# Rent or Buy?



## Greenman100 (Jul 23, 2011)

I need some advice on my housing situation. My wife and I recently graduated from college as teachers and have $46000 in student loans. We are moving to northern BC this fall to start our teaching careers. Our combined income for a year is around $60000 before taxes. We are trying to decide whether we should rent or buy while living there. We have about $3000 in savings. Finding rental property is extremely difficult. At the same time I fear we don't have enough for a downpayment on a house. What would you do if you were in our situation?


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## financialnoob (Feb 26, 2011)

I think you have to rent for a while, and reduce your expenses as much as possible, as you'll need to pay down the student loans while also saving up for a down-payment.


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## KaeJS (Sep 28, 2010)

With $46,000 in Student Loans....

You must rent.

You are $43,000 in debt, and your jobs will be fresh.
With all that being said, I don't even know if you would qualify for a mortgage.


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## Dmoney (Apr 28, 2011)

I would lean towards renting if only because in a new job in a new location, who knows what will come up. You may love it and want to stay forever, or you may find a better opportunity somewhere else. Either way, a year of renting will allow you to feel out the job/city and see if it's what you want longer term. 

Also, obviously less stress in renting than in owning, so it's a good opportunity to pay off as much debt as possible and get as financially sound as you can before you get into ownership.


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## Cal (Jun 17, 2009)

Rent. Save. Have a little patience about jumping into the RE market.


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

Wow I must say I am pleased at the responses to this thread. Needless to say, I agree with all and might go one step further and suggest a LOT of patience prior to jumping into RE. Take your time, don't fall for the rhetoric about prices going up so fast and RE always being a safe bet or the usual rhetoric against renting. In your own situations, renting is perfectly normal and acceptable. You need to spend the next few years finding yourselves in the work world and seeing where you end up.


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## cannon_fodder (Apr 3, 2009)

Canadian Business Magazine had a really eye opening article on whether it is better to rent or buy. Their conclusion, from a purely financial point of view, is renting is better for your financial health. 

If you don't want to buy the magazine, check your local library for their latest copy. Or perhaps they will have it online soon.


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## kcowan (Jul 1, 2010)

Northern BC? Have you ever lived there before? You might need to experience for a year before making any long term commitments. If you are talking Prince Rupert, then it gets almost no sun all year. OTOH Prince George is more like Alberta.


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## MoneyGal (Apr 24, 2009)

cannon_fodder said:


> Canadian Business Magazine had a really eye opening article on whether it is better to rent or buy. Their conclusion, from a purely financial point of view, is renting is better for your financial health.
> 
> If you don't want to buy the magazine, check your local library for their latest copy. Or perhaps they will have it online soon.


I assume it is this article - I posted it here a little while ago: 

http://www.canadianbusiness.com/article/33638--rental-complex

Very worthwhile read.


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

Brilliant MG, absolutely brilliant. And thanks cannon-fodder for bringing it up.

specuvestors, I love it.

Indeed, the gap between rental and ownership is larger than it's ever been. I don't see the snob appeal to home ownership. I think for a lot of people, renting makes the most sense. Of course, these people are regularly marganized and chastised by those who blindly follow the anti-rental rhetoric.

Good article and should be mandatory reading prior to every new ID's first post in the RE section of this forum.


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## andrewf (Mar 1, 2010)

How would you even buy a house when you have a grand total of $3k to your name and a negative net worth?


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## andrewf (Mar 1, 2010)

That article is tickling my confirmation bias bone. I certainly feel social pressure to buy, especially since much of my family lives in an area with depressed real estate prices where buying is an obvious move. In the GTA though, I just can't make myself undertake a financial decision that leads me to pay twice as much for equivalent housing. Unfortunately, that leads to a cost in social status. Maybe I should just frame a 24x36 poster of my balance sheet by my front door.


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## Charlie (May 20, 2011)

I've always felt that buying with a timeframe less than 5-8 years is speculating.

Too many uncertainties in OP's situation for me to justify a buy....new area...new jobs...house size need in 5-10 yrs. You may move around a bit yet before settling in. And that's before getting into the whole financial side of it!

Congrats on the new jobs, BTW. Tough gig to get started in!


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## brad (May 22, 2009)

Charlie said:


> I've always felt that buying with a timeframe less than 5-8 years is speculating.


Especially when you consider that with a long-term mortgage you will have very little equity after 5-8 years since much more of your payment in the first few years goes toward interest than principal. So if your house doesn't appreciate in value during that time, you may actually lose money compared with renting, especially when you consider all the additional expenses of buying and maintaining a home. You'd be throwing money out the window just the same -- instead of throwing it to a landlord you'd be throwing it to the bank, with virtually nothing to show for it at the end.


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## jamesbe (May 8, 2010)

It's pretty easy. If buying a unit and then renting it out won't allow you to at least break even then it's cheaper to rent it .

I know someone that recently bought a $300k investment property. They rent it out for $1000 a month.

I am confused at how this is an investment, to me it sounds like a loss....


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## Four Pillars (Apr 5, 2009)

jamesbe said:


> It's pretty easy. If buying a unit and then renting it out won't allow you to at least break even then it's cheaper to rent it .
> 
> I know someone that recently bought a $300k investment property. They rent it out for $1000 a month.
> 
> I am confused at how this is an investment, to me it sounds like a loss....


That's the "tenants are paying my mortgage, so how can I lose" school of thought.

http://www.moneysmartsblog.com/tenants-paying-my-mortgage/


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## Elbyron (Apr 3, 2009)

I'm having a hard time accepting the math in that article. First of all, a mortgage of 450K doesn't cost $3000 a month unless you're trying to pay it down in ~16 - 17 years, or if you use an interest rate of around 7%. In the former case, that $3000/month would vanish after the 16 - 17 years is up whereas the renter would keep paying rent. Sure the renter can keep his down-payment money of 400K and instead invest it in something safe... let's say his return is 3.25% after inflation, then after 50 years of renting that 400K would have grown into 2 million. But the owner can also invest 3K/month after the 17th year, which grows into about 2.1 million after 33 years using that same rate. But the owner also now has a property that has likely appreciated to well over a million, putting him way ahead of the renter. Of course, I didn't account for property taxes and maintenance costs that the owner has to pay that are typically included in the rent. It's hard to put an exact number on those costs but based on my house, I think $400/month is more accurate than $2000+ like the article suggests. I suppose in some cities the property tax could be really high, but then the rent should be equivalently higher too - otherwise the landlord is taking a big loss. Which brings me to my next question: why would anyone want to be a landlord renting at $3500/month when your costs are over $5000/month?
The article seems to imply that landlords are all running cashflow negative operations, and are taking huge losses on their investments. And yet there is huge demand for new rental properties in the major cities. So why would everyone want to be an owner if it wasn't profitable?

I am a landlord in Edmonton, and my mortgage-to-rent ratio is 0.45, not 2 or 3 like the article claims for the bigger cities. So maybe it's just in Vancouver, Toronto, Halifax, and Montreal that it makes sense to rent (but then why be a landlord there?). After taking into account the principal portion of the mortgage being paid, and the positive cash flow coming into my bank account (with deductions for maintenance), I've figured my down-payment amount of ~30K is earning me $4200/year, which is a 14% return. So somebody please explain to me how my renter is going to be financially better off than I am as a result of this arrangement?


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## andrewf (Mar 1, 2010)

Elbyron said:


> So why would everyone want to be an owner if it wasn't profitable?


The price of housing always goes up, usually by 7 - 10% a year. You can't lose.


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## Dmoney (Apr 28, 2011)

I find with these articles, the math is always skewed to prove a point. In both directions, without fail. Two posters up we have the renter earning 3.25% on his investments (commonly 6% is referenced for a well-balanced portfolio). The advocates of renting are saying mortgages are substantially more expensive than they are, and are adding way too much in property taxes, maintenance and so on.

I'd like to see a truly unbiased calculation of rent vs. own in various markets. Obviously there are landlords making money, or there wouldn't be landlords. How much of this is banking on price appreciation though?

I'm renting a place right now for 1600/month in Toronto. Would cost about 300K to 325K to buy it. Maintenance fees of 300-400/month. A 25-year mortgage at 2.35% (PC Financial variable rate right now) would cost $1,321 a month. At 5% (10 year fixed rate roughly) would be $1,744. Long story short, my landlord is definitely cash flow negative, but A) I am paying a substantial chunk of his mortgage, B) If the price goes up, he makes a killing for very little financial outlay.

