thinking of buying first condo - questions

Leveraging, renting vs owning, making an investment or buying a home?
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stebed
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Post by stebed »

hey guys, i'm thinking of buying my first condo very soon, i'm not a big spender so this is quite a big deal for me :) i'm looking for a place to live but i also know i won't be there forever so i'm looking for something that will hopefully be desirable to others in the future. people always say location location location, and this place is in a good location, adjacent to the water in old montreal.. literally a ten second walk to the water, however it doesn't have a view, that kinda thing is rare in that part of the city and comes at hefty premium i cannot afford.

i'm just wondering though, from an investment perspective, is it generally better to get anything in a great neighborhood vs getting something great in a neighborhood that might be on the verge of becoming the next 'place to be'? i guess the important word there is 'might'.. this condo was listed at $269,000 with a parking spot, 900 square feet.. he bought it for $244,000 18 months ago. its been on the market for five months, the entire place is painted red and unfurnished.. shows terribly. i saw one of these very same units three years ago and know how nice they can look with a proper paintjob and furniture, the difference is night and day. the one i saw three years ago sold for $199,000, it was the first place i'd ever looked at, by the time i realized it was the best one for me it had long since been sold. i'm going to offer this guy $210,000 for the loft without the parking (parking is worth 30, 35 if you're lucky). he's just an investor and this is his last canadian property so he's motivated to sell. we share the same agent and he's pretty sure he'll go for it. the place needs a wall to wall paintjob but thats it.. afterall its just one big room, how messed up can it get? :)

other exact same units in this building have sold for: $247K w/ parking jul '04, $221K may '04, $244K w/ parking in jan '04 (the unit in question), and $186,000 jan '03. there are 20 of these particular units in the building, building in 97, four have been resold in the last 33 months, doesn't seem too bad. the way i see it, at $210k i might not be getting a smoking deal in a market thats definitely cooled off, but i can't see the price ever dipping back down under $210 for this unit.. so i think i'm safe. i'm 26, i have $200,000 cash (i'm a good saver), i haven't really invested it much because i wasn't sure what i was going to do with it, if i was going to buy a condo, or invest it in another business venture, or buy stocks, etc.. its been in a scotia money master account for a while now, i know i know, you're all cringing, its ok, im going to do something with it now! :) i know i've missed some opportunities to make some money, indecision certainly cost me but i've learned my lesson and i know there will always be more opportunities. my questions are:

1- interest rates are low, should i just put down $50,000 and get a mortgage at 5% or whatever? or just buy the thing outright and be done with it? afterall that would be the equivalent of a guaranteed 5% return on my $150,000 because otherwise i'd be paying out 5% right? and more as the years went on and rates went up..

2- if i should just get the mortgage, whats the best way to find/get the best rate? and what should some of those rates look like right now?

3- what should i get? variable rate? fixed for 5 years? 10 years??

4- im currently reading the cmhc's condominium buyers guide, im sure it will be helpful, but what do you think are some things i NEED to know before jumping into this?
http://www.cmhc.ca/en/bureho/buho/loader.c...fm&PageID=54585

5- if i were ever to rent this place, what kind of return should i expect on it? condo fees and taxes total $3,900 a year, it was previously rented for $1350 a month, thats $16,200 - $3,900 = $12,300. on an investment of $210,000, that's a return of 5.8% excluding any capital gains. is that reasonable?

anything i'm forgetting?
thanks!
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Post by Rambler »

stebed wrote:people always say location location location,
My belief is it's not always about location, location, location. Location is only a third of the package. The whole package is Timing, Trend, and Location. In no particular order.
Timing is everything when it comes to buying low and selling high for real estate. Remember the downturn in the 80' and early 90's?
What's the latest trend when it comes to real estate. For example, when the boomers sell their huge homes to trade down for a rancher or smaller homes, those huge homes that used to house all their children will flood the market with little interest. Or worse yet, just look to B.C. and you'll see condo's built during the last boom and you'll see leaky condos with building tarps covering them. Buyers are not exactly lining up to buy these until they're fixed properly, but their owners are losing their shirt because they're already mortgaged to the hilt and need to have a third mortgage of 50K and up for repair cost.
Then finally location, no need to explain this one.
And my belief from what you've mentioned about your monthly rent income of 1350. Anyone who can afford 1350 per month for rent would probably be qualify for a mortgage equal to or near what you'll be paying for this condo. Now you need to asked yourself, what kind of people am I renting my investment to if they're paying 1350 a month to me but should be buying this place instead.
These wisdoms may or may not apply to your situation now. Only you could answer this.
Last edited by Rambler on 17 Sep 2005 12:34, edited 1 time in total.
dustie
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Post by dustie »

