Buying to Rent or Flip
Should you buy a house OR buy a condo
I'll look at this question from two perspectives. From the point of view of House Flipping for a quick return versus Rental investing in condos and Rental investing in houses.
This page will focus on comparing real estate investment options. If you are thinking of buying a house to live-in, then see my other webpage. As an investor you are buying and renting, for appreciation and cash flow. These are two important distinctions since many recent 'Investors' are actuallly speculators, planning to flip a condo.
Investors vs Speculators
A speculator is anyone who puts money into an asset in wishful, hopeful anticipation it goes up in value. Speculators have no control of the asset. A pre-construction condo buyer is a speculator. They buy a $500,000 condo with 20% down and they wait. The condo is scheduled to be ready in 3 years, but it's delayed to 4 years and during that time the market has gone up... AMAZING... Investment ??? In fact, the buyer speculated the market would go up, they had no control of whether the market went up or down, however, these speculators have been right for most of 2000 - 2017. Good guess guys...
This strategy became popular with many people choosing to sell the condo immediately after completion. Some of these specultors got a call from the Canada Revenue Agency. Oops, did you forget to consult your realtor for real estate advice about pre-construction fees and taxes? Yes Bruce, I'm talking to you...
If you chose to keep the condo and rent it, then you probably did better than the quick exit speculator, but you were losing money early on. The rent wasn't covering the mortgage and maintenance fees. Yes, the property went up in paper value, but you need cash now.
Cashflow is King
You can thank Kathlyn Wynn for announcing new rent control measures in April 2017. She helped all the landlords make a small windfall and go in the black with their condo investment. Upon announcing new rent controls, landlords collectively decided to raise rents immediately before the rent controls came into effect. I saw one bedroom condos renting from $1600 go to $2000 almost overnight. Depending on where you rent / own, downtown or suburbs, renters are paying $1900 - $2600 per month. Thanks Kathlyn. Much love.
Whether you own a condo or a house, the rent you can charge in 2018 is significantly higher. This webpage is to determine what's a better investment, houses or Condos. As a real investor, you know that control of the asset is the key factor of any investment, not appreciation.
Lets take an example: Should you buy a condo or buy a house ? I'm going to compare a 15 year old resale condo to a 15 year old resale house.
Those of you know who know where i'm going with this..... shhh don't tell. Let's keep the suspense going for the others.
|CONDO LANDLORD||HOUSE LANDLORD|
|EXPENSES||PAID BY||BENEFIT||PAID BY||BENEFIT||REPLACEMENT||TIMING|
|Water Tank||Maintenance Fee||Both||Landlord||Tenant||$1500 - $2000||15 Yrs|
|Water Usage||Maintenance Fee||Both||Tenant||Tenant||-||-|
|Furnace||Maintenance Fee||Both||Landlord||Tenant||$2000 - $4000||15 Yrs|
|Air Conditioner||Maintenance Fee||Both||Landlord||Tenant||$1000 - $2000||15 Yrs|
|Landscaping Grass Snow||Maintenance Fee||Both||Landlord||Tenant||$1000 - $7000||5 Yrs|
|Roof||Maintenance Fee||Both||Landlord||Tenant||$2500 - $6000||15 Yrs|
|Fences||Maintenance Fee||Both||Landlord||Tenant||$1500 - $4000||10 Yrs|
|Driveways / Garage||Maintenance Fee||Both||Landlord||Tenant||$1000 - $4000||10 Yrs|
Do you have the time?
In the chart, you will notice the Landlord is either paying Maintenance Fees to cover expenses or paying directly out of pocket. The key distinction is TIME. What is your time worth? A condo requires less of your personal time, since the property manager is maintaining the condo common elements. Much of the work required with owning a property is outside, thus a Condo Investor uses the services of a third party to administer the tedious and laborous day to day maintenance.
Some of you are screaming - " I get the tenant to take care of my lawns and they clear the snow." Well, yes...and no. The tenant will never take care of the lawns as well as you would. Non-owners showcase their crab grass lawns with little yellow flowers multipling like crazy until one day, its a sea of weeds. Eventually the owner will need to lay down new grass to try and rid themselves of the problem. If you have trees and shrubs, then you may aslo get fungas and over growth. In short, there is no replacement for Pride of Ownership. Even if your tenant is great at lawn duty, you still need to find the time to contract a roofer, repave driveways, fix fences and research / hire general contractors and licensed professionals to fix or replace aging infrastructure. Another key question is your investment time horizon. Since this is another big topic on it's own, i'll reserve it for another webpage.
Should I buy a house or a condo investment?
You can see, I've been swaying towards condo investment as the better option, but there's a compelling case to be made for investing in houses.
I intentionally used a 15 year old resale property as my benchmark. The reason being replacement costs. After 15 years many items in a house need to be fixed or replaced. If you're buying an investment, then ensure the replacement value is factored into the purchase price. The same can be said for a condo, except the previous owners have been putting money aside into a reserve fund that stays with the property when it's sold. Assuming the condo has been administered correctly, then the reserve fund should cover the cost of fixing or replacing all the common elements such as roof, heating, cooling and water equipment.
Imagine if freehold houses had reserve funds. Typically, homeowners pay the full replacement cost in a lump sum payment when the need arises. This is why it's frustrating when a buyer says, " No Condos !! - I don't want to pay maintenance fees. " Arg !! You can read my page about maintenance fees to learn more.
A house can be a great investment if the previous homeowner has done the necessary repairs and replaced the aginig infrastructure. Is it better than a condo? It can be. Depending on where you invest, the municipality may allow basement apartment rentals. That's double the income versus a single family condo and it gets better. Typically, freehold properties appreciate at a faster rate than condos, thus you're benefiting from additional cashflow while also reaping the rewards of additional appreciation.... a win win !!
I have simplified this topic, but it can be much more complex depending on tenancy law, location, condition of the poperty and the past mismanagement of the property. Please consult your lawyer and real estate agent. If they know what to look for, they will ask about the attic, the basement, and how ugly it looks.
Yes, how UGLY... the best investments are ugly.