It is still way cheaper for me to rent (parking is included, I can rent it out for 150/month) and definitely more convenient.

This math is just one back of the napkin calculation though, and it's very possible that properties elsewhere are cash flow positive.


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## Eclectic12 (Oct 20, 2010)

the-royal-mail said:


> Brilliant MG, absolutely brilliant. And thanks cannon-fodder for bringing it up.
> 
> specuvestors, I love it.
> 
> ...


For some people - yes it does make more sense to rent. But then again, there's also the personality factor. My co-worker definitely has a sweet deal on rental - the only problem is he's pouring most, if not all of his free cash into bar bills. He has time to reverse this, if he can break the habit.

At the end of the day, this is the problem with general analysis, whether it's RRSPs, TFSAs, renting versus buying etc. It can be easy to calculate one option is better than the other but what the individual does can change what works.



Cheers


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## Eclectic12 (Oct 20, 2010)

Elbyron said:


> I'm having a hard time accepting the math in that article.
> 
> [ ... ]
> 
> ...


That's the problem with general articles. If they talk about what one landlord achieved, there is no guarantee anyone can reproduce the results. If they talk in averages, then there is a large amount of room for anyone to find something that is different from the average.

Same thing with the maintenance costs - though I suspect other factors include the landlord's connections to good labour and the demand in the area. (I once wasted a year trying to hire someone to do a small dry-wall job but since the housing market was so busy - everyone who bid was mysteriously on indefinite vacation when asked when they would start.)


As for renting at loss - it might be a short term thing until the market improves or as some landlords pointed out to me, "sure I'm losing on this one but I have twelve others that are all paid up - this is expanding my portfolio in an area I want to be in". So at times, it's not just the one property that factors in to the decision.



Cheers


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## Eclectic12 (Oct 20, 2010)

Dmoney said:


> I find with these articles, the math is always skewed to prove a point.
> 
> [ ... ]
> 
> ...


I'd like to see such an article / calculation as well but there are lots of variables. 

Take the maintenance - those high numbers might be correct for a new landlord starting from scratch. Most landlords I've talked to who have been in the busines a whlie have developed their networks and aren't paying what a new landlord would. Then too, if this is their main business and not a side-line, then odds are they are repairing a lot more themselves.


As for the landlord being cash-flow negative - say he or she is. If this is the latest property and the other ten or so are cash flow positive, the landlord may not care or be at much risk. I had a co-worker at one point who had calculated at what point of paying off his latest property, he was comfortable buy another and at what prices. At the time, he figured he was five properties short of retiring from his day job.


Cheers


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## Plugging Along (Jan 3, 2011)

In the case of the OP, I do think renting is their best option. They have alot of debt, are just starting out, no down payment, and there is too much uncertainty and risk for them. 


However, despite what people may say here, I am still a believer of RE as a long term investment. I actually do count on appreciation, as over 20 years, I don't know of any real estate that is worth less now than it was 20 years ago. I am not sure why one wouldn't account for appreciation. I believe the RE performs at the same rate of inflation over the long term, so I don't have an illusion of granduer.

I think where the money that is being made is a little on appreciation, but more on the fact that you're using leverage. If you're putting down the 20%, but the amount is appreciating by the total sale price, let's say 2% (I think that's conserative enough), then you're still making 10% on the amount actually invested. For sake of simplicity, I will assume that the rents are at least covering the interest payments (mostly like not all the principle), fees, taxes, maintenance, etc. I have found that covering the interest has never been a problem. I have always made a profit. 

One could argue that you could do much better with leveraged investments, and I do agree. However, there is also relatively much more risk. I have never seen any of my real estate hit zero dollars. I have unfortunately, seen many of the stocks of have bought in the past hit zero. Even if RE decreases, if you are in it for the long run, then it will always correct itselfe. I know some of my stocks will never bounce back, as they are long gone. Don't get me wrong, I still invest in equities, but right now I wouldn't be comfortable leveraging them.

My parents invested in real estate because they didn't understand the other means of investing. They were told by many people to get our of real estate, with the same arguments that are here today (that was 30 years ago). Their biggest regret was that they listened to people talking about the bubble, and didn't buy more. For them. they never intended to sell, it was all about buying and holding, and passing it on to the next generation. My parents how others pay off their mortgages, and have been living off of the rental income since their early 50's (that's how they were able to retire early)

I'm not quite of the same mind set, but I see no problem in real estate if you are ok with illiquidity and will not need to sell, are in it for the long term (possibly very long term), have the means to pay for the months where it can be empty, and have all the expenses paid (perferably a positive flow), then why is RE so bad?


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## Eclectic12 (Oct 20, 2010)

Plugging Along said:


> In the case of the OP, I do think renting is their best option. They have alot of debt, are just starting out, no down payment, and there is too much uncertainty and risk for them.
> 
> [ ... ]
> 
> ...


I also agree that renting is their best option. If they decide to stay in the area, they will have had a chance to figure out where they want to live. If the job doesn't work out or if opportunities elsewhere open up when there is more experience on the resume - the ability to windup a rental quickly will be a big help.


As for leveraged investments - a lot depends on the timing. With three exceptions, I'm happy with what I bought using my HELOC in 2009. Most of what I have left would have to drop in the range of 50% before selling no longer pays off the loan.

While I'm glad your real estate hasn't hit zero, my parent were buned on their sale. The sale of the house went through far enough that it was seized as an asset of the bankrupt buyer. At the end of the day, they ended up with pennies on the dollar, thanks to the legal system. I'm not saying this happens to everyone but that there are losses out there.



Cheers


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## Potato (Apr 3, 2009)

Dmoney said:


> Obviously there are landlords making money, or there wouldn't be landlords. How much of this is banking on price appreciation though?


Well lots of landlords are/were in it for the long haul, and the disparity in price-to-rent is fairly recent, so they may have had their properties for a long time and are using a yield-on-cost approach to thinking. They may be better off selling for today's price and taking the money, but they may just not think that way. 

But I don't have the option of buying a house at 1999 prices, so it is possible for it to be better for me to rent, and yet also possible for my landlord to want to rent to me.


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## Dmoney (Apr 28, 2011)

Potato said:


> Well lots of landlords are/were in it for the long haul, and the disparity in price-to-rent is fairly recent, so they may have had their properties for a long time and are using a yield-on-cost approach to thinking. They may be better off selling for today's price and taking the money, but they may just not think that way.
> 
> But I don't have the option of buying a house at 1999 prices, so it is possible for it to be better for me to rent, and yet also possible for my landlord to want to rent to me.


Agreed, but if you look at the Toronto rental market, there are a ton of brand new (1, 2, 3 years old) condos, recently purchased for upwards of 300K, renting for 1400-1800 a month. Factoring in opportunity cost of any sizable down payment, none of these are cash flow positive. However, appreciation is a definitly possibility and may be making a lot of owners very rich.

Like many others have mentioned, there is more to buying and renting than just simple math can determine. My brother bought a house that he rents to four students and lives in himself. Basically, they are paying for the house, and he is living for free. It might be barely cash flow positive, but if you factor in the fact that he isn't paying rent, he's making money. It's different in each case, and there are too many factors to make blanket comparisons.


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

There are a lot of amazing responses in this thread.

Since this question seems to keep coming up on CMF, could the mods consider pinning this thread?


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## cannon_fodder (Apr 3, 2009)

MoneyGal said:


> I assume it is this article - I posted it here a little while ago:
> 
> http://www.canadianbusiness.com/article/33638--rental-complex
> 
> Very worthwhile read.


I think my wife got the subscription for $1/month. Now I'm wondering if that is too much money considering this article was posted on July 14th and I think I only received the magazine last week!

Is there anything the internet CAN'T do???


