New Investor – Appreciate advice on options

[fishdog]

Hey everyone,





I`ve been reading the forums for a long time and appreciate all the insight and advice being thrown around. I signed up today because I was hoping to get some advice from the forums. My wife and I have been wanting to get into real estate investing for a while now but just recently we were able to and I wanted to ask the people here what your opinions are on our options.





We live in Kelowna which is one of Don`s best real estate towns in BC, but real estate is relatively expensive to get into. We just sold our condo (cannot be rented out) because we have a growing family. After covering all closing costs and paying off the existing mortgage we have about 60k to work with. These are the 2 options we have been analyzing (but we are definitely open to other options).





Option 1 ` We found a nice property with a legal rental suite that we could get for roughly $425k. We would put 5% down and save the rest. We would live there for roughly 2 years and rent out the basement suite during that time. After the 2 years we would take the remaining amount left over from the original 60k plus the money we save over the 2 years (this will total roughly 50K combined) and use that to buy the house we want to live in permanently. We would keep the original place and rent out both the top and bottom. Similar places in that area rent for $1000 in the suite and $1400 main level. I realize that with this little 5% down payment on the rental properly that it will have a negative cash flow of $200-$300/mo.





Option 2 ` Buy the house we want to live in permanently for $500k with 5% down (which would leave us with roughly 25k after closing) and then save up for a few years for a 20% down pmt on a $200k investment property (probably a condo for that price in Kelowna).





To me option 2 seems like the safer play but with option 1 we will have 2 houses (1 rental and 1 primary) after a year or two. My concern with that option is owning 2 houses with only 5% down on each. One final note. I have been looking for rental properties in Kelowna for a while now and it seems to be very hard to find a good cash flowing property. I`m sure they are out there but most of the decent rental properties have about a 6-7% cap rate.





Sorry this is so long I just wanted to give you a bit of background. Any advice at all is appreciated. Thank you very much in advance!





Ryan

 

[tsokalski]

The first rule in investing, is doing so for CASH FLOW. in the one scenario you proposed you would end up with negative cash flow, this goes against the fundamental rule of buying for cash flow. Unless you can put more money down to cash flow it when you move, I would not consider having a negative performing asset. What if it goes vacant? Then you coud be down $1500-1700 month. How long can you support that?

 

[moparcanuck]

Always remember the two most important rules when it comes to investing in properties:



1. Cash flow is king.



2. Don't forget rule #1

 

[Thomas Beyer]

Why Kelowna ?



Where is the upside ?



What industry is there that is expanding and hiring ?



Live in Kelowna, but invest elsewhere, such as most booming AB, SK or a few select BC or ON towns. Not in Kelowna. It is an overpriced market with poor economics.



Of course, if you chose to live there, having a mortgage helper, i.e. basement suite is a good idea !

 

[Thomas Beyer]

[quote user=tsokalski]The first rule in investing, is doing so for CASH FLOW.


It's one rule, but not the only one.



You can buy an old ugly house in a decent location, fix it up with no cash-flow, and sell it and make $50,000 on $150,000 invested, with no cash-flow.



Cash is King. Cash-Flow is Queen. (TM)

 

[fishdog]

Thanks for all the advice everyone. I really do appreciate it.



Thomas - to be honest the only reason we were thinking Kelowna is because we live there and figured it would be easier to invest where we already live. I realize that from an investor perspective this is not a valid reason and it would make better sense to look elsewhere. Thank you very much for your insight.



Just slightly off topic - Whar are your thoughs on condos as an investment for somebody just starting out? Most of the things I read seem to have a negative opinion on them because you can't really controll your expenses that well. Also it is my understanding that they don't appreciate quite as fast as houses. The reason I ask is because in Kelowna it seems much easier to find condos that rent for say $1200/mo and cost $175k (8% cap rate); whereas houses you can usually only find a 6-7% cap. Also for a new investor you can obviously get started much sooner as the down pmt is less.



What do you guys think?



Thank you very much!



Ryan

 

[Karma]

We have a rental house purchased for 152000 with approx. 8000 renos and we've rented it for the past 3 yrs. for 1200/month.



We also bought a large house for 290 000 (did approx. 50 000 renos to our portion) with an existing above ground apt., spent 20000 totally renovating the apt. and have rented it for more than a year for 875/month.



In my opinion the attached apt. is far more profitable and we are able to deduct 25% of our hydro, gas, cable, internet, mortgage interest, taxes and maintenance costs.



From someone that knows both options I would suggest option 1.



S.G.

 

[Thomas Beyer]

[quote user=fishdog]houses you can usually only find a 6-7% cap.
That is likely not true after you count all costs such as taxes, insurance, property management, vacancies, R&M .. likely sub 5% for most decent houses or sub 4% even.



[quote user=fishdog]Whar are your thoughs on condos as an investment for somebody just starting out?
I started with rental pooled condos in 1997 until I switched to lower priced apartment buildings with the same rent per unit in 2000. I still own 2 rental pooled condos, one in Edmonton and one in Kelowna (Thunderbird/Evergreen) .. both 2 BRs bought for about $80,000 around 1999 and 2002 .. rents for around $1000 right now. Those today would go for $120-140K .. and at that price it is OK but not wow. However, retal pooled condos allow a degree of convenience and predictale rents as vacancies are shared across all owner in the rental pool. Very consistent cash-flow.



I'd buy rental pooled condos at the right price all day long, if well managed, and also SF homes with suites or townhouses. It comes down to price and management .. and area upside. Property management of (SF or town)houses is harder and rents more volatile, but indeed provide more upside potential. Devil is in the details as you can make a killing in Kelowna if you buy well or lose your shirt in boom town Saskatoon.

 

[fishdog]

You are correct about the 4-5% cap rates Thomas. I was calculating it with just gross rents and not including expenses which was obviously incorrect. That is very interesting about the rental pooled condos. Do you have any advice on finding out if a condo is rental pooled or not (a specific website or something)? Or is it just something that you happen to learn as you do your market research? I guess any good realtor should know which are pooled and which are not. I took a look at a listing for an Evergreen condo for example and it didn't mention anything about being pooled. The one I saw was listed at 154k if I remember correctly.

Thanks again for your help,

Ryan