Is It Time To Sell Our Property?

Before we dig into the meat and potatoes of today’s post, we wanted to thank Stefan and Sebastian from the Nomadic Boys for including us as a part of their Top Gay Blogs To Inspire Your Life.  Thank you!  You can check out the full article here to see the full list.  Pretty cool to see some of the other LGBTQ+ FI friends on it too!

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Within a week our life takes a 180 and we now own two properties… our current townhouse and a house within our town we take possession of 60 days later. Oops! At least we figured out what to do with a majority of the cash we had on hand. Always a silver lining eh?!

Our new home was purchased for $395,000 with 20% down in cash ($79,000), leaving a mortgage of $316,000 to pay off. We could likely sell our townhouse for $300,000 (meaning $288,000 net after realtor fees), throw money from the sale of our townhouse to the new mortgage, and have ~$28,000 remaining to become debt-free. With my current part-time income + bonus I’ll be receiving in March, we could pay this remainder off by March. We’d want to then build up our cash reserves a bit before pulling the FIRE plug since we dumped a good chunk into the down payment.

But first…we need to do some math to figure out what the hell to do with our townhouse. (Warning: this post is FULL of numbers and scenarios – sorry if it’s confusing!) 

Our first thought is to sell it. We have no intentions of being landlords in our FIRE life and we’d rather sell our townhouse and throw that money towards our new home as we plan to have zero debt once we FIRE (even though we understand the math likely says to invest this money instead – we are all about the psychological benefits and peace of mind of not owing anyone anything). So in a rapid crazy mode, we listed our townhouse.

We bought this property in 2016 brand new from the builder for CAD $315,000. How much could we sell it for today? After digging into some comps, two sold the month before for $309,000 (thanks Coivd + living in oil and gas country which is a suffering industry these days). One was a bit nicer than ours and ours was nicer than the other. So we figured we too would sell ours right around $309,000 so we listed it for $312,000. We decided up front that if we couldn’t sell it for $300,000 or above, we’d rent it out for a year or two, make some rental income, and then reassess the market to hopefully sell it then. Note, this is a reminder there is NO guarantee that your home will appreciate in value!

We heard from our realtor that there was a showing scheduled the day after it was put on the market so we decided rather than be crazy lunatics trying to keep the house clean and tidy with a toddler constantly making a mess, we’d drive out 5 hours to Nic’s grandparent’s cabin and park there for a few weeks and chill by the lake until it sold. I’d drive back and forth to work for a few days in between 8 days off and Nic and Finn would stay there.

Welp… it was crickets after the first showing. Our realtor never heard a response back from the potential buyer’s realtor. It then sat for 2 weeks with NOTHING. No movement. Whatsoever. Humph… Finally, we had a second showing at the 2-week mark. They liked the home but ended up wanting to be in another part of our town. No offer. We’re now going into week 3 with zeroooooo interest. Well well well, this isn’t going well. At all. We’re now getting ready to enter September and families with school-aged kids are likely not moving at this point with the school year (or home school year / virtual school year) starting. The last thing I want is for this place to sit all winter long. It also doesn’t help that Nic’s family who had come and gone to the cabin for visits here and there were back at their respective homes and Finn started asking for her friends and wanted to go home. We decided on September 1st to head home and we would list it for rent. (We’d be responsible for organizing showings on the rental side of the game so we’d have to be home for those.) We’d see which route ended up getting someone inside faster and go that that way. We did some research and decided to list our place at $1,750 / month (no utilities included) as that seemed like a competitive and fair price. (The 1% rule is nowhere close to existing where we live.) We said non-smoking tenants only and well-behaved pets were negotiable. We listed our place for rent on September 4th, 3 weeks after sitting relatively dormant on the market with availability starting October 15th (to give us a week to move our stuff over once we take possession at the new house). Nic posted it on a local Facebook group for homes for sale and rent that evening. And the following morning we posted it on rentfaster.ca for $35.

Within 48 hours over 20 people contacted us. Within the first week, over 50 people contacted us. W.T.F. Night and day. Legit a complete 180. Whoa, totally not expecting that!! Looking back on it – it does make sense with all the COVID related uncertainties that people are leaning towards renting these days.

We now were just trying to keep up with all the emails, Rentfaster messages, Facebook messages, and voicemails people were leaving us.

Ok, so clearly it seems like we are going to be renting this bad boy out…! Not what we were originally anticipating but sure.

