Advice: hold or sell?

Question

Beginner seeking wisdom from seasoned investors/professionals :)

Context: I currently own a condo (A) in Toronto valued at 470k, owing 170k. Currently rented, net + 445/month. The market is on fire which, admittedly, has me a bit spooked given the position in the cycle. I have an LoC which I’ve yet to tap into.

I also just bought a pre-construction condo (B) in Montreal, completion 2022. I used my liquid instead of LoC, paying the interest didn’t make sense to me if I had cash, even though it could be a tax deductible.

Questions: Should I sell (A) and realise the appreciation before a bear hits? Or should I hold and hope the future value will surpass the current value while benefiting from positive cash flow? Ideally, I want my equity to work as hard as it can. Am I thinking about it correctly? What’s the best strategy in my position?

Patricia Steiner · Answer

As a former wealth manager, you don't want to use a liquid asset to acquire one that isn't.  Interest rates are so low that borrowing is a no brainer.  The real issue here is are you earning 2.5% or more on your cash?  That's what you need to keep in line with inflation.

Building wealth takes a plan BEFORE you act.  What's your plan?  Do you want to own investment property?  Are you looking to run a business (that's what rentals are) or are you incline to sell when a property reaches a certain appreciation threshold and re-employ those funds into a newer, bigger condo to live in?  How much cash/liquid assets do you need to have on-hand to fuel your lifestyle and maintain a strong balance sheet?

You have a condo that is cashing flowing but what is the NOI?  Is it a performing asset based on net income?  What rehab will it need in the near future?  HOA cost now versus future?

Should you sell is based on how it fits in your wealth plan. The market will adjust...it always does. That doesn't mean crash but it does mean that having a plan, performing assets, and liquidity are more critical than ever.

Theresa Harris · Answer

@Andrew T. You have no way of predicting what the market will do. I sold my place in Burnaby a few years ago and got almost 3x what I paid for it. People were saying the market was going to crash, it wasn't sustainable, etc. Guess what? The people that bought it have seen the price go up by 60% in the last couple of years. I'm still happy as I used that money to buy another place (cash flows about $550/month) and finance a second (increased ~50% since I bought it). None of the increases in housing prices were expected.

If you can take that money and use it to buy two places, even if the combined cash flow is similar, your tenants will be paying off two mortgages for you; think about it. If you are going to take the money and buy one other place with similar cash flow, I wouldn't bother.

If you can take that money and use it to buy two places, even if the combined cash flow is similar, your tenants will be paying off two mortgages for you; think about it.  If you are going to take the money and buy one other place with similar cash flow, I wouldn't bother.

Andrew T. · Answer

@Theresa Harris Thanks for sharing! Agree with your thoughts. Instead of buying two properties with the money, my thought was to house hack, either a duplex or triplex, with a similar strategy of having the tenants contribute to the mortgage - with a larger cash flow than the initial condo.

Marcus Auerbach · Answer

@Andrew T. I think there is a missconception about the "cycle": what happened in 2010 is not part or the normal cycle. Real estate is relativley cheap measured in affordability. Of course everyone feels it is expensive, but when you look at the historical data you can see that the percentage of income spent on housing is at a historic low - partially thanks to low rates.

When looking at the last 5 economic recessions, home prices have been holding strong or going up in almost every single recession, one time we lost a couple points - but nothing like we have seen 2010, which in all fairness was a mortgage and housing crisis, that became a recession.

In conclusion, I do not see a scenario, where real estate prices are dropping more than a few percent. Will the market shift from a sellers market to a buyers market - absolutley! We will see more days on market, six or eight months worth of inventory and much longer sales cycles. That's normal. Look at historic data! But that does not mean that we are going to see the market drop like we did 10 years ago.

To anser your question: always decide with a spreadsheet. Develop scenarios, calculate your ROI over time and consider your risk and then decide based on numbers. I think you should take advanatge of low rates and you have more equity sitting idle than you probably should have.

Andrew T. · Answer

@Hai Loc Absolutely! Plexes are common. I’m contemplating my path to funding and securing one without overextending myself financially.

Theresa Harris · Answer

I don't know. I've only been to Montreal twice and it was literally crossing the river from Ottawa to go to the museum.

Hai Loc · Answer

Doesn't Montreal have all kinds of triplex Fourplex sixplex..  You can househack all day

Marcus Auerbach · Answer

Before you do anything why don't you speak with a couple local lenders and ask them what about your financial scenario and good options? Make sure you find a loan officer, who is working with investors on a regular basis, you can find good names on  BP!

Andrew T. · Answer

@Patricia Steiner Appreciate your reply. Great questions to ask for my reflection.

Can you clarify the reasoning behind not using a liquid asset to acquire one that isn't? Meaning I should have used my LoC with low interest rate and maintain my liquid.

I'd like to develop a more solid plan to maximise building wealth. My goal is to create a wealth building portfolio of multiple investment properties.

For NOI, how do you calculate deferred expenses (depreciation, maintenance, rehab, etc.). Is there a factor?

Andrew T. · Answer

@Marcus Auerbach Thank you! Will definitely work out the scenarios. I agree, if I hold, the equity I have shouldn't sit idle. With the 2 properties, I'm wondering if a lender will think my service debt ratio is too high to secure a mortgage. I'm guessing would be best to establish condo (B) at occupancy with a a mortgage and then begin the search for another property instead of jumping in again to purchase another one right away.

Advice: hold or sell?

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