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## cannon_fodder (Apr 3, 2009)

Elbyron said:


> I'm having a hard time accepting the math in that article. First of all, a mortgage of 450K doesn't cost $3000 a month unless you're trying to pay it down in ~16 - 17 years, or if you use an interest rate of around 7%. In the former case, that $3000/month would vanish after the 16 - 17 years is up whereas the renter would keep paying rent. Sure the renter can keep his down-payment money of 400K and instead invest it in something safe... let's say his return is 3.25% after inflation, then after 50 years of renting that 400K would have grown into 2 million. But the owner can also invest 3K/month after the 17th year, which grows into about 2.1 million after 33 years using that same rate. But the owner also now has a property that has likely appreciated to well over a million, putting him way ahead of the renter. Of course, I didn't account for property taxes and maintenance costs that the owner has to pay that are typically included in the rent. It's hard to put an exact number on those costs but based on my house, I think $400/month is more accurate than $2000+ like the article suggests. I suppose in some cities the property tax could be really high, but then the rent should be equivalently higher too - otherwise the landlord is taking a big loss. Which brings me to my next question: why would anyone want to be a landlord renting at $3500/month when your costs are over $5000/month?
> The article seems to imply that landlords are all running cashflow negative operations, and are taking huge losses on their investments. And yet there is huge demand for new rental properties in the major cities. So why would everyone want to be an owner if it wasn't profitable?
> 
> I am a landlord in Edmonton, and my mortgage-to-rent ratio is 0.45, not 2 or 3 like the article claims for the bigger cities. So maybe it's just in Vancouver, Toronto, Halifax, and Montreal that it makes sense to rent (but then why be a landlord there?). After taking into account the principal portion of the mortgage being paid, and the positive cash flow coming into my bank account (with deductions for maintenance), I've figured my down-payment amount of ~30K is earning me $4200/year, which is a 14% return. So somebody please explain to me how my renter is going to be financially better off than I am as a result of this arrangement?


I happen to know Oakville very well. Here is how the person, who admittedly did "back of the napkin math" could have arrived at those numbers:

$450,000 mortgage at 10 year rate of 6.35% (Alterna Savings - I've seen higher and I've seen lower, namely ING Direct's 4.99% for 10 years) is $2,973 / month.

Property taxes would be at least $750/month for that house based on my extrapolation. 

Maintenance budgets stipulate somewhere between 1% - 3% of the home's value per year. Now I don't know if that assumes 'wear and tear' or other things like yard maintenance (my wife buys flowers every year for the garden), repainting, etc. So, if we take 2% then we are at about $1,400/month. 

Utilities, insurance and various amenities could easily approach $1k/month. Now, I would have thought that if you're renting a house, the renter would be responsible for 100% of the utilities (except maybe that Hot Water Tank rental we so love in Ontario!) but perhaps I'm wrong.

Myself, I would put the opportunity cost of the mortgage higher but I think his is a very real, non-inflation adjusted, figure.

The rental deal he saw was very good. I've just looked up a $3,299 /mth rental (assuming that it is "all in") and the equivalent house would cost about $675k not including transaction costs, legal fees, etc.

So, IMO, the numbers were skewed but certainly not unrealistically so.

Also, for another bash at home ownership as a lucrative investment, check out a (similarly skewed?) article in the Summer 2011 Moneysense magazine, page 9, "What You Really Made on Your Home". (Darn! Another subscription wasted - here it is online... http://www.moneysense.ca/2011/06/24/what-you-really-made-on-your-home/)


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## Charlie (May 20, 2011)

Skewed???? Ya think?

The article ignores the value of 'rent' for 10 years except as a footnote!

So....assuming an average of $1200/mo (I'm guessing this is very low), our buyer made $144,400 + $13,212 after tax profit for a $24,860 investment 10 yrs ago. I'd say that's pretty good. Better then he'd get from a nicely balanced portfolio of ETF's I'd guess.

Doesn't mean real estate is a good value at any price, at any time....but that 'analysis' was pretty poor.


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## Charlie (May 20, 2011)

I think that's why real estate investors look at cap rate (plus other factors) while article writers seem to muddy the analysis with financing, opportunity cost etc.

In Dmoney's example of the Toronto condo worth $325K rented at $1600/mo with maint of $400/mo and ptax at $200/mo??? the cap rate would be $12,000/$325,000 or 3.7%. 

As an investor, a 3.7% inflation protected return is not unreasonable if I'm OK with the prospects of the neighbourhood, condition of unit, effort to manage etc. Compared to passive bond investments, this could be more attractive for some investors. A different set of risks then the stock market. This investment may make sense, long term, on a strictly income basis with the principal value also inflation protected. I'm not necessarily betting on appreciation here beyond cpi.

THe canadian business example of an $850K house with $2K/mo costs (I think this is high -- but we'll go with it) and $3500/mo rent works out to $18/$850 or 2.1% cap rate. I'd be more scared of this investment. Return seems low, rent seems high, upside -- not so great. For the individual profiled, renting was absolutely the better option since he could get by with less house (only $2200/mo) and potentially needed more flexibility. (And I think the same is true for the thread starter here).

Some of the newer Vancouver condos are being bought at cap rates of 1.5% to 2.0% with what I think are high rents already. I really don't see the investment sense in these.


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## MoneyGal (Apr 24, 2009)

Charlie said:


> Skewed???? Ya think?
> 
> The article ignores the value of 'rent' for 10 years except as a footnote!


Apparently this article was comparing the return from house buying and...homelessness.


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## jamesbe (May 8, 2010)

^ nah the author probably lives in their parent's basement.


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## andrewf (Mar 1, 2010)

Charlie, real estate companies include all their costs of ownership in their cap rate. Your 3.7% cap rate is before insurance, maintenance, vacancy and property management. That drops your cap rate down to 1 or 2% if you're lucky, negative if you're not.


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## andrewf (Mar 1, 2010)

Eclectic12 said:


> For some people - yes it does make more sense to rent. But then again, there's also the personality factor. My co-worker definitely has a sweet deal on rental - the only problem is he's pouring most, if not all of his free cash into bar bills. He has time to reverse this, if he can break the habit.
> 
> At the end of the day, this is the problem with general analysis, whether it's RRSPs, TFSAs, renting versus buying etc. It can be easy to calculate one option is better than the other but what the individual does can change what works.
> 
> ...


FWIW, if I owned a house, I would probably spend more on it that my present accommodations.


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## Plugging Along (Jan 3, 2011)

I do it difficult performing these calculations based on the number of assumptions. 

I usually assume that I will buy and rent the same type of place, in the similar area. I know when people rent, they often are willing to forgo a nicer place in order to save money, however, they are doing that for a temporary time period. The purpose of them renting, is often to save money. If I am buying a house for me to live in, I am doing it long term. This equates to me wanting to be in a location that I would raise my kids in. You wouldn't do a comparison between leasing a Honda Civic, and buying a Ferrari, and say that leasing is always better because the Ferrari is so much more money.


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## andrewf (Mar 1, 2010)

^ But you might find it hard to resist the pull to buy a loaded car with all the options if you tell yourself you will own it for 10 years, rather than a car you got on a 2 or 3 year lease.


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## Young&Ambitious (Aug 11, 2010)

MoneyGal posted a great link in a thread I started over in the Frugality or Real Estate forum. It lets you put in your assumptions and on that basis tells you whether renting or buying makes more sense. I would recommend the original poster take a look at that.


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## Eclectic12 (Oct 20, 2010)

cannon_fodder said:


> [ ... ]
> 
> Utilities, insurance and various amenities could easily approach $1k/month. Now, I would have thought that if you're renting a house, the renter would be responsible for 100% of the utilities (except maybe that Hot Water Tank rental we so love in Ontario!) but perhaps I'm wrong.
> 
> ...


The utilities and amenities seem to depend on the market, how much time the renter is willing to search and what the landlord is willing to deal with. 

Some of the situations I've personally experienced when renting are:
a) landlord took care of the utilities. 
b) same but the landlord monitored for "excessive" usage which was billed.
c) utilities were in landlord's name but the bills were passed on to me.
d) utilities were in my name, including connection/disconnection fees.

I've also had to pay myself or share the costs of cable but others have cable, internet, wireless internet and phone as part of the rental.


Thanks for the article.


Cheers


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> FWIW, if I owned a house, I would probably spend more on it that my present accommodations.


And that's a common way homeowner "waste" money. They put in a new rec room or bar, thinking it will increase the value. Instead it ends up being a loss except for kitchen/bathroom type improvements.


Cheers


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## jamesbe (May 8, 2010)

Most aren't thinking it will increase value, they think it will increase enjoyment of the home / quality if life. Not everything is about money.


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## Charlie (May 20, 2011)

andrewf said:


> Charlie, real estate companies include all their costs of ownership in their cap rate. Your 3.7% cap rate is before insurance, maintenance, vacancy and property management. That drops your cap rate down to 1 or 2% if you're lucky, negative if you're not.


back o' the envelope math. For a condo, in decent shape, maintenance beyond strata fees should be minimal, and insurance would be included in strata fees. Property mgmt and vacancy and 'headache factor' need to be considered...but in the TO example I doubt they add to $5K per yr. Just pointing out, that for an investor, willing to manage the property, the TO example is not necessarily a bad deal. Real estate's a different kind of annuity. Not for all (or the faint of heart) but works well for many.

