# Does Renting Forever Make Sense For me?



## Dragonprotein (May 22, 2017)

I've got a bit of a math/financial puzzle on my hands and hoping I could get some feedback. I am sure that dome of my math is wrong, but is the overall logic sound?

I work and live overseas 11 months a year and have no property in Canada. I want to retire in 20 years in Montreal but I don't think buying a home there makes sense. I'd rather invest money in ETFs until 2037, then rent a home with the profits. I'd rent it in perpetuity since I'd only be withdrawing 4% from my saved income. Buying a home in Montreal now and paying it off would, according to my figures, be dramatically less profitable. Here's my logic:

Supposing I have 100k and use that now in 2017 as a down payment on an average Montreal condo, valued at 400,000. I get a mortgage at the average of 2.65%. So I owe the bank 300k plus interest.

Every year I also owe 250 a month in condo fees and 1.7% in property tax, or $6800. Combined that's $9800.

Supposing that somehow I got renters in there for all 20 years at 800 a month. I'd make $9600 (all of this not adjusted for inflation yet) so only have to pay $200 a year.

However, the interest on the mortgage remains to be paid. A mortgage calculator calculates this as a little under $88,000 over the 20 years. But I also have to pay off the principal, which if I divide by twenty is $15,000 a year. If I divide the $88,000 up into monthly payments and divide up the principal into monthly payments it's not mathematically accurate but I believe close. Please correct me if it's wildly wrong. I get 88,000/20/12= $367 and $15,000/2=$1,250. That totals $1617.

OR

I take the 100,000, put it in ETFs, and make monthly deposits of $1617. Assuming the rate of return is the historical market average of 7% and increasing deposits at inflation of 3.5%, my ETFs will accrue to 1.5 million in 20 years.

The condo, originally purchased at 400k will hopefully have increased in value at the rate of inflation (3.5%) to 800k.

This assumes I somehow got tenants every month for 20 years, I didn't pay tax on the rent, condo fees didn't change, the property tax didn't change, and absolutely nothing went wrong (repairs) with the condo. I'd also have to assume I didn't need a property management company because somehow everything took care of itself. Then, 20 years from now, I would still need to continue to pay those condo fees and property tax AND I have no savings.

In the ETF scenario, I draw 4% a year from my 1.5 million, which is enough to cover rent in Montreal, food, and everything else within reason in perpetuity along with yearly escapes for 5 months to Thailand or wherever (I've already calculated all this based on projected inflation).

So...is there something I'm not thinking of? I am sure there are flaws in my math, but generally I can't see how buying a property makes any sense in my situation.


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## Just a Guy (Mar 27, 2012)

Well, your initial math looks wrong (I can't see $800 rent cash flowing on a $400k house for example without a loss). But, having said that, I've done the math myself in the past and found that, if you invest just the difference between rent and a mortgage (assuming it's not ridiculously high rent) then you can usually come out ahead in the end. Investing all the money from a home purchase should easily do better long term, especially if a correction happens in the market. 

Being a remote landlord is also difficult, just being a landlord is a lot of work. So you'll also avoid a lot of hassles.


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## naysmitj (Sep 16, 2014)

I have a $300,000 house that I rent out for $1,700 monthly. I bought new and rented out from day one. The house has increased in value and it runs cash flow positive. The current mortgage rates are very favourable to rental houses. Even if everything just broke even on a monthly basis, nearly half of the mortgage payment goes towards principal.


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## Just a Guy (Mar 27, 2012)

A couple of problems with that example.

1) real estate has gone on an unprecedented 20+ year bull market. There is little chance that it will continue to increase at these rates (if at all) for the next 20 years. So, you may not have any capital gains and likely could face a capital loss if we have a correction. 

2) yes, half the current mortgage payment goes towards principle. Again record low interest rates which probably won't remain this low for the next 20 years, not to forget point #1, so don't count on that as cash flow.

3) as a multi-property landlord, I'd be surprised if $1700 covers all the actual expenses and breaks even. Many people don't factor in maintenance, vacancy, legal fees, taxes, unplanned expenses etc. Preferring to only use the basic costs (mortgage, sometimes property taxes) to calculate their cash flow and artificially inflating those numbers. Real estate costs a lot more than most people think. Personally, in this market, I'd be looking for a 1% return. Yes, it's more than positive cash flow, but that makes up for the times when it won't be (vacant) and when other factors arise (rates go up). 

4) don't forget you've locked up your down payment as a guarantee for the bank. There is no guarantee that you'll earn any ROI on that money, especially if housing prices correct. That money could be invested elsewhere where you at least have some control over its potential ROI.


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## sags (May 15, 2010)

Most of the time I would tend to agree with JAG on rentals, but there are strange dynamics in the rental market right now in some places.

Rents are really crazy anywhere near the GTA.

My son can't find anything. There are waiting lists of 50-75 people for every apartment building. Homes are attracting "bidding wars" for rent.

People can't afford to buy homes and they can't get a place to rent. It is turning into a crisis that we will be hearing a lot more about.


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## Pluto (Sep 12, 2013)

being an absentee landlord is risky. Tenants have to have somone to call to deal with any problems, and you are not available, so you likely have to pay somone to be on call. Its not just the math on the mortgage and what not. And what if they stop paying the rent? Or just leave? 

The etf idea is a lot better.


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## TomB16 (Jun 8, 2014)

Just a Guy said:


> 1) real estate has gone on an unprecedented 20+ year bull market.


Not where I am. We're low based on the 75 year average gain.

It's not easy to earn a living as a landlord but it's not hard to make a bit of money.

If a house pays for itself in 15 years, and it should, you will end up with roughly 14x return on investment.