The really nice part about this flood of interest is that we could be quite picky to try to find the best tenant. Sure, we realized we likely could have bumped the price up by another $50-100 but having all that interest meant we had options to find our ideal tenant. We ended up narrowing it down to someone who could meet our ideal move-in date, did not have any pets, and would be keen for a rent to own arrangement.

Let’s take a step back and dig into some numbers! Does it make sense to sell it now? Or rent it out for a year or two and then sell? Or go with an option to purchase? Let’s dig in!

Sell It Now

As noted above, we listed our place for $312,000 with the floor we’d be willing to sell for at $300.000. With no bites at the current list price after a month on the market, it appears we’d be lucky to get $300,000 at this point. If we happened to sell for $300,000 and took out the associated realtor fees, we’d net $288,000 (6% on the first $100,000 and 3% on anything over $100,000). We could throw this at the new mortgage that has 2.04% interest on it. Without this lump sum payment, we’d be paying $5,000-$6,500 in annual interest during the first few years while the mortgage balance is still quite high. So we can view this as a $5,000-$6,500 “win”.

Ok, this is our baseline easy calculation to compare various alternatives to.

The non-numerical pro to going this route as it’s the most hassle-free. No landlord life in our future. We’d throw this $288,000 at our mortgage and have it paid off within a year.

Rent It Out

If we rented it out, we’re thinking of a 12-24 month time frame as we aren’t looking to be long term landlords and we want the mortgage of the new house gone by the time we FIRE and the majority of that payoff will be coming from the sale of our current townhouse.

So let’s see what we would net if we rented out our place for $1,750 / month for 12 -24 months.

For us to qualify for the mortgage at the new place, we had to pay off our current mortgage. Again, thank you cash on hand for allowing us to do this. So here’s what our monthly expenses would look like on the rental:

• Property taxes: $2,100 / year or $175 / month
• Landlord insurance: $570 / year or $47.50 / month
• HOA: $184 /month
• Repairs: $100 / month (estimate / earmarked for any future work to be done)
• Management fees: $0, we would be self-managing as we live 5 minutes away, have the time to deal with any potential issues, and the house is new enough that it doesn’t warrant the fee to us.
• Total: $506.50 / month

Renting it out for $1,750 / month would then net $1,750 – $506.50 = $1,243.50 / month (note that this is within $100 of the mortgage at our new place so the rental income is allowing us to continue to keep our house expense line item very low). This comes out to $14,922 – $29,844 in net rental income over the 12-24 months depending on if we rent for a year or two. 

We would also have taxes to pay on this rental income that we would have to calculate too.  It depends on our marginal tax brackets.  If Nic can solely report the rental income under her name, the taxes owed would be very minimal as she has no other income to report other than minimal CCB.  We have to dig into this more to ensure we are handling everything properly/legally.

For this to be a worthwhile endeavor versus selling now, we’d want to make a total profit of more than $288,000 (as mentioned above in the sell now scenario). If we sell it for the same $300,000, netting $288,000, the numbers favor renting it out as we’d be making more than double what the annual interest payments on the 2.04% mortgage be ($14,922-$29,844 rental income vs $6,500-$12,500 interest).

What would it take to make sure renting it out makes sense?

If we rent for a year, we’d have to be able to sell our place for $292,000. ($292,000 minus realtor fees yields $280,240. Add in the rental income of $14,922 over the year and we get to $295,162. Subtract the ~$6,500 in mortgage interest payment we’d be paying during that first year while we still had the larger balance and we get to $288,662.) If we sell for anything over $292,000, renting for a year makes sense. I’d like to think we could sell for over $292,000 a year from now but who knows.

If we rent for 2 years, we’d have to be able to sell our place for $282,500. ($282,500 minus realtor fees yields $271,025. Add in the rental income of $29,844 over the year and we get to $300,869. Minus the ~$12,500 we’d be paying in mortgage interest over those 2 years and we get to $288,369.) If we sell for anything over $282,500, renting for 2 years makes sense. It’s hard to imagine that we couldn’t sell it for more than $282,500 in two years.

Of course, what we actually sell it for a year or two out is the big mystery. It’s hard for me to see much if any, appreciation happening in our neck of the woods in the next year or two. But I also don’t see any major drops in prices happening. I’m going to guess we’d be selling anywhere in the $295,000 – $310,000 range.

Another big mystery is how is the tenant going to leave the place? Will there be minimal repairs or will be spending more than the security deposit getting every back to how it looked before their move in? Unfortunately, you never really know.

