Tuesday, March 13

Long Range Housing Plans Part II

After being rather confused yesterday, I got myself on a spreadsheet today before writing the post and I am feeling much better. Using a 3% rate of increase for both house prices and rents, I modelled the value, mortgage, rental income and payments for house #1 (the one that I currently own) and house #2 (the one that I want to buy).

It's a bit hard to describe the results of a spreadsheet, but here are a few observations.

  • The longer I wait, the more money I will need as a down payment (because house prices only go up in my model)
  • About 10 years before the houses are paid off they go cash flow positive (which actually means that house #1 is paying the mortgage on both houses). The effect of compound interest works on this too - at 5% rental increase it is closer to 15 years. The interesting thing is that this is very close to the same for one house or two.
  • I didn't include property taxes, repairs/maintenance, vacancy costs, etc. so this is a bit optimistic.
  • On the other hand, I started my rent and property value low compared to what I could get on the market right now.

So basically the biggest barrier to my plan is coming up with a second down payment. But I've been thinking about that.... There is quite a substantial cash position in my company (~$75,000 at this writing) and I have strong receivables as well. And the investment property may actually be better off inside my company than in my personal ownership. So if I sold my house to my company I could make use of the cash in there, and perhaps take back a mortgage as well. I would make sure I have enough left from this to put a down payment on another house in my own name.

And since I have 4.5 years before I want to make this move, that is lots of time to work on the downpayment. If I earmark the current $75K plus $20K per year for this purpose and put it in a high interest savings account or GIC at 3.5% (ING's current rate) I will have $185,000 at the end of 4.5 years. I think that this plan just might work...

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