Buying your first condo is a thrilling milestone to be celebrated and remembered for a lifetime. There is no rite of passage into adulthood like moving into a place that is 100% your own. However, as time goes on and you become more established in your career, you may want to upgrade to a larger space. As exciting as your first condo is, it was always a stepping stone and never meant to be your forever home. It can be hard to let it go, but perhaps you don’t have to.
Many people are using their starter home to get into the market as an investor. Instead of selling, you rent it out when you move away. Financially, there can be a lot of benefits to this strategy. The longer you hold on to a property, the more your equity will grow. The rental income you receive can help offset the cost of your monthly mortgage payments.
Is the time right for you to invest?
As sentimental as you may feel about your home, the decision of what to do next can’t be emotional. Your next step needs to be logical and strategic.
Here are some steps to take right now to help you make the right choice for yourself:
Obtain a mortgage pre-approval. The first step is to find out if you have access to enough financing to allow you to buy a new property and hold on to your condo. Housing prices are high everywhere, especially in Toronto proper. You may need the cash from selling your condo to fund your new house.
Do you have a down payment available for a new purchase? Or are you relying on your equity in your condo as leverage? If you have significant equity, you might be able to get away with a smaller down payment. However, you’ll want to ensure you have enough cash flow to get you through the first few years.
Do you have enough cash in the bank to manage both properties? High property values make it hard to collect enough rental income to carry a second mortgage. During the pandemic, the government froze rent amounts, which meant you couldn’t charge more even as your own costs increased. While that is changing now, high mortgage payments mean there still may not be enough rental income to cover the monthly expenses. Keeping your condo is likely a good investment if you have enough liquid cash available. Your equity gains will likely surpass the deficit of your carrying costs.
What condition is the building in? Is it modern and up to date, or is it at an age where the finishes have become outdated and rundown? How high are the maintenance fees relative to the newer condos? Is the building managed well, and are major repairs handled quickly? Your answers to these questions will indicate how likely you can find a tenant for your unit. Once a condo reaches the 8 – 15 year age mark, it might be better to sell in favour of a newer product. The exception is if it’s a very well-managed building that will increase in value as time goes on.
Are you ready to become a landlord? A tenant will typically not care for the unit nearly as well as an owner would. As a result, there will be wear and tear, and you will require more frequent maintenance and repairs.
Want to know more about selling or investing in the GTA? Here are some other helpful reads:
- Five Up and Coming Neighbourhoods for Investment in Toronto
- Buying an Income Property: Here’s What to Look For
- How to Prepare Your Home Like a Luxury Listing
The above factors can help you determine whether or not the building is a sound investment worth holding onto. If so, there are still advantages and disadvantages to selling or renting. Let’s take a closer look at each option.
Selling the Condo – the Pros
If you decide to sell the condo, you’ll have a significant sum to afford the down payment on your next home. If you’ve always dreamed of living in Toronto proper, the proceeds from your sale might give you the financial boost you need.
You won’t have to worry about the headaches of being a landlord. You won’t have to vet tenants or chase them down for rent if they don’t pay.
There will be less financial strain because you won’t have two mortgages to cover and less risk of losing one or both of your properties if you’re forced to default on the loan.
The Cons of Selling
Selling your condo now may make it harder to get into a real estate investment later as prices continue to climb. You will also miss out on the equity you would have built by owning two homes instead of one.
Renting the Condo – the Pros
As property prices increase, more people are looking to rent, which means you will almost certainly be able to find tenants for your unit. Your equity will grow faster when you own multiple properties. The higher prices go, the more equity you will build.
Plus, you will always have the option if you ever want your condo back.
The Cons of Renting Your Condo
Not everyone is cut out to be a landlord, and owning an investment property is more work than you might think.
You will need greater financial stability as it can take time to find the right tenant, and the rental income may not cover your costs completely. This means you may have less disposable income for the lifestyle you want to enjoy.
If you decide to sell your condo later, you’ll have to pay capital gains tax on a portion of the profit you make. As of right now, your primary residence is exempt from this tax.
Should you sell your condo or hang onto it?
Only you can decide based on your situation and your long-term goals. Overall, real estate is one of the safest and most profitable investments you can make. An experienced and licensed Realtor® can provide further information to help you decide if the time is right for you.
Whether you’re interested in selling or investing in real estate, we’re here for you! Get in touch to learn more about the Toronto real estate market.