# Don't Buy a Condo--Rent it!!



## Belguy (May 24, 2010)

From the Globe and Mail's Rob Carrick, renting a condo has many advantages over buying one:

http://www.theglobeandmail.com/glob...-why-its-best-to-rent-not-own/article4619669/


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## jamesbe (May 8, 2010)

Yup, if something major happens and they levy $20,000 to repair the condo in fees if you rent you are isolated to rent increase only while if you own pay the piper!


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## Four Pillars (Apr 5, 2009)

I don't disagree with Rob, but I would argue that similar risks exist for house owners.


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## Square Root (Jan 30, 2010)

Four Pillars said:


> I don't disagree with Rob, but I would argue that similar risks exist for house owners.


Agree to a degree. Condo special assessments are imposed on you by your neighbours so you have less control over amount, timing, execution, etc.


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## Four Pillars (Apr 5, 2009)

Square Root said:


> Agree to a degree. Condo special assessments are imposed on you by your neighbours so you have less control over amount, timing, execution, etc.


Yes, good point. In a condo, you have very little say.


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## Quotealex (Aug 1, 2010)

jamesbe said:


> Yup, if something major happens and they levy $20,000 to repair the condo in fees if you rent you are isolated to rent increase


 You can be sure that one way or another, the landlord will find a way to make his/her tenant pay for the increase in the repairs over a period of years


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## dvelecka (Oct 18, 2012)

I disagree with this. Landlords must follow a strict set of rules when it comes to rental rate increases. However, tenant turnover has been much faster in recent years, giving landlords many new opportunities to elevate cash flow. 



Quotealex said:


> You can be sure that one way or another, the landlord will find a way to make his/her tenant pay for the increase in the repairs over a period of years


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## andrewf (Mar 1, 2010)

Can you? Landlords are mostly price takers--they can only charge what the market will bear.


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## Berubeland (Sep 6, 2009)

Hi All,

Here's what's going on in the condo market... there is currently a premium to buy over rent a property. 

http://www.realtor.ca/propertyDetails.aspx?propertyId=12066437&PidKey=308483360 here's a subject condo for sale for $389,000 with a 5 year at 4.99% amortized over 25 years your monthly payments are... $1807.02 for mortgage payment and $567.37 for maintenance fees for a total of $2374.39

The rental prices at the exact same address on the exact same floor for (a possibly different layout) is http://www.realtor.ca/propertyDetails.aspx?propertyId=12465812&PidKey=995737090
the rental price with no special assessment risk or real estate market risk is $1750. 

This is a difference of $624.39 that's a premium of 26% to buy vs. rent not to mention the risks...


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## Dmoney (Apr 28, 2011)

Berubeland, how do you factor in equity pay down?
Also, 4.99% seems incredibly high for this calculation.

For $389K mortgage, at 2.99% (closer to what you'd get for 5-year fixed at the moment) I'm getting monthly payments of $1,842 of which more than $900 is paying down principal.
In my opinion, buying a condo has no real advantage over renting a condo, but I think the financials are actually not that different. Obviously the one drawback (or advantage if prices go up) of ownership is that you are at risk of special assessment or price crashes. 

To me it seems that condo ownership isn't all that great. You can still get stuck with crappy neighbours. You may pay for damage others cause to common areas. You have no control over expenses, even if you are on the board.

But, it looks to me that it's not a clear cut win to rent instead of own. The place I'm currently living would give about a 4.5% cap rate at current market value. Plus, when I leave, there's probably room to increase rent an extra $100/month. Finance at 3% and factor in steady rent increases and you're not necessarily better off renting.


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## andrewf (Mar 1, 2010)

What happens when rates rise to 6%? Houses are like long duration bonds. Taking market risk at rock bottom interest rates does not seem very bright, at least to me.


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

Well said, Berube, but how do you address those who continue to insist that renting is throwing money away?