Saw a Vancouver condo today, however, yielding less that 1% -- also before vacancy and property management. Wow.


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

Charlie said:


> back o' the envelope math. For a condo, in decent shape, maintenance beyond strata fees should be minimal, and insurance would be included in strata fees.


Whoa - that's stretching it. My condo fees were $350 per month and subject to annual increases (once in the order of around 40%!) plus insurance was about $200 per year and taxes were another $1700. None of those added expenses exist here, where I live in the same type of apt tower (heck, even the same unit number!) in another city, slightly older QUALITY building, well maintained, half the price AND twice the space.


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## Charlie (May 20, 2011)

our numbers are similar, no? I used $400/mo condo, and $200/mo property tax. They'll be subject to annual increases, but so would the rent. Building insurance is usually included in the condo fees (can't have only some units rebuilding after a fire) but even if the $200 excluded contents -- wouldn't affect calculation much...I'm not selling this unit! Nor trying to be too precise here.


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## Eclectic12 (Oct 20, 2010)

jamesbe said:


> Most aren't thinking it will increase value, they think it will increase enjoyment of the home / quality if life. Not everything is about money.


We must be travelling in different circles. Even where the home owner states it's enjoyment / quality of life ( ... or a bargain ), eventually there's a comment or maybe hope, that the value has been increased.



Cheers


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## andrewf (Mar 1, 2010)

Charlie said:


> back o' the envelope math. For a condo, in decent shape, maintenance beyond strata fees should be minimal, and insurance would be included in strata fees. Property mgmt and vacancy and 'headache factor' need to be considered...but in the TO example I doubt they add to $5K per yr. Just pointing out, that for an investor, willing to manage the property, the TO example is not necessarily a bad deal. Real estate's a different kind of annuity. Not for all (or the faint of heart) but works well for many.
> 
> Saw a Vancouver condo today, however, yielding less that 1% -- also before vacancy and property management. Wow.


New kitchen and baths every 15 or so years, new flooring every 5 - 10 years, repairs to walls periodically, painting between tenants, new appliances every 10 or so years... it adds up. Never mind that the building tends to start to fall apart and the maintenance fee spirals.


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## cannon_fodder (Apr 3, 2009)

Charlie said:


> Skewed???? Ya think?
> 
> The article ignores the value of 'rent' for 10 years except as a footnote!
> 
> ...


I've posted links to two articles. Are you referring to the one about how much you really make on a house?


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## Charlie (May 20, 2011)

yup. The Moneysense article neglected rent.


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## peterk (May 16, 2010)

Well I've ran some numbers and concluded that renting is almost always cheaper than buying. It only *seems* like buying gets you ahead in the long run because your mortgage is just a leveraged investment in an asset that will likely appreciate in time. It is not at all a fair comparison to put mortgage ownership against non-leverage rent. When you compare outright ownership to renting, the opportunity cost of ownership comes into play, and the numbers skew strong towards rent. Comparing mortgage ownership to leveraged stock investing & renting is a more fair comparison, and even further favours renting.


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## HaroldCrump (Jun 10, 2009)

^ good point above.
I wish people would stop thinking of owning their primary residence as an "investment".
Think of it as a car - it's a consumer good.
Pay as much down payment as possible, and pay off the mortgage as soon as reasonable (without starving yourself) - just as you'd do with a car.

However, unlike a car, don't go buying a new house every 3 years 

Once seen in this light, the path is clear.
If you really wanna "invest" in RE, buy a rental property.
Then we can compare market investing vis-a-vis RE investing and keep all the emotional baggage associated with home ownership aside.


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## Plugging Along (Jan 3, 2011)

I agree about the Primary Residence (PR) not being a true asset. So It's not quite like a car, in the sense that it depreciates, and held long enough it will appreciate. I consider an asset as something that will feed your family in the event of income loss, so something with a positive cash flow, or that you could liquidate to help your situation.

In the case of a PR, if you sell it, you still have to find some other place to live. It could be an asset if you bough a home, sold it and bought a less expensive place, but that only happens if you're going to a cheaper market, or downgrading. Often, people keep buying up, saying how much money they have made by doing so. Until they sell they are only paper rich. I do believe a paid off PR is an asset as chances are, if you don't have a mortgage on the home, then the operational costs/expenses to live in it, are much cheaper than what you would rent for. For many, a PR is a means of forced savings. The majority of the population would not have the discipline to save and invest the different between home ownership and rent. Also, I do believe that as a long term investment, that the PR is a good one in terms of renting for 25, 35, or 50 years vs. buying 1 home and living in it for 50 years.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> [ ... ]
> 
> It is not at all a fair comparison to put mortgage ownership against non-leverage rent. When you compare outright ownership to renting, the opportunity cost of ownership comes into play, and the numbers skew strong towards rent. Comparing mortgage ownership to leveraged stock investing & renting is a more fair comparison, and even further favours renting.


This is one of the problems I have with the comparisons. 

Sure, mortgage ownership compared to leveraged stock investing & renting is a fair comparison, except that none of the renters I know personally are doing any investing with the extra cash flow. It's nice that they have the opportunity but if they don't use it, who is really ahead?

Note that I'm sure some are investing - it just seems like they are far and few between.


In comparison, it is no trouble to find are those who are handy who are buying "fixer-upper" primary residences, fixing up and then selling at a profit.



Cheers


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## HaroldCrump (Jun 10, 2009)

The Money Sense magazine ran an article earlier this Spring _How to become a landlord_.
It's now posted online:
http://www.moneysense.ca/2011/01/31/how-to-become-a-landlord/

Anyhow, in the April issue, a reader wrote back in the Letters to Editor commenting on this article.
I quote:


> *Why so negative?*
> I just read the "How to become a landlord" and I was quite surprised by some of the negativity expressed.
> One expert said : _"I wouldn't settle for a property where I'm just paying down the mortgage. I need to get paid NOW._
> 
> ...


Interesting thoughts from a real life RE investor.
I take this to mean that most RE investments are:
- Not cash flow positive
- A huge bet on low interest rates
- A huge bet on constantly appreciating RE values
- Huge money pits in cases of unexpected maintenance, insurance claims, etc.

Am I reading this right?


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## MoneyGal (Apr 24, 2009)

It depends on what your goals are. There is a maxim that you can get two, but only two, of three possible benefits from any investment: 

- current cash flow
- long-term capital appreciation
- tax-preferred income

The corollary is that you sacrifice one to get the other two (and you might not get two out of three in any case). The author of that letter is clearly preferencing long-term gains.


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## Eclectic12 (Oct 20, 2010)

HaroldCrump said:


> The Money Sense magazine ran an article earlier this Spring _How to become a landlord_.
> It's now posted online:
> http://www.moneysense.ca/2011/01/31/how-to-become-a-landlord/
> 
> ...


*grin* - if the variables are all the same, then yes. 

However, with the wide variation in landlords I've chatted with over the years, I doubt that all landlords operate the way this fellow is, all parts of Canada match his/her experience in Alberta, etc.

Case in point - the condo-king I worked with had to start out with a thin margin (or loss) on the first one but after adding a couple of other condos to his portfolio and paying down the mortgages, the income from the other condos provided an emergency fund to help with the make the latest purchase far less of a risk - even though the starting rentals weren't generating a large income.

Then too - when looking at a boom-bust area like Fort McMurray, the last five years might have been "barely cover the expenses" and then all of a sudden, the next three years or so are all of a sudden huge cash-cows. This is not the average experience.

As a final example - if like my co-worker, the landlord has the contacts to get a cheap bank power-of-sale house, all of sudden there is a built in capital gain and a positive income.



Just like picking investments, it's a wild wooly world out there, with lots of variables.


Cheers


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## cannon_fodder (Apr 3, 2009)

Charlie said:


> yup. The Moneysense article neglected rent.


They did, almost parenthetically, mention you got a place to live for 10 years. 

Let's imagine the Moneysense scenario but instead of living in the house a renter pays you exactly what you require to live in the exact same house right beside it (owned by a landlord). Let's imagine that there are no income or capital gains taxes. 

Your net cash flow is the same. Your living experience is the same. You live rent free in a house while a renter lives in yours but you have all of the expenses associated with owning that house. 