Option to Purchase

Here are the terms we showed for the option to purchase setup.

• They have up to 6 months to decide if they want to switch from a regular lease to a lease + option to purchase.
• Purchase price of $305,000. (This equates to a sale price of ~$317,000 if it was listed on the MLS with a realtor and then taking out the associated realtor fees. So more than our current listing price of $312,000 which we know we are not getting a full price offer on this go around.)
• The timeline to strike this option is anywhere from 12-24 months after moving in (so October 15, 2021 – October 15, 2022).
• They would provide us with $5,000 upfront as the option fee. This $5,000 would go towards the purchase price/down payment as long as they exercised the option to purchase within the allotted time-frame. If they did not end up buying the home, they lose out on this $5,000 and we keep it. The purpose of this is for them to have “skin in the game” showing us their intent to buy.
• Once the lease switches over to an option to purchase, for every on-time monthly rent payment, we would earmark $250 / month as a rent credit to be applied to the purchase price as well. So if they decided from the get-go they wanted to go this route and struck the option at the 12-month mark, they’d have another $3,000 to go towards the down payment ($250 * 12 = $3,000). If they waited until the 24-month mark to strike the option, they will have $6,000 on top of the original $5,000 to put towards the down payment ($250 * 24 = $6,000). It all depends on when they decide to go through with the option to purchase and when they strike on the deal but they could get up to $6,000 back.

So we would be getting $1,500 in rental income (reducing the $1,750 rent by the $250 credit as we hope they buy the place and this goes towards the home purchase). And from the rent-only section above, we calculated we would have $506.50 / month in monthly rental expenses to account for.

We likely would spend a thousand or two working with a lawyer to get everything set up properly. We do not think the lease will switch over to an option to purchase right away so we are calculating as if we are putting $250/month towards a rent credit when in reality the first few months this would go to lawyer fees and then rent credits.

Doing the math, $1,500 – $506.50 = $993.50 / month in our pockets. If they rent for 12 months, that’s a total of $11,922. If they go the full 24 months it’s $23,844. And then the locked in $305,000 purchase price of course. So we’d be netting anywhere from $316,922 – $328,844 depending on when they strike the option.

Comparing this to the sell now scenario:

If they buy after 12 months, we would have paid ~$6,500 in mortgage interest payments at the new house so we’d be comparing $316,922 – $6,500 = $310,422 to $288,000 or a net positive of $22,422.

If they buy after 24 months, we would have paid ~$12,500 in mortgage interest payments at the new house so we’d be comparing $328,844 – $12,500 = $316,344 to $288,000 or a net positive of $28,344.

Well, that sounds pretty good. (Of course, an appreciating asset would be better but the glass is half full over here, and were squeaking out small gains this way.)

With me so far? Now let’s see how the rent-only scenario compares to the option to purchase scenario.

When looking at how the rent-only setup would have to line up to compare to the option to purchase numbers, we’d have to be able to sell for $314,000 after renting it out for 12 months ($314,000 minus realtor fees is $301,580. Add in the rental income of $14,922 and subtract the $6,500 in mortgage interest gets us to $310,002.)

Similarly, for the 24-month route, we’d have to be able to sell for $311,000 in 24 months ($311,000 minus realtor fees is $298,670. Add in the rental income of $29,844 and subtract the $12,500 in mortgage interest gets us to $316,014.)

Both of these prices are likely possible but also come with some risks. What will the markets do? Will the place be sitting empty for a few months waiting for the sale to go through (and thus reducing our profits by $515 + utilities for each vacant month)? There would likely be some time, money, and effort needed to get the home show ready after the rent-only tenant moves out. Whereas in the rent to own option, we’ve peaced out once the tenant executes the option. Any damage they have done is now their responsibility. (And likely there is little/no damage as they know it could be theirs soon.)

But wait, we’re not done yet. Told you there was a lot of number crunching going on!  There’s one last scenario to consider.

If for some reason they ended up switching to an option to purchase but then didn’t end up buying the townhouse, they would not get the $250/month rent credit back so we’d be making the full $1,750 not the reduced $1,500 and we’d also keep the $5,000 option fee. So we’d instead make $1,750 – 506.50 = $1,243.50 / month just like the rent-only scenario above. So anywhere from $14,922 – $29,844 in rental income over the 12-24 months plus the $5,000 for a total of $19,922 – $34,844.

