mortgage pre-payment or downpayment on rental property?

[hawkgt]

hi. i have a financial scenario that i was hoping to get some input on.

i purchased a condo last year and have been diligently paying the mortgage payments. in the meantime, i've been able to save up about 20K. i am considering 2 options with this:

option 1: in september, i will have the option of putting down a lump sump payment into the mortgage towards the capital. My father is suggesting that this should be a priority. the interest rate on my mortgage right now is 3.9% (3 year term) which is fairly low.

option 2: i am also considering, along with 2 friends, purchasing a rental condo within toronto. we possibly have a relative of mine who would be the long term tenant so i think that makes an ideal situation but we're not sure we can make the numbers work. i've down some research into rentals in the core and our monthly carrying costs would exceed the rent we could charge. we need to have 25% down. the concern with this is that we have no prior experience in this field and there may be something i'm missing wrt cost calculations, legal issues etc.

i am interested in option 2 but am just a little unsure. do we need to incorporate or does the mortgage go under one of our names?

other information:
-i've pretty much maxed my rrsps so far so that won't be a concern. i'm still contributing through a company matching program and will continue to contribute.
-i'm fairly young (28 years old) with no dependents. i'd like to set some groundwork in place to start building some longterm financial growth.

any ideas or insights would be appreciated. thank you.

[bambam]

Lowest risk option is paying down your mortgage as much as you can. You will never know what kind of sharpturn the economy might take. Or better yet put your money into savings account like GICs that pay more than 4% or else for those rainy days (ie unemployment etc)

[Sylvestre]

hi. i have a financial scenario that i was hoping to get some input on.

i am also considering, along with 2 friends, purchasing a rental condo within toronto. we possibly have a relative of mine who would be the long term tenant so i think that makes an ideal situation but we're not sure we can make the numbers work. i've down some research into rentals in the core and our monthly carrying costs would exceed the rent we could charge. we need to have 25% down. the concern with this is that we have no prior experience in this field and there may be something i'm missing wrt cost calculations, legal issues etc.

any ideas or insights would be appreciated. thank you.

So, to paraphrase,
you can't do it alone and need assistance. you may have tennant, but you may not. and even if all that goes well, you still may not make a profit.

seems those are some big red flags there.

I do agree that if you have signigicant money, looking into investing isn't a bad option (especiallly since your mortgage rate is so low) but perhaps real estate isn't the best choice for you right now.

[hawkgt]

2-0 for mortgage pre-payment.

i agree that my description of option 2 doesn't reek of confidence. i am chartering into new waters and am usually pretty cautious and risk-averse so there is some hesitation. i've tried asking advice from people who're doing this now, real estate agents, family etc but haven't gotten very far. i just want to make sure i evaluate this option thoroughly before i scratch it off. for some reason, it's very appealing to me...i'm just not sure why, and if i can make it work.

a third option would be to invest that money in equities but that is even further from my comfort zone. the little experience i have with stocks, bonds, funds (both personally and professionally managed) have been luke warm.

thanks for the input. please keep them coming.

[mangotango]

Assuming this condo is your residence and you have no other loans or debt, pay all of it against your mortgage.
Well..., maybe save $500 and treat yourself for so diligently saving the 20k.
my 2 cents...

[st7860]

option 2[/B]: i am also considering, along with 2 friends, purchasing a rental condo within toronto..


You should wait till the market prices drop before buying it.

[controlyar]

You should wait till the market prices drop before buying it.

And what is the exact date of this market price drop? The OP is treading into deep waters as real estate investment is foreign territory. I think it only adds to the confusion when a bold statement of market timing in real estate prices is added to the mix.

Hope all goes well and you make the appropriate decision.

What would I do? I would have to review everything to make an informed decision. But based on exactly what you wrote, I would pre-pay my mortgage.

[st7860]

I believe that Ontario Cities, and some suburbs, just like in BC have had a huge run up in house or condo prices in the past 5 years.

[controlyar]

I believe that Ontario Cities, and some suburbs, just like in BC have had a huge run up in house or condo prices in the past 5 years.

Thanks for the obvious statement of the year.

[hawkgt]

4-0 prepayment.

