# renting, who does this benefit?



## joncnca (Jul 12, 2009)

there seems to be a lot of discussion on the forum about how it's a bad time to buy property (in toronto). high prices, poor economy, projections of housing correction, etc. granted, i'm sure there is some significant population bias here, seeing as it is a money forum and the (many to most) posters are likely to be more prudent, financially informed, and possibly more conservative than those who do not visit this forum (most canadians?).

nevertheless, i wonder how much prudence is too much. specifically, i'm reading many suggestions to those who are trying to buy property, that this is not a good time, and that they should continue to rent.

(BTW, i'm not talking about EVERYONE, everyone's situation is different, no one-size-fits-all answers apply, i know, but i'm expressing feelings about general impressions i'm getting from reading posts in the RE forum)

there are some very legitimate, hard-and-fast reasons why a given person should continue to rent. a big one, i imagine, is limited financial ability. if you only have $600 to spend on housing, you probably shouldn't try to buy a house/condo/etc. you simply do not have the capacity, and need more income. another big one is short occupancy expectations. it's a bad idea to buy if you think you'll move/sell within a short period of time.

but what about the people who do have enough means to sustain home ownership, but may not necessarily need as much house in this point in their lives? i understand the rationale of buying a house (regardless of immediate need, such as the expansion of one's family) to be, wanting to stop paying rent and building equity in one's own house. in this case, would one not want to buy a house as soon as he/she is able to do so, even if it happens to be during current economic conditions?

all this talk about how people should rent now because of fears over a housing market correction, this doesn't really help people who want to get into the housing market and are able to do so financially, does it? renting will help the landlords, who already own the properties and who are getting their mortgages paid off by renters.

i think my point is, i feel there has recently been an oversupply of advice to keep renting instead of buying in various parts of toronto, due to fears of a housing correction, etc. and this can cause some people to lose out on opportunities, even under current economic conditions. 

there are clearly some posters on this forum who are landlords/investors, who have successfully made money off of their real estate through capital appreciation and/or rental income. are you telling me that all of you only bought property during 'better' economic times, and would not dare to buy anything today? furthermore, to those same people, consider if you did not currently own your properties but knew of others who were successful homeowners/investors, would you still be so opposed to buying anything today?

i think that there are some posts from people who are looking to buy property now, and other posters (particularly those who currently own properties) dissuading them from doing so, instead, suggesting that renting is the better option right now. well it's easy to give this kind of advice when you already own these properties, which are probably making at least some money off of them (even if it's via paying down a mortgage). those posters who are looking to buy property, are they not just trying to get onto the other side of the fence as well, to improve their situation (through ownership of RE)? are they deserving of as much discouragement from buying RE right now, as they seem to be receiving.

i think this almost has a hint of a haves vs. have-nots discussion, but am i misguided here?

no disrespect to anyone, but i'm really feeling the bias in the RE forum, and i wonder how much of it is real in the real world, and how much is just confirmation bias from the types of people who frequent this forum?


----------



## brad (May 22, 2009)

It mainly has to do with thinking through the financial implications.

If you don't have a stable job or if you're not sure you're going to stay in an area for more than 3-4 years, renting probably makes more sense than buying because (depending on your downpayment and the length of your mortgage), you'll have very little equity built up after 3-4 years. When you sell, you will lose money overall, due to all the initial expenses involved in buying vs. renting, unless your house happens to gain value in that time. Which is not a certain thing in many markets.

For the initial years of a mortgage, you're paying a lot more in interest than you are in principal. In my mind, paying interest to a bank is not much different than paying rent to a landlord: you're still throwing money away. If you sell your house after 3-4 years, all you'll have to show is your initial downpayment plus the small amount of equity that you've built up during that time. It doesn't sound like a great deal to me. If you have the means you can pay off your mortgage faster and/or take a shorter-term mortgage to bump up the rate of equity building. But not everyone can afford to do that.

I rented until my mid-40s, and I think that was a smart move, because I never stayed in one place more than 4-5 years and I switched jobs fairly frequently. For my last five years of renting I rented a cheap ($550/month) 3-bedroom apartment in an undesirable part of town while I saved up for a downpayment on a house. I was making $120K/year during the time. It's not a haves-and-have-nots issue.


----------



## Potato (Apr 3, 2009)

joncnca said:


> but what about the people who do have enough means to sustain home ownership, [...] in this case, would one not want to buy a house as soon as he/she is able to do so, even if it happens to be during current economic conditions?


You're missing the point, _even_ for people who'll live there for a long time like 10 years and have the financial strength, it's just a bad time to buy. Prices are too high relative to rents, and it no longer looks like you can count on property appreciation to make up the difference. It just doesn't make sense to buy in Toronto now. People are not losing out on opportunities by renting, they're avoiding risks.

Here's a case example for you: a townhouse in North York. _Exact same unit_ for rent and for sale. $2500/mo for the rental option, $518k for the purchase option. 

If I were to buy that unit, I'd have to pay $1000/mo in condo fees, $388/mo in property tax, and I'd have interest/opportunity costs of at least $1080/mo (and that's assuming a variable rate of 2.5% that never increases). That's just about at the cost of the rent and we haven't even looked at transaction costs, interior maintenance, CMHC fees (if req'd), and any other costs of ownership I may have forgotten.

So I don't see any opportunity there.

What about the risks? There's really only two to be concerned of as a renter: that rents will go up, or that the landlord will, after at least a year has passed, decide to sell the unit or use it for personal use, forcing a move. I'm not terribly concerned about rents increasing: I don't want to use the fallacy of projecting past returns into the future, but there really don't look to be any catalysts for rents to increase drastically. 

As an owner, I have a lot of risks to worry about: property prices going down, the need to suddenly move (whether for work or because I get new neighbours that play the drums and smoke), interest rates going up, condo fees going up, property taxes going up, something breaking in the unit, or in the rest of the condo complex leading to a special assessment. 

I might be willing to take on those risks if I was getting paid to (by owning being cheaper than renting), but that's not the case. So my wisest council is to take the rental option in Toronto now.



> all this talk about how people should rent now because of fears over a housing market correction, this doesn't really help people who want to get into the housing market and are able to do so financially, does it?


So now we come back around to this, and yes, it does help even those who are able to do so financially. Saving money, even if you can afford to throw it away, is a good thing, as is reducing risk. But I could frame it another way, and ask for a given budget, how many square feet of living space can I get? And of course the answer would be that by renting I get more space (or nicer space, or better-located space, etc) at the moment, so that's the option to go with.


----------



## the-royal-mail (Dec 11, 2009)

I think we're about to rehash the discussion again. Was that the aim of the OP? I have read the post but I don't quite see the point. None of us should be involved in any "groupthink" on matters like this. We are all free to express our own views and it appears there are strong arguments in favour of both options.

As far as renting goes, the thing that irritates me the most is people who say I'm "throwing my money away" or "paying someone else's mortgage" just because I'm renting. What a bunch of BS. I've owned and I've rented and I'm $ way further ahead when I rent. It's too simplistic to simply compare the rent charge to the mortgage charge. Ownership has a LOT of responsibility that renting does not:

-RE fees (5%)
-taxes (you are now the gov'ts ATM)
-condo fees
-money wasted when your place doesn't sell when you would like it to (you can be out of an apt quickly if you give proper notice)
-land transfer tax
-legal fees

When you own, you are feeding these middlemen as opposed to the landlord.

Why not just save this money in your pocket as cash? Even GIC income would protect your capital, something which is never guaranteed in a RE market.

I think these facts speak for themselves. Readers here would be well informed to make their own decisions based on facts, not on rhetoric.


----------



## Sampson (Apr 3, 2009)

I personally agree with the poster, there is an excess of rhetoric on the 'don't buy' side'.

To me the hard numbers are accessible and it is possible to calculate whether renting or buying will cost more, but when was the last time someone showed a detailed comparison? and even if one-side comes out clearly ahead, that relationship may not hold true for every property in that city.

The other problem I have with people giving blanket statements that buying now is bad, is that there is an assumption here, that renters actually save the difference. All the bank studies show this clearly isn't happening so renting COULD be better, but I'll bet often people end up just spending the difference.


----------



## kcowan (Jul 1, 2010)

the-royal-mail said:


> ...Ownership has a LOT of responsibility that renting does not:
> 
> -RE fees (5%)
> -taxes (you are now the gov'ts ATM)
> ...


- maintenance costs not in the condo fees
- special assessments
- opportunity costs
- capricious restrictions imposed by the condo council

Plus the time-honoured consideration: Never become mortgage poor. Keep the total of above costs at less than 35% of family income and you should be OK.

I had a salesman remove me from his newsletter when I pointed out that his specially discounted condo still had an HOA fee of $750/mo!


----------



## Maybe Later (Feb 19, 2011)

I agree with Sampson. 

If you crunch the numbers and you feel it is the best choice for you, then it probably is. If you're staying in the same home for some time, it really doesn't matter if the market goes up down or sideways. You already made a decision on that property at a monthly cost you thought was worth it.

Unless you're buying outright, you either have to rent space or rent money.


----------



## Four Pillars (Apr 5, 2009)

I never get tired of this topic.  I actually did a CBC radio show on this very subject last year.