How does it look now?


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## cannon_fodder (Apr 3, 2009)

It's articles and discussions like this which have prompted my wife and I to change our perspectives. In a few years when the kids are through college, we will be free to move to where we want to live. I think we will find renting is more financially prudent and allows us more freedom to consider wintering in warmer locales for longer periods. 

My wife was enamored with the idea of buying a vacation property that we would rent out. But once she looked at the opportunity cost vs the ROI (and the fact we have so much more of the world to see) she realized we would be tied down unnecessarily.


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## Charlie (May 20, 2011)

cannon_fodder said:


> How does it look now?


same as before? You're up by the small gain they calculated PLUS the rent you didn't have to pay. 10 years worth.

Let's say that instead of buying that condo, you rented for 10 years. You invested your 24K down payment and, somehow, earned 10% annually. You're a very savy investor. 

Your $24K is now worth $62K. And you paid...say...$1200/mo rent -- or $144,000, over that period. (you gleefully note that your rent of $1200 was less than the mortgage payment would have been -- before all those other expenses).

So....at year 10, our buyer is up a measly $13,212 per moneysense. Plus he got his down payment back of $24K, so he has $37K. Our renter, after his beat-the-market decade of returns has $62K -- less his outflow of $144,000 rent-- for a net outflow of $82K. The buyer is almost $120K better off.

It's hard to twist the numbers to make this particular property a wash given the timeframe.

Same may not be true at current valuations....and is rarely true for vacation properties (which often sit vacant for much of the year -- or otherwise earn no revenue). But this particular moneysense analysis is flawed.


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## andrewf (Mar 1, 2010)

So, we're talking:

$1200 rent

vs

$1300 mortgage +
$250 taxes + 
$100 insurance +
$250 repairs and maintenance =
$1800

That is what you call an apples-to-oranges comparison. For the comparison to be valid, you need to compare the downpayment invested in stocks initially, plus the $600 (or whatever it ends up being) difference in carrying costs per month over ten years. $600/month * 120 months is $72k without any return accounted for. You can't exclude that from an analysis.

Is the buyer still ahead? What about if prices are flat or decline by 5% over the decade (leverage cuts both ways)? In the long run, housing appreciation can't exceed inflation much or at all. To see why, look at a nice villa in Rome circa 300 BCE. Say it cost the equivalent in denarii of $200,000 in today's dollars. Even assuming a very modest 0.5% per year real price appreciation. That villa would be worth $20.1 billion today. As it turns out, you can buy a decent swath of Rome for that price.


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## Charlie (May 20, 2011)

My oh my. 

the back of my envelope is just about full up.

But....I think all that's missing from my previous example was the earnings on the 600/mo rent savings. So lets add those.

Our savvy investor, who earns an after tax 10% will earn $92K on $24K initially plus $600/mo for 10 yrs. The TSX earned 3.7% during that time. The US exchanges were negative. But our guy is super smart. Had he only been twice a smart as the TSX, he'd be at $60K earnings.

So...Buyer has $13K moneysense gain. (the down payment and monthly extra cost were deducted from their proceeds).

Renter has....$90K gain at 10%, less $144,000 rent or $54K outflow. We're down to buyer being $67K ahead. And our renter has earned 2.5 X the TSX return. If he only earned twice the TSX, he'd be $97K behind ($60K earnings less $144K rent vs $13K gain). At the TSX rate of 3.7% he earned only $26K, and would be $131K behind. 

I'm sure we could add taxes, maybe some present value calc's regarding timing, or some other variables. Seems awfully complicated for a hypothetical example, and unlikely to change much. 

The point of the article -- that your gains may not be as big as you think -- is a good one. My calculations have reduced the $200K gain to anywhere from $131K to $67K. But by ignoring equivalent rent in the numbers, they ended up with a meaningless and misleading analysis. Since it's hypothetical anyways -- they could have fudged the numbers to come up with the example they wanted. A cottage example, used two months a year, and compared to the cost to rent for two months, might have got them there. Or a slightly smaller gain/higher operating costs/lower rent. A little excel magic would have done the trick. But given their numbers....this place was a great buy. 

And, yes....under different assumptions -- a flat market, a 2400 year hold period....results might be different.


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## Charlie (May 20, 2011)

More fun with numbers. 

I PROMISE this will be my last post on this moneysense thing. But once excel is set up....the it's my playstation/Xbox....

One way to look at this, is to calculate the return the buyer achieved -- to see how well he/she did compared to similar investments. These returns are after tax.

All numbers from the article.

So on the buy he paid: Down Payment; Transfer tax and half legal -- $29,071

During the hold he paid: mtg, prop tax, maint, sales tax -- $1838/mo

On sale he received: Sales price - less commission, mtg payout, and half legal -- $262,906.

So it's simply a rate of return calculation based on day 1 outflow of $29071, monthly outflows during the hold, and Yr 10 inflow of $262,906.

if rent was $1200/mo, his monthly 'investment' was $638 and his return was 13.1%

if rent was $1000/mo, his monthly 'investment' was $838 and his return was 10.7%

if rent was $1400/mp his monthly 'investment was $438 and his return was 15.6%

And if vacant, his monthly 'investment' was $1838 and his return was less than 1%.

I don't think it was vacant. And I think he did quite well at any rent greater then $1000/mo.

Interestingly, the place itself appreciated at just over 6% annually.


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## colossk (May 11, 2011)

HaroldCrump;76983If you really wanna "invest" in RE said:


> I've read this thread and it had some interesting thoughts but I'm surprised no one has brought up the fact that there are more than just condo's and Single Family Homes available as rental properties.
> 
> We just bought a Duplex. (1st of many we hope as this is our retirement plan, we don't plan on selling any rental properties at all, we are in this for the long term)
> Cost us $270k with a $54k down payment. Our carrying cost for this property (morgatge, taxes, Insurance, utilities, maintanence is about $1,700. We rent out one unit for $1,450 and the other for $900. We are cash flow positive to the tune of about $650/month plus our tennants are paying off hundreds of dollars off our mortgage each month.
> ...


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## Charlie (May 20, 2011)

sounds pretty good colossk.

If your $54K equity grows to $270K equity in 25 years (assuming a 25 yr mtg), you'll have achieved a 6.5% return. More then likely you'll get a 6.5% + inflation return as your duplex's value is likely to keep pace with inflation, plus whatever positive cash flow you generate. Subject to repairs, refurbishments, and vacancy risk, of course. But you've got $650/mo to fund those (and I've excluded that return from the above)...Be sure to budget the big stuff.

The catch with real estate is that it's most definitely not a passive investment. So good luck. Landlording is much more work then watching a portfolio. And can be expensive if you're not handy or cannot manage tenant issues....


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## colossk (May 11, 2011)

Charlie said:


> sounds pretty good colossk.
> 
> If your $54K equity grows to $270K equity in 25 years (assuming a 25 yr mtg), you'll have achieved a 6.5% return. More then likely you'll get a 6.5% + inflation return as your duplex's value is likely to keep pace with inflation, plus whatever positive cash flow you generate. Subject to repairs, refurbishments, and vacancy risk, of course.  But you've got $650/mo to fund those (and I've excluded that return from the above)...Be sure to budget the big stuff.
> 
> The catch with real estate is that it's most definitely not a passive investment. So good luck. Landlording is much more work then watching a portfolio. And can be expensive if you're not handy or cannot manage tenant issues....


Also don't forget that in 25 years that $650/month cash flow will be much greater since there won't be any morgatge to carry.


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## HaroldCrump (Jun 10, 2009)

How much have you budgeted for escalating mortgage interest rates?
What is your flexibility with increasing rents?
At what hourly rate are you imputing maintenance labor?
What is the discount applied for vacancy?


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## colossk (May 11, 2011)

HaroldCrump said:


> How much have you budgeted for escalating mortgage interest rates?
> What is your flexibility with increasing rents?
> At what hourly rate are you imputing maintenance labor?
> What is the discount applied for vacancy?


Lets assume a 5% Vacancy rate, and a jump of 3% in Interest rates I'm still cash flow positive to the tune of about $150/month. I've included an estimated 3% for maintanence in the previous $1700/month carying costs
upcoming allowed Rental increase for this year is 3.1% I belive

I'm still cash flow positive for about $150/month and the previous posters 6.5% Return does not include appreciation nor does it factor in the increase in cash flow when I am morgatge free.

