Run Down House vs Newly built Condo

Canadian Real Estate
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Run Down House vs Newly built Condo

Alex Kovalenko
Member since 2020 · 76 posts · 45 votes

Hey sorry if this question gets asked 200 times here .. but here it goes.. 

Is it better to buy a run down (ie 1960s built) 3 bedroom, 2 bath house with minor renovations at $400k-$450k and rent it for $2k or new condo (2 bedrooms, 2 bath) $400k-$450k and rent it for similar $2k. 

The house would probably require $30k-$50k renovations and is in OK neighbourhood with not so great schools; while condo is in good neighbourhood with great school systems.. but has $500 condo fees a month.. 

gut feeling is that house would be better down the road (as it has a lot of land).. but i also feel like condo would be much easier to rent that a run down house.. i only see a few similar houses rented vs dozens of condos being rented every month

photo example of 2 bedroom $440k condo vs 3 bedroom $440k house

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Account Closed
Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
6y

 @Alex Kovalenko   you've got to be missing something in your analysis.  You keep mentioning positive cash flow, but this entire forum is telling you that it isn't there.  For most investors, cash flow is what's left after paying all expenses AND debt servicing (mortgage). As an example (guestimates on a 400K property in Hamilton based on past investing in Kitchener):

Income (rent): $2,000

Expenses (per month): $740

  • Property tax: $200
  • Insurance: $150
  • Property management: $100 (5% of gross rent, this would be very good)
  • Water tax: $40
  • Maintenance: $100
  • Capital improvements $100
  • Landscaping / snow removal: $50

NOI (Income - Expenses): $1260

Debt service (Mortgage), assuming 80% LTV, 3%: $~1,500

Cash flow = $-240/month (and that's being generous; I haven't allowed for vacancy). For a condo, drop the landscaping and capital improvements but add your condo fees; likely gets worse

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  • Account Closed
    Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
    6y

    @Alex Kovalenko  you are going to hear from people that are passionate about condos and others that are passionate about houses.  Here are some things to consider

    Condos

    • Pros: New build = less maintenance, may attract a higher quality tenant
    • Cons: Condo fees will escalate ($500 new is really high), no control over future strata decisions (i.e no rentals), no land

    House

    • Pros: land, ability to value add (BRRR, change use/add units, rent garage space, etc)
    • Cons: more maintenance 
    2Reply
  • Alex Kovalenko
    OP
    Member since 2020 · 76 posts · 45 votes
    6y

    Thanks Chris! What cash flow would you be looking for? $300+ a month is OK? 

    0Reply
  • Account Closed
    Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
    6y

    @Alex Kovalenko on $2k of rent I don't see how you are going to cash flow $300... If you want to share your calcs, I'll have a look

    1Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Alex Kovalenko

    Don’t want to throw a wet blanket on the party but there is 0% chance either of those will cashflow even a dime over 5 year hold.

    1Reply
  • Alex Kovalenko
    OP
    Member since 2020 · 76 posts · 45 votes
    6y

    Thanks Kris and Chris! I am running the numbers and coming up anywhere between $300-$800 a month positive cash flow.. resulting in about 3%-4% annual return on investment (without taking appreciation into account).

    Good / bad? Or what # should I be looking for in return? I am out of Toronto area (and looking for properties 1 hour out - Hamilton, Guelph, Niagara, etc.) Thanks!

    0Reply
  • Samuel Toby
    Specialist · Toronto, Canada · Member since 2017 · 36 posts · 14 votes
    6y

    It would depend on what you're trying to get out of this investment. If your goal is cashflow and your interested in building a portfolio of strong cash flowing properties, then the option with the higher cashflow would fit for you. If your focused on the long term and want to hold on to a property that will break even/have minimal cashflow but your confident that the area will have accelerated equity growth than possibly the house may be more aligned with your goal. 

    I have the same dilemma in Toronto, I feel more confident going after a run down home in an area that I think will have greater appreciation due to the limited supply of land and detached homes, and on the upside rental homes are more scarce than condos (in Toronto) so I know i won't have much trouble renting it out.   

