159 replies to this topic

[CPCFTW]

People often forget the effect of leverage when buying a home. It's not fair to compare renting to owning when you aren't borrowing and investing. You can get 3:1 leverage in a margin account. Let's look at the real dichotomy to someone with 50k:

Invest 50k in a margin account = 150k diversified portfolio, 100k debt at 4 - 4.5% interest.

Invest 50k downpayment on 250k home, 200k mortgage debt at 3 - 3.5% interest.

There's no question which option diversifies your risk more. The difference in interest rates on the debt is somewhat mitigated by the tax deductibility of margin interest. Stock markets have historically had a significantly better return than housing:

http://3.bp.blogspot...rket+Growth.jpg

http://www.milliondo...arketsgoup2.jpg

When you take into account the costs of buying/selling real estate vs financial assets, IMO home ownership is pretty overrated. The freedom to move pretty much on a whim while renting is also a huge advantage.

Edited by CPCFTW, 24 March 2012 - 08:26 PM.

[msj]

Was doing a tax return this week.

A client bought a condo in 2008 in BC (somewhere on Vancouver Island - not Victoria).

Rented it out (cash flow negative) and finally sold it in 2011.

Loss on the sale?

After legal and real estate fees - about $97,000.

That's a 27% loss - not including the rental losses (net of tax savings - oh how people love to factor in those tax savings as if spending $1 to save 40 cents doesn't still cost them 60 cents).

I did the return so I gave it to one of my professional staff to review because she and her husband just bought a condo in Vancouver last year (for a family member to attend University).

Hope it doesn't happen to them because for my client that loss is a very painful lesson.

[The_Squid]

Was doing a tax return this week.

A client bought a condo in 2008 in BC (somewhere on Vancouver Island - not Victoria).

Rented it out (cash flow negative) and finally sold it in 2011.

Loss on the sale?

After legal and real estate fees - about $97,000.

That's a 27% loss - not including the rental losses (net of tax savings - oh how people love to factor in those tax savings as if spending $1 to save 40 cents doesn't still cost them 60 cents).

I did the return so I gave it to one of my professional staff to review because she and her husband just bought a condo in Vancouver last year (for a family member to attend University).

Hope it doesn't happen to them because for my client that loss is a very painful lesson.

Bad timing to buy and sell a condo.

If anyone buys when the prices have maxed out and sells when they drop, they will lose money. If they bought in 2000 and sold now, they would have made some good coin.

It isn't all that mysterious....

[msj]

Bad timing to buy and sell a condo.

If anyone buys when the prices have maxed out and sells when they drop, they will lose money. If they bought in 2000 and sold now, they would have made some good coin.

It isn't all that mysterious....

Sure, in hindsight anyone can time anything.

In real time, however, people have to consider many things such as, at the time of purchase, is this a good use of my investment dollars?

They bought in March/April 2008. A year before the stock market dove.

Had they bought the TSX they would have only lost about 9% (but earning dividends may have made it close to a break even).

But, as people discover, homes are not very liquid.

Sometimes that makes it difficult to time your exit and sometimes it makes people panic and sell either too early or not at all.

In this case, they could have not bothered to sell and could still be holding a cash flow negative rental.

And who knows when/if the real price would recover prior to their demise.

------------------

I had clients in today who have just bought a house in Arizona.

They figure it will be a great investment since a few years ago it was priced at about double that they bought it for.

They were so happy until I explained all the US and Canadian tax consequences.

For their sake they better hope the US isn't Japan because otherwise they will be long dead before they make a capital gain off of this property.

[fellowtraveller]

The thing about talk of a realestate bubble bursting is that the people who own all the stuff in our society are the most powerful, and get the most government action. Look at how much money they dumped into the US economy to avoid large devaluations there.

If theres any sign of a bubble bursting, the government will dump a zillion dollars into the system to make sure the ownership class doesnt lose their profits. This essentially ammounts to the government using taxpayer dollars to sponsor realestate investors.

I figure realestate is pretty safe for this reason. They will avoid large rate hikes, and keep propping up the market. Even in the US there was very little real devalation.

The government will force renters and everyone else to sponsor my ownership so its kinda hard to say no.

"Ownership class"?? Home ownership is about 67% in Canada, which is typical of Western countries. Pretty big class.

[dre]

"Ownership class"?? Home ownership is about 67% in Canada, which is typical of Western countries. Pretty big class.

That depends on how you look at it. Most of those 67% only own a small fraction of their home. Really you have two different interests in play... you have homeowners (as you pointed out a large and influential group), and you have Banks. And my point was, until the CREDIT bubble collapses I have a high level of confidence that the government and banks will do everything in their power to prevent a market driven devaluation, and they have a lot of tools at their disposal to delay it for quite some time. This is exactly why rates are pegged so low.

[fellowtraveller]

This is exactly why rates are pegged so low.

True if you believe in The Unified Conspiracy Theory.
Another explanation for low mortgage interest rates is that residential mortgages are traditionally a relatively safe place for investors money. Low risk -= low return=low rates. Stock market scary? Put some money in first mortgages. Couple that with the reality that this generation is awash in cash that has to go somewhere, anywhere that has any kind of return and the low rates for mortage investment make sense. Banks like mortgages because they don't make a lot, but they do earn and earn for a long time. People- 67% of people- like mortgaes because it is the only way they can buy a house.