It's really hard to quantify interest rate increases as it's quite possible by the time it's increased 3% my morgatge will have dropped significantly or it could jump 3% by this time next year or it may not increase that high for a while.

I doubt my return would be nearly as good an a single family dwelling but then it has a much easier exit strategy comapred to multi unit dwellings.

I'm not expecting sky high returns, I just want to have 5-6 rental properties when I retire providing me with an income stream


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## peterk (May 16, 2010)

Charlie said:


> sounds pretty good colossk.
> 
> If your $54K equity grows to $270K equity in 25 years (assuming a 25 yr mtg), you'll have achieved a 6.5% return. More then likely you'll get a 6.5% + inflation return as your duplex's value is likely to keep pace with inflation, plus whatever positive cash flow you generate. Subject to repairs, refurbishments, and vacancy risk, of course. But you've got $650/mo to fund those (and I've excluded that return from the above)...Be sure to budget the big stuff.
> 
> The catch with real estate is that it's most definitely not a passive investment. So good luck. Landlording is much more work then watching a portfolio. And can be expensive if you're not handy or cannot manage tenant issues....


Sounds pretty not good to me. You are gaining 6.5% return on a 5:1 leveraged investment. If I was leveraging 5x into the stock market I would expect to be taking home ~25% returns on _my initial_ investment.
Perhaps if the banks called a mortgage a "house buyer's investment loan" and and an investment loan a "retirement mortgage" people would start to realize they are the same thing. Only the "retirement mortgage" would be tax deductible and stand to grow in value at 2-3x what the "house buyer's loan" does.


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## blin10 (Jun 27, 2011)

andrewf said:


> So, we're talking:
> 
> $1200 rent
> 
> ...


and what if prices increase (Toronto is center of Canada after all) ?people were giving same example 6 years ago, and whoever bought gained a lot of dough vs people who were speculating lost a ton to renting... houses in my area appreciated by 300k in 5 years that's on average 60g's a year and people who rented lost 72g's @1200/m over 5 years... also when you're comparing mortgage you should not count principal part because that money goes towards you, you should only count interest that goes to the bank, so from 1300$ interest is probably 800$... btw $250/m on repair is no way, I spend $300 to fix furnace over 5 years period, and also most people who rent pay for utilities as well


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## andrewf (Mar 1, 2010)

If you need 6% (or 4% real return) appreciation on your real estate to make the investment look reasonable, be prepared for it to end in tears. As I showed before, you can't expect real estate to appreciate by much more than inflation in the long run. Otherwise a townhouse in 1600 Amsterdam would be worth the same as all the real estate in Canada. A $500,000 (in 2010 CAD) house in 1600 Amsterdam at 4% real return would be worth $4.8 trillion today. In other words, real estate does not appreciate in the long run. You can speculate on the ups and downs, but you have to eat on the cashflow it generates in the current year, not a beautiful 6% exponential curve reaching for infinity.


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## andrewf (Mar 1, 2010)

blin10 said:


> and what if prices increase (Toronto is center of Canada after all) ?people were giving same example 6 years ago, and whoever bought gained a lot of dough vs people who were speculating lost a ton to renting... houses in my area appreciated by 300k in 5 years that's on average 60g's a year and people who rented lost 72g's @1200/m over 5 years... also when you're comparing mortgage you should not count principal part because that money goes towards you, you should only count interest that goes to the bank, so from 1300$ interest is probably 800$... btw $250/m on repair is no way, I spend $300 to fix furnace over 5 years period, and also most people who rent pay for utilities as well


$3000/year to pay for:

-new appliances (10-15 years), say $300 per year
-new kitchen (15 - 20 years), say $1000 per year 
-new bathrooms (10 - 15 years), say $200 per year each
-new roof (15 - 20 years), say $300 per year
-new furnace/AC (15 - 25 years), say $200 per year
-landscaping (every year), say $300 per year for various supplies and equipment
-new deck (every 10 - 15 years), say $200
-new windows (20 - 25 years), say $200
-dozens of other things that need to be fixed or replaced ($300)

There you are, $3000/year.

Houses are in a constant state of falling to pieces. Your $60 a year in maintenance is not going to keep the place together.


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## colossk (May 11, 2011)

peterk said:


> Sounds pretty not good to me. You are gaining 6.5% return on a 5:1 leveraged investment. If I was leveraging 5x into the stock market I would expect to be taking home ~25% returns on _my initial_ investment.
> Perhaps if the banks called a mortgage a "house buyer's investment loan" and and an investment loan a "retirement mortgage" people would start to realize they are the same thing. Only the "retirement mortgage" would be tax deductible and stand to grow in value at 2-3x what the "house buyer's loan" does.


You must know something the rest of us don't if you expect to make 25% returns year after year. 

So if I gave you $54k your going to make me $13,500+ year after year?


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## cannon_fodder (Apr 3, 2009)

colossk said:


> You must know something the rest of us don't if you expect to make 25% returns year after year.
> 
> So if I gave you $54k your going to make me $13,500+ year after year?


That would be easy. You must have missed the fact that he would leverage it 5:1. Thus, you give him $54k, he then is investing the equivalent of $270k. Whether he uses margin or options or leveraged ETFs or a combination, effectively he is putting a lot more money to work than the original investment.

The downpayment in this example is being leveraged 10:1. Extrapolating, peterk would estimate he could deliver 50% gains on the original investment annually.


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## cannon_fodder (Apr 3, 2009)

Charlie said:


> More fun with numbers.
> 
> I PROMISE this will be my last post on this moneysense thing. But once excel is set up....the it's my playstation/Xbox....
> 
> ...


Never apologize for using Excel! I appreciate your input and efforts.

I also used Excel but I went further and noticed the author made some mistakes. I know how they came up with mortgage payment, but I can't figure out how they came up with the principal remaining.

The person made the common mistake of using 5% in their calculations rather than the effective rate (because of semi annual compounding) which would be 4.9487%. The result is the mortgage payments are $1,301.29 and the principal is $165,112.23.

I think you only forgot the mortgage insurance (which notably means they neglected house insurance since I didn't see that mentioned anywhere in the article - perhaps they kept that separate like all of the utilities).

My calculations show a net profit of $19,643.52. If you look at the downpayment as your initial investment, the legal fees plus land transfer tax plus mortgage insurance as your Up Front Load fees, the mortgage payments + property taxes + maintenance fees as your MER, and your realtor fees + legal fees as your deferred sales charges then you can think of it as investment - with the huge benefit of free accommodations.

If you took the other approach that I'm borrowing the $223,740.90 (original house price - 10% down payment) and add that to my down payment and invest in the market, what would I get at the end? It would be, as you have shown at 10% annually, 10x what you calculated for just the down payment or $644,807. 

You'd have carrying charges of the interest (assuming you don't pay any principal) which is $111,870.45. 

You would also have the $223,740.90 to pay back which means a net profit (before taxes since I've heard of only one couple which has close to this amount of room in their TFSA's) of $309,195.62.

Free accommodations + $19,643.52 tax free profit VS.

Need a place to stay + $309,195.62 of capital gains (at least partially taxable plus the chance that you could write off the interest costs)

What my eyes have seen is renting a house is far cheaper than buying a house. What I see rent for $1,650/mth is a house worth $330k+, or $3,300 for a $675k house. So, perhaps a $248,601 house would have rented for $1,250/mth with increases so that the rent is now $2,250/mth. Back of the napkin suggests something around 120 x ($2,250+$1,250)/2 = $210,000 of total rental payments (again avoiding the utilities since the original article did, too - we'll assume the renter pays 100% of them).

That makes it pretty close even if one assumes that the couple splits the capital gains and has to pay taxes on the full amount with no loan interest deductibility.

Likely to have made 10% annually over the past 10 years? Maybe 1% of the people could have done that.

Likely to have seen your house go up in value > 80% in the last 10 years? Depends on where you live... I'm in a suburb of Toronto and even though I'm in a nice area, it's been about 50% in 8 years which is still unusually good.

I'd bet my own money that I will have a much better chance returning 10% annually in the next 10 years on my money than getting 80% increase in my house by 2021. But, others would have very valid but opposing views.

I like this discussion as it challenges my preconceived notions. Hopefully any errors I've made will be pointed out.


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## cannon_fodder (Apr 3, 2009)

It would interest me to know how many people who use rental properties as their strategy to financial independence would not be comfortable with borrowing to invest in the stock market. To me it is leverage in both circumstances.