It doesn't sound like a huge bargain, first off, the building isn't new, there is no view - which is very important, considering it's a loft-, he's asking $269 -with no takers for 5 months, parking worth $30-35,000, so you'd be stuck with it. The main question is - do you like it enough? My advice is to buy a condo brand new, pick out a high, south facing unit and wait for it to be built. That way you get what you want. You have to wait awhile, but I think it's worth it.
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Post by stebed »

dustie wrote:It doesn't sound like a huge bargain, first off, the building isn't new, there is no view - which is very important, considering it's a loft-, he's asking $269 -with no takers for 5 months,  parking worth  $30-35,000, so you'd be stuck with it. The main question is - do you like it  enough? My advice is to buy a condo brand new, pick out a high, south facing unit and wait for it to be built. That way you get what you want. You have to wait awhile, but I think it's worth it.
basically i'd be getting the loft for what he bought it for 18 months ago, either he overpaid or i'm getting a deal. i don't necessarily think i'm getting a deal, but i think this is what the unit is worth, an identical unit next door to this one was purchased for $209K six months ago, i forgot to mention that one in my original post. also on this one his agent offered him $190k w/o parking and he turned it down, i'd probably offer $205K and see what happens.. the parking is just an option..

regarding the view, i don't know if you're familiar with old montreal but its a lot of low buildings (no high rises allowed, i think ten stories is the limit) and very tight streets, so a view is hard to come by and if you can get one its going to cost at least $300,000. this is a renovated building so it has the 12 foot ceilings and huge cement columns that the new constructions just don't have. i've seen so many new constructions, i wanted to buy one, but i just find the quality to be lacking..

i like the unit though, its nice. it has a lot of character and old montreal isn't getting any bigger..
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Post by stebed »

Rambler wrote:
stebed wrote:people always say location location location,
Then finally location, no need to explain this one.
And my belief from what you've mentioned about your monthly rent income of 1350. Anyone who can afford 1350 per month for rent would probably be qualify for a mortgage equal to or near what you'll be paying for this condo. Now you need to asked yourself, what kind of people am I renting my investment to if they're paying 1350 a month to me but should be buying this place instead.
These wisdoms may or may not apply to your situation now. Only you could answer this.
[/quote]

well this project was finished in 1997 and i don't think there's anything to worry about regarding quality, it was actually one of the first projects that kicked off the huge conversion blitz in montreal in recent years, its won awards, etc.. regarding timing, well, the time to buy these would have been between 1997-2001 when they went for $130K with parking, vs $245K nowadays. regarding the 'who would pay $1350 a month rent', you know i asked my agent that question this morning, i said if they can afford $1350 rent, why don't they just buy a place instead of throwing away all that money? he said a lot of people they rent to are people working on contract, they're only in montreal for a year or two.. or people who know they'll be leaving montreal sooner rather than later, or couples who just want a place for a couple of years before they go buy a house and have kids, etc..
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Post by Rambler »

stebed wrote:, you know i asked my agent that question this morning, i said if they can afford $1350 rent, why don't they just buy a place instead of throwing away all that money? he said a lot of people they rent to are people working on contract, they're only in montreal for a year or two.. or people who know they'll be leaving montreal sooner rather than later, or couples who just want a place for a couple of years before they go buy a house and have kids, etc..
I think you've asked the wrong person regarding who would rent this place for 1350 per month. It's like asking a Ford car dealer who makes the best cars in the world. You should asked yourself, would you rent this place for 1350 per month? I've used to be a landlord for many houses and apartment buildings until I've sold some of my real estate holdings last year during the big real estate boom. I know what people expect when they fork over their rent cheques to me every month. One thing you can't afford to have is a vacancy when there is nobody there to rent it each time someone leaves or high turnovers due to contract work. You want stablity and someone who would take care of your investment. 1350 is alot of money and anyone who can afford that should seriously think that a mortgage is within reach. A young couple would not pay you 1350 a month if they're seriously thinking of buying a house of their own anytime soon if they're planning on saving their down payment. With today's less than 5% downpayment and little down, they would be better off with a high ratio mortgage than renting from you for 1350 per month with nothing to show for it. Think about it for a moment, would you pay your landlord 1350 per month, or would you get a preapproved mortgage and buy the place yourself if you're the young couple.
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Post by stebed »

