Maybe this is groundbreaking thought, and maybe it isn’t, but if you think of your house or condo as an “investment” before anything else, then you could be making a tragic mistake…
Home.
House. Residence. Dwelling. Abode. Domicile. Quarters.
A place in which you live, not just sleep; but live your life, and experience all that there is in this world.
How can you put a price on that?
Every buyer has a different set of criteria when house-shopping, and what may be important to one buyer might not even be a factor to another. But every buyer considers the financial element of the purchase to some degree, both in present and in future terms.
But how much will the potential appreciation of a property factor into your decision? Enough to completely change course?
People throw around the word “investment” a lot when it comes to real estate, and personally, I think the word is being misused.
Stocks, bonds, gold coins – these are things in which you invest, but you don’t live inside them.
Real estate is a whole different animal.
Real estate is the most unique “investment” there is, since you actually live inside the investment. And as I said at the onset, the real estate that you own is responsible for your well being, and shapes your life.
So how can you possibly look at a house or a condo strictly and solely as an “investment?” You can’t, in my opinion, and I don’t think that the investment angle of the purchase decision should ever be atop one’s list, so long as that property is as a primary residence.
A member of my extended family, who we’ll call “Mikey,” is 21-years-old, and finishing university. He’s a brilliant kid, and is coming from a business background, so naturally he’s already thinking about when and where to purchase his first condo.
The only problem is: Mikey considers this purchase to be nothing more than an investment, and I think he needs to broaden his horizons.
I’ve tried to explain to Mikey that my first condo on King Street East changed and shaped my life. Sure, I made some money on the property, and I could have made more or less money in a different building, but none of that mattered to me then, and I wouldn’t change those five years for anything.
Moving downtown changed my life in many ways, and it provided me with some of the best years of my life.
So, would I have rather lived at Yonge/Finch if I knew I could have made another 10% on the sale of the condo? Not a chance.
But this is where Mikey disagrees with me. Mikey believes that he should be looking strictly at a condo for how much it’s going to appreciate (or how little it’ll depreciate for you market-bears), and that this is the only factor in the decision-making process.
I told Mikey, “You’re looking at this all wrong. Do you think your condo is actually an investment?”
He said, “That’s the only thing it is.”
When I start working with a first-time-buyer, I try to expand their horizons a little. Many agents would simply sell the buyer the first thing they express interest in, but I like to take them out of their comfort zone, and introduce them to new areas.
You only want to look in Liberty Village? Great, let’s meet at the Garment Factory Lofts in Leslieville, and then we’ll head to Liberty Village right after.
You’re completely set on Bay Street condos because they’re two-minutes from your office? Cool. But let’s check out 11 St. Joseph’s, and a handful of other buildings that are walking distance.
Why else would somebody hire me? Any agent can take a buyer to see two condos that the buyer pulled off www.realtor.ca, but my job is to highlight the neighbourhoods, locations, and styles that the buyer doesn’t know about.
How many buyers do you think knew about the Robert Watson Lofts when they started their search? Very few, but every time I take a buyer into that building, they fall in love with it, as well as the giant park next door, and the booming retail strip on Roncesvalles Avenue.
A buyer’s housing-search can take many shapes and forms, and last one day or one year, but I think that most buyers are interested in finding a property they love, in a location that will shape their lives for years to come.
So should they give all that up for another $10,000? $15,000? At what point do you move to Ajax because you know you can make more money on your “investment?”
A lot of my downtown-banker-type clients are obsessed with the investment side of real estate, and they always ask me to forecast the appreciation of the property. So I’ll ask them, “If that unit we saw at 37 Grosvenor Street went up 5% per year for three years, and the unit we saw at 38 Princess Street went up 4% per year for three years, would that be a factor in your decision?”
These guys always look at me like I’m nuts; as if the question is rhetorical.
But should it be?
If you bought a $300,000 condo, and it was worth $336,000 in three years, would you kick yourself for not having bought a different unit if you “knew” it would have been worth $345,000?
What about the life you lived in that condo for three years? What was that worth? Would your life have been different at 25 Carlton than at 38 Princess Street?
Would you have met your girlfriend at Betty’s on King Street?
Would you have had breakfast at the Patrician Grill every Sunday?
Would you have discovered the same sights & sounds, bars, restaurants, furniture stores, brunch locales, and movie theatres?
Would you have had met the same people and done the same things?
I’m not trying to over-romanticize this, but I can speak from experience (both mine, and that of my clients) that where you live in the city of Toronto plays far more of a role in your life than you might think.
I have a client right now who lives in a condo up in Richmond Hill and he can’t wait to buy a place downtown and get the hell out of Dodge. Why? Because all his friends live midtown, downtown, or some place in between, and he’s tired of checking his watch on Saturday night to see if he can catch the last hour-long bus back to Richmond Hill. Where he lives, and what he “invested” in, is shaping his life.
So I asked my cousin Mikey the other night, “If you lived at The Florian, where would you eat? Where would you hang out? Who do you know that lives around there? What attracts you to the area? How far is it from the TTC? Where would you park your car if you bought a unit with no owned space? What’s the quickest way to get to the highway for golf? What’s the cost of groceries like compared to Yonge/Eglinton?”