    0Reply
  • Account Closed
    Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
    6y

    @Alex Kovalenko, what @Account Closed and I are telling you is that we don't see how either of these 2 examples cash flow.  A $400k property will have a ~$1500/month mortgage.  To cash flow $300 on $2000 of rent, you would need all other expenses to be <$200/month (which isn't going to happen). If you have specific deals you want help analyzing, lots of forum members are happy to help.  I personally would not be excited by a 3% return.

    0Reply
  • Alex Kovalenko
    OP
    Member since 2020 · 76 posts · 45 votes
    6y

    Yes Samuel - same feeling.. House would appreciate - you can still snatch up a house with a lot of land in Hamilton for around $300k ($200k USD) - and it's only 20 min to Mississauga, Oakville, Burlington and 40 min to Toronto.  

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  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Alex Kovalenko

    Buying an investment property where your main (or only?) source of profit will be appreciation is called speculation. It is noticeably more risky than buying a property which cash flows well.

    1Reply
  • Adrian Clapp
    Scituate, MA · Member since 2018 · 69 posts · 33 votes
    6y

    I invest exclusively in condos (medium and long-term rental and commercial) in Arizona, Massachusetts, and Vermont.  Most of my condos are thousands of miles away from where I live.  I view condo fees as a management fee (I don't need to worry about exterior maintenance, landscaping, pool, snow, etc). Also major repairs like a new roof are reduced because they are shared across multiple owners.  As long as the condo association has a decent reserve, is well run, and communicates well, there shouldn't be too many surprises. If you want more control over the condo association expenses, consider joining the condo board.  Make sure you read the condo association rules regarding rentals carefully (rental length, restrictions etc) before purchasing.  Finally, my condo investments in all three states have appreciated very nicely.

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    The house.  You have condo fees with the condo and while they may be low now, they will go up.  Plus if the condo is poorly managed, they can quickly run into trouble.

    0Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Adrian Clapp

    Approximately what % of corps that you evaluate are candidates in your eyes Adrian? Curious as when I started I considered condos and read about 20 different Corp docs (last 3 years of monthly minutes, agm minutes/ report, and last reserve find study) and didn’t find a single one that was functioning well business wise. Deferred maintenance was usually astronomical even once you factor in the incredibly conservative engineering reports in the reserve fund study. The general theme in my area was “keep fees low and out property will be worth more”, some minutes even stated this as a reason for no annual increase...

    0Reply
  • Adrian Clapp
    Scituate, MA · Member since 2018 · 69 posts · 33 votes
    6y

    Maybe I have been lucky, but all of my condo associations in Arizona have large reserve funds in place along with reserve studies projecting every major expense that should be required during the next thirty years. A portion of the condo fees are allocated to the reserve fund to grow it and to make sure there is a plan to cover the major expenses when needed.  They adjust the condo fees annually based on operating expenses increasing but it has been limited to 0-3% increases per year over the past five years since I started investing in Arizona (my condos were purchased between 2015 and 2019).  In one complex, there was a special assessment that was $1,500 because they decided to retile some of the roofs ahead of schedule after storm damage but insurance funds were also involved and I agreed with the decision.  That was the only special assessment at any of my complexes.  My AZ condos were purchased between $125k and $350k each (5 different condo developments) and condo fees average $150-$300 per month per unit.  RE Taxes are also extremely low in Arizona. My Arizona condos have appreciated 15-60% over the past five years.

    My VT condos have appreciated 50% over the past five years and my MA commercial condos have appreciated 65% over the past five years.  Rents have regularly increased too.

    I definitely recommend attending condo board meetings (remotely if not in person).  Even better - join the board for a term.

    I would avoid any condo developments that have not kept up with exterior maintenance, landscaping, etc.. even if the asking price seems like a great deal.

    1Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    @Alex Kovalenko

    How do you plan to make a single dollar at $2k/month on a $400-450k house?