Edited by fellowtraveller, 16 April 2012 - 04:08 PM.

[Topaz]

Aren't we in NA, kinda brainwashed to have the must haves like owning a house? It used to be a good thing to but these past years the cost of owning a home is going up and up and I'm not counting the mortgage, like the utilities, gas, hydro, insurance etc. I guess it also depends were you live, like big cities vs rural. Rents in cities are from $1000-3000. while rural areas can be as little as $500.00 and that can be for a house or apartment. So it seems the young have to decide to own or rent and the seniors have to decided to stay in their homes or rent.

[dre]

True if you believe in The Unified Conspiracy Theory.
Another explanation for low mortgage interest rates is that residential mortgages are traditionally a relatively safe place for investors money. Low risk -= low return=low rates. Stock market scary? Put some money in first mortgages. Couple that with the reality that this generation is awash in cash that has to go somewhere, anywhere that has any kind of return and the low rates for mortage investment make sense. Banks like mortgages because they don't make a lot, but they do earn and earn for a long time. People- 67% of people- like mortgaes because it is the only way they can buy a house.

True if you believe in The Unified Conspiracy Theory.

Low interest rates are used to expand the money supply, dumping money into the economy and stimulating growth. This isnt a conspiracy theory its their stated objective... and it works for a while. But it also creates asset bubbles in things like stocks and realestate, and potentially anything else people invest in or buy.

Couple that with the reality that this generation is awash in cash that has to go somewhere, anywhere that has any kind of return and the low rates for mortage investment make sense.

Thats not true at all. This generation is not awash in CASH. Its awash in EASY CREDIT. We HAVE no cash, and we have no savings. They are trying to ward off what is probably an inevitable and pretty severe recession, and the only tool they have to do that is to make a whole bunch of new money and thats exactly what having low interest rates does.

And my point was, it will work for a while. Low interests will delay a market based correction in realestate prices and other assets as well, but eventually you not only are stuck with the origional problem but its much worse now, because low interest rates today means less consumption tomorrow, which again means a recession.

[fellowtraveller]

Low interest rates are used to expand the money supply, dumping money into the economy and stimulating growth. This isnt a conspiracy theory its their stated objective... and it works for a while. But it also creates asset bubbles in things like stocks and realestate, and potentially anything else people invest in or buy.




Thats not true at all. This generation is not awash in CASH. Its awash in EASY CREDIT. We HAVE no cash, and we have no savings. They are trying to ward off what is probably an inevitable and pretty severe recession, and the only tool they have to do that is to make a whole bunch of new money and thats exactly what having low interest rates does.

And my point was, it will work for a while. Low interests will delay a market based correction in realestate prices and other assets as well, but eventually you not only are stuck with the origional problem but its much worse now, because low interest rates today means less consumption tomorrow, which again means a recession.

Incorrect. Hundreds of millions of booomers have inheriited easy times, booming economies and trillions of dollars from their dead parents.
It has to be invested somewhere.

[fellowtraveller]

Aren't we in NA, kinda brainwashed to have the must haves like owning a house? It used to be a good thing to but these past years the cost of owning a home is going up and up and I'm not counting the mortgage, like the utilities, gas, hydro, insurance etc. I guess it also depends were you live, like big cities vs rural. Rents in cities are from $1000-3000. while rural areas can be as little as $500.00 and that can be for a house or apartment. So it seems the young have to decide to own or rent and the seniors have to decided to stay in their homes or rent.

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?

[dre]

Incorrect. Hundreds of millions of booomers have inheriited easy times, booming economies and trillions of dollars from their dead parents.
It has to be invested somewhere.

Sorry this is just patently false. We have less cash than Canadians have had at any time in the last 50 years. Take a look at a graph that shows cash on hand (personal savings rates).

Youre confusing CASH which we dont have, with CREDIT which we temporarily have in abundance due to extremely low rates, and large infusions of credit into the economy, and the decouple of money from real value that took place in the early seventies.

Canadians are deeply in debt, and they have no cash at all.

Edited by dre, 17 April 2012 - 09:18 AM.

[msj]

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.

[dre]

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.

I think at the end of the day theres very little difference between buying and renting unless theres significant appreciation. But there is a quality of life difference IMO. I like the "feeling" i get from owning my own place... I built it myself, and I do work on it to make it nicer. I dont have to ask anyones permission, and I have a little more control over my privacy.

But Im still renting... bank takes a thousand each month, city takes another 300 or so, insurance company piles on for another 100 bux.

[Bonam]

People often forget the effect of leverage when buying a home. It's not fair to compare renting to owning when you aren't borrowing and investing. You can get 3:1 leverage in a margin account. Let's look at the real dichotomy to someone with 50k:

You can also get much higher leverage, if you want, using various investment instruments, such as leveraged ETFs and options. You can have an essentially unlimited amount of leverage buying options. It's all a matter of your risk tolerance, of course.

The advantage of a home is you are getting an asset that you are actually using (living in), which is not the case with other investments such as stocks, which are just a number in a database.