I asked Mikey about forty questions, all of which he answered with some form of “Doesn’t matter” or “Who cares?”
Mikey is convinced that “it’s all the same,” and that if he can make a better ROI by purchasing a unit at The Florian, then he need not look at King West, King East, Liberty Village, Yonge/Eg, or any other location in the city of Toronto.
And I think that’s a mistake.
If Mikey made $180,000 on his “investment” in the next six years, versus making $110,000 on a different condo, in a different area, that would be far more conducive to his life and lifestyle, then is it worth it?
You can play around with the numbers all you want; everybody has a price. Yes, I would live at Yonge/Finch if you paid me $1 Million per year.
But in reality, we’re still forecasting numbers here, and the potential appreciation of Condo-A versus Condo-B is guesswork anyways.
Real estate does have an investment component to it, but it can’t be viewed strictly as an investment.
As I told Mikey repeatedly, “Stop using the word ‘investment’ and starting using the term ‘principal residence,’ because that is what your condo would be.”
Maybe I just need to inject more life into this kid, or maybe he’s smarter than all of us. I’m not sure.
But unless you’re purchasing a true “investment property,” ie. something you don’t live in (a second property, an income generating property, etc), then I think the property you actually live in should not be considered a true “investment.” It’s a home.
Otherwise, we would only purchase the car that depreciated less than all the rest instead of the one that’s the safest for our family, (or the flashiest for our easily-impressed friends if that’s your thing…).
And wouldn’t we all be wearing Froot of The Loom from head to toe as well?
Ralph Cramdown
at 8:04 am
How the seasons change! When everything’s going up, people in the industry stress the investment aspect. “Getting on the property ladder,” “starter home,” “building equity,” “up-and-coming neighbourhood” are all popular phrases. When things start to turn, suddenly all realtors agree — your home is primarily a place to live (i.e. don’t expect as much appreciation). But for the premia over rent that owned units generally cost, there’d BETTER be appreciation.
Your cousin Mikey didn’t come by his opinions organically; they’re completely a product of the environment he’s been raised in. And the reason finance types look at you like you’ve got a screw loose when you ask if they care about getting 5% over 3 years vs. 3% over 3 years? You already know the answer: The 5% property returns 70% more, gross, than the 3% one. Here’s one last tip for Mikey: If he MUST buy, be sure to buy in a neighbourhood he really likes, because he may end up living (or landlording) there longer than he anticipated if his exit strategy doesn’t work out.
MY
at 10:40 am
I don’t think forecasting ANY sort of appreciation is a wise decision at the moment. I’m in Ottawa so our housing market has different variables but running the math on owning versus renting, potential appreciation, etc. doesn’t have me convinced that one can tell me I would have 0, 3, 5 or 10 percent appreciation over the next five years. If Mikey really wants to buy then I definitely agree he should be ready for the long haul.
Geoff
at 9:12 am
It’s said that ‘youth is wasted on the young’ and this is a classic example. I mean why a 21 year old kid just starting his career wants to own anything is crazy – what if he wants to travel, or his job changes, or he meets a girl who lives in the US, life throws a lot of things at you. Renting gives flexibility, and freedom.
Mstar
at 12:54 am
To Own anything is crazy ?? At any age and earlier the better(if life changes, you turn the prop into an income producing one)! Many of the wealthy accumulate wealth through ownership of appreciating assets and business. This Kid should be complimented not called crazy. Crazy are the youth that are wasting their money on owning short term pleasures usually to make others/ friends happy. I realize a balance is needed but this type of long term thinking should supported not frowned upon. C’mon Geoff.
Geoff
at 9:03 am
I think my argument is pretty rational – that to own anything AT 21 is not suitable for most people I think. Not to own anything at any age. Though with current pricing, it doesn’t seem logically supported to buy over renting. (It’s like we’ve never heard of what happened in this small country called America).
Oren
at 3:17 pm
Solutions:
Travel: He can save up.
Job changes: He can adapt to the changes, sell & relocate if necessary
Meets a girl who lives in the U.S: Adapts, she can move in, he can sell and relocate. Besides, she would probably fall in love with him even more because of his maturity which is seen in his sound decision in buying a condo.
To own anything anything at 21 is not suitable for MOST. He is clearly not in the “most” category since the median age of first time home buyers being 31.
Memememe
at 9:36 am
I completely agree with David.
I can buy or sell a stock/etf/bond with a couple of clicks, minutes, and a $5.00 commission.
If you buy a house with the intent that it is anything more than a place to live, you are in for a nasty surprise when 5% of the sale price of your home goes to realtor fees alone, with additional costs for lawyers, house inspections and all that other fun stuff are added into the mix. All of this can quickly eat away at your investment profits when it comes to housing.
Past generations have been lucky to see such generous gains in housing year over year… having said that, as we know with the stock market, past performance is no guarantee of future performance.
Buy within your means and buy for the long haul.
ABB
at 10:53 am
This is a spoiled generation that thinