Hot Tips for
Real Estate Investors
VI. Essay: "Why Your Kids Should
Buy a Condo"
By Robert Stuart Thomson,
Ph. D.
Author of "Hot Tips for Real Estate
Investors".
To order my book send me an e-mail
at rthomson@islandnet.com (Note that
the main points of this article
involve strategy. They work in any
market. It does not matter that
prices have inflated somewhat (more
than doubled) since I wrote this
article in 1996. This article was
written with the "Generation X" in
mind, but anyone can gain by
following the plan.)
My 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; she didn’t
think she could afford an apartment.
I crunched some numbers with her and
showed her that she could afford to
buy. Maybe you know someone in a
similar position. If so, read on.
Here is her background. She has a
good steady job (at $20. an hour)
but has only $2000. in savings. She
now lives in Victoria and spends
$700. a month for rent on a
one-bedroom apartment. She needs a
game plan. Here it is.
She should decide where in the
Greater Victoria area she wants to
live and start looking for
one-bedroom apartments. I have
emphasized how important it is for
her to look at a lot of units so
that she has a good sense of prices.
Let’s assume she can find one for
$100,000. (I am predicating these
prices on the 1996 market, but the
method is still the same.)
With a CMHC mortgate she needs only
$5000. down. The mortgage will be
$95,000. She has $2000. in the bank
so she should borrow $3000. from us.
(If we weren’t willing she would
have to find another source, but
that’s not impossible.) She is
willing to repay the loan in $100.
per month payments as soon as she
moves in; she is definitely not a
risk.
I told her the rest of the plan.
Find a mortgage broker in the Yellow
pages and ask for help finding the
best rate on a three year closed
mortgage (you will have your own
ideas as to the best kind of
mortgage plan). Ask me and your
mother to cosign for the mortgage
(we will...) 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 you
will avoid heavy penalty fees. It
pays to look ahead. Repay your
mortgage weekly rather than monthly.
This always saves you money.
Let’s look at how much money you are
going to save. If you continue to
pay rent, your rent money will earn
nothing for you (this is called zero
equity). If you buy as I have
suggested, here’s what you will
get.When you move in, you’ll owe
$97,450., not $95,000. (CMHC will
charge you 2.5% of the mortgage as a
fee, plus a $75. charge.) This may
sound steep but it isn’t if it gets
you that apartment and starts you on
the road to building equity.
Besides, no other mortgage company
is likely to lend you such a sum.
Let’s assume that your mortgage is
calculated to be paid off
("amortized" is the technical term)
in 25 years. Your weekly payments
will be $136., which is much the
same as the rent which you are
currently throwing away. If you keep
making these payments for three
years you’ll owe $97,428.
This might not sound great, but
listen. Over the three years your
apartment has probably increased in
value (after all, you did your
homework well before you bought: you
knew the prices and you bought it
under market value. You also will
have fixed it up and made it look
gorgeous. In short, you will have
studied my handy little book, "Hot
Tips for Real Estate Investors".)
Your apartment should be worth at
least $110,000., maybe even
$120,000.
Now let’s look at saving even more
money. This you can do by doubling
up on your mortgage payments. If you
can manage to pay $272. per week
(trade your car for a bike? Give up
smoking? Or drinking?) 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. (Realtor’s fee, plus
conveyancing)
-------------
=$111.000.
- $4,000. (New carpets? Paint?
Mirrors? Plants?)
-------------
=$107,000.
- $73,737. (Unpaid mortgage:
transfer it or pay it off)
-------------
=$33,263.
Maybe now you want a two bedroom
apartment 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 or friend co-sign for the
mortgage, as above.
Naturally, you must take
precautions. Choose your partner
well. S/he should be employed,
responsible, reliable, 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 there be a fine of some
sort? You might feel that you want a
formal contract drawn up. Who does
the cleaning? Who is in charge of
repairs and maintenance? What are
the consequences if one of you
doesn’t pull his/her weight? Can you
agree on improvements? Are you going
to repaint the place? Install larage
mirrors on the walls (an excellent
way to make the place look bigger
for when you resell.) Recarpet? Or
what?
What happens if one of you wants to
sell the place and the other doesn’t
want to? (and you never know: a good
offer might come in out of the blue
and one of you will want to take
advantage of it). In this case
you’ll need the handy "shotgun
clause" which I explain in "Hot Tips
for Real Estate Investors". It goes
like this:
"Any time 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 , buy out 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 yet be stuck with a
partner who doesn’t want to sell.
Best to iron out your plans and put
them into a contract. Sign it and
have the signing witnessed. This
might sound mistrustful and/or
over-cautious, 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. for
both of you) you’ll owe only
$73,737.58 in three years. If you
sell at the same profit which I’ve
assumed above, you’ll each clear
half of $33,263. i.e. $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. (Realtor’s fee and
conveyancing)
-------------
=$111,000.
-$4,000. (Carpet, paint, mirrors,
plants)
-$26,376. (Unpaid mortgage: transfer
it or pay it off)
-------------
=$80,624.
Divide this by two 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 looked over by a lawyer or
notary, then have it witnessed,
there’s little, if any, risk.
If you buy low (and again, see my
"Hot Tips for Real Estate Investors"
to find out how to do this) you’ll
do even better than I’ve outlined
above and you’ll be in a good
position to flip this apartment and
"buy up" to a two-bedroom, a
townhouse, or even a starter home.
Remember to arrange things so that
your mortgage is transferable; in
this way the person who buys your
apartment can assume your mortgage
and save money.
(Note: please respect the fact that
this three page article is the
intellectual property of Robert
Stuart Thomson, Victoria, BC. I
don't mind if you copy it, but
please tell your friends who wrote
it. My book, "Hot Tips For Real
Estate Investors" (120 pp. with
illustrations) is full of useful
ideas; overall, it's as good as the
article which you just read. You can
order it by sending me a cheque for
$10. (U. S. or Canadian: same
price.) Cash is okay: up to you...
If you send a cheque please make it
out to Robert S. Thomson and send it
to P.O. Box 50058, Fairfield Plaza,
Fairfield Rd. Victoria, B.C. V8S 5L8
The ideas in my book are valid for
any market, peak or trough. Feel
free to phone me. My number: 250 414
0215
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