Real Estate Agent · North ONT, Ontario · Member since 2016 · 43 posts · 12 votes
Hi - i have a big Choice, my single family property in Hamilton Ontario was purchased in 2001 for $194K and has appreciated in Value to around $400K(~12%/yr). The property gives a small NOI (after Mort and all costs) of $150/mth.
I am wondering if it would be better to SELL, take the money - 1) can the Cap Gains be protected and kept for future Property Purchases and not Taxed?
if i sell, it will allow me to pay down some investment debt (at 3.5%) and have enough to buy another 3-4plex with better NOI (~$500/mth);
2) or should i - Keep the property and enjoy continuing getting ~12% appreciation value and a small passive income;
The typical return i am seeing with 3-4plex units is NOI of $5-700/mth.
Please make suggestions or comments on things that might help me in making a educated decision, i am confident there are some things i have missed or not considering.
First I would say that if your property has increased from a value of $194 to $400 it is very unlikely your are positive cash flow if you properly do your analysis. Honestly a $400000 SFH is a terrible choice as a rental property unless you are catering to high end tenants willing to pay $3500-$4000/month.
At a value of $400000 with a interest rate of conservative 3.5% your return on equity needs to be $14,000 per year. If you still have a mortgage you also add to that your monthly principal payment. If you consider normal long term expenses being 50% 0n a SFH then you need to be collecting rent monthly north of $2500/ month to break even. If you are great if not I would sell the place and reap the profits. Use the money as a down payment on several multi plex units.
Do not pay down any debts at 3.5%, that is practically free money. You can get a better return leveraging more properties.
You should be able to turn the equity in that property into 2- 3 multi plex units producing far greater positive cash flow that what I see as a negative cash flow property.
Don't hold on to a property simply because you have it, if a property is not a good, or at best a mediocre investment, unload it and move on to better returns.
Speculating on appreciation has bankrupted more investors than you can count.
Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes
10y
Brent,
Not a bad position to be in as all your choices are not bad.
I think (speak to a CPA) that the capital gains CAN be protected. In the US they call it 1031 but I don't know what it is called up here or exactly how it works.
With respect to the appreciation, it depends how your crystal ball is doing with respect to how the real estate market will do. I personally would not count on continuing 12 Y o Y but that's me. The appreciation issue may be a bit of a red hearing in that while not all markets / market segments will appreciate at the same rate, a rising tide lifts all boats.
IF the capital gains can be sheltered, I would try to trade up (in my mind) to better diversity and higher NOI. With the SFR you currently have, if it becomes vacant and it takes any amount of time to fill, you have ZERO income (even if it is just to make some repairs). With a 3 - 4 plex, a vacant unit only represents ~25-33% of your income.
Real Estate Agent · Kitchener-Waterloo-Cambridge, Ontario · Member since 2013 · 408 posts · 90 votes
10y
the question is what's your long term goal?
Me personally I like cash flow and pay down as my goal is to eventually replace a working income through cash flow. Single family appreciation historically will build more wealth in the long run though.
The market is hot and likely won't cool down for a bit longer, I would wait a couple months to sell.
As far as taxes, if you reinvest the money within a certain time period after sale you can defer the capital gains tax. Speak with an accountant though as I am not one.
Your best alternative though, would be to take out a HELOC and use that as a down-payment on a MONDAY property. Best of 3 world's. Old property, new property, tax deductible interest on the loan.
First I would say that if your property has increased from a value of $194 to $400 it is very unlikely your are positive cash flow if you properly do your analysis. Honestly a $400000 SFH is a terrible choice as a rental property unless you are catering to high end tenants willing to pay $3500-$4000/month.
At a value of $400000 with a interest rate of conservative 3.5% your return on equity needs to be $14,000 per year. If you still have a mortgage you also add to that your monthly principal payment. If you consider normal long term expenses being 50% 0n a SFH then you need to be collecting rent monthly north of $2500/ month to break even. If you are great if not I would sell the place and reap the profits. Use the money as a down payment on several multi plex units.
Do not pay down any debts at 3.5%, that is practically free money. You can get a better return leveraging more properties.
You should be able to turn the equity in that property into 2- 3 multi plex units producing far greater positive cash flow that what I see as a negative cash flow property.
Don't hold on to a property simply because you have it, if a property is not a good, or at best a mediocre investment, unload it and move on to better returns.
Speculating on appreciation has bankrupted more investors than you can count.
Investor · Cambridge, Ontario · Member since 2016 · 25 posts · 5 votes
10y
Hi Brent, I want to first of all congratulate you on the situation. You are I'm a favorable position. My advice would be to analyze your portfolio and see what your long term goals are and then decide. Now that being said if it was in my portfolio I would have it appraised and say like you said worth 400k, would refinance using a HELOC and purchase 1 to 2 more multi plex units. Cost of barrowing is still extremely low, use it to your advantage. Good luck!
Specialist · Orlando, FL · Member since 2015 · 183 posts · 83 votes
10y
and regarding the capital gains, unless you're planning on moving in, you'll have to pay the capital gains tax... from what I understand. Even if you move in, you can only defer the taxes, which isn't always beneficial.... especially in a hot market like Hamilton's.
Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
10y
@Greg S. said it perfectly!! You could sell that property and get multiple multi family units that could cash flow 10X what that one does! Just because a property cash flows doesn't make it a good investment.
As for taxes I don't know about Canada, but I'm sure there are loopholes in place. Look for a 1031 equivalent.