You should wait till the market prices drop before buying it.

i've considered that.

firstly, if (big if) i can find a condo now at a price that works with my carrying costs/rent, i may as well purchase it now seeing as my relative will have to rent a place soon either way. so far, i haven't found such a place yet but i haven't committed that much time into looking. if i choose to wait, my relative will have to find another place to live in the meantime. also, in the next 2 years or so, i'm not convinced that the condo prices will drop that significantly.

good insight. thanks everybody.

[st7860]

Thanks for the obvious statement of the year.


Well, then , explain why its good for him to buy when prices have risen up so rapidly?

"And what is the exact date of this market price drop? The OP is treading into deep waters as real estate investment is foreign territory. I think it only adds to the confusion when a bold statement of market timing in real estate prices is added to the mix."

[hawkgt]

what other info do you think would be relevant in evaluating this?

And what is the exact date of this market price drop? The OP is treading into deep waters as real estate investment is foreign territory. I think it only adds to the confusion when a bold statement of market timing in real estate prices is added to the mix.

Hope all goes well and you make the appropriate decision.

What would I do? I would have to review everything to make an informed decision. But based on exactly what you wrote, I would pre-pay my mortgage.

[controlyar]

Well, then , explain why its good for him to buy when prices have risen up so rapidly?

"And what is the exact date of this market price drop? The OP is treading into deep waters as real estate investment is foreign territory. I think it only adds to the confusion when a bold statement of market timing in real estate prices is added to the mix."

It wouldnt be a wise move when prices have risen and when there is no expectation for a continued increase. I agree with that.

[controlyar]

what other info do you think would be relevant in evaluating this?

Without getting into detailed specifics..here are some ideas that come to mind:

interest rate volatility, marriage, other dependents, real estate market, tenants, maintenance costs, if you have spare time, job stability. current mortgage rate, amount of mortgage remaining, other investment assets.

[muffin]

While option 2 is quite tempting, I would have to go with option 1 based on this fact alone: i am also considering, along with 2 friends

That can get a tad tricky, with ensuring everyone puts up their part, PLUS the complications later if someone wants to sell, but others don't etc. Stick with the safe bet. If it was just you, option 2 may be more viable and less risky, but personally, I wouldn't bother with that hassle, even if it were 2 members of my own family, let alone friends.

[AlexH]

option 2: i am also considering, along with 2 friends, purchasing a rental condo within toronto.

Personally, I would do the mortgage prepayment but make sure you are able to get a home equity loan in the future, so you can put a down payment on a condo all on your own.

[hawkgt]

yes. that is obviously a concern. we've discussed this and have agreed that we would need some kind of legal document that covers exit strategy etc. i've heard of horror stories of friendships ending over business deals but i also know of positive outcomes as well.

it seems the overwhelming majority is in favour of the mortgage pre-payment. i can take a hint :)

anybody think the rental property is a good idea?


While option 2 is quite tempting, I would have to go with option 1 based on this fact alone: i am also considering, along with 2 friends

That can get a tad tricky, with ensuring everyone puts up their part, PLUS the complications later if someone wants to sell, but others don't etc. Stick with the safe bet. If it was just you, option 2 may be more viable and less risky, but personally, I wouldn't bother with that hassle, even if it were 2 members of my own family, let alone friends.

[grant]

i've down some research into rentals in the core and our monthly carrying costs would exceed the rent we could charge.
WHY would you buy an 'investment' that loses money??

forget it!

[controlyar]

WHY would you buy an 'investment' that loses money??

forget it!

For an investment to be worthwhile, the cash flow does not have to be higher than the income generated. Perhaps you forgot about an increase in property value upon disposition which is referred to as a capital gain.

[hawkgt]

WHY would you buy an 'investment' that loses money??

forget it!

i agree. i haven't found a property yet that could balance the numbers. but i do think there are properties out there that could. but i wouldn't purchase a place unless i was comfortable with the carrying costs/income.


For an investment to be worthwhile, the cash flow does not have to be higher than the income generated. Perhaps you forgot about an increase in property value upon disposition which is referred to as a capital gain.

it's probably because i'm a newbie at that this but i wouldn't feel comfortable taking a loss each month in return for the housing appreciation. it seems as if at that point, other vehicles of investment may have a better return.

thanks guys! i think we're at 7-0 prepayment. most onesided poll ever.