Should you rent out or sell your condo? There are a ton of websites and calculators to help you gauge whether or not you should rent or buy a home, but there are not very many calculators to help you gauge whether or not you should rent OUT or sell your home.
With the ridiculously increasing real estate in Vancouver it might be nice to have that home equity freed so that your Financial Independence Retire Early recipe can come into fruition.
I like to research the crap out of stuff before making a decision, so here’s my thought process. Let me know what you think.
Should you rent out or sell your condo? Let’s look at first how much it would cost to rent it out, and how much it would cost to sell the home. Then we will compare the return on investment of each option.
First, there are some conditions to be aware about in Canada. In Canada, if you sell your principle residence, you don’t have to pay tax on the gains from the home sale. You do still have to report your ACB on your principal residence sale though.
If you sell your rental, you will have to pay capital gains (50% of the profit taxed at your marginal rate) on the income from the sale. If you convert your principle residence to a rental unit or add a laneway house, you will need get it appraised or used a fair market value at the time of conversion to a rental unit, and will need to pay the taxes on the capital gains when you sell after you convert it to a rental.
Let’s say you have a 1 bedroom condo that is estimated to sell on the market for $450,000.
Should you rent out or sell your condo?
Table of Contents
renting it out costs
To calculate roughly how much it costs to rent out your home, you have to factor in:
- How much you pay per month for your mortgage (the mortgage interest- let’s say on a 1.79% mortgage rate with a $350,000 balance owing the mortgage interest annually was around $6000)
- Your maintenance fees (unfortunately in the few years that I have lived here, the maintenance fees have gone no where but UP, they have gone up almost 20% over the past 4 years). There has been a special assessment too (though it was under $1000), and I anticipate there will continue to be more of these as the building continues to get older. Let’s say annually it is $3000 in maintenance fees, or $250/month.
- The home insurance- because this is a condo, the home insurance in Vancouver is not as expensive as living in a house. I’m not sure what the insurance would look like with the unit being rented out, I anticipate it should be higher than what I am paying now given the increased of not being owner-occupied. Currently I pay about $450 a year. Using an online home insurance company like Square One can save you money, get a $25 bonus when you sign up.
- Your property taxes let’s say it was $500 annually.
When I calculate this, on the $450,000 condo ($6000 + $3000 + $450 + $500), it costs about $825 per month to own this home for ownership purposes or if you were to rent it out.
cost to sell home
The alternative to renting out the condo is to sell the home. Of course, there are costs with that as well. Here are the closings costs when selling a home in BC to consider.
To calculate the costs to sell the home, these have to be factored in:
- Realtor fees– I would likely use One Percent Realty since my husband had a good experience with them. This would mean a cost of $6900 + GST since the home is under $600,000, provided that the buying realtor doesn’t ask for more. However, the buying realtor usually does though.
- Property taxes for your portion for the year– if these haven’t been paid already
- Lawyer or Notary fees ($1000 approximately)
- Breaking the mortgage penalties if it is a fixed term loan- this would normally be about 3 months of interest. In my situation the mortgage is low (for Vancouver anyway!) so the penalty should not be very much.
- Any staging costs or cleaning up costs to prepare the home for sale (let’s say $1500)
After fees and after repaying the mortgage loan (let’s say around $100,000), it will be roughly $340,000 in your pocket. This would be tax free since there are no taxes on your primary residence in Canada.
Now let’s compare the two:
return on investment comparison
Renting Condo Out:
I would assume a $1400-$1500 monthly rent in Vancouver for a 1 bedroom, since this would be on the smaller side.
The average cost to rent a 1 bedroom unit in Vancouver is now $2090 a month. Going forward, you would be allowed to increase the rent to the maximum that the Province of B.C. allows, which was frozen for a few years and recently in 2022 is allowed to be 1.5% maximum.
Let’s say you rent it out for $1500 a month. The cost to own this property is $825 a month. That’s $675 a month profit, x 12 months = $8100 a year.
On roughly $350,000 of home equity (factoring in the $100,000 mortgage), the return on investment of $100,000 is about 8%.
On the $8100 rental income per year, one would have to pay taxes on this at your marginal rate.
So, looking at this scenario, it looks like the only thing going for renting it out as the continued increase in home equity (the tenants would be paying down the mortgage), and the potential appreciation of the condo if Vancouver Real Estate continues to rise exponentially.
Who knows where Vancouver real estate prices would be in a few years? I can’t imagine a small 1 bedroom condo selling for more than $500,000 but I can’t predict the future. The last thing I would want to do when buying a home is over stretch myself.
Now let’s look at the situation of selling the condo:
If one were to take that $340,000 (tax free) and invest it in the stock market with a 7% average annual return on investment, that would yield $23,800 for the first year. This amount compounds too.
If one were to get a 3.5% dividend yield from the $340,000 invested in the market, one would get a juicy $11,900 annual dividend yield. Not too shabby huh?
Also, Canadian dividends are taxed at a favourable rate, and much less than the marginal tax rate.
$8100 in rental income vs $11,900 in dividends from Canadian corporations.
Personally I prefer dividends to rental income for my passive income in Canada.
Now, there are a lot of things that influence this decision. For example, if I sell this place, I will still need a new place to stay. Well, my husband and I are moving to a bigger place in a little over a year. Since we have income inequality we have figured out a ratio of how much we should each contribute to the new home.
Since I need cash to fund my portion of the new home, and I don’t want to be liquidating my investment portfolio to fund my contribution towards this new home. I also don’t want to have my net worth be even more tilted towards real estate (it would mean having over 50% of my net worth in real estate, which I am uncomfortable with).
Since my goal is to have a $1,000,000 net worth by the time I’m 40, with the specifics being $1,000,000 invested in a portfolio generating passive income so that I won’t have to use the 4% Safe Withdrawal Rate, I think selling the condo would be the right move for me.
Of course, there are other non-monetary considerations, like do I have the time (and patience) to be a landlord (again)?
If AirBnB were allowed in Vancouver (right now you can only have long term rentals through AirBNB in Vancouver, meaning the guests have to stay for more than 30 days, unless it is your primary residence and you live there) then the return on home equity would be much higher, but would it be worth it still? (I ran the numbers of a 20 day occupancy per month and still it doesn’t beat the 6% ROI on an investment portfolio).
Alternately you could just do real estate crowdfunding in Canada instead, if you want to sell and stay in the Canadian real estate market. With addy, you can invest in Canadian real estate (many of the properties offered are multi-unit residential properties or commercial properties) with as little as $1 (and maximum $1500). Each property offered is different and the offering memorandum would be the best place to review each of these properties up for offer.
While you can only invest a maximum of $1500 with each property, you do not have a limit to the number of real estate crowd funding properties you can invest in.
What do you think?
Would you rent out or sell your condo?
GYM is a 40 something millennial writing about personal finance since 2009 and interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for a free dividend yield spreadsheet and the free Young Money Bootcamp PDF.