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Why buy a Condo?

Author: Robert Thomson
First Posted: April, 2002

Robert discusses how his daughter-in-law, with a good, steady job paying $20/hour, $2,000 in savings, and monthly rent payments of $600, was able to buy a nice one bedroom condo in Victoria for $100,000.

My future daughter-in-law has been paying rent for several years. Throwing money away. A shame! She really needs to buy her own apartment and build some equity.

She was skeptical when I mentioned this and didn't think she could afford an apartment so I crunched some numbers with her and showed her that she could afford to buy. Maybe you're in a similar position. If so, read on.

Background: K has a good steady job ($20 an hour), but only $2,000 in savings. She now lives in Victoria and spends $600 a month for rent on a one bedroom apartment.

She needs a game plan. Here it is. She should decide where in Victoria she wants to live and start looking for one bedrooms. She can find one for $100,000 and with a CMHC mortgage she needs only $5,000 down. The mortgage will be $95,000.

She has $2,000 in the bank so she should borrow $3,000 from her Mother (or whoever). There has to be some relative or friend who will stake her the $3,000, especially since it will be paid off in $100 per month payments.

Here's what I told K. Find a mortgage broker in the Yellow Pages and ask for help finding the best rate on a three year closed mortgage. (I am assuming a three year closed although you readers out there might have other ideas.) Ask your mother (or me) to cosign for the mortgage–this should satisfy the mortgage company. Your mortgage should be transferable in case you decide to resell the apartment before three years are up and (a) transfer the mortgage to the new owner or (b) use this same mortgage yourself on the next property you buy. Either way heavy penalty fees will be avoided. It pays to look ahead.

Repaying your mortgage weekly rather than monthly always saves you money.

Let's look at how much money you are going to save. If you continue to rent, your rent money will yield nothing. If you buy as I've suggested, here's what you'll get.

When you move in, you'll owe $97,450, not $95,000 (CMHC will charge you 2½% of the mortgage for their service, plus a $75 fee). This might sound steep but it isn't if it gets you that apartment. Besides, no other mortgage company will lend you such a sum.

Let's assume your mortgage is calculated to be paid off ("amortized") in 25 years. Your weekly payments will be $136 which is much the same as the rent you're now throwing away. If you keep paying this for three years you'll owe $97,428.

However, through appreciation your apartment probably will be worth at least $110,000 and should even be worth $120,000 because you will have bought it below market value and fixed it up to look gorgeous.

Now let's look at saving some real money. This you can do by doubling up on your payments. If you can manage to pay $272 per week, (trade your car for a bike? give up smoking and wine?) you will owe only $73,737.58 at the end of three years. So if you sell the apartment for $120,000 you will be sitting pretty. Here's the math:

$120,000 (selling price of your apartment)
- $9,000 (approx. realtor's fee and conveyancing charge)
- $4,000 (new carpets, paint, mirrors, indoor plants)
- $73,737 (unpaid mortgage: transfer it or pay it off)
$33,263 (what you're worth: allow for some mortgage penalty)

Maybe now you want a two bedroom or even a townhouse.

Here's how a partnership could work. You pay $2,000 of the down payment and your friend pays $3,000 (write your friend a promissory note for $500 and pay it back soon). Have a relative cosign for the mortgage, as above.

Naturally, you must take precautions. Choose your partner well. S/he should be employed, responsible, reliable, and willing to make sacrifices. Also, of course, compatible!

First, write out an agreement with your partner as to financing and responsibilities. What happens if one of you can't pay or pays late? Will s/he forfeit his/her share? Will s/he be fined?

Who does the cleaning? Who is in charge of repairs and maintenance? What are the consequences if one doesn't pull his/her weight?

Can you agree on improvements? Are you going to repaint the place? Install large mirrors on the walls (excellent to make the place look bigger for the day when you resell)? Recarpet? Or what?

What if one of you wants to sell the place and the other doesn't? (You might get a good offer out of the blue.) You'll need the handy "shotgun clause" to handle this situation. Insert something like this:

"Anytime after 18 months from the purchase date either party can demand that the property be professionally evaluated and then demand either (a) that the property be put up for sale and the proceeds split or (b) that the partner who doesn't want to sell, buyout the other partner for half of the appraised value."

This clause can save you a lot of grief. It is really annoying to want to sell and be stuck with a partner who won't cooperate. So iron out your plans and put them all in contract form. Sign it and have the signing witnessed. This may sound mistrustful and/or overcautious, but it's just common sense.

The Yin of a partnership is that it makes the purchase easier. The Yang is that you get only 50% of the profit when you sell.

How much money will you and your partner make on the transaction? If you each pay $136 per week (total of $272) you'll owe only $73,737.58 in three years. If you sell at the same profit I've assumed above, you'll each clear one half of $33,263 viz. $16,631.50.

It could get even better. If you both pinch pennies and double up on your weekly payments (each pays $272 per week), here's what you'll get:

$120,000 (selling price of your apartment)
- $9,000 (approx. realtor's fee and conveyancing charge)
- $4,000 {carpet, paint, mirrors, plants)
- $26,376 (unpaid mortgage: transfer it or pay it off) $
$80,624 (what you're worth; allow for mortgage penalty)

Divide this by 2 and you get $40,312, which is what each of you is now worth.

Surprisingly, by doubling your mortgage payments you can make more with a partner than you can on your own. There are risks (what happens if one of you loses his/her job?) but if you write up a good contract, have it verified by a lawyer (or notary), then have it witnessed, there's little, if any, risk.

If you buy low you'll do this apartment and "buy up" to a two bedroom or townhouse. Remember that your mortgage is transferable and that the person who buys your apartment might want to take it over.

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Robert Thomson is the author and publisher of Hot Tips for Real Estate Investors.

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