My main summary is that affordability is the key. If you can afford the place, you can handle anything that happens. As Jon said, you need to be able to stay a place for a while to make it worthwhile buying.

I don't believe anyone can predict the markets well enough to base buying decisions on that. I agree with Potato's ratios etc but where is the timing aspect?

Real estate cycles can last a long, long time and a good portion of your life can pass you by if you are waiting for a specific event.

I bought my first house at the end of 1999 - the market was overvalued, interest rates were on the way up, etc etc etc. I didn't care - I knew I could afford the place easily so it wasn't a problem.

At the time I was tired of living in crappy basement apartments and wanted to rent something better (ie $1200,$1300/month) or buy something. For whatever reason I ended up buying and have no regrets.


----------



## slacker (Mar 8, 2010)

I think real estate has topped out and it's safe to buy in Toronto now.


----------



## MoneyGal (Apr 24, 2009)

What FP said. 

I bought in early 2001 in what was absolutely described as a hot Toronto market. But we had a big downpayment (a key to making a house affordable, natch) and even at those higher interest rates we were going to pay about the same as we had been paying to rent a very modest house (we actually got a bigger, better-situated house than we had been renting). 

I think a lot of these discussions mix together various concepts including consumer behaviour ("renters should save the difference, but rarely do"), mathematical optimization ("what is the best possible outcome defined mathematically, behavioural factors be damned") and affordability (which recognizes that different people, of different ages, downpayment levels, sensitivity to interest rate changes, and risk tolerance) will make different choices from each other. 

It's really rare that people will say, or even think, that they've made bad financial choices - especially around a purchase decision as large as a house. But if some large fraction of the population apparently is living "paycheque to paycheque," then surely a large fraction of the population "can't afford" to buy houses in rising markets.


----------



## andrewf (Mar 1, 2010)

In 1999/2001, price:rent ratios were still in a normal historical range. If you look at the chart now, it's a hockey stick.

I don't see much room for price appreciation in the next couple of years. This takes the pressure off in the 'get in now before you're priced out of the market forever' frenzy.


----------



## meddlesomemarmots (Feb 16, 2011)

The rent vs owning debate is a strongly case specific thing, in my opinion.

If I were going to put a rash generalization of the local market in the area I'm in, I'd say that renting is the way to go for suites/condos, and buying is generally a better idea when looking at single family housing (again though, this is strongly based on the idea that people are saving up down payments and not taking property ownership lightly.

Myself, for example, rent a basement suite for $800, which covers the rent, all utilities, and our cable TV and internet. If we bought even the cheapest condo around our area (around $150,000), we'd be looking at 'throwing away' the money to the utilities company, and the property tax every month (never mind if the building has a levy that requires a large payment from each owner) - so our costs would be fairly close to our entire rent, before we start to consider interest payments on the mortgage.

This type of lifestyle allows me to save 50% of my pay packet, and work towards building a down payment for eventual home ownership, which I see as more of a necessity when children come along.

That said, my case is strongly case specific - I know that I can save the money, and have the discipline to not see a surplus from my paycheck and spend it all on the latest smartphone.

For someone who rents and has a relatively poor spending control, the rent vs ownership debate may be rendered a lot more skewed towards the buying side, as at least it provides a forced saving system.

It's a deeply individual issue for most people - even when the price ratios are so ridiculously out of line, as they are in Van and Toronto at the moment.


----------



## Dmoney (Apr 28, 2011)

It seems whenever the rent vs. own debate crops up, people pick a side and run with it through any and all scenarios. There are so many parameters that it is impossible to say one is better than the other without a full background on the buyer/renter.

It's also not a decision that is exclusively reliant on which alternative is a better financial decision. There are a whole load of other factors to consider including psychological. 

It's always interesting when an individual is trying to make the decision and comes to the forum with the question. In those cases, by knowing way more facts, it's possible to look at the purely financial side and determine which is the cheaper alternative. 

Depending on the cost of purchase, cost of similar rental accomodation, mortgage rate, downpayment, mortgage term, taxes, salary and so on, it's possible to paint a more accurate picture of which option is better. To apply a blanket statement saying one is cheaper than the other, or better than the other is pretty useless and inaccurate.


----------



## Cal (Jun 17, 2009)

I think it varies for each individual situation, the amount of house you are considering buying, the amount/price you can rent a comparable for. The amount you would be able to save above and beyond rent.


----------



## Sampson (Apr 3, 2009)

The issue I have with those on the 'rent is better because of the math of today' argument is simply this.

If you want to save the most money, live at home if you can. I'm 32, married, with a kid, and I know my parents wouldn't mind if I lived at home, they would even endorse it rent free. Just because I could save tens of thousands upon thousands of dollars this way, doesn't make it a good decision.

I don't endorse either, and I understand the cost/benefits of both approaches, but to argue that housing is too expensive period isn't productive. I don't necessarily agree that the argument is always between 'haves and have-nots', but I do think that people's personal situations dramatically affect their opinions on the topic. Unaffordable for one person can be peanuts to another.


----------



## CanadianCapitalist (Mar 31, 2009)

Home prices have been going up, up, up for more than a decade now. At some point, odds are there will be reversal. It's hard to forecast it though. For a while, it seemed like the market kicked into reverse gear in 2008 but then it came back. Markets can stay irrational for a long time.


----------



## Berubeland (Sep 6, 2009)

Because this is a financial forum, we tend to calculate things. Currently in Toronto landlords that have bought in the last five years are subsidizing tenants for the most part. 

Having said that the disadvantages of being a renter which I am also familiar with would get me to buy again (Just not in Toronto - It's too expensive)

For instance I rented a property last month for $1500 and the price of a identical unit is $349,000 plus condo fees. The financial benefit to the tenant is about 2-300 per month, plus the landlord is on the hook for repairs and depreciation of the house. (Think of those nice modern kitchens, baths and countertops that will be horribly dated in 10-15 years) 

Financially it is a much better decision to rent and this is a financial forum. 

Another house I rented for $1700 sells for over $700K 

All in all I had two landlords sell this month, because the capital gains are so much that they just can't say no. 

Almost every single metric that people use to measure if real estate is overvalued is stating it is. 

I don't understand how any person with a conscience could tell a person to go ahead and buy real estate in this market knowing they are likely to lose 25% of their equity in Toronto and more than that in Vancouver. The only question is when. 

I was just watching Flipping Out a show from the States Jeff Lewis sold one of his houses in 2006 for $2,700,000 and he bought it back 5 years later in 2011 for $1,625,000 

When the market does drop, it may take you 20 years to get back to your original purchase price. 

I'm sorry I'm down on real estate as an asset class, I work in this field but the numbers don't lie. And your wanting to buy real estate doesn't change that. 

It's the same for overvalued stocks, go over and ask in the stock forum what people think of an overbought stock and they'll tell you the same thing. Just because you want to buy it and you don't like what we say doesn't mean it's wrong. 

People who know stocks look at P/E ratios and other metrics to analyse that stock and report what they see. 

Here's the deal... EVEN IF THE PRICE OF REAL ESTATE KEEPS GOING UP it doesn't change the metrics. That's what I'm looking at. 

No matter how you see it, it'll be a long time before I tell someone to buy a house in a market where the rent/price ratio is so skewed, Canadians have an all time high debt level, interest rates have nowhere to go but up, boomers are retiring with virtually no savings except their houses, most Canadians live paycheck to paycheck, salaries are flat, housing affordability is at an all time low, our #1 trading partner is in a depression/recession and so on, and 70% of people already have houses.


----------



## financialnoob (Feb 26, 2011)

If you think there's a bias towards renting in the RE forum, that's nothing compared to the bias about having to BUY BUY BUY that is out there the rest of the time. I have people who are being strangled by their mortgages telling me I should buy several times a month. 

I like RE, and I plan on buying a place at some point, but I'm not going to just dive in because lots of people say it's fool-proof. I would feel the same reservations about any investment where people were going to drop $30-$50K down without fully understanding it, especially if they're not planning on staying in that investment long-term. You don't see people doing this with the market, but it happens all the time with RE.

As FP and MG already touched on, I have no issue with someone who has enough money to afford the place. So long as they've thought through all the issues associated with ownership, and aren't relying on a significant increase in value over 5 years to cost-justify the purchase, I have no problem. But you rarely see that in here.


----------



## sags (May 15, 2010)

From a strictly investment viewpoint.....in simple terms

If you buy a home, and the value of the home appreciates enough, you may win.

If you buy a home, and the price of the home remains flat.......you lose.

If you buy a home, and the price of the home declines.......you really lose.

As people found out in the US, when your home value falls well below the amount you owe on the mortgage or have invested in the house...........that homey feeling dissipates in a hurry.


----------



## andrewf (Mar 1, 2010)

Sampson said:


> The issue I have with those on the 'rent is better because of the math of today' argument is simply this.
> 
> If you want to save the most money, live at home if you can.


I probably would, if it were practical, and pocket the $10k I spend in rent per year. I get along well with my parents. They have plenty of room and would probably like the company. Unfortunately, they are just too far from work. Even if the commuting didn't drive me insane, the cost of driving 200 km per day would eat up a substantial portion of the rent I'd be saving. Perhaps all of it, since $900 rent / (200 km * 235 work days / 12 months) = 22.3 cents / km. Gas alone would be 10 cents per km, plus the rapid depreciation on a car when driven 50,000 km per year. That puts zero value on your time, too. Therefore, I'm happy to rent and not go crazy.