We’d then be dependent on the real estate market at the time to see what we can sell our townhouse for. To make that same $310,422 – $316,922 total profit above depending on move out date, we’d have to sell the townhouse for ~$308,000 in 12 months or ~$306,000 after 24 months. Essentially it’s the same math above in the rent-only vs rent-to-own but now there’s the extra $5,000 in our pockets from the forfeited option fee.

Viola. Congrats to those who are still with me! That was a lot of numbers to dig through and various scenarios to consider! But now you see how my crazy math brain works 🙂

Note that in none of these scenarios did we consider the opportunity cost to selling sooner rather than later to have the cash on hand to then throw at the market and invest. That would be an entirely different thought process and a whole separate set of calculations (and likely an entire blog post needed to dig into those weeds which is not happening). That opens up the can of should you pay off your mortgage or invest in the market. This not a question that we personally are entertaining because again, we want to be completely debt-free in a year or two once we FIRE.

After digging into all of this, we also wouldn’t be opposed to renting it out for a 3rd or 4th year if the rent to own option doesn’t pan out. We aren’t making a ton of money renting it out but we’re making more than our mortgage interest. We know we’re locked in at 2.04% for 5 years so as long as can make more than that in rental income after expenses, we may keep going and then have the mortgage of the new house paid off before the interest rate renews. We shall see what the real estate market dictates!

Here’s What You Can Buy Just Outside Calgary for ~$300,000

Similar to last week, here’s a glimpse into what you can realistically purchase just outside of Calgary. It’s a 3 bed 2.5 bath townhouse with a little over 1,150 square feet above ground. The finished basement adds another ~450 square feet of living space. It has an attached 1 car garage, upstairs laundry, small yard, and backs on to a nature preserve that cannot be touched.

Impact On Our FIRE Plans

So how does this increase in the home cost impact our timing to FIRE? Time will obviously tell but we’re quite confident the answer is not too much! We originally thought we’d reach our family of 4 FIRE number once hopeful baby 2 is born in 2021 but we were surprisingly already there after Q2 2020 with the townhouse set up. We will have to revisit our future annual spend with the home vs townhouse to see if / how our target FIRE number changes (no monthly HOA fee now, out of pocket expenses for landscaping, higher property taxes by ~$600/year, beef up the emergency fund for a new roof, furnace, water heater, appliances, etc.). These are all things we considered before making the purchase.

A lot of it depends on how our investments do in the next year or two and how and when we sell our townhouse. 

If we go this rent to own option we’d end up with somewhere in the ballpark of $310,000-330,000 once our home is sold. Compare that to our new home purchase price of $395,000 and we’re sitting at a net difference of $65,000-85,000 to make up the difference. We paid 20% upfront in cash meaning a starting mortgage balance of $316,000. So this townhouse sale will be able to eliminate the mortgage (as the balance will be even lower in a year or two until our townhouse sells).

So it’s really a matter of building up our cash reserve again which has been depleted to about 2 years worth of cash vs 5. Meaning building up another ~$75,000 in cash which we should likely be able to do by early 2022.

I am in a very privileged and fortunate situation where my team at work has had an incredibly good year. I feel weird writing this while millions have lost their jobs this year but I am likely going to see more than a 100% bonus of my salary come March (never had this happen before, although I can see it happening again for another few years which makes it VERY hard to want to leave my job anytime soon even though I am a Swami). That will go towards maxing out Nic’s TFSA, our spousal RRSP, and building up cash. We will also be able to build up our cash reserve in 2021 from my income since we’re able to save 50% of my part-time income. All the while we’re not touching our investments and letting them grow.

If I was a betting girl (I’m definitely not!), I’d guess I will work through March 2022 to get another good bonus and we will be more than set. And who knows, my job setup is really really sweet and I may end up keeping this setup longer if the balance in our house warrants it. I am very grateful to be in a position where I have the sweet work-life balance so many people crave, make good money, never see my boss (nothing against him but I’m just highlighting there is NO micromanaging as I work nights when everyone else is sleeping), have a TV on in the background a foot away, never bring work home with me, and it’s low key 80% of the time (these blog posts get written while at work!).

So, all in all, yes this is not a very FI thing to do but hey, we made it so we’re moving into a place we truly think we will enjoy and love. And it was totally worth it and the right decision for us!

There you have it! Hope you enjoyed all the number crunching or at least didn’t get too lost. Do you think we are out of our minds? Or do we sound somewhat reasonable in our decision?

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