Should You Rent Out or Sell Your Condo?

Should You Rent Out or Sell Your Condo

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:

Selling 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.

the caveat

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?

Should You Rent Out or Sell Your Condo

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About genymoney

GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, investing, and living a minimalist lifestyle.

28 comments on “Should You Rent Out or Sell Your Condo?

    • @Tom- I am learning that I don’t think I am landlord material too. There’s stuff that I should fix in my own home and I don’t even know how to do it. Like regrout my bathroom tiles.

  1. Well, that’s a tough one, you know about my landlord stories! I don’t think being a landlord is for everybody but I still think it is a good investment.
    You didn’t calculate your return including the repayment of principal, how much would that be? It is money in your pocket at the end of the day, just not monthly cash in your pocket!
    Also are you being overly conservative with your rent estimate?
    The housing market crashing is no different than the risk of the stock market doing the same:) You may still be getting some dividend but your equity could still go down.
    I think a little diversity in any portfolio is good…but being a landlord is work!
    Caroline recently posted…My December Grocery Challenge Was A FAIL, Here Is WhyMy Profile

    • @Caroline- Yes you’re right! I don’t know why I didn’t do that and include it in this post. I have a post coming up about the exact break down of your net profit including calculating mortgage interest (this is what happens when you schedule posts 1-2 months in advance you forget what you wrote about haha). The calculations show that selling is better than renting right now. I don’t think I’m being overly conservative, maybe $1600 max. It’s a small 1 bedroom.

  2. Hey GYM,

    Reflexively, I would want to avoid the hassle of being a landlord, though I don’t really have any expertise on the subject. I do remember that when I rented from a corporate landlord in Miami, I was required to have renter’s insurance. Maybe requiring it of a renter would bring down your owner’s insurance costs?

    Cheers,

    Miguel

    • @Miguel- I don’t have much expertise too except being a landlord to basement suite renters a few years ago. From what I recall with my insurance company when I used to be a landlord, my insurance was higher because of the rental. Rental insurance usually just covers property that is inside (like the renter’s belongings).

  3. “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.”
    I’m not sure if I’m understanding this correctly. Does it mean that, in Canada, at the time you convert from a principal residence to a rental, you have to pay capital gains taxes based on the appraisal at the date of conversion? If so, that would be very prohibitive to wanting to convert an appreciated residence into a rental because you would have to pay taxes up front and yet the equity would still be tied up in the residence.
    In the US, you just need to keep a record of the FMV at the time of the conversion, which you can then use as part of the basis to determine capital gains when you ultimately sell the property. So nothing due to the IRS in the year of the conversion.
    CashflowKat recently posted…The End of the Costco Love AffairMy Profile

    • @CashflowKat-I know, it’s so different in Canada and US! In Canada, you don’t have to pay taxes on any appreciation of a principal residence. But if it’s an investment property and if you sell it, you will have to pay capital gains tax when you sell it. You don’t have to pay any taxes if you don’t sell it, but eventually when you do sell it, then the taxes will have to be paid.

  4. Hi GYM, I think either rent or sell are good depending if you have the time/patients to be a landlord. Just for diversification reasons I prefer REITs for my real estate investing. Although I have held my REITs for a long time, I can sell them with a click of a mouse and they are not invested in one asset, on one street, in one city.

    • @Steve- I have some REITs too but not very much. They are a great option for diversification. You are right, it’s not just one asset, one street, or one city, but I guess the appeal is being the management of your own real estate asset (both good and bad reasons) rather than putting your money into the hands of others.

  5. OMGosh… I had to rewrite this from scratch again. There was something wrong with my Internet and the web didn’t post the comment… sigh…….. lol

    Overall, excellent analysis! There’s so many things to consider when it comes to renting OUT your current home or selling it. Even though if the returns are great, the question would be: are you willing to be a landlord? Another consideration is whether you have time, or if you want to dedicate your time being a landlord.

