favour.

If you're thinking as a deposit 1-3 years in advance, I agree that would be ridiculous unless they offered some sort interest on deposit. I'm talking about at the time you secure your mortgage. It shouldn't make a difference to the deal how much you put in as your down payment at closing.

[WarrenC12]

Originally Posted by Laniatus

If you're thinking as a deposit 1-3 years in advance, I agree that would be ridiculous unless they offered some sort interest on deposit. I'm talking about at the time you secure your mortgage. It shouldn't make a difference to the deal how much you put in as your down payment at closing.

Shouldn't make a difference?! Hello opportunity cost...

[Cypherus]

In Surrey Ultra to which I am living, it was common for 1 bedrooms to drop immensely in price after presales. For instance, a condo unit 3 floors below mine was $50,000 cheaper just after 6 months the building was completed. To those who are patient, you will reap the rewards.

As well, there are a few squaters who are inhabiting some condo units in Surrey Ultra without paying rent. They take advantage of the landlord's struggles with the court system delays to benefit months of free rent until a formal court eviction order is finally drafted and released. Those landlords have a lot of grief considering the who owns a unit below mine is going to cost him thousands of dollars in repairs. Let's also not forget the constant flooding in high rise towers, where in my experience 10 floors got flooded all because someone moved in and put a box on the stove, rubbing their shoulder on the turn on burner dial. The most recent flood happened when a cat turned on the sink when the tenant/owner was not home, and the sink was plugged...causing 6 floors of flood units below me. The moral of the story is that owning a condo doesn't mean Profit if you have terrible tenants living in the building. It's a naive sentiment especially shared amongst young people. Insurance claims, loss of property (constant parkade and storage locker thefts), and increasing strata fees yet lower rental rates as the building ages also don't make the propsect attractive.

[littlewenzi]

A big thank you to everyone for your help.

I



I went the REIT/Stock way. After looking at the number crunching you guys did, it all makes sense now

Wenzi

[littlewenzi]

What's a reasonable return for REIT?

I am thinking of buying a few to diversify my portfolio.

Wenzi

[Alex Mackinnon]

6ish? If you're as risk friendly as I am, 7-8%.

[rofina]

Originally Posted by littlewenzi

What's a reasonable return for REIT?

I am thinking of buying a few to diversify my portfolio.

Wenzi

Invest your down payment in a TFSA, tax free income. Plus you pay no penalty when you pull your cash out to eventually buy locally.

Lots of appealing REITS in Canada in the 5-8% range. Definitely do your research. REIT holdings vary wildly, Industrial, Residential, Commercial - locations too.

[GMasterAres]

Originally Posted by rofina

I would humbly suggest that if you have to put down as much as 35-50% than the deal is definitely not in the buyers favour.

I should add the note on my comment was based on new investors, not those that have many properties and thus have a cushion for the problem properties with reduced odds.

If you own 10-15 units around town, then your odds of having a problem are reduced greatly over the earnings of all the others, so you have a greater cushion and as such can get away with less down for investments. If you're starting out and it is your first unit, you need a lot more down OR you have to be earning enough income from your day job to compensate for the higher risks.

You own 1 unit, it fails, you have no other buffer, and ultimately have 0 units making you money. You own 15 units and 2 fail, you have 13 others to compensate.

The richest people on the planet for the most part make their money in real estate but they don't own 1 or 2 condos, they own hundreds and often entire buildings. That way their eggs are not all in 1 basket. Like any "business" the first investments are your riskiest to the overall success.

[GMasterAres]

Originally Posted by Cypherus

In Surrey Ultra to which I am living, it was common for 1 bedrooms to drop immensely in price after presales. For instance, a condo unit 3 floors below mine was $50,000 cheaper just after 6 months the building was completed. To those who are patient, you will reap the rewards.

As well, there are a few squaters who are inhabiting some condo units in Surrey Ultra without paying rent. They take advantage of the landlord's struggles with the court system delays to benefit months of free rent until a formal court eviction order is finally drafted and released. Those landlords have a lot of grief considering the who owns a unit below mine is going to cost him thousands of dollars in repairs. Let's also not forget the constant flooding in high rise towers, where in my experience 10 floors got flooded all because someone moved in and put a box on the stove, rubbing their shoulder on the turn on burner dial. The most recent flood happened when a cat turned on the sink when the tenant/owner was not home, and the sink was plugged...causing 6 floors of flood units below me. The moral of the story is that owning a condo doesn't mean Profit if you have terrible tenants living in the building. It's a naive sentiment especially shared amongst young people. Insurance claims, loss of property (constant parkade and storage locker thefts), and increasing strata fees yet lower rental rates as the building ages also don't make the propsect attractive.

Ultra was grossly overpriced. Said that for years thus why I never looked back at the project. Doesn't surprise me at all. The same size unit to mine on the same floor in Ultra was $200,000 more than I paid for mine. That's ridiculous.

So losing $50,000 is actually a) not surprising and b) not actually too bad given the high costs of the tower. There's a big reason the entire development stalled and they had to sell off a bunch of land to Wave and other projects.

As for the risks, that happens no matter what. Even houses have risks based on your neighbors and neighborhoods. As they age risk goes up too. Part of business. We did have flooding here the first month in the building though so it does happen (thus why if you're living in a condo they always recommend flood insurance especially given they all have water sprinkler systems in them).

Completely agree though that it isn't all roses and if you do have a problem tenant, you can get them out of the property but it does cost money in court and take time + you are still needing to cover your mortgage and strata fees. Not to mention the risk of them damaging the unit considerably.

[Laniatus]

Originally Posted by WarrenC12

Shouldn't make a difference?! Hello opportunity cost...

If your opportunity cost is greater than the return on investment with a larger down payment, you probably shouldn't be investing in the property in the first place.