Rambler wrote:I think you've asked the wrong person regarding who would rent this place for 1350 per month.  It's like asking a Ford car dealer who makes the best cars in the world.  You should asked yourself, would you rent this place for 1350 per month?  I've used to be a landlord for many houses and apartment buildings until I've sold some of my real estate holdings last year during the big real estate boom.  I know what people expect when they fork over their rent cheques to me every month.  One thing you can't afford to have is a vacancy when there is nobody there to rent it each time someone leaves or high turnovers due to contract work.  You want stablity and someone who would take care of your investment.  1350 is alot of money and anyone who can afford that should seriously think that a mortgage is within reach.  A young couple would not pay you 1350 a month if they're seriously thinking of buying a house of their own anytime soon if they're planning on saving their down payment.  With today's less than 5% downpayment and little down, they would be better off with a high ratio mortgage than renting from you for 1350 per month with nothing to show for it.  Think about it for a moment, would you pay your landlord 1350 per month, or would you get a preapproved mortgage and buy the place yourself if you're the young couple.
well i tend to do things differently than most people. also im buying this place for myself, but if i move i'd like to be able to keep it and rent it.. regarding rent, lots of people pay over $1000 a month rent, i have a friend who rents a loft for $1050 a month, why doesn't he buy a place? because he doesn't have $50,000 for the downpayment and even if he could, he knows he's outta here in no more than two years.. its just not worth the trouble for him to buy a place, its a huge commitment. where do you live? im just curious because $1350 is definitely not an obscene amount of rent for two people in old montreal.. thats $675 each, i pay $575 now just for my 400 square foot 2 1/2 downtown..
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Post by Rambler »

Sounds like you already know the answers to your questions and have made up your mind to purchase the place and just looking for assurance to your decision. I'm just helping you think outside the box with an impartial view. A young man like yourself who could save up over 200k is no dummy when it comes to money and knowledge. Like the old saying goes, "a fool and his money will soon apart". Doesn't look like this applies to you. Good luck and best wishes to your purchase. Cheers
Last edited by Rambler on 18 Sep 2005 13:53, edited 1 time in total.
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Post by steves »

anything i'm forgetting?
I didn't read the 'condo guide' in depth, but you should ask to see the last several years' minutes from the strata council meetings as well as the financials and especially the amount of money in the contingency fund.
Live Rich, Die Broke (but not too soon).
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Post by stebed »

Rambler wrote:Sounds like you already know the answers to your questions and have made up your mind to purchase the place and just looking for assurance to your decision.    I'm just helping you think outside the box with an impartial view.  A young man like yourself who could save up over 200k is no dummy when it comes to money and knowledge.  Like the old saying goes, "a fool and his money will soon apart".  Doesn't look like this applies to you.  Good luck and best wishes to your purchase.  Cheers
no i haven't made up my mind yet, but thanks for the replies, like i said i had the same concerns you raised (and still do), i hope you didn't take my replies the wrong way, thats just my way of working things out :)

but if anyone has answers on the interest rates questions, etc.. that would be much appreciated, i've done a lot of reading as it is but the more info you have the better right? thanks
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Post by stebed »

steves wrote:I didn't read the 'condo guide' in depth, but you should ask to see the last several years' minutes from the strata council meetings as well as the financials and especially the amount of money in the contingency fund.
yup thats in the guide, thanks
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Post by valuethinker »

stebed wrote:no i haven't made up my mind yet, but thanks for the replies, like i said i had the same concerns you raised (and still do), i hope you didn't take my replies the wrong way, thats just my way of working things out :)

but if anyone has answers on the interest rates questions, etc.. that would be much appreciated, i've done a lot of reading as it is but the more info you have the better right? thanks
My gut says no one should buy a first home without at least a 5 year fixed mortgage, or at least the option of fixing the mortgage if interest rates move up.

Second Rambler's concerns about your property as a rental property. I realise in Montreal it has been more traditional to rent than say in Toronto, but nonetheless the best rental properties are ones that young people (who can't yet afford to buy a home) or people who will never buy a home (too little income) can rent. If you price yourself into the 'executive' market you are buying a luxury good, and in a downturn, luxury goods get hit.
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Post by stebed »

valuethinker wrote:My gut says no one should buy a first home without at least a 5 year fixed mortgage, or at least the option of fixing the mortgage if interest rates move up.