    1Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    6y

    @Alex Kovalenko

    Terrible returns on both. Even if you pay cash for them. The numbers just don’t work. And don’t count on appreciation as a big incentive.

    0Reply
  • Alex Kovalenko
    OP
    Member since 2020 · 76 posts · 45 votes
    6y

    Thanks Josh and Matt

    Thanks for feedback. What numbers would work? I heard the 2% rule all the time but where I live toronto cheapest properties would be in Hamilton and go for around $200k usd ; rent would be $1.1k usd for that property. We can get $350k usd house and maybe rent to 2 tenants (1 basement say for $600 usd and 1 main for $1.5k)

    0Reply
  • Account Closed
    Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
    6y

     @Alex Kovalenko   you've got to be missing something in your analysis.  You keep mentioning positive cash flow, but this entire forum is telling you that it isn't there.  For most investors, cash flow is what's left after paying all expenses AND debt servicing (mortgage). As an example (guestimates on a 400K property in Hamilton based on past investing in Kitchener):

    Income (rent): $2,000

    Expenses (per month): $740

    • Property tax: $200
    • Insurance: $150
    • Property management: $100 (5% of gross rent, this would be very good)
    • Water tax: $40
    • Maintenance: $100
    • Capital improvements $100
    • Landscaping / snow removal: $50

    NOI (Income - Expenses): $1260

    Debt service (Mortgage), assuming 80% LTV, 3%: $~1,500

    Cash flow = $-240/month (and that's being generous; I haven't allowed for vacancy). For a condo, drop the landscaping and capital improvements but add your condo fees; likely gets worse

    4Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Chris Baxter

    Above cash projection is literally best case scenario. It only goes downhill from there unless all ducks line up.

    0Reply
  • Alex Kovalenko
    OP
    Member since 2020 · 76 posts · 45 votes
    6y

    Thanks guys! I was calculating with more generous down-payment and around $700 mortgage. But I assume when you talk about cashflow you calculate it based on 20% downpayment and not higher. 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y
    Originally posted by @Alex Kovalenko:

    Thanks guys! I was calculating with more generous down-payment and around $700 mortgage. But I assume when you talk about cashflow you calculate it based on 20% downpayment and not higher. 

     You calculate cash flow based on the amount you actually pay.  So if you put more than 20% down, your mortgage payments will be lower.

    1Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Alex Kovalenko

    Generally, 20%. However, many lenders are now pushing hard for both 25% down and a 25yr amm. TD, CIBC, and Scotia would be the 3 that I’ve had experience with recently

    0Reply
  • Dennis Cosgrave
    Rental Property Investor · Member since 2019 · 304 posts · 462 votes
    6y

    The question I have is, how much value are you adding by spending $30-$50k on renovations? The advantage of the house is that you can add significant value if the dollars are spent correctly. There is little upside potential in a newly built condo.

    0Reply
  • Alex Kovalenko
    OP
    Member since 2020 · 76 posts · 45 votes
    6y

    My numbers are : $200k downpayment on $400k house (in Canadian $)

    expenses:

    mortgage $900 a month

    Property tax: $250

    Insurance: $150
    Water: $40
    Misc repairs: $250

    revenue:

    $1,600 a month 

    ----

    $1,600 - $1,590 = $10 cash flow or breaking even.. 

    So it seems in Toronto area its impossible to be cash flow positive

    0Reply
  • Account Closed
    Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
    6y

    @Alex Kovalenko if you have a $200k downpayment, you can leverage that into much more than  $400k house.  You can buy an $800k+ property. Smart use of leverage is key to investing. 

    1Reply
  • Adam Krawec
    Member since 2018 · 47 posts · 16 votes
    6y

    @Alex Kovalenko Chris has some great points, you should utilize your leverage position, the security of a low monthly payment is comforing, but a properly managed multi-family would give you a bit more control to increase value through rents, etc. You can pick up a multi for about $150k-200k a unit in Niagara, most could use some small updating though. Current minimum rents on a 1-bd are $1,100/month, and for a 2-bd $1,400/month

    0Reply
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