I wouldn't go the rental property market because to me it is too difficult and time consuming and risky and non-diversified to be successful when compared to investing in stocks. Except for the diversification point, I anticipate many of the landlords would list the same challenges about the stock market.

I know of people who have been successful in both endeavours - it's great that people find their strengths and leverage them.


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## Charlie (May 20, 2011)

Promises are made to be broken.....can't resist -- this stuff is my drug.

At $1750 avg rent, my spreadsheet spits out a return of greater then 20% on money invested. I didn't tweak the rest of the numbers as this is hypothetical -- I think they're close enough for an illustration. 

Your 10% returns seem higher since you've assumed no principle repayment -- so you've got 5% money earning 10% for a longer period, plus you've paid the interest with no cost additional money -- an additional $100K invested over the term??? 

My guy's numbers are after tax. You'll pay some tax on the earnings, get a deduction on interest paid, but pay your rent with after tax dollars. Too complicated for me. Let's just say that a 20% after tax return is pretty good. US stocks were negative, and the TSX returned less than 4% during that period. 

And....I'm def not saying this is representative. Far from it. Just that, looking backwards, you cannot reasonably conclude this TO house buy was a bad investment over that time period. It was a great investment. Which doesn't mean it's a great investment going forward.


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## andrewf (Mar 1, 2010)

What time frame are you looking at? TSX has returned about 7.5% total return over the past 10 years. Seems like you might be cherry-picking the time period to capture a bubble-bursting in the stock market and a bubble run-up in real estate. If you look at very long term returns, 7.5% for stocks is quite reasonable. 6% for real estate, not so much. Isn't 30 or 40 year returns for real estate something like 0.5 - 1% real return?


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## Charlie (May 20, 2011)

I got it from here:

http://www.taxtips.ca/stocksandbonds/investmentreturns.htm
courtesy of a google search on 10 yr returns. 

I don't know how accurate or complete that is. But even 7.5% is less then any of the scenarios we've run through. 

And I didn't pick the time frame. I just challenged the conclusions of the guy who did.


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## blin10 (Jun 27, 2011)

andrewf said:


> $3000/year to pay for:
> 
> -new appliances (10-15 years), say $300 per year
> -new kitchen (15 - 20 years), say $1000 per year
> ...


it's not 3000/year, more like 3000 in 20 years.... and most people move after 10 years... landscaping nobody needs (most people do that themselves or their wives), new deck is not a need and most people don't have it, you just trying to make sh!t up to make it seem like renting is so amazing


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## andrewf (Mar 1, 2010)

Landscaping is free? No lawnmower to buy, weedwhacker, fuel, shovels, rakes, trees, shrubs, plants, yard waste bags, etc.? Even if you never buy anything to do the property maintenance, I think you spend at least $300 a year in your time, cutting grass, weeding gardens, shoveling drives, etc. that are not something you would do for fun otherwise. I love your answer: make your wife do it! Is she your spouse or indentured servant?

Your appliances never break and never need to be replaced? Most modern appliances (ie, the sort you can buy 4 or 5 pieces for $3000, not high end) don't usually last more than 10 - 15 years.

$3000/20 years is $150 per year. You've got to be kidding, or in denial. You can't even replace a roof for that (or twice that, for many houses), and that has to be done every 20 years with asphalt shingles.

I love how your answer to your house falling apart is to do no maintenance and sell it after 10 years. What happens to the person who buys it? You're in some serious denial, guy.


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## Charlie (May 20, 2011)

andrew --- I don't find your maintenance numbers unreasonable. High in some areas (I've never had a landlord bless me with a $20K kitchen!) -- but low in others. $3K/yr, including big replacements is within the realm of a reasonable estimate. Many would argue higher.


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

recent examples of work performed on well-maintained houses:

-garage winterization including adding of heavy insulation and plywood $3000
-roof $4000
-lawn mower & tractor $1000 (bargain)
-legal fees $2000 (upon purchase)
-insurance $357
-taxes $522

$150/yr (stated above) is laughable, almost trollish in fact.


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## Charlie (May 20, 2011)

a few points on real estate investment -- since it seems to be the black sheep of this forum and many investment advisers:

On the advantages of real estate as an investment:

1) Leverage. You can often borrow 80% of the asset value quite readily. A stock portfolio will generally be limited to 50%, and if FMV drops below that at any time you'll get a cash call -- and possibly be forced to sell in the dips. The leverage, with good cash flow, can result in real returns even if (when!) real estate does not appreciate in real terms (and long term it shouldn't). See colossk's example where I calculated a 6.5% real return on the assumption that his expected $650/mo cash flow would be required (and would be all that was required) for maintenance and other costs in excess of his estimates (I think his cost estimates are low). The key, of course, is cash flow. If op costs or big hit repairs are too high, this doesn't work. But if his revenue covers his debt repayment, op costs, and replacements, he's achieving a real return of that debt repayment amount. No price appreciation needed.

2) Income. Either actual, through rentals, or equivalent through no rent. And this is why it's so leverageable. Lenders have greater assurance you'll be able to service the debt. (and it's also why commercial properties are often limited to 60% or so -- since the vacancy risk is greater). They'll lend more on your residence -- since it's sure to be occupied -thus saving you 'rent', and less on investment properties and cottages which, if vacant, are an additional drain on your other income. Many investors have greater comfort in ongoing cash flow from real estate they can rent out -- then from dividends which are at the discretion of a board, or having to sell stock. Not everyone trusts the stock market.

3) Inflation hedge. This is the big one. The underlying asset, and the income from it, tend to increase with inflation as long as it's properly maintained. Over 10, 20, 30 years, this can be huge -- even in a relatively low inflation environment. In a period of higher inflation, portfolio income can be eroded, but real estate income will tend to keep pace. Any DB pension fans, or indexed annuity lovers out there? Real estate income can have a similar inflation protection component -- with a principal nest egg too -- subject to risk and hassle factors, outlined below. 

4) Control. Some investors like the 'sweat equity' aspect. And the ability to choose how to manage or maintain a place -- either for income or enjoyment potential. 

And...of course, there are pitfalls:

1) Difficult and time consuming. Absolutely. It's not a passive investment. If you hire a property manager for a small investment, the fees, extra charges for 'rent ups' etc, outside contractors for every repair will likely drain your returns. So your alternative is to manage it yourself. Now you're responsible for the late night calls about broken appliances, arranging or doing the maintenance, following up late rents, and trying to collect them, or evicting people, adhering to local tenant legislation, finding tenants and all the other headaches that will undoubtedly arise. Not for everyone. A lot more consuming then checking that your quarterly dividends were deposited to your account and calculating your portfolio returns.

2) Risk. Lots of different kinds. 

Tenant risk: a bad tenant can trash your place, take forever to evict (all the while not paying rent), and play havoc with your sanity. Even threaten your safety. 

Interest rate risk: Anybody remember 18%?? At the time 5% was unthinkable. Good bye cash flow. Likely accompanied by a drop in value as real estate's overall affordability takes a hit.

Liquidity: Selling costs are high. And you can't sell only a portion. With real estate you better be prepared to hold. Local governments can assess higher and higher fees should they choose and you're 'tied' to that investment unless you're prepared to abandon it completely and pay the high transaction costs to do so. 

Cash flow: unless you maintain a reserve you may have to scramble when that fridge has to be unexpectedly replaced, or your tenant is late with rent or moves out.

Refurbishments and surprises: Leaky condos anyone? That investment that made sense at $200K doesn't seem so great with that added assessment of $100K. And good luck renting out your place when it's covered by a tarp. I saw a few 'good' investments go south under this scenario. The casual investor often overlooks the big stuff -- roofs, plumbing, structural etc. And sometimes, even the best due diligence and budgeting can't foresee an upcoming hit. 

In the end....like any investment, it's about cash flow, returns and risk. With the added, and significant, management factor. At current prices in high priced areas, I've seen very few investment properties that appeal to me. None of the new condos coming on stream seem to make sense to me. Far too risky, returns too low. And I think that, generally, individual investors tend to vastly underestimate costs and are often unprepared for the hassle. But I've seen many that have worked out very well, and were not dependent on the recent real estate run ups. 

10 year govt bonds are yielding less than 3%. With no inflation protection. The stock market of the 70's and early 80's, a period of high inflation, had dismal returns. At what rate of return is a real estate investment with a degree of inflation protection worth your while? It's all about buying an income stream. And risk profiles.


