There are a ton of websites and calculators to help you gauge whether or not you should rent or buy a home, but there are not very many calculators to help you gauge whether or not you should rent OUT or sell your home. With the ridiculously increasing real estate in Vancouver it might be nice to have that home equity freed so that you can make the Financial Independence Retire Early recipe can come into fruition.
I like to research the crap out of stuff before making a decision, so here’s my thought process. Let me know what you think.
Should You Rent Out or Sell Your Condo?
Let’s look at first how much it would cost to rent it out, and how much it would cost to sell the home. Then we will compare the return on investment of each option.
First, there are some conditions to be aware about in Canada. In Canada, if you sell your principle residence, you don’t have to pay tax on the gains from the home sale. If you sell your rental, you will have to pay capital gains (50% of the profit taxed at your marginal rate) on the income from the sale. If you convert your principle residence to a rental unit, you will need get it appraised and will need to pay the taxes on the gains after you convert it to a rental.
Let’s say you have a 1 bedroom condo that is estimated to sell on the market for $450,000.
renting it out costs
To calculate roughly how much it costs to rent out your home, you have to factor in:
- How much you pay per month for your mortgage
- Your maintenance fees (unfortunately in the few years that I have lived here, the maintenance fees have gone no where but UP, they have gone up almost 20% over the past 4 years). There has been a special assessment too (though it was under $1000), and I anticipate there will continue to be more of these as the building continues to get older.
- The home insurance- because this is a condo, the home insurance is not as expensive as living in a house. I’m not sure what the insurance would look like with the unit being rented out, I anticipate it should be higher than what I am paying now given the increased of not being owner-occupied. Currently I pay about $450 a year.
- Your property taxes
When I calculate this, on the $450,000 condo, it costs about $1200 per month to own this home for ownership or rental purposes.
cost to sell home
The alternative to renting out the condo is to sell the home. Of course, there are costs with that as well.
To calculate the costs to sell the home, these have to be factored in:
- Realtor fees– I would likely use One Percent Realty since my husband had a good experience with them. This would mean a cost of $6900 + GST since the home is under $600,000, provided that the buying realtor doesn’t ask for more.
- Property taxes for your portion for the year– if these haven’t been paid already
- Lawyer or Notary fees
- Breaking the mortgage penalties if it is a fixed term loan- this would normally be about 3 months of interest. In my situation the mortgage is low (for Vancouver anyway!) so the penalty should not be very much.
- Any staging costs or cleaning up costs to prepare the home for sale
After fees and after repaying the mortgage loan (let’s say around $100,000), it will be roughly $345,000 in your pocket. This would be tax free since there are no taxes on your primary residence in Canada.
Now let’s compare the two:
return on investment comparison
Renting Condo Out:
I would assume a $1400-$1500 monthly rent in Vancouver for a 1 bedroom, since this would be on the smaller side. The average cost to rent a 1 bedroom unit in Vancouver is now $2090 a month. Going forward, you would be allowed to increase the rent to the maximum that the Province of B.C. allows, which was 3.7% in 2017, and 4.0% in 2018.
Let’s say you rent it out for $1500 a month. The cost to own this property is $1200 a month. That’s $300 a month profit, x 12 months = $3600 a year.
On roughly $350,000 of home equity (factoring in the $100,000 mortgage), the return on equity is about 1.03%.
On the $3600 rental income per year, one would have to pay taxes on this at your marginal rate.
So, looking at this scenario, it looks like the only thing going for renting it out as the continued increase in home equity (the tenants would be paying down the mortgage), and the potential appreciation of the condo if Vancouver Real Estate continues to rise exponentially.
Who knows where Vancouver real estate prices would be in a few years? I can’t imagine a small 1 bedroom condo selling for more than $500,000 but I can’t predict the future.
Now let’s look at the situation of selling the condo:
If one were to take that $345,000 (tax free) and invest it in the stock market with a 6% average annual return on investment, that would yield $20,700, an increase of $20,700 in the investment portfolio. If one were to get a 3.5% dividend yield from the $345,000 invested in the market, one would get a juicy $12,075 annual dividend yield. Not too shabby huh? Also, Canadian dividends are taxed at a favourable rate, and much less than the marginal tax rate.
Now, there are a lot of things that influence this decision. For example, if I sell this place, I will still need a new place to stay. Well, my husband and I are moving to a bigger place in a little over a year. Since we have income inequality we have figured out a ratio of how much we should each contribute to the new home.
Since I need cash to fund my portion of the new home, and I don’t want to be liquidating my investment portfolio to fund my contribution towards this new home. I also don’t want to have my net worth be even more tilted towards real estate (it would mean having over 50% of my net worth in real estate, which I am uncomfortable with).
Since my goal is to have a $1,000,000 net worth by the time I’m 40, with the specifics being $1,000,000 invested in a portfolio generating passive income so that I won’t have to use the 4% Safe Withdrawal Rate, I think selling the condo would be the right move for me.
Of course, there are other non-monetary considerations, like do I have the time (and patience) to be a landlord (again)? If AirBnB were allowed in Vancouver (right now it’s not really approved but is rampant throughout Vancouver) then the return on home equity would be much higher, but would it be worth it still? (I ran the numbers of a 20 day occupancy per month and still it doesn’t beat the 6% ROI on an investment portfolio).
Readers, what do you think? Would you sell and be mortgage free or would you rent it out and start to build your real estate empire?