Here's the math for a $500K house (round number):

You invest $100K. The house pays itself off in 15 years, if the payment is adjusted to zero cash flow (it will pay for itself in less, depending on expenses and vacancy, unless you contract out management and repairs).

In 15 years, the mortgage will be paid so your equity will be the house value. That value will be $1.4M (house values double every 10 years, average in my area).

I don't understand the idea of calculating 0% rent increase over 20 years. I'd sell my houses and rent, if I could get 1997 rates. $400 per month? I'll take it! Can you give me a 40 year lease?

Having written that, don't do it. It's a bad idea for some of the reasons indicated.


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## Just a Guy (Mar 27, 2012)

Sags,

Markets can change in a heartbeat. Look at Alberta a couple years ago. Hottest rental market, now pretty cold, lots of vacancies. 

With real estate you have to look at least 10 years down the road, those who only look at the present tend to get burned.


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## ian (Jun 18, 2016)

I think that this decision is dependent on your personal preferences, the market that you are thinking of buying into and the type/location within that market, as well as alternative investment opportunities.

We owned our homes for many years. Sold in Calgary four years ago when the market was strong. We were downsizing. Traveled for seven months. Then took a short term rental....that turned into four years of rental. Invested our home equity. When we returned it was a sellers market. People were making offers with no home inspection. We quickly walked away from that market and remained in our rental. At that time the financials of buying a condo did not work. They are still questionable given the rental market and the condo glut.

The after tax savings from renting vs buying, net of all rental costs, essentially paid for four years of travel twice a year, for 2-3 months each time. Plus some money left over. We just bought a new home. But not a condo, because there are multiple years of inventory available in our city and condo prices will remain constant for several years. We paid slightly less now than what we would have paid for the same home four years ago. Toronto and Vancouver markets are different. Montreal's may improve significantly.

One thing we have learned over the years. Buy when others are selling, sell when others are buying.


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## lonewolf :) (Sep 13, 2016)

Dragonprotein said:


> This assumes I somehow got tenants every month for 20 years, I didn't pay tax on the rent, condo fees didn't change, the property tax didn't change, and absolutely nothing went wrong (repairs) with the condo. I'd also have to assume I didn't need a property management company because somehow everything took care of itself. Then, 20 years from now, I would still need to continue to pay those condo fees and property tax AND I have no savings.
> 
> 
> 
> .


 With technology homes could be built different then today your condo could be worthless


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## Dkogan (May 20, 2017)

I agree that renting is the way to go in the current market.


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## My Own Advisor (Sep 24, 2012)

Does renting forever make sense?

Only you can decide.

FWIW, I personally like the idea of drawing 4% per year (maybe 5% as you get into your 60s) on $1.5 million portfolio - likely "enough" for most Canadians unless you have expensive tastes....cash for life.

However you "get" to that mark through a combination of renting, rentals/home ownership, other styles of investing is totally your call but certainly doable with a modest to high savings rate (>20% of net income) over 20-30 years.


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## Rusty O'Toole (Feb 1, 2012)

I didn't look over your figures in detail but I am sure you are right. Mathematicians and accountants are always proving that buying a house does not make sense. BUT they always assume you will put the money you save into mutual funds or some kind of investment.

In principle they are right but in practice, most of my friends have one investment they ever made that they made money on, and one asset that is worth substantial money and that is their house.

In your case you should definitely not buy as you live outside the country and you should definitely save and invest your money. When you reach retirement age you probably won't want a house anyway. That is when most people sell their house and move to an apartment or condo, just to free up some money and get out of the work and hassles of maintaining a house.


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## Eclectic12 (Oct 20, 2010)

Dragonprotein said:


> I've got a bit of a math/financial puzzle on my hands and hoping I could get some feedback. I am sure that dome of my math is wrong, but is the overall logic sound?
> I work and live overseas 11 months a year and have no property in Canada ...


Regardless if the math - with being outside the country so much of the time, is it worth the hassles to you of owing a property?

I only had a nine hour drive plus some locals who would help out but as soon as I could sell, I did.




Dragonprotein said:


> ... I don't think buying a home there makes sense. I'd rather invest money in ETFs until 2037, then rent a home with the profits.


What's wrong with going with what you want?
IMO, there is value to sticking to what fits your life/personality versus worrying about the $$$.




Dragonprotein said:


> So...is there something I'm not thinking of?


As mentioned above, if you don't want to do it - why bother with a comparison that:
a) has unrealistic assumptions.
b) is an incomplete picture (ex. mortgage payments have to be made but as it is a rental, interest is deductible as is condo fee, property taxes etc.).
c) the type of investor as well as success investing in ETFs by you is unknown. I have co-workers who sold out in Dec 2008, locking in losses as they "couldn't take more losses".


IMO, you either need to stick to your preference of going the ETF investing route or spend some time coming up with more reasonable comparison.


If was me, I'd go the ETF route as a lot can change in twenty years so while you may end up retiring in Canada - it may not end up being Montreal. The ETF route leaves you free to adjust if needed.



Cheers


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## CalgaryPotato (Mar 7, 2015)

Dragonprotein said:


> Supposing I have 100k and use that now in 2017 as a down payment on an average Montreal condo, valued at 400,000.
> Every year I also owe 250 a month in condo fees and 1.7% in property tax, or $6800. Combined that's $9800.
> 
> Supposing that somehow I got renters in there for all 20 years at 800 a month.


I don't know anything about the Montreal real estate or rental market but if these numbers are realistic I would rent forever. 

In Calgary you could buy a house for that price and rent it out for $2000 plus a month. And the property taxes are only a third of that price.


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## Janina Morrell (Aug 21, 2017)

Have you ever thougth on retire to Panama?


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