Second Rambler's concerns about your property as a rental property.  I realise in Montreal it has been more traditional to rent than say in Toronto, but nonetheless the best rental properties are ones that young people (who can't yet afford to buy a home) or people who will never buy a home (too little income) can rent.  If you price yourself into the 'executive' market you are buying a luxury good, and in a downturn, luxury goods get hit.
thanks for tip, regarding the mortgage, the company my agent reccomended lists 5 year fixed at 4.5%, is that reasonable? and you definitely think it's better to get a mortgage than to just buy the thing outright? thanks
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Post by valuethinker »

stebed wrote:thanks for tip, regarding the mortgage, the company my agent reccomended lists 5 year fixed at 4.5%, is that reasonable? and you definitely think it's better to get a mortgage than to just buy the thing outright? thanks
I don't know what counts as a 'reasonable' mortgage rate in Canada but shop around! Credit Unions are usually the best I think. A mortgage with an 'open' option to pay 10% of principal off at the end of every year is also a good thing.

What you want is protection if the mortgage rate rises so high it starts to really hurt, but conversely flexibility if interest rates really drop (paying off part of the outstanding is a way of benefiting from that). A good (and conservative) rule of thumb is that mortgage+condo maintenance fees should be less than or equal to 3 times your income.

Remember that condo prices go up and down a lot more than house prices. If the real estate market falls, you can be almost sure condo prices will fall more. You don't want to be in a negative equity situation, ever, and that should condition your thinking about the size of downpayment (ie a minimum of 20% of the sale value).

You want to make sure you use 100% of your RRSP capacity and should retain the cash to do that-- rules have changed though since I was doing this and there is now a 'catch up' provision for unused RRSP contributions from previous years.

For investments outside the RRSP the situation is much less clear as the return from an investment has to be 4.5%/ (1 minus marginal tax rate) to be equivalent. Which for most people is near 9.0%. Equity markets (with volatility) aren't likely to exceed 9% pa returns in the future, and some years they will be negative.
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Post by stebed »

valuethinker wrote:You want to make sure you use 100% of your RRSP capacity and should retain the cash to do that-- rules have changed though since I was doing this and there is now a 'catch up' provision for unused RRSP contributions from previous years.

For investments outside the RRSP the situation is much less clear as the return from an investment has to be 4.5%/ (1 minus marginal tax rate) to be equivalent.  Which for most people is near 9.0%.  Equity markets (with volatility) aren't likely to exceed 9% pa returns in the future, and some years they will be negative.
i didn't follow any of this, can you try resaying with different words? im not quite sure what you're getting at, are you trying to say that i should just buy the place outright vs investing the money in the hopes of getting a higher net return than the interest on a mortgage? thanks
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Post by valuethinker »

stebed wrote:i didn't follow any of this, can you try resaying with different words? im not quite sure what you're getting at, are you trying to say that i should just buy the place outright vs investing the money in the hopes of getting a higher net return than the interest on a mortgage? thanks
You have to believe you can get a return on your investment (outside an RRSP)

investment return > mortgage rate/ (1 - marginal tax rate)

So if your marginal tax rate is 50%, and your mortgage rate 5%, then your expected return has to exceed 10% pa.

Just as a benchmark, your expected return on long term government bonds right now is about 4.5% (I haven't looked up the Canadian government bond yield in the paper right now, but it is about that for bonds with more than 10 years to maturity). Your expected return from stocks is anywhere from 3-5% above bonds long term (but stocks go down about 1 year in 3 or 4, in fact stocks often do badly for *years* then catch up very quickly in a 2-3 year burst).

So the call is pretty marginal right now between investing in your mortgage and investing in stocks. Investing in your mortgage (by paying it down) is a certain return, in any case, whereas stocks are a risky return.

So my standing advice is make sure you use all your RRSP capacity (because you do that with before tax money). Then pay down debt. Then make other investments. If you work for a large, stable defined benefit pension scheme then these calculations don't matter much-- you don' t have the RRSP room to invest in RRSPs, and in any case that scheme is looking after your future retirement security.
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Post by stebed »

valuethinker wrote:So the call is pretty marginal right now between investing in your mortgage and investing in stocks.  Investing in your mortgage (by paying it down) is a certain return, in any case, whereas stocks are a risky return.

