SOLD! Bye Bye Condo ... Hello Rental!

As mentioned in my Why We're Selling and Choosing to Rent post/analysis from before we got married, we decided to put the Condo up for sell. Well ... As of Wednesday, I'm happy to say that we sold the property to a Greater Fool in less than a month.

I actually had the opportunity to meet the buyer when I came home from work and he was viewing the property with his Realtor. Did I forget to mention that I am in sales? Well ... I basically opened the chance meeting up to questions and managed to sell him on the fact that the condo corp has a great reserve fund and that all future expenses will be used to increase the value of the condo vs. new condos being built around it (which is true from the info I got from attending the AGM last month) while keeping the condo fee increases in line with inflation and the great "real" 2 bedroom layout the condo bolsters as the bedrooms are separated by 1 of 2 washrooms.

Why are you selling? Well ... We would like to find a bigger place for my wife and sister-in-law as this condo is great for 2 people, but a little tight for 3 and we would like to buy a family home soon and are willing to rent until we find it.

This is when they get to mentioning that he's looking to buy as an investment and would be interested in knowing if we would rent from him. "That's always an option. Depends on the numbers, but we really do need a bigger place." all the while biting my tongue about the viability of his term "investment."

So after our chance meeting, he was up against another first time home buyer and we had a nice little bidding war (always fun). He ended up increasing his offer to $315k and taking out the "arranging a first mortgage" escape clause since he was pre-approved and had 20% down. (i.e. damn firm offer)

So what does his investment look like?

Purchase Price: $315,000
Down Payment: $63,000 (20%) + Closing Costs ($1,500)
Mortgage: $252,000 (Interestingly $4k below what my wife bought the place for 3 years ago)

Debt Service ... Let's say 5 year fixed @ 3.79% at ING.
Mortgage Payment: $1,297.04 per month
Taxes: $195/month
Condo Fees: $469.78

Total Expenses: $1961.82 / Month

Now ... A 2 bedroom unit in our condo typically goes for $1700-$1800/month all-in. Meaning that he'll be negative cashflowing about $161.82 to $261.82 per month. That's a -3% to -4.87% Cash-on-Cash return in Year 1. No Deal by my investment standards.

But that mortage payment goes to principal + Interest! So the tenant is paying down more principal than the negative cashflow! Interest rates are so low! More of your payment goes to paying down principal than ever before! It's time to buy!

Here's the breakdown on that argument:
That mortgage payment translates to the following in year 1 - $9,370.21 or $780.85/month Interest and $6,194.26 or $516.19/month Principal. So yes, the tenant is paying down the principal greater than the negative cashflow, but this argument is crazy because you don't get the difference until you sell! This should only be considered a BONUS when analyzing an investment and not a deciding factor to it being a good investment! Also, if the market continues to go down, which it will so don't let this spring craze fool you, this principal paydown will disappear.

He can improve his cash-cash on cash by 35 year amortizing his mortgage which will bring down his total mortgage payment but will either bring him into a small positive cash flow situation or continue to negative cash flow by a few bucks per month. Basically, this will give him a mortgage payment of $1,079.87 per month ($9,415.60 or $784.63/month Interest and $3,542.83 or $295.24/month Principal). This almost eliminates any BONUS he'll get upon selling. Isn't it interesting to see what increasing your amortization schedule will do to your principal and interest?

So yeah ... Not really a great investment in my opinion. I'm glad we sold though and are being fiscally responsible by renting in this economic climate, while protecting and adding to my wife's equity, until it's time to buy (Deal that's >25% below market peak level or in 2011/2012.)