How is "phantom rent" calculated?

[vultur09]

My point is, the building is unfinished.

That's all you needed to say. The rest of your argument is completely moot. In your eyes the building is unfinished, in the eyes of the city inspectors it is fit for habitation hence the occupancy.

When you sign on to purchase a pre-construction residence, either for yourself or unwisely for 'investment' you are subject to this sort of exercise. It has zero relevance to paying down a mortgage. You are not amortizing a debt therefore not building any paper equity (an illusion anyway if you decide to sell and subject yourself to market vagaries, commissions and other costs) A builder can reasonably expect you to establish residency in your suite when it's suitable for occupancy. The inconvenience is relatively limited and part of the process. Any real frustrations arising from it result from a misunderstanding of the public policies that underlie it. I'm sure the developer wants you in there covering costs even sooner than your move-in date but public safety will determine otherwise.

 

[simuls]

You gave up 1/12 of your revenue stream and still saved 'thousands' in 1 year after covering all occupancy costs? That sounds extremely unlikely unless you put down a 50%+ deposit on the unit in which case you're just forgoing 'thousands' that you could make in a comparable investment such as a REIT (comparable but diversified risk). Furthermore, TARION does not cover you for damage caused by a tenant.

I wonder whether you are counting all the costs associated with the unit or overlooking the fact that you got a property tax bill a few months after you moved in that canceled out your windfall....

It never ceases to amaze me. Why would I lie? What possible motive could I have? Why would I want to give out false information? To screw people around?

Here's the math...it always comes down to the math.

I bought the unit in March 2003 and it was ready for occupancy in Jan of 2006. I paid $191 000, and put 20% down. My occupancy fees (interest on outstanding amount of approx $152000, plus property taxes, plus condo fees) came to $1037 month. I rented it for $1600/month including parking (they paid their own hydro,phone,cable,etc.). Total income for the one year was $17600, costs were $13244 (my cost went up $400/month once my mortgage kicked in in months 11/12), giving me an excess of $4356. As stated above, the property taxes were collected by the builder and in fact, were over collected and I received $943 back from the builder the next year - which would be added to the above amount for a profit of $5299.

Simple.

 

[vultur09]

Thanks for the details. I understand the situation now. How large was this $191,000 unit?

To be fair, on the $38,000 down payment you probably could have achieved a 7%+ dividend yield and nice appreciation on the stock in any of the more legitimate REITS. In fact, if you margined a REIT investment even 2-1 in that period (vs. 4-1 on the condo) you would have probably doubled your money with the combined appreciation and dividends. You would have had liquidity as well.

Not knocking your purchase, presumably it appreciated as well, just for comparsion of similar risk investments with the added benefit of liquidity. For example, CREIT went from under $15 to $25 in that period.

 

[simuls]

1+den, 630 ft. The property did appreciate very nicely, and I just recently sold it - a little too soon in retrospect, but nobody could've predicted the turn around this RE market has had - especially in condos. I probably left 20 grand on the table which sucks, but after all expenses for the condo were factored in, including mortgage, property taxes, minus the equivalent I would've paid in rent, I realized a tax free 21% annual return over the 6 years, roughly quadrupling the initial investment.

 

[AKS]

1+den, 630 ft. The property did appreciate very nicely, and I just recently sold it - a little too soon in retrospect, but nobody could've predicted the turn around this RE market has had - especially in condos. I probably left 20 grand on the table which sucks, but after all expenses for the condo were factored in, including mortgage, property taxes, minus the equivalent I would've paid in rent, I realized a tax free 21% annual return over the 6 years, roughly quadrupling the initial investment.

I think this spring/summer might be the top. The prices are really getting too heated IMO. I can't believe the prices psf people are willing to pay.

 

[Xenosblitz]

Something you might want to look at if you want to go the rent during occupancy route, before moving into your unit yourself - tax implications. If you collect rent, you will have to pay tax at your marginal tax rate on it, net of your expenses. But not living in it for 12 months, as stated in a previous post, exposes your capital gains on the property to capital gains taxes. It cannot get the primary residence exemptions if you did not live in it during the year, though you can try to get around it with the +1 year rule... very very complicated - regular accountants don't even try to touch this area. They refer you to tax specialists.

I think the simplified version of what I just said is, consult a tax expert before you try to attempt this. You can end up worse off. The profits quoted are a little too rich considering no tax was taken into account. And the tax can be steep.

 

[simuls]

During occupancy, since you don't own the unit, there are no Capital Gains issues. But, if during the lease, registration happens and you do become an owner, then tax problems arise (even if it's just for a month). The key is to get a renter who will sign a lease (or better yet, not sign one so it's all under the table) for only what you anticipate the length of the occupancy will be.

You're correct in that rental income is taxable above/beyond expenses at the marginal rate. Mine was negligible (less than 15%) as I was starting a business that year.

 

[Xenosblitz]

Ah... that sounds about right! That's why I'm not a tax expert. I know issues are there, but I can't get it down to the nitty gritty...

But I see a lot of risk in this. You need a tenant that will rent for a short amount of time, who will move out promptly when asked. The biggest risks to the returns you've quoted are not finding a tenant right away, and having the tenant overstay their welcome, which triggers possible capital gains that will destroy your profits, and possibly drive you into losses. You also risk damage to the unit.

It seems like your very good returns are based on the amount of risk you took, and the remarkable timing of your income stream since you just happened to be in the lowest marginal tax bracket during the occupancy period. I don't think most of us can time it just as good as you can.

 

[amitkalia]

Interim occupany fees

I heard it's usually on the higher end but am curious to see how it's calculated.

Do you mean the interim occupancy fees when you say phantom rent. If yes, then visit the above link.