    I feel that sometimes being a landlord is a lot of work. Generally speaking, things can run smoothly, but you never know when your tenant is going to “complain” about something so small haha… it’s as if you’re on call at random times.

    Nothing is as glamorous as it sounds. But if a person has an interest in being a landlord and it excites them, then it’s worth the shot (not looking at the monetary returns but experience). My fiance always wanted to know how it feels to be a landlord, and so now he knows how it feels (sorta)… after going through some rough times, it can be quite entertaining telling your stories to friends or family. They always look forward hearing how unreasonable some tenants are. haha

    I’m curious… will you and your husband be buying a home, or renting once you move out of the condo?
    fin$avvypanda @ finsavvypanda.com recently posted…Make Compound Interest Your BFFMy Profile

    • @fin$avvypanda- The Internet was all wonky today I had issues too. Sorry you had to retype the comment, that’s the worst! One option is to hire a property management company. I know someone who rents out her two bedroom condo and just pays $75 a month for her property management company to not have to deal with the calls etc. Of course that’s taking it off the top but it might be priceless if you don’t have to deal with a toilet overflowing at 2:00am.

      If you and your fiancee could do it again, would you be landlords again?

      I will message you about what our plans are 🙂

      • haha no worries! That Internet issue happens to me a few times. Going forward, I will make sure I copy the message before hitting submit. In case anything goes wrong, I’ll just paste it again, haha.

        Yes, another option is to hire property manager as long as the net return is reasonable! I would definitely pay for that if we had no time to take care of any issues. It’s a bit too early to tell since we’ve been landlords for only 3 years. My fiance wanted to become a landlord for the experience. If we do pursue in any more properties, my fiance is looking into hiring a property manager as long as the returns make sense. For now, we’re just going to DIY like Cash flow kat hehe… Despite some hiccups from time to time, it’s been a really good learning experience 😀
        fin$avvypanda @ finsavvypanda.com recently posted…Make Compound Interest Your BFFMy Profile

  6. We had to do this math last year!

    Vancouver is similar to SF home values so we ended up coming down on the side of selling instead of renting out after doing the math for several reasons which I was a bit sad about because it would have been awesome to have an SF based rental for the money but it’s a bit speculative, too.

    1. Long term it’s likely that property value will continue to increase so that we get the benefit of the repaid principal as well as the property value of the sale BUT we needed better cash flow to keep up maintenance and any vacancies in the meantime. We were tapped out from the new home purchase and the renovations, and needed the sale equity to top up our savings again.
    2. We have to live in the property 2 of the previous 5 years to avoid the tax so that would reduce our gain.
    3. I didn’t want two properties in such close proximity to each other considering we’re at high risk for major earthquakes. Can you imagine having to repair two homes at the same time after a major earthquake? I’m pretty risk averse and that was more work than I was ready to take on.
    Revanche @ A Gai Shan Life recently posted…My kid and notes from Year 2.10My Profile

    • @Revanche- Thank you again for fixing my website today lol! Thanks for sharing your reasons. Cash flow is so important and not feeling completely ‘pinched’. I know a couple who decided to rent out their condo and bought a duplex and now they are pretty darn leveraged (I think $1 million mortgage). I wasn’t aware of the tax implications, interesting to know about 2 of 5 previous years (then you would probably want to sell within 5 years if you decided to keep it and rent it out?). I wouldn’t have even thought of that (the earthquake prone nature of SF and having to repair two homes)- smart thinking…

  7. I love this post! I often daydream about purchasing another place just for the sole purpose of renting it out annnnd also serving as a temp place to live if we ever moved again and had to sell our current home.

    Darn – I wish Airbnb was allowed in Vancouver. That was my suggestion. I have a friend who is making a killing off of his – it pays for mortgages of his current place and the new one. He also cleans up after and he’s heavily involved. But – he’s single and has time to do that.

    Abandonedcubicle.com has lots of great posts about his frustrations and adventures renting and getting in business with Airbnb if you want to check out his stuff and decision factors as well.