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## phankinson (Oct 4, 2012)

I do not agree with the article at all. I'm currently living in a condo, in which my combined property taxes, condo fees and mortgage are cheaper than rent in the area. Since, owning the condo I've freed up more cash flow and built up equity. A friend of mine, recently did the same thing and was able to negotiate a property $15,000 under value. As soon as the transaction was complete, his net worth basically was up $15,000 and he had more disposable income because it was cheaper than where he currently was renting.

I'm not specifically referring to the Toronto market in my case, but I do believe there are instances where owning condos is WAY better than renting. Even in the Halifax market, there are lots of cases where it absolutely doesn't make sense to own a condo and renting would be the way to go. It doesn't mean that great opportunities don't exist in the market.

If you're worried about major expenses, avoid condo corps that are < 10 units and already have a decent reserve fund in place.


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## andrewf (Mar 1, 2010)

You really have to look at the cap rate. Buying a property with a 3 - 4% cap rate is asking for trouble.


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## Dmoney (Apr 28, 2011)

andrewf said:


> What happens when rates rise to 6%? Houses are like long duration bonds. Taking market risk at rock bottom interest rates does not seem very bright, at least to me.


If rates rise to 6%, more than just the condo market will be in trouble. Doubling the rate from 3% to 6% adds $170/month per $100K in mortgage debt. That's a big jump in interest rates that will not happen overnight. The only way rates increase to that level is if the economy is on fire, and inflation is rampant. In that case, salaries are rising, house prices are rising and the increase in rates is to contain inflation. 

No way the government or central bank precipitates a crash by raising rates too quickly.


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## andrewf (Mar 1, 2010)

It is not impossible to have an economic environment of weak demand growth and inflation. The Bank of Canada's mandate is pretty clear. If inflation begins to rise, it is bound to respond to contain it. I am sure that the Bank will consider the sensitivity of the economy and inflation to changes in interest rate, but their job is not to preserve RE bubbles. Even if interest rates rise only slowly, there is a decent chance of a significant correction given the low cap rates in the condo market. Prices are sustained by the bubble mentality of beyond-inflation rises in property values. It's not sustainable, and when things are not sustainable, they won't be sustained.


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## Berubeland (Sep 6, 2009)

Dmoney said:


> Berubeland, how do you factor in equity pay down?
> Also, 4.99% seems incredibly high for this calculation.
> 
> For $389K mortgage, at 2.99% (closer to what you'd get for 5-year fixed at the moment) I'm getting monthly payments of $1,842 of which more than $900 is paying down principal.
> ...


Even at 2.99% which would be difficult to get because it's a second property, it still doesn't cash flow because even with 20% down and 2.99 the payments are $1470.00. Add in maintenance fees and you're over your attainable rent amount. 

Over 5 years, you're going to have a few months of vacancy and some repairs and a paint job or two. At the end of 5 years mortgage paydown is $46,000 but realtor commissions are roughly $22,000... the way I see it without capital appreciation, you've risked $78,000 to make $24,000 over 5 years. 

There's no money in landlording if you buy condos. There may be some money in specuvesting, which I really have no problem with but you need to be clear that this is what you are doing. 

Roughly for the numbers to work for an investor over time the rent attainable needs to be a factor of 10... so 389.000 the rent would have to be $3800 or so. Less expenses such as maintenance fees it makes sense for a landlord.


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## Jay (May 9, 2012)

Interesting thread... I'm completely off condos after watching the horrors of my mom's condo - including corrupt boards of directors, a scamming and abusive property manager, $20k+ special assessments without justification combined with close to $600/month condo fees... And this is all on a 20 year old building that was originally well built but has been neglected for the 10+ years of the same property manager that always makes sure board members are "taken care of", while the core of the building rots. This isn't a small 10 unit condo in a bad neighbourhood either, but a 30+ unit high-end building in downtown Ottawa with many wealthy and well educated (in other areas) owners.