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## peterk (May 16, 2010)

cannon_fodder said:


> That would be easy. You must have missed the fact that he would leverage it 5:1. Thus, you give him $54k, he then is investing the equivalent of $270k. Whether he uses margin or options or leveraged ETFs or a combination, effectively he is putting a lot more money to work than the original investment.
> 
> The downpayment in this example is being leveraged 10:1. Extrapolating, peterk would estimate he could deliver 50% gains on the original investment annually.


Yes exactly - I thought the example was a 20% mortgage? Why is it that most people would laugh at the insanity of leveraging 5:1 in the stock market, but have no problem putting every penny of savings they have into a 20% downpayment? The point I'm trying to make is that buying a house only gets you ahead financially because of the massive leveraging involved. It's only because the ignorance of the risks involved that everyone does it, and the overestimation of the risks involved in the stock market that cause almost nobody to use leverage in that capacity.


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## blin10 (Jun 27, 2011)

andrewf said:


> Landscaping is free? No lawnmower to buy, weedwhacker, fuel, shovels, rakes, trees, shrubs, plants, yard waste bags, etc.? Even if you never buy anything to do the property maintenance, I think you spend at least $300 a year in your time, cutting grass, weeding gardens, shoveling drives, etc. that are not something you would do for fun otherwise. I love your answer: make your wife do it! Is she your spouse or indentured servant?
> 
> Your appliances never break and never need to be replaced? Most modern appliances (ie, the sort you can buy 4 or 5 pieces for $3000, not high end) don't usually last more than 10 - 15 years.
> 
> ...


in the last 10 years of owning houses I spend total of $300 fixing furnace, $200 grass cutter and probably $100 on supplies to water grass... I'm talking about real life experience here, not some theoretical replacing roofs, buying appliances and remodeling kitchens with crazy landscaping.... this is my real life experience, and it stands... you also can't compare your renting space to the house space, my buddy is renting condo in North York area for $1600 and it has ONE room and one small office room, for that much in mortgage you can have a nice 1800 sq.ft. townhouse 10 min away in same area... anyways, I don't even know why I replied because I knew i'll be enemy number one here with many "pros" still in school, renting out cheap condos in ghetto areas with no cars (because it's a debt) and putting all their money into rrsp lol...


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## andrewf (Mar 1, 2010)

$500 in maintenance over ten years is just not credible. By that I mean not-believable. You're also talking in terms of cash accounting, while I'm talking about accrual. All those building components have deteriorated over the past ten years, and in accrual accounting you don't pretend the cost of that deterioration is zero until you have to replace it. You depreciate each period to account for the cost of eventual replacement.

I'm not saying that real estate is always and everywhere a bad investment. But in 2011 GTA, the numbers don't add up. In 2011 Niagara Region or 1995 Mississauga it was a good/great investment. You can speculate on the ups and downs. Right now the market is toward the high end of what the underlying economic fundamentals will support. Buying now expecting 6% returns for another ten years is laughable.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Buying now expecting 6% returns for another ten years is laughable.


The poster is not imputing the cost of labor either.
As they always ask on the Dragon's Den : _And what are you paying yourself to run this business?_

Even if we assume 6% returns is possible, it doesn't compare well against passive investing in a REIT or REIT ETF, esp. after accounting for imputed labor costs.
XRE pays about 5.5% isn't it?
The effort required to "manage" XRE vs. a slew of personal investment properties scattered all across town is not even worth comparing.


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## blin10 (Jun 27, 2011)

andrewf said:


> $500 in maintenance over ten years is just not credible. By that I mean not-believable. You're also talking in terms of cash accounting, while I'm talking about accrual. All those building components have deteriorated over the past ten years, and in accrual accounting you don't pretend the cost of that deterioration is zero until you have to replace it. You depreciate each period to account for the cost of eventual replacement.
> 
> I'm not saying that real estate is always and everywhere a bad investment. But in 2011 GTA, the numbers don't add up. In 2011 Niagara Region or 1995 Mississauga it was a good/great investment. You can speculate on the ups and downs. *Right now the market is toward the high end of what the underlying economic fundamentals will support. Buying now expecting 6% returns for another ten years is laughable.*


I heard that 6 years ago, exact same line, I wonder who is laughing now... although i somewhat agree, I believe housing market is pretty high and it might not get you same gains in the next 6 years, but there is still room to go up... look at New York, even with states being in recession housing there is still ridiculously high, vs other small cities where houses are dirt cheap AND Canada never had bank problems like states... I remember even in the worse time in 2009 when everything was crushing like crazy, 500k houses only took about 10% haircut and were going for 450k, which is nothing compared to states


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## andrewf (Mar 1, 2010)

TD Economics just released a report forecasting 10-15% declines in Canada over the next two years, almost all of it focused in the GTA and GVRD.


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## marina628 (Dec 14, 2010)

What would you have to pay for a house in Northern BC?My friend moved to that area and paid $80,000 for a house.SHE is a nurse and works in a small hospital sounds like middle of nowhere.If these are the rates you are looking at and plan to stay long term it may be better to buy.But if you are having to spend city rates definitely rent as cheap as you can while you tackle your student loans.

As for factoring costs to own a house ,I have had an investment property which cost us $3000 a year doing upgrades and after 8 years and $24,000 later we only earned $28,000 profit.I have had new houses which cost me $200 for a set of taps in kitchen that made me $70,000 in 2 years.
A realistic budget for home maintenance is $2000 -$3000 a year ,I say budget this amount and if you do not need it then great.At least you are prepared!


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## Square Root (Jan 30, 2010)

when I was younger I dabbled in real estate as an investment class. Did OK but the time committment was a real pain. If I wanted some exposure to RE now, why wouldn't I consider REITS? i read a study a while back that said REITS and RE owned personally would likely return about the same amounts?


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## marina628 (Dec 14, 2010)

I like the idea of somebody else paying off my mortgages which is why i have 5 investment properties.I own 0% reits and have done very well over the years with my RE.In 2015 my mortgages start burning with maybe 25% cost to me with all expenses including taxes considered.


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## Square Root (Jan 30, 2010)

Reits have done very well also. Much more liquid and the fairly high yields can pay your debts down too. Much easier as far as I'm concerned.


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## cannon_fodder (Apr 3, 2009)

Charlie - another risk is geographic in nature. Unlike many REITs which spread their holdings in different cities and provinces, an individual is more likely to concentrate in a small geographic area. 

I could imagine that being an RE investor in Windsor or Oshawa wasn't a lot of fun seeing entire plants, and supplier plants, close thus bringing down the value of housing significantly.


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## zylon (Oct 27, 2010)

*kijiji Red Deer, AB*

http://reddeer.kijiji.ca/f-real-estate-apartments-condos-W0QQCatIdZ37

In the category of "apartments, condos" *rentals* there are 366 ads. 
217 offering; 149 wanted. I am amazed at these numbers. 
Never have I seen so many "wanted" ads. Has anyone seen offering/wanted ratio like this in their area?

Houses for sale: 1077 offering; 43 wanted

Condos for sale: 114 offering; 2 wanted

I interpret these numbers to mean that more than a few people favour renting vs buying (?)


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## Causalien (Apr 4, 2009)

Can't do it like that. 
People who want to buy browse and contact seller.
People who wants to sell post ads.

The ones who post a wanted ad are usually someone who already has something going and are just fishing. They are not desperately in need of housing. The ones who are in need will contact the seller the moment the ad went online.


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## zylon (Oct 27, 2010)

Good point.

I haven't checked the prices, but it's likely that the renters posting "wanted" ads are just looking for something cheaper than what's being "offered".


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## sags (May 15, 2010)

A recent study showed that even after the collapse of housing prices, renting in the US was still cheaper than buying in most locations. 

More interesting is the fact that so many Americans have turned away from home ownership.

Prices have fallen......from 30-80%, depending on location, mortgages interest is tax deductible, Americans can lock in a mortgage interest rate for 30 years,.......and yet the collapse of housing prices has affected them so deeply, that Americans still won't buy.

Perhaps credit worthiness has something to do with it, and despite all the hoopla about more positive data reported, for many Americans the main street economy is still very bad.

People are still unemployed and too many Americans are reliant on one form of government support or another.

Still though............those Americans who do have money aren't investing it in real estate.

Once the shine is gone..............it may take a long time to return.

Effects from the Great Depression left an impression on a whole generation of Americans. The Great Recession may be having the same affect.


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