    It’s a tough decision! The deciding factor for me is usually one that best matches the stage of life I am in right now. If/when we have another kiddo – I would not want the responsibilities of being a landlord or Airbnb host until they are school age. Your decision to sell for all your factors listed above, and suggested in the comments would lean me towards selling as well. Best wishes!

    • @Mrs. DS- Oh cool, just checked out Abandonedcubicle.com- so great! I know someone who quit his job and he just manages Airbnb properties in Vancouver now, and that’s all he does. That’s pretty sweet. I think even though it’s not really allowed, it’s still being done. Yeah, I can barely get out to the home on time right now for any appointment, it would be crazy to be running around trying to fix things or clean up the place (Airbnb ‘clean’ is like hotel quality clean which is something I have never achieved despite hours of cleaning).

      • Oh I’m so happy you checked out Cubert! good dude there. Side funny story when you talk about cleaning it made me think about, my mom used to clean houses when I was growing up for a while. Often times she would take my sister and I…because she could do it 3x faster and get paid the same! Since then, I love cleaning! When we moved out of a rental when we were in between houses, the landlord actually asked if I would work for them on the weekends…lol. There’s good tricks/hacks and I’m a fan of square cornered bed sheets!
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        • @Mrs. Defined Sight- Haha oh my, slave free child labour! AND she taught you to clean! Square cornered bed sheets- you must be a pro. I used to clean one of my dad’s rental offices in high school. It was kind of disgusting cleaning the toilets but I did get paid $20 for 1-1.5 hour’s work, which was pretty good back then– sure beats the current ROI of time for this blog HAHA.

  8. Very good analysis, GYM. I’m not a landlord person. Don’t have the patience to deal with the maintenance and tenants. I would probably just sell the condo, and get a new one. That’s the easier way, but may not be the best way. Good luck.

    • @Helen- I like the easy way 🙂 Though I will look into the Airbnb option as the profit will be much higher than just a straight month-to-month rental and it might be more worth it if it can be automated.

  9. When I was a kid, my parents rented out the house we grew up in and since it was an older house, tenants would often call our parents to fix various maintenance issues(mainly in the bathroom and kitchen) on a frequent basis. Luckily my uncle is a contractor and was able to help out my dad to fix most of them. Back then, I never figured out why they wanted to deal with the hassle of fixing stuff in our old home since we don’t live there anymore. Now as an adult, I see why my parents along with so many more landlords deal with it, to get a better ROI than just selling the place.
    I think if you guys can deal with the potential maintenance issues in your condo, you should rent it out and maybe down the line turn it into an AirBnB.
    Kris recently posted…My 2017 Expenses Sankey StyleMy Profile

    • @Kris- Yeah, if your parents bought in SF back then, they must have done really well. It’s good that you have a contractor in the family! They are so handy! My husband is not handy at all (shh he doesn’t really read this blog but he wouldn’t mind me sharing that).

  10. This is a local issue based on numbers for each individual. I just feel like most of the time it makes more sense to sell if it is your personal residence. Usually the best rentals are bought with the intention of being a rental from the get go.

    Beyond this you have to factor in becoming a landlord and what value you place on your time. With just one unit you will not really reap the major benefits that you hear about on sites like biggerpockets and other real estate savvy folks sites out there.

    There is not a one size fits all answer to this question though that is for sure~
    Damn Millennial recently posted…7 Reasons I Pay Down My Mortgage In Place Of A Bond AllocationMy Profile

    • @Damn Millennial- Oh gosh DM you are always so wise and articulate! I wonder if I am older or if you are older, millennial-wise. Good point about having it converted to a rental vs just getting a rental intended to be a rental in the first place.

  11. Landlord woes are more than enough to keep me away from renting a property to anyone ever. You’ve gotta be a pretty disagreeable type of person to be a proper landlord, or your tenants are gonna walk all over you.

    • @Stephen- Haha, unless you have some really nice tenants! But yeah, your statement is likely correctly at least 75% of the time.

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