Investor · Hamilton, OH · Member since 2013 · 139 posts · 27 votes
10y
I would speak with a Realtor about average days on market for this type of property in your area. If it is more than a few months, I would consider listing it now (if you can shelter the gains). Because if you try to wait to get the maximum return of the sale, you may miss the market and be trying to sell on the down slope.
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
No cap gains protection in Canada. HELOC it and go shopping.
Of course, I didn't just run the numbers on three dozen properties to confirm that opinion like you are about to do, right? Opinions don't run businesses.
Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
10y
I really like the point above about not worrying TOO much about the debt at 3.5%......you should certainly be able to find properties cash flowing at more than enough to pay that as well as some extra cash flow.
I believe someone asked - but what exactly is the scenario with your property? You own and rent it? Or live there? Either way - good problems!!!
Your best alternative though, would be to take out a HELOC and use that as a down-payment on a MONDAY property. Best of 3 world's. Old property, new property, tax deductible interest on the loan.
Real Estate Agent · North ONT, Ontario · Member since 2016 · 43 posts · 12 votes
10y
Wow - Great info and answers from both the US and Canadian investors. Karp - i was pretty sure that in Canada we had a similar program of sheltering Capital Gains with in a Corporation...?
Frank - i am a long term Buy and Hold investor, but i do realize that at a time we must Sell, take some profits and for me - reinvest in a New Venture with better returns or simply more diversity in real estate.
Samuel - i was an Engineer and 3 years ago went full time into this with only six properties - it is now my Full Time thing, not huge yet but still enough to keep my pockets full...almost Bigger Pockets.
I really like the point above about not worrying TOO much about the debt at 3.5%......you should certainly be able to find properties cash flowing at more than enough to pay that as well as some extra cash flow.
I believe someone asked - but what exactly is the scenario with your property? You own and rent it? Or live there? Either way - good problems!!!
Hi Paul - i own and rent it out, don't live in it...single family rental.
No cap gains protection in Canada. HELOC it and go shopping.
Of course, I didn't just run the numbers on three dozen properties to confirm that opinion like you are about to do, right? Opinions don't run businesses.
Matt - is a HELOC simply refinancing it with the Equity?
First I would say that if your property has increased from a value of $194 to $400 it is very unlikely your are positive cash flow if you properly do your analysis. Honestly a $400000 SFH is a terrible choice as a rental property unless you are catering to high end tenants willing to pay $3500-$4000/month.
At a value of $400000 with a interest rate of conservative 3.5% your return on equity needs to be $14,000 per year. If you still have a mortgage you also add to that your monthly principal payment. If you consider normal long term expenses being 50% 0n a SFH then you need to be collecting rent monthly north of $2500/ month to break even. If you are great if not I would sell the place and reap the profits. Use the money as a down payment on several multi plex units.
Do not pay down any debts at 3.5%, that is practically free money. You can get a better return leveraging more properties.
You should be able to turn the equity in that property into 2- 3 multi plex units producing far greater positive cash flow that what I see as a negative cash flow property.
Don't hold on to a property simply because you have it, if a property is not a good, or at best a mediocre investment, unload it and move on to better returns.
Speculating on appreciation has bankrupted more investors than you can count.
Hi Greg - you are correct from a Math perspective, i am not hitting the potential cash flow targets to be "positive" but since i purchased it at $194K and gettting $1350/mth pretty close to the 1% target. With the changed Valuation, it has changed my numbers, but that is just a CompMarket Analysis number...so still positive on the Cash Flow.
Yes - i could buy 2 more properties which would definately Net me more cash flow. One thing that wasn't discussed here is, trying to get a RTO buyer and utilize the increased revenue stream and interest payments that come with being a Lender - carrying the mortgage too...any comments???
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
@Brent Byers those are a bit different. Not speaking from experience, I think that a refi is better than a HELOC if you plan to use it all right away.
To compare, a 100k property that you owe 50k on, they'll let you be indebted 80k so you have 30k to play with.
a) HELOC: The bank opens a 30k line of credit, secured by your house, usually at a point or so above your mortgage rate. You can use the money however and whenever you'd like and pay it back and use it again... it's just a line of credit.
b) Refi: The bank closes your mortgage and opens a fresh one at 80k, and hands you 30k cash.
Both have originating fees. HELOC is at a higher rate, but you aren't instantly paying for it and you can use/pay/use all you'd like. If you're going to immediately put all 30k into a down payment on another house, then a refi makes more sense because you are instantly tying it all up and you won't need the flexibility - so enjoy the lower rate.
You may get nailed on a refi if you are not at or near the end of your mortgage term.
Personally, I used a HELOC to buy my rental property and I have learned more since. I think it wasn't the right way to do it.
There may also be some tax advantage to HELOC... I'm not sure if you can claim the interest of the 30k that you refi'd out as a business expense, but you CAN claim the HELOC interest. This isn't a big deal.
Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
10y
@Brent Byers, I agree with @Account Closed.........I would absoltely get a home line attached to your current mortgage (if you dont' already......aka a HELOC) and use some of the equity at about 3-4% to get another multiplex.......with your equity position you'd be able to get into a great building.
Now, if you don't have an LOC attached to the mortgage - I'm not 100% sure if adding one counts as a refinance.......i'm sure people in here will know with certainty - and if not, just call your bank.
Investor · Cambridge, Ontario · Member since 2016 · 25 posts · 5 votes
10y
Hi all, all really great answers mentioned above. If I may I would like to ask a question since we are touching on this topic. Is it possible to refinance a property and pull straight equity out instead on just increasing a HELOC and barrowing against that? In my current portfolio I have always used HELOC for my initial down payments on my properties and then paid them off.