The worst part is the lack of control over everything - from what ive seen of condos, its like the negatives of renting without the positives of owning or renting. The worst of all worlds.

I'm renting for the time being, but when I do buy a property, it won't be a condo.


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## Berubeland (Sep 6, 2009)

I'm with Jay on this one. I would say the biggest mistake condo owners make is that they fundamentally don't understand that they own their unit but they also own a share of all the common elements. The assets and the liabilities. So when the glass starts falling off or the million dollar elevator or boiler fails...you own that too. 

The other major problem is the complete lack of experience of the condo board to make decisions about these kinds of things. Being a board member is a volunteer position and tends to attract retired busybodies who are far more interested in if their neighbour has put a mat or door knocker outside their unit than how their boilers or roof are maintained. They care more about whos dog pooped in the elevator than if the repairmen are doing an effective job.


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## My Own Advisor (Sep 24, 2012)

andrewf said:


> What happens when rates rise to 6%? Houses are like long duration bonds. Taking market risk at rock bottom interest rates does not seem very bright, at least to me.


Agreed, although not on the rates comment my friend. I don't see rates increasing until 2014.


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## andrewf (Mar 1, 2010)

And so? Rates will rise, sooner or later. Some price path will have to take housing back to reasonable valuations. Either that is flat for decades (negative real) as incomes and rents catch up, or a significant correction. Neither scenario is favourable for specuvestors who need significant capital appreciation to make money. Which is every investor who owns a rental condo in the GTA.


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## Dmoney (Apr 28, 2011)

Berubeland said:


> Even at 2.99% which would be difficult to get because it's a second property, it still doesn't cash flow because even with 20% down and 2.99 the payments are $1470.00. Add in maintenance fees and you're over your attainable rent amount.
> 
> Over 5 years, you're going to have a few months of vacancy and some repairs and a paint job or two. At the end of 5 years mortgage paydown is $46,000 but realtor commissions are roughly $22,000... the way I see it without capital appreciation, you've risked $78,000 to make $24,000 over 5 years.
> 
> ...


I was looking at it as me as an individual renting vs. owning the same place. So if I were to buy my current rental unit, I'd be able to get ~3% mortgage. Vacancy wouldn't be an issue since I'm living in it. I ran the math on my current place and it works out in favour of buying the place, but only if I were to stay here for 5+ years, which I will not. I think with prices and rents where they are now, there are some places where buying is better, others where renting is better.

Obviously the deciding factor is further price appreciation, or a crash. $40,000 rental income is nothing compared to how much prices could rise or fall over this period.


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## dvelecka (Oct 18, 2012)

I read an article the other day published by cbc titled Rent vs. buy? With real estate, it depends. (http://www.cbc.ca/news/business/story/2012/11/06/rent-versus-buy.html) I think it is worth reading for everyone. They basically mention that the majority of Canadians are in favor of buying, as it is viewed as a safe investment and a wise retirement savings vehicle. However, the mortgage rate that buyers are given for financing is often the biggest factor to consider. When the implementation of the new mortgage rules, borrowers are forced to pay back their loans quicker, which reduces the amount they're able to borrow overall. Moreover, if borrowers refinance these mortgages, and interest rates were to rise, most Canadians wouldn't be able to afford these homes.
In my opinion, this is starting to resemble the same problems the US housing market dealt with... interest rates were held at 1%, allowing people who would otherwise not be able to afford a home to buy one. But once interest rates increased, these people were faced with foreclosure as they could not longer afford to refinance their mortgage at higher interest rates.


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## andrewf (Mar 1, 2010)

In the short run, the biggest factor is pricing. You can be ruined, financially, if you buy house you can just afford at current interest rates, and the price drops. If in 5 years at renewal time you don't have enough equity, you may find yourself in a liquidity crunch and have to cough up additional funds to renew your mortgage. I don't think this is necessarily likely, but it could happen.


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