----------



## Sampson (Apr 3, 2009)

You must love your parents lots 

I know my wife and I are happy enough to pay and not be there  

We are supposed to be a generation of stay at home kids anyway right? That's what all the media portray.

p.s. (love you mom and dad)


----------



## Four Pillars (Apr 5, 2009)

sags said:


> If you buy a home, and the price of the home declines.......you really lose.
> 
> As people found out in the US, when your home value falls well below the amount you owe on the mortgage or have invested in the house...........that homey feeling dissipates in a hurry.


I talked to a friend last weekend who owns a condo in Michigan - somewhere not too far from Windsor. He paid $160,000 for it a few years ago and now it's worth $60,000! He said with all the foreclosures etc going on, he's not really even sure if he could get $60k.

Losing $100k of equity on your first place - That would really suck.


----------



## andrewf (Mar 1, 2010)

Sampson said:


> You must love your parents lots
> 
> I know my wife and I are happy enough to pay and not be there
> 
> ...


I don't mind my parents. I never had teenage angst and I was the last of several children, so by that point they had lost the will or desire to impose arbitrary rules on my behaviour. I don't have the general sense of dread and loathing most of my friends seem to feel toward their family/parents (something I always found incredibly strange and sad).

All that said, of course I prefer to live on my own. If I could save a substantial portion of my income by living with my parents, I would rather do that than have a random roommate. For one thing, they live in a much nicer place than I do!

For a married couple, I think it's different. It would be much harder to live with in-laws than your own parents.

I also think that it's probably a bad thing that many people these days live with their parents until their thirties. I lived away from home since I went to university. Learning how to be a semi-responsible adult is a great side-effect of having to move out at some point. As a parent, I would probably insist that my kids live in residence for first year, even if they went to a local university.


----------



## joncnca (Jul 12, 2009)

lol, this was more of a response than i was expecting to get, though i'm quite proud of myself that i managed to get a bunch of you heavy hitters in this forum to chime in with your thoughts as they are much appreciated =)

i wasn't exactly referring to myself with my original post, though i was in a way too. i had sold a lakefront condo in toronto last year, and bought a townhouse in mississauga in advance of getting married this year. i would say that this decision was one of those "appropriate for life, lifestyle, and future goals" varieties, irrespective of the market, and i chose something that i could afford comfortably and that i plan to stay in forever (if possible). so i hope i'm just as prudent as the next poster here.

so i'm not having this debate over rent/own for my own residence, and i fully agree with all of you who believe that there are SO many considerations as to whether a given person should rent/buy.

but in reading the forum, i noticed lots of advice to rent instead of buy, particularly when it comes down to the numbers, which i actually think is much more important for investments purposes (as opposed to primary residence, lifestyle/life-stage considerations). but yes, i guess the case can be made for property virgins, as they save as much for DP as possible.

i don't want to rehash the rent/buy debate in general (i.e. one's first home, primary residence, etc), cause obvious there's a lot that can be said with respect to economic forecast, individual life factors, etc etc. let's say we're just talking about investment property.

i guess the short answer is that, at this point in time, renting benefits the renter (more than the landlord)? but is this likely to be true in the future, or is it so unpredictable that generally no one should even try to get into the the investment RE realm right now (based on various metrics...uh...like cap rate???)

am i to understand that right now, it may be because all the RE seems overvalued, and rent has not kept up, and therefore landlords are selling their properties to cash out on capital appreciation. well...is this too short sighted?

in particular, i remember reading a good number of posts (i think) by Berubeland and others extolling the higher income potential from RE as compared with REITs and other market investments. maybe i misunderstood something, or maybe i'm up way past my bedtime.

i might have though that renting should ultimately benefit the landlord (i.e. RE owner), otherwise..why would anyone bother buying/owning investment RE? oh, of course the middlemen (government? etc) take their piece of the pie too.

so back to my original question, i do believe that renting can benefit the renter inasmuch as he/she can save up (potentially) for a bigger DP when they do buy (primary residence, or investment property). but does renting not benefit an owner more, in which case, wouldn't everyone eventually hope to own (especially for investment purposes?)

when it comes to stocks, i've heard that the right time to buy is when you have the money. to do otherwise, would be to speculate, and speculation seems to be unpopular among us 'educated' folks  should this not translate to RE as well (ya ya, i know cycles in RE can be loooong, which complicates this)? 

if it is true that ultimately renting benefits the owner, people would ultimately want to be in a position to own. following the above logic, shouldn't they try to buy when they are able to do so (i.e. have downpayment, can afford to do so)? maybe i'm getting my signals mixed here, or i'm oversimplifying?

