You can pay your mortgage, or you can pay your landlords mortgage. Do you think the costs of oownership for rental properties are less than they are for owner occupied homes?
The costs may be the same but who's paying is different:
Let me do the math for my situation:
Rental fee - $1,575 per month. Utilities - well, who cares, they would be the same whether I owned or rented. Responsibility - none.
Had I bought with even 10% down:
Mortgage interest (year 1) $21,366. Interest over 25 years assuming 4% interest rate (unlikely to last for 25 years) $315,096 (so an average of $12,603 per year for interest).
Strata fees - at least $400 per month.
Property tax - at least $300 per month - strange how property taxes keep going up each year....
R&M - for 2011 - likely between $5 to $8,000 for a bathroom fix that was not covered under the warranty.
So, to recap, for 2011:
Total rental cost: $18,900.
Total ownership cost: $34,766 (at least)
Don't forget, however, about opportunity cost - those mortgage payments would not be interest only - the principal in year one would be another $12,837.
You can figure out your own investment return to calculate what that value could be (it's not material for one year but is material as it accumulates over several decades).
Oh, but really the opportunity cost is not only on the $12,837 for principal but on the $15,866 difference between the ownership cost and the rental cost for year one (with applicable adjustments for each year thereafter).
Sure, the landlord has an "asset" although that is largely offset by his liability (the mortgage). [Although I suspect my landlord may be underwater given present market conditions]
Oh, and given how long the units are staying on the market, not to mention further price reductions in the past couple of months, I suspect that the $600,000+ he paid would sell for less than $500,000 today.
Good thing he has a job to make up the difference in the cash flow so he doesn't have to sell.
Hopefully the price will come back at some point in time so he can actually make a capital gain off this place. He is unlikely, however, to make a "real" capital gain off of it anytime soon (as in, adjusted for inflation, he will be lucky to break even - but that's what happens when one buys near the top).
My gut is telling me that the strata fees will be going through the roof (if the continual repairs to the pool/hot tub/steam room mean anything) while property taxes spiral ever upwards.
Funny, my rent has barely budged in the past few years (previously in a house close by).
Yet property taxes have gone up by at least 3% per year.
I also do a lot of rental statements for clients at tax season.
If they find a good tenant (and even if they don't) rents rarely change. I can look at 5 year summaries as I review the tax return and the rental revenue is often the same each year.
Meanwhile, all expenses, except, usually, mortgage interest, are higher.
So whatever world you are living in FT, it's not the real world.
As can be seen with Chart 7
showing real rents generally declining.
As for me - well, I'm glad I chose to rent the shelter and buy a business which has given me a ROI of 20%+ per year rather than buy a condo which merely provides shelter but at twice the price.
Rare circumstances, to be sure, but if more people actually did the math for whatever house they bought prior to buying it then maybe we wouldn't have a bubble in the first place.
To get back to who's paying:
Forgot to mention the taxpayer. Since my landlord is not only cash flow negative, but is actually losing money each year, he is saving taxes.
For 2011 his tax savings (and I will assume the top tax rate) would be around $6,933.
That helps mitigate the pain a bit.
Of course, he's still spending $1 to save 43.7 cents which, logically, is stupid.
Clearly he is hoping for a capital gain at some point because he is going to continue funding this loss for many, many more years to come if he doesn't get out.
Edited by msj, 17 April 2012 - 01:25 PM.