Buy an Apartment or House?

[KevinMurray]

Quick background. I have been approved for a max purchase price of $250K with a 20% down payment. This will be my second investment property.



I am torn between buying an apartment in east vancouver or a house in a neighbouring community like Chilliwack or Nanaimo. Does owning a piece of land really matter if the property cash flows? It seems owning land would be better than owning a portion of a property.



Thanks for any feedback.

 

[Thomas Beyer]

Yes, land is THE KEY, especially in land constrained Vancouver area. As such, buy a small house with the largest land parcel.



Forget about the cash-flow.



The cash-flow merely exists to allow you to hold for mortgage paydown and equity appreciation. I talk about this further in my book, but cash-flow merely makes a brief stopover in your bankaccount for a few months, perhaps a few years before it is used for major property enhancements like new carpet, new fridge, new fence, new roof .. Cash-flow with less than 40% down doesn't really exists anywhere in Canada. More here: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-26733-133015-What_is_better_cash-flow__or_higher_ROI_.html

 

[3canctheayr]

Thomas-



I would disagree with part of your post here. I've never put down more than 20% on my properties and do get real cash flow, after setting aside funds on a monthly basis for maintenance and upgrades.

The key is buying right and staying out of overbought areas such as Toronto and Vancouver. Granted I don't get the high appreciation rates, but nor do I really want them right now.

Buying only for appreciation is awesome on the way up, but magnifies worse on the way down. It's a recipe for disaster when interest rates climb, or the economy worsens etc.



I find many people don't add enough expenses in when they calculate cash flow, deceive themselves & end up over paying for investment properties.

I've further supercharged my cash flow and equity by finding properties that I can increase in value in some way.

 

[Thomas Beyer]

[quote user=3canctheayr]but magnifies worse on the way down.


Of course you want to avoid down markets. If your outlook is for falling real estate prices then you should not buy real estate, as rents usually fall with it or vacancies go up. Cash flow is just one of 3 parts of the real estate investment story, and often by far the smallest of all three.



yes, they must be positive cash-flow to hold, but the bulk of the return will not be the cash-flow, from my 16+ year investment experience in condos, houses, land and primarily apartment buildings in a variety of markets/locations.

 

[3canctheayr]

Yes, cash flow is usually the smallest of the 3, but in my mind it's more important than appreciation on its own. If the investor has bought smart such that they get decent cash flow, then they can sleep better at nite. Appreciation can't absolutely be counted on and if the property doesn't cash flow, or cash flows negative, the investor has to subsidize the property from other sources - not ideal and definitely not good in the long run. If they can't afford to pay for upgrades/maintenance because of lack of cash, they hinder appreciation.(unless they have especially valuable land sitting under the property - there are sometimes good reasons to buy just for land value, but you need a lot of unencumbered cash to take advantage of that.)



If the value drops, the investor with cash flow still has a cushion to work from, whereas the appreciation investor now finds him/herself in trouble. History has shown us that rents and vacancies aren't as negatively affected when RE values drop, as more people are forced to rent.

Many unprepared homeowners and RE investors got creamed in the early 80's and again in the early 90's.



In my mind investors buying rental buildings should stress test them on a value and rent drop of 20-25%. If it passes that test, the investor can sleep at nite without much worry.

 

[KevinMurray]

Thanks for the reply Thomas. Your answer to my post was spot on. I feel there is much more upside to owning a house than an apartment. It gives you the option to rebuild or renovate which will increase the value of the property or rental income. Like you said "the mortgage pay down is the main course" and I want to be served as soon as possible!



Also I feel I am at the mercy of inexperienced strata council members or owners that are making decisions on behalf of my investment. When you own a house those decisions are completely controlled by you which makes a big deal.



All the best.

 

[Rickson9]

[quote user=3canctheayr] Yes, cash flow is usually the smallest of the 3, but in my mind it's more important than appreciation on its own. If the investor has bought smart such that they get decent cash flow, then they can sleep better at nite. Appreciation can't absolutely be counted on and if the property doesn't cash flow, or cash flows negative, the investor has to subsidize the property from other sources - not ideal and definitely not good in the long run. If they can't afford to pay for upgrades/maintenance because of lack of cash, they hinder appreciation.(unless they have especially valuable land sitting under the property - there are sometimes good reasons to buy just for land value, but you need a lot of unencumbered cash to take advantage of that.)



If the value drops, the investor with cash flow still has a cushion to work from, whereas the appreciation investor now finds him/herself in trouble. History has shown us that rents and vacancies aren't as negatively affected when RE values drop, as more people are forced to rent. Many unprepared homeowners and RE investors got creamed in the early 80's and again in the early 90's.



In my mind investors buying rental buildings should stress test them on a value and rent drop of 20-25%. If it passes that test, the investor can sleep at nite without much worry.





I agree with this. Appreciation has never been the main course for me. It has been the icing on the cake.

