John and Erin, 30, Toronto
The market researcher and television producer have been sitting on a gold mine - an income property with tenants which covers the monthly mortgage payment (and then some). But they need bigger digs, and he wants to sell while the market's hot. She wants to keep the house and continue renting it out. Who's on the money?
HE SAYS: TAKE THE EQUITY AND RUN
This is really Erin's house - she bought it before we were serious. But now that we're planning our future, I want to make sure we're doing the smart thing. I'd like to sell the house and put the equity toward a new, bigger place. Right now it's a bungalow with two separate units, the first floor and basement. It's an excellent income property, but not really suitable for conversion into a single-family home, and the basement apartment where we live is tiny. If we rent out both apartments, we could easily make double what the mortgage payments are, but we'd take a big tax hit on capital gains. What's more, I'm concerned about being financially responsible for maintenance on a 100-year-old house.
SHE SAYS: WE'RE IN IT FOR THE LONG HAUL
Yeah, I'm a bit emotionally attached to this house - it's my first, and I bought it entirely on my own, having saved up the money by living with my parents far longer than most people would. I got a great deal on it in the middle of the recession, and I'm not ready to give that up yet. That said, I don't want to hold onto it for too long - maybe another five years. It is a century house, and things do go wrong: We've already had a flooded basement and blocked chimney. But dealing with tenants has luckily been easy so far, and I can't help but be addicted to income properties. I found out that my area has just had one of the biggest surges in property values in the city, and I'd like to wait and see whether prices will go up even more.
Years together: 3
Household income: $100,000 (evenly split)
House purchase price: $280,000 in early 2009
Mortgage: $980 per month
Rental income: $1,100 per month (for the main-floor unit)
THE ADVICE: STAY PUT - FOR NOW
Financial expert Kelley Keehn
This isn't a cut-and-dried situation, guys. But there are a few obvious issues that may help narrow down your decision:
1. Selling while the market is hot is tempting, but unless you're planning to purchase a place in Regina, you're also going to be buying while the market is hot. I spoke with Jason Mercer from the Toronto Real Estate Board, and he estimates that 2010's average house-price rise will end the year around 9 per cent (for all levels of housing) over 2009 and he predicts modest growth for 2011 in the low single digits (3-5 per cent). Whatever increase you see on Emily's home when you sell it would need to be factored into the new digs you're going to purchase (assuming you stay in the same neighbourhood).
2. I'd be anxious about the risk you're taking on by making your current property 100-per-cent rental while purchasing a new one. If you're already worried about covering the costs of possible repairs, what would you do if you lost your renters? If you're still living there, the worst-case scenario is you'd be on the hook for one mortgage payment. Could you handle two?
3. You've been together for just three years. Have you discussed investment in the new property as a joint venture? Or will Erin simply be on the hook for rolling her investment into your new home together?
Erin, you probably need to put some distance between your investment and your emotions, but I'm not saying you should sell - yet. I'm leaning toward playing it safe: staying put for the short term while building an emergency repair fund.
But this is a complex decision that requires further research. Shop around and get the assessments of two or three realtors to get a feel for your home's current market value, along with a price range for the house you'd eventually like to purchase. Then get an accountant and/or fee-only certified financial planner to crunch the numbers on several different scenarios (including their tax implications), so you can take into account not just the numbers, but what makes the most sense for you as a couple.
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