sell SFH to buy 3 condo's?

5 Replies

Guys,

This is my first post and I am over the moon to join this community so thank you for having me!

So, we rent out a 4 bedroom detached house about 45 mins outside of Vancouver, BC, Canada. It has two suites, an upper and a lower. We have 43% equity in it. Before it was a rental we lived there ourselves. During those years we gave it a lot of TLC. We didnt always plan for it to be an eventual rental so every improvement we made was done with the thinking that this may be our forever house and we wanted it to last.

When it was converted to a rental it cash flowed negative by $200 a month but I was ok with this because properties seem to appreciate endlessly in this market and the tenants would be paying down principal and honestly I was just so happy to be able to hold an investment property like this. In the 4 years since its become a rental house we've gotten it to cash flowing neutral and its value has appreciated at 4% per year. I know the house inside and out and have great tenants. Managing it could not be easier. The house is also centrally located and the lot is now zoned for two houses if a developer bought it for that purpose.

However, the rent is about $250 under market for the lower suite and there is a cap on how much it can increase per year to the point where we could never get that number up to where it should be unless that tenant moved out which they likely wont.

The more I hear about opening up new investment opportunities with cash flowing properties the more I'm considering selling it and using the profit to buy something that does actually cash flow. When I ran the numbers we could use the profit from the house sale to buy three, 2 bed, 2 bath condo's nearby. Each would cash flow about 4% ($400) per month. What scares me with condo's is the lack of control over choosing when to sink money into large building upgrades like roof and exterior as that is controlled by the strata (I think thats the same as HOA fees in the States). As well if the monthly strata fee rises due to insurance then my cash flow gets reduced a lot. Alternatively I've considered doing a refi on the house to pull out 100k to buy just one cash flowing condo but the cash flow I'd gain with the condo would only go to subsidizing the increased mortgage on the house and I'd be back to cash flow neutral again.

In short, the house is great for the safe long game but it seems to limit what we can do to really grow in the short term.

I'm very interested in what you guys think!

Ryan

Hi, @Ryan Kenneth . You've hit on some of the main arguments against investing in condos. There are a couple of other issues to consider. Not sure if they apply to you in Canada as well:

  1. Many condo associations limit the percentage of units that can be rentals at any one time.
  2. Some also limit how long you can rent them for. For example, I live in a coop and owners are only allowed to rent out their units for 2 years after they have tried to sell them for at least 1 year.

In general, if a property can't cash flow, I recommend selling it. It's one thing to buy only for appreciation, if you have an enormous portfolio, but the way I see it every property is its own small business. The life blood of any business is profit, so if there's no profit...

Finally, on the condos, I'd really like to see your numbers. Is the intention to buy these outright or finance? You wrote, "Each would cash flow about 4% ($400) per month." Can you explain this? 4% of what? Certainly not value or initial investment.

My guess is that it's going to be very difficult to cash flow in an expensive market like yours. As an alternative, consider taking the profit from your current property and using it to purchase a MFR property that can strike a good balance between cash flow and appreciation. Sounds like you could have ~$400k to work with. That puts you in striking distance of a $2MM property, why mess around with a few condos?

Hi Ryan,

I am currently a Strata Manager in Vancouver.    You need a set of the Strata's bylaws to check to see how many units are allowed as rentals.   Even if there are 10 out of 100 units allowed, the Strata may already be at the limit and you are stuck.  You can sometimes get hardship exemptions but that is unlikely if this is an investment property.   You can also get stuck between a rock and a hard place if you CAN't rent due to Strata Bylaw restrictions, and then get stuck with an empty homes tax. (Local tax in BC designed to limit foreign buyers who buy and let property sit empty) Before you buy, you should request a set of documents from E-Strata Hub, .. a Depreciation report and a copy of the Strata's most recent insurance; AGM minutes to check any recent Special levy projects that have been completed or if you are due for a large project soon.  The Depreciation report should give you a good idea of when and how much money is supposed to be spent on replacing aged building components such as roof, elevator, exterior painting, HVAC/MUA, etc. and what year to expect to see that project coming up.    if you are in Surrey or surrounding area, Insurance is likely to be the largest increase in the Strata budget and will affect your Strata fees directly.  I even have Strata that are trying to reduce the number of rentals from X to X-2 or so so that they can use this to their benefit when dealing with insurance since renters are a higher insurance risk.

Personally I would keep the property and refinance to get into your next property.   You have extensive knowledge of the current property, its problems and how to fix them and who to call to fix them.  That is extremely valuable!    If there is a leak here..   go there and shut off that valve.  if there is an electrical problem.. go to the panel located here.. and check the breaker panel.   etc. 

You should also request a Form-B.  This will identify the number of current units that are rented out.   (item L)  among the other bits of information that the form provides. 

I would consider putting two houses on the lot if you're able. If you can sell them as separate titles then you could sell one or both for a good pay day. Worth looking at to see what you're able to do there! If that doesn't work for you then I would look at selling and buying a larger rental property, maybe a fourplex, rather than condos. You lose a lot of control with condos.

Owning SFH I HATE apartments specifically strata.
When you have your own place you are the king of your domain so to speak. 

Want to put in new flooring, renovate, or what ever . . . good to go.