=)


----------



## financialnoob (Feb 26, 2011)

joncnnca: I'm glad you thought through your purchase and you're happy with it. And I do think we tend to overlook the additional lifestyle value, which extends beyond just dollars.

I'm confused since you're mixing primary residence purchases and investment property purchases. On investment property, don't forget you have to put 25% down now, and you'd still need to rent since you aren't living there. 

But the short answer would be that if you can charge more in rent than your mortgage and expenses, and you don't need the money in the short-term, that's good. The problem is that it's hard to find a good deal like that in the market today. Rental prices have been depressed lately, while home buying prices have gone up significantly. So you're paying more for the property, yet you're able to charge less.

Several recent posters have argued that they can afford to lose a bit of money since they're gaining equity, but that equity is subject to market conditions which point to a drop at some point. If the person isn't committed long-term, will the equity increase be enough to offset the investment once you factor in all fees related to selling the property? Usually based on the scenarios we've seen, no.

Again, I have no problem with people buying property for personal or investment use. But I generally object to anyone putting tens of thousands of dollars into anything they don't really understand, whether it's houses, stocks, bonds, GICs, a friend's business, a house, a farm, a golf course, whatever.


----------



## andrewf (Mar 1, 2010)

Jon, you seem to be confused about commercial transactions. You seem to be suggesting that they are zero sum, and that if one party does well, the other party must do poorly out of the deal. Most commercial transactions are win-win. It is entirely possible for both the renter and the landlord to be better off.


----------



## joncnca (Jul 12, 2009)

ya i guess i'm jumping back and forth between primary residence and investment, i should probably start a more focused thread when i can get to it =)

i didn't mean to imply a zero sum scenario, i meant implicitly that i felt like owners would tend to benefit _more _from the arrangement than tenants (financially, and in the long run) and therefore would not all people want to be owners (assuming long term investment, no moving around, other factors kept equal-ish)


----------



## andrewf (Mar 1, 2010)

I'm not all that sure the the landlord is doing better. There are many landlords shovelling hundreds of dollars in net cash flow into their properties, their only hope of breaking even being a brisk rise in the value of the property.


----------



## hboy43 (May 10, 2009)

Hi:

Well in my case, it benefitted both the renter and the landlord at the likely expense of the new owner.

I bought and lived in a house in Ottawa about 20 years. Then I moved and rented until I sold it summer of 2010.

The way I see it, the renters got to live in more house than they could afford to buy, so they benefitted. I harvested the approximate doubling (70% who knows?) of the house value in those 5 years, so I benefitted. We will see how the new owner makes out, but my hunch is he gets the short end of the stick in the long run.

Plus with the repatriated capital, I get to buy stocks LOW.

hboy43


----------



## Berubeland (Sep 6, 2009)

Who benefits more depends entirely on the purchase price and the timing of it. 

The problem is that with the market wide increases in property prices landlords are getting away from the fundamental reason to buy property, which is cash flow or adding value in a number of different ways such as renovating, increasing rents, buying in a gentrifying neighborhood and so on. 

They will get burned and burned badly because if the market turns around they will not be able to hold onto the property or even want to. I have an owner for example that owns 5 condos that don't cash flow, he pays about $100 per month each for those properties. Every month or so he looks at the MLS and sees that the market price for his condo is about $250K and he paid $200K or so. So he goes on... 

Now what happens when the value of the condo goes down to 180K? He's going to feel very differently right? 

His gains are all on paper and he can't even spend that money unless he refinances, all repairs and the negative cash flow come out of his pocket. If he refinances then the cash flow problem becomes worse. 

And that is why it is so essential to have cash flow. In a very real sense capital appreciation doesn't matter one single second because you can't spend the money on operations. 

This single reason is why landlords hurt financially. Except there's a whole contingent of real estate pumpers telling people that they can't lose, and prices have steadily gone up for the last 20 years so they think it's true. 

I'm here to say that it is true that you can lose money in RE, you can also make a lot of money in real estate. 

I'm also here to report the exodus of experienced savvy landlords that are selling to new less savvy investors who are paying too much for the properties to ever make cash flow. In fact every single building I have worked in has been sold in the last few years. 

Who needs to concern themselves with cash flow when the capital appreciation always goes up? Cash flow is small, it's boring, it requires proper management and it's about margins...Capital appreciation is sexy with big numbers. You look at the mls and you "made" $50,000 in two years with a $40,000 down payment. In the context of this market cash flow is irrelevant as long as everything goes up forever... 

Investors in real estate have to know the fundamentals and stick to them and walk away from those properties that would eat them alive.


----------



## the-royal-mail (Dec 11, 2009)

Excellent post berube, but how many posts have we seen in CMF of wanna-be LLs who think that buying an urban condo and sticking down $50K downpayments is the instant ticket to riches. It's much more involved than that. Some people can win, some can lose, others have higher stakes but the people I'm talking about don't even have family emergency funds, much less sufficient commercial cashflow to handle the whole property game.

Because of rent controls, and because of extremely high residential property prices, the time has never been better to rent quality units. If you manage your money property, you can bank the money saved that would otherwise be going to pay CMHC, RE agents, taxes and numerous other middlemen. Save more cash and make a bigger downpayment later, on a better house. Even if property values increase, so what? Your ability to pay isn't increased on a more expensive house. You still have a limit as to what you can afford to pay. So whether you buy $150K worth of equity on a paid-off house, or $150K worth of equity on a $300K house, you're still only able to pay what you can as defined by your income.

So take your time, save more money, make a bigger downpayment. There will ALWAYS be property to buy.


----------



## jamesbe (May 8, 2010)

^ As usual perfect reflection of the current landlord market.

I bought 2 years ago and when I was looking I ensured I would have cash flow. It wasn't much but I "made" $50 a month for 2 years.

My tenants moved out and I re-rented the place, now I cash flow $250 a month! I was looking for another property but I cannot find one in my area that will cash flow, not even close. I had agents and sellers try to convince me "You only have to put in $200-$300 a month you gain in appreciation." Then I laugh at them, sorry it's an investment if I don't see immediate return I don't want it.

Some of the properties would cash flow if they rented them properly but they were too lazy and rented for too little, based on the market they could have asked more. Heck I'm asking $200 more than all similar properties in my building and I rented before them! LOL.


----------



## joncnca (Jul 12, 2009)

i totally agree with Berubeland's perspective.

now my question is, HOW can one be a 'winner' in this apparent sea of 'losers'. 

are all experienced LL selling to inexperienced investors, and that anyone buying into the market right now is going to lose?

it's like back in the day in school with standardized tests when some students were scared to death by statistics that 80% of students did not pass a test. i don't want to sound egotistical, but i never concerned myself with such meaningless statistics because i was going to be in that 20% that passed. and so i would study, or ask for help, or figure out HOW to be in that 20% that passed.

i don't dispute that it may be a bad time to buy in toronto right now in general, but HOW can one be in that group of 'winners'. if you're saying that basically EVERYONE buying now will lose, well how can one obtain the tools necessary to identify a winning investment if the the investment opportunities get better....

and to some extent, i don't believe that either, there must be SOME people making money right now on RE, so how can I do that too?

=)


----------



## Quotealex (Aug 1, 2010)

joncnca said:


> now my question is, HOW can one be a 'winner' in this apparent sea of 'losers'.


 Chose a location and study it until you become "the expert" (you should know more about the location than real estate agents and appraisers). When you become knowledgeable in your area, you will see opportunities in properties where others dont and avoid properties with no potential no matter how good it looks on the surface....


----------



## Berubeland (Sep 6, 2009)

I totally agree with Quotealex. 

I would say that the first skill you need to develop as an investor is the ability to walk away from 50 - 100 places or more if required. You are literally looking for a needle in a haystack. 

What you are looking for is buying opportunities and be willing and able to take on other people's problems. 

Here's one I saw that seemed worth a look. At 77K per unit in the Junction with 2 commercial spaces it seems like there is an awful lot of room for rent increases and improvements. Hard to tell without looking at it. I also know this property has been on the market for a good long time. There is something wrong with it. So my job would be to go there and figure out how much it would cost to take on someone else's problem. 

http://www.icx.ca/propertyDetails.aspx?propertyId=11020767&PidKey=1397414923

There are a lot of opportunities for the patient investor in real estate. 

Last year one of my clients bought a house at Bayview and Sheppard for $500,000 privately from an old man going into a retirement home. The man had seen the work that he had done to improve other properties in the neighborhood that he owned and wanted him to have the house. Plus he liked him. Needless to say on the open market that house would have fetched over a million. 

The trick is to only buy when you can make a profit. I like Warren Buffet's saying "I like to shoot fish in a barrel, after the water has run out" 

99% of the investors who have been in the business a while don't pay extra for potential either. Let's say a current owner has a place on the market and tells you that you could change the zoning to something else and you will make a mint. If the price for property A + potential is $500,000 and the price for property B without the potential is $300,000 the savvy investor will pay $300,000 for it because they know that these kinds of projects are fraught with risk. Plus they don't want to pay the previous owner (who did nothing) for an endeavor that may take years, fail, not be possible and give them the money for what are the fruits of their intellectual property and hard work. 