 

[invst4profit]

We have to remind ourselves that we are often advising novice investor. With that in mind it is important to keep in mind that they need to be able to afford to keep the properties they purchase. When starting out usually the only way they can afford this is with positive cash flow.

The name says it all- "Income Investment Property"



Appreciation and principal pay down on income investment properties is of zero value except under two circumstances- refinancing to pull out equity or liquidating a property. Appreciation doesn't pay the monthly hydro bill.

Compare the number of negative cash flow to positive cash flow properties a investor can afford to own and it becomes fairly obvious what the first priority of income investment properties should be.

 

[KevinMurray]

My primary focus is to find a property that does not cost me money at the end of the month. Breaking even or cashing flowing after all expenses is the plan. Unfortunately the Vancouver market doesn't provide a novice investor like myself to buy a house unless you are cash rich. My only options are an old apartment in Vancouver or a house outside of Vancouver. I am going to buy and hold for the long haul (20+ years) so purchasing outside of Vancouver seems like a good strategy because I have time on my side.



In your experience what has been a better investment. An apartment or house? Taking into consideration the maintenance, feasibility, ease of renting and adding value etc.

 

[Thomas Beyer]

[quote user=KevinMurray]Thanks for the reply Thomas. Your answer to my post was spot on. I feel there is much more upside to owning a house than an apartment. It gives you the option to rebuild or renovate which will increase the value of the property or rental income. Like you said "the mortgage pay down is the main course" and I want to be served as soon as possible!



Also I feel I am at the mercy of inexperienced strata council members or owners that are making decisions on behalf of my investment. When you own a house those decisions are completely controlled by you which makes a big deal.




Exactly.



Also, you own more land per sq ft of rental unit, and the value upside is in the land more so than in the sq footage.

 

[Thomas Beyer]

[quote user=KevinMurray]My primary focus is to find a property that does not cost me money at the end of the month. Breaking even or cashing flowing after all expenses is the plan.


Of course, but there will be "expenses" that happen only every 3, 5 or 20 years like new fridge, new carpet, new roof ... and that will eat into your cash flow.



So, you make $200/month for 3 years .. great. This $7200 on tenant trunover might be spend on a new carpet, new paint job and 2 new appliances for enhanced property value and higher future rent but the cash-flow of three years is now gone.



I use real estate primarily as a networth builder. Plenty of options exist turning $s into monthly cash-flow, but the base of $s has to be quite sizable.



[quote user=KevinMurray]purchasing outside of Vancouver seems like a good strategy because I have time on my side.
Indeed, Langley, Surrey, Maple Ridge, Delta .. all makes sense ..

 

[Thomas Beyer]

[quote user=invst4profit]Appreciation and principal pay down on income investment properties is of zero value


Not quite.



I rather have a zero cash-flow asset that goes up $1M than one that cash flows $1000/month in 3 years !



Cash is King - Cash-Flow is Queen ! (TM)

 

[Thomas Beyer]

[quote user=Rickson9]It has been the icing on the cake.


Consider trying a different cake once in a while. You might like it.

 

[Rickson9]

[quote user=ThomasBeyer]

Consider trying a different cake once in a while. You might like it.





There's no point. I already like what I have.

 

[invst4profit]

[quote user=ThomasBeyer][quote user=invst4profit]Appreciation and principal pay down on income investment properties is of zero value


Not quite.



I rather have a zero cash-flow asset that goes up $1M than one that cash flows $1000/month in 3 years !



Cash is King - Cash-Flow is Queen ! (TM)




That makes perfect scense for you Thomas because you have deep enough pockets to ride out the bad times. For most small investors having zero cash flow would likley mean the bank would own the property before the 3 years were up.



New investors struggle to stay in the game while big players see a loss only as a tax write off. It's all about perspective.

 

[Thomas Beyer]

[quote user=invst4profit][quote user=ThomasBeyer][quote user=invst4profit]Appreciation and principal pay down on income investment properties is of zero value


Not quite.



I rather have a zero cash-flow asset that goes up $1M than one that cash flows $1000/month in 3 years !



Cash is King - Cash-Flow is Queen ! (TM)




That makes perfect scense for you Thomas because you have deep enough pockets to ride out the bad times. For most small investors having zero cash flow would likley mean the bank would own the property before the 3 years were up.



New investors struggle to stay in the game while big players see a loss only as a tax write off. It's all about perspective.




Please reread my earlier posts, Greg. Cash flow is important to hold. Very ! Or shall I say enough of a cushion perhaps, via reserves or cash-flow. But what I am saying is that over a five or ten year period the cash flow is not the bulk of your profits, but mortgage pay down and appreciation is, or rather should be for a decent investment.

 

[invst4profit]

Please reread my earlier posts, Greg. Cash flow is important to hold. Very ! Or shall I say enough of a cushion perhaps, via reserves or cash-flow. But what I am saying is that over a five or ten year period the cash flow is not the bulk of your profits, but mortgage pay down and appreciation is, or rather should be for a decent investment.



Agreed.