So my standing advice is make sure you use all your RRSP capacity (because you do that with before tax money).  Then pay down debt.  Then make other investments.  If you work for a large, stable defined benefit pension scheme then these calculations don't matter much-- you don' t have the RRSP room to invest in RRSPs, and in any case that scheme is looking after your future retirement security.
so even with interest rates at these near all time lows, it still makes more sense to pay down your mortgage first than try earning a higher net return than the mortgage rate with other investments? if so, why aren't we all hardwired to pay down our mortgages as quickly as possible? how many people with mortgages also buy equities outside of their rrsp..? probably a lot, if its pretty much a losing battle now, when was it ever a good idea??
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Post by adrian2 »

valuethinker wrote:You have to believe you can get a return on your investment (outside an RRSP)

investment return > mortgage rate/ (1 - marginal tax rate)

So if your marginal tax rate is 50%, and your mortgage rate 5%, then your expected return has to exceed 10% pa.

Just as a benchmark, your expected return on long term government bonds right now is about 4.5% (I haven't looked up the Canadian government bond yield in the paper right now, but it is about that for bonds with more than 10 years to maturity).  Your expected return from stocks is anywhere from 3-5% above bonds long term (but stocks go down about 1 year in 3 or 4, in fact stocks often do badly for *years* then catch up very quickly in a 2-3 year burst).

So the call is pretty marginal right now between investing in your mortgage and investing in stocks.  Investing in your mortgage (by paying it down) is a certain return, in any case, whereas stocks are a risky return.
Your equation holds true if the investment returns are fully taxable every year.
This is not the case for stocks.
Even for high turnover cases, part of the stocks' return is taxed at reduced rates; OTOH you can defer most of the taxes for a long time by not selling.
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Post by stebed »

adrian2 wrote:Your equation holds true if the investment returns are fully taxable every year.
This is not the case for stocks.
Even for high turnover cases, part of the stocks' return is taxed at reduced rates; OTOH you can defer most of the taxes for a long time by not selling.
but i mean the bottom line here is, buy the condo outright, right? that seems like a no brainer at this point..
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Post by valuethinker »

adrian2 wrote:Your equation holds true if the investment returns are fully taxable every year.
This is not the case for stocks.
Even for high turnover cases, part of the stocks' return is taxed at reduced rates; OTOH you can defer most of the taxes for a long time by not selling.
Very good point! My equation was too simple.

Another related problem is that capital gains outside an RRSP are taxed at a lower rate, whereas when they are withdrawn from an RRSP they pay full tax.

The (more complex) conclusion is therefore:

- invest the RRSP in interest bearing instruments if my equation holds
- then pay down debt
- then invest outside RRSP primarily in dividend and capital gains producing investments

*however* the problem with stock investments is the volatility. You really have to be able to hold for at least 20 years to give a very high probability that you will get your money back and earn a positive return. If you look at the long run history of stock markets you have to wait that long-- what markets typically do is have a fantastic run (and the period 1980-2000 was the best run ever recorded) and then they don't do much for a subsequent 20 years-- stocks peaked in 1966 and did not again reach that level until 1980, for example (and after inflation they did far, far worse).

So we go to the question of what is the appropriate risk-adjusted return: ie at one point is certain money (from paying down the mortgage) worth uncertain money (investing in the stock market). Which is also caused the 'size of the equity risk premium' puzzle.
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Re: thinking of buying first condo - questions

Post by zontik »

Sorry for resurrecting such an old thread. I'm in the same shoes that the original poster was in 11 years ago. The difference being that I am a US Based first home buyer that really loves the city of Montreal... with the currency USD being so strong, I keep contemplating about making a purchase. And the more I wait the worse the rate gets for me :) first considered a purchase in January!

Anyways, a few questions:

1) What did the OP end up doing? Did you end up buying something in Montreal? Do you regret it? You were looking to buy something in exactly the same part of town that I want to buy in...

2) What is the current state of real estate in Montreal currently? Is it a buyers market or a sellers market? Have the prices been going up, pegging to the USD in anyway?

3) Would you recommend a purchase at this time in Montreal? Especially considering my residency / citizenship status?
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Re: thinking of buying first condo - questions

Post by cashinstinct »

1) No idea what the op did :)

2) Condos in Montreal are a buyers market for sure, in used condos at least.

Some new projects are popular downtown, but I have many friends unable to unload their used condo in the Montreal area.

Montreal market has been kind of flat for the last couple of years, compared to Ontario-British Colombia at least ! It takes time to sell if you don't want to move down your price too much.

3) I would recommend to buy something that you don't want to sell for many many years, considering transactions costs.

There are many new projects coming in Old Montreal near Jacques Cartier bridge... but it will be in many years.

Are you set on a condo? Are you single or you have a family?
Do you want to move here or it's an investment?

I would not recommend a single condo as an investment in general.
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