House Hunting In Charlottetown
August 22, 2011
My friend James has made Charlottetown his residence each summer for over a decade, where he plays in the orchestra for the Anne Of Green Gables Musical. It's a great gig for James, where the complexity of his artistic craft is counteracted by the simplicity of island life.
Prince Edward Island embodies all the caricatures of storybook bliss. With its rolling green hills, sea breeze scent and all the clapboard charm of small town life, the only crashing sounds you're likely to hear are the rhythm of the waves at high tide, the symbols from a jazz trio playing on Victoria Row in downtown Charlottetown, or those occasions where someone has gone on a celebratory bender (like payday!).
When James told me the only thing that could make life better on PEI was perhaps returning each year to a 'home' rather than a rental, it got me thinking. What if James and I bought a property here for our use each summer and rented it out during the winter? Would there be a market for a winter rental? Was this an affordable way of building our real estate portfolio, have a summer home and perhaps over the long term create an enchanting place to live part-time in retirement?
There are many ways to build a real estate portfolio. Buying a property with a friend can be a great opportunity if your friendship is strong enough to weather differing opinions while having a mutually agreed upon objective. Co-ownership is a way to share the risk, the troubles, the joys and the profit! James and I have been solid friends for over 25 years, which gave us the confidence to know our commitment to each other and a property purchase was honourable and with good intentions. After several discussions, we decided to look for a property that was affordable, in a location which would meet our own needs in retirement, and would ideally carry the total debt and operating expenses with as small a down payment as possible. Was this realistic?
It is in Charlottetown. This is my first lesson to those interested in building a real estate portfolio. Real estate prices are expensive in Toronto relative to the somewhat marginal rents an income property can garner. In fact, you're only looking at a 3 to 5 percent return on investment when you purchase an income property in downtown toronto, which isn't particularly lucrative when taking into account some of the risks associated with having your capital tied up in bricks and mortar. Investors aren't counting on the income for the return on investment but for the property value to increase substantially during ownership to net a sizable profit. This has been the case in Toronto for well over a decade, but can one count on increasing property values as a sure-fire means to wealth? Consider revisiting my April Home Of The Month post by clicking HERE to better understand the opportunities and challenges in making a Toronto investment purchase.
One of the appeals of purchasing a property in Charlottetown was that James had already established a social world who could offer him insight on daily life, guidance on the real estate market, and connect him with reputable people who could help manage and repair whichever property we purchased. If you're going to be purchasing in a location that isn't easily accessible to you, you need to build a real estate support team who can assist you with the operation, maintenance and management of your property, especially if you're going to derive an income from it.
It was four years ago now when James sent me this first affordable option. This skinny minny of a house located on a tiny urban lot in a fringe part of downtown Charlottetown was quirky at best. Reconstructed into a tiny tower of a property having two bedrooms and one bath on three levels of 300 square feet each, we found it hysterically amusing and affectionately called it the Cindy Lou Who House based on the wacky architecture in Dr. Seuss "Grinch Who Stole Christmas' storybook. As odd as it was, the house was literally all new top to bottom which made its ease of maintenance attractive, plus it had a reasonable list price of $99,000. With ten percent down (and James purchasing it as an island resident), we felt we could carry the total mortgage and operating expenses of $850 per month (and take a small loss each year) even if it wasn't tenanted during the winter.
After a dozen emails exchanging photos and ideas, James submitted an offer for less than $5000 below the list price on our behalf. To our surprise, even at a smidge below the asking price the sellers did not respond to our offer submission. The offer contract expired without word.
Now that James and I were committed to a purchase, after some reflection we found ourselves somewhat relieved the negotiations didn't continue. Even though our objective was a long term purchase, I think it's important to remain cognizant of your potential future resale upside. This house was too quirky a dwelling in too marginal a location to assure a future profit. Plus, the more we processed purchasing an income property, the more we realized we should try spread our total housing expenses over more than one unit to reduce our risks.
So what other options presented themselves to us? Stay tuned for more Tales of Upper Hillsborough.
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