I have been pondering a question lately and thought I would get everyone's thoughts on the subject.
My wife and I live in Ontario, Canada and we rent a house in Nova Scotia to my parents. My parents are considering moving out here in 3 years when my mom hits retirement age. At which point we will be faced with a decision: Sell the house in Nova Scotia, or Rent it out?
We bought this house this January and really got an awesome deal. We paid $220K put 5% down and will put in another $5-$10K in improvements over the next few years. 1/2 a year later and our neighbor's houses are selling between $260k-$280k.
When my parents move here in 3 years we will put 5% down on a house here in Ontario and do the same thing. Prices are a lot higher here but we would not need any of the equity to get the 3rd house locally. I am not super stoked about the idea of owning an out of province rental (to a non family member) but am not ruling it out.
My question: What should we do in 3 years, take the equity and reinvest elsewhere or keep renting and building equity with decent cashflow?
@Ben Le Fort - I would imagine you will get a wide variety in responses based on personal preference.
For me personally at this point in my investing career, where I am at in life (financially & family responsibilities), and where we might be in the market (in the final third of, or towards the end of a bull market), I am not maxing out on leverage.
If it was me in that specific instance you mentioned, I would evaluate that specific property as is, and make sure it will be able to sustain itself as a normal market rental (maybe you don't charge market rent right now because it is your parents, just an assumption). Also, being in the property for around $210k, and it being worth $260k to $280k isn't a lot of room. A 20% pull back could wipe out that equity. Now if you said you owed $150k, and it was worth $280k, I would look at getting some of that equity out. But this is just my personal preference.
Thanks, Andrew. Yeah I guess a big factor will be where the stock market is in 3 years. The Real Estate market where the house is located pretty much just increases by 2-3% per year. Even in 2008 prices did not drop too, too much.
in 3 years time, I project we will owe about $185 and the house will be worth anywhere in the $285-$300 range (if prices continue to edge upwards). If there is a crash in the stock market it might be looking quite attractive to take the equity and invest it in tax-preferred accounts.
Lots of variables! But a good problem to have.