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To sell or not to sell, that is the question…
Or in this reader’s case, more like “how do I stop the bleeding?”
As you all know, here at Millennial Revolution, I never shut my trap about the dangers of buying into the housing “cult”. Why? Because locking all your wealth into 1 asset, feeding it your entire paycheque, betting on it making a buttload of money because housing always goes up, up, up…is stupid.
And here’s your proof (e-mail has been edited for brevity):
“In 2014 I moved into a swanky one-bedroom condo in Edmonton. I was a single guy, with a great job, and making good money so I figured I’d better buy the place, since “renting is a waste of money” and I didn’t want to move again. I believed that if I did end up meeting someone I could easily sell it, or rent it out since Edmonton was full of single guys with lots of money. My realtor assured me that I could easily rent it and be cash flow positive by a couple hundred bucks each month. And that was all the homework I did. I bought my place for $295,000 in the fall of 2014.
1. I met a great girl, and in January 2016 I moved into her place. (My condo is too small for both of us, and her place allows us to walk or bike to work). G/F and I are splitting rent on her place and my place is empty most of the time.
2. The price of a barrel of oil went down the shitter, and all the wealthy dudes took off. It’s now a renters market, and I would be lucky to rent my place out for $1600/mth.
3. My monthly cost of ownership is $2100 (mortgage at 2.1%, which I’m making accelerated payments on – 16 yrs owing, and condo fees, property taxes, utilities, insurance)…this eats up 36% of my monthly take home pay of $5900.
5. The current suggested list price of my place is $259,000. Realtors I’ve spoken to have warned me to be prepared for a sale at closer to $245,000.
6. Given that I owe $265,000, and considering the cost of selling, I suspect I’d be on the hook for a big stinky loss of $30,000. This would go onto my line of credit, and I can pay it off in 10 months. I tried listing it in the spring at $299,000 (same price as my competition), with no success.
7. There are plans for more development around my property. I’m concerned that the potential construction would scare away renters, and that the other condos, once completed, will outcompete with my mine for renters and buyers.
Given that moving into my place isn’t an option, I’m left with the decision to either sell and eat the $30,000, or rent and eat $500/mth until the economy improves (whenever that’ll be).
I’ve been waffling on this decision for months. I’ve been trying to convince myself that the $30,000 is not a bill, rather, the cost of the lessons learned, but then there’s a nagging voice that keeps reminding me of sunk costs, maybe things will be better next year, and there’s only 16 years left on my mortgage – maybe I should refinance to 25 years so maybe I can rent and nearly break even each month, eventually I’ll make a profit, etc.
So many variables, it makes my head hurt, and I haven’t even mentioned landlording hassles, tax brackets, and capital gains…
I’m feeling like I should just pull the trigger and list it for $259,000 – if it doesn’t sell I can still rent it and relist later if I have to.
What should I do?
STB (Stop the Bleeding)”
Yikes! Okay, let’s summarize:
• Should STB keep the condo and lose $500/month or sell it and lose $30,000?
Oof, this is tough. And don’t think we didn’t try to make this work, we really put our thinking caps on and tried to get out of this situation without losing money but try as we might we just could not get the math to work out. The reason is that rental income is unfortunately taxed at STB’s marginal rate, so even if he deducted the cost of insurance and property taxes, he’s still down an extra $400 a month (20.5% Fed + 10% provincial). That’s a monthly deficit of $900 a month, or $10,800 a year.
If he sells now he’ll be able to get back to even within 10 month. If he keeps it, in less than 3 years, he’ll have bled away around $30,000 anyway. And that’s assuming he has 0% vacancy rate and a perfect tenant.
But if we were to get creative and try to re-finance that mortgage? We plugged it into a mortgage calculator at today’s rates and we estimate that can bring our monthly cost of ownership down to $1500. That helps, but because of taxes on the rental income, he’s still not breaking even. He’s operating at a loss of $300 per month, or $3600 a year.
And here’s the bigger problem: if he breaks his mortgage in the middle of his term he’ll incur a massive penalty of >$10k. So assuming he has the most common 5 year fixed term, he’ll have to wait 3 years anyway before he can refinance, making this all a moot point.
So we are faced with a rock-and-a-hard-place situation. Lose $30k now or hope like Hell that prices recover by more than 12% to dig himself out of this hole. That’s a tall order, and it doesn’t sound like the condo construction around him is going to help.
Personally, I don’t see the housing market in Edmonton getting better any time soon (in fact, overall Canada is losing jobs and the Vancouver housing market is already cooling), and given the risk of further losses once the other condos are completed, I can’t justify holding onto it.
BUT if he can somehow re-finance right away without penalties, renting it out at a smaller loss gives him more time to wait for a rebound.
Still, that’s not a great outcome. Absolute best case scenario with a perfect tenant and the ability to re-finance right away, he’s still losing $3600/year. Whereas if he sells, he’ll break even in 10 months. Does he think the housing market will come roaring back in just 10 months? And since he mentioned that his GF’s place is closer to work, he can reduce his expenses by not having a car, start saving money, and be cash flow positive in less than 1 year.
And that right there is EXACTLY why I prefer renting and investing over buying.
When the market crashes (as it ALWAYS does), my portfolio continues paying me dividends, while letting me rebalance and preserve my capital. Houses on the other hand, bleeds your equity while it sits on the market, plummeting in value. And while you’re tearing all your hair out, it continues costing you in property taxes, mortgage, insurance, and maintenance. On top of that, there’s another 5% just to sell it.
That. Sucks. Balls.
STB made a HUGE mistake by betting into the Edmonton housing market. And at this point, his only choices are either “rip the band-aid off” and take the loss or “continue bleeding” and possibly lose even more money.
So that’s my analysis, but let’s hear what you guys/gals think. Sound off in the comments. What would you do if you were him?