What they would say to the seller is "Well when you finish the work and the property is worth more please call me and I'll consider it" 

This is how they make money. Look at Jamesby's reno above. He made money on his renovations and added value to his property. First of all if he had hired trades to do this work his profit upon rental or resale would have been zilch. So he did it himself. 

For a while I was working with a few investors to find places and what I found was that they liked the idea of a property that would make them money but not the actuality of the property that made them money. 

In a property that will make you money, your feet stick to the floor, it stinks, the decor is nonexistent, the tenants are bad, there are vacancy problems, you will have trouble even getting financing. You have to tackle the problems and fix them. 

The way I look at it the building is just the shell for a housing services business. The cheaper the cost of acquisition is the better off you are. You make money when you buy the real estate.


----------



## joncnca (Jul 12, 2009)

hmm..interesting, i understand.

in choosing a location in which to be the expert, what kinds of things should one look out for? CMHC has statistics on occupancy rates....i guess an area with high occupancy rates would be good, as this means many people want to live there for some reason...work, industrial, school...etc? how else to narrow the field geographically? or is geography relatively unimportant, as there should be opportunities in any area?

a commercial property like the one listed, it's listed at $2M. please forgive my inexperience, but how is one to purchase the property. even if the down payment is $25% with the rest mortgaged, that's $500,000 that needs to be raised. how can this be done for a typical working individual? aside from taking on partners, simply saving up seems to be almost unrealistic. does this mean it's unrealistic for someone who doesn't already have hundreds of thousands in cash lying around? there must be ways around this as well, right?

not paying for potential is a good point. i think the key point that is being conveyed is to look for properties that seem to have good qualities, but suffer from some critical flaw, which causes it to be undervalued. identify the flaw and how to remedy it, buy the property at a discount because of the flaw, then fix the flaw. manage well and (hopefully) prosper?


----------



## Quotealex (Aug 1, 2010)

joncnca said:


> hmm..interesting, i understand.
> 
> in choosing a location in which to be the expert, what kinds of things should one look out for? CMHC has statistics on occupancy rates....


I guess CMCH is a start but I prefer to drive by the area as often often as possible, talk questions to local business people, real estate agents, police officers and other people that work in that neighbourhood, go to open houses, read the local newspaper. Basically, I want to know why people live in that neighbourhood or why they dont want to live there and can't wait to move out, why sellers are selling and buyers buying, which streets to avoid, which streets are more promissing. These sorts of info, I dont get them by reading national publications like the CMCH but by doing lots of legs work.


----------



## joncnca (Jul 12, 2009)

hmm..ok, thanks for the advice. 

local newspapers, i guess this would be a good start? i don't imagine i could drive around the entire city again and again, i'd have to narrow down the areas a bit more before driving around, asking questions to locals, etc.


----------



## Berubeland (Sep 6, 2009)

I'd suggest your own neighborhood, first of all you're already almost an expert, you know all the good and bad things about it. 

Look at MLS.ca for the listings, go attend open houses, walk around the neighborhood.


----------



## Quotealex (Aug 1, 2010)

joncnca said:


> hmm..ok, thanks for the advice.
> 
> local newspapers, i guess this would be a good start? i don't imagine i could drive around the entire city again and again, i'd have to narrow down the areas a bit more before driving around, asking questions to locals, etc.


The two locations I focus on are about 30 streets by 5 streets for one and about 20 streets by 20 streets for the other. As you can see, it is hardly a whole city and it is very manageable. In your case, your area may be bigger or smaller depending on the type of properties you want to acquire.

If you keep your eye open and study your market, you are bound to find deals. But you will also have to be ready when deals present itself.


----------



## joncnca (Jul 12, 2009)

ok, i'll definitely look around my own neighbourhood, or near my own neighbourhood (as my current neighbourhood is somewhat new, and there are some new properties still being built).

Quotealex, those two locations that you focus on, what caught your attention about these locations for you to zero in on? is it because they're near a landmark, or people are known to like living/shopping there, or something else? what gave you the idea to focus on these locations, instead of any other locations in your city?


----------



## Quotealex (Aug 1, 2010)

joncnca said:


> Quotealex, those two locations that you focus on, what caught your attention about these locations for you to zero in on? is it because they're near a landmark, or people are known to like living/shopping there, or something else? what gave you the idea to focus on these locations, instead of any other locations in your city?


The main reasons I chose these two areas are that they have a high concentration of two to six units residential buildings, they are located within walking distance to a subway station and less than a 20-minute car or bus ride to Downtown and universities and the area is being gentrificated.

There were other neighbourhoods that fit the bill as well but their properties prices were too rich for my blood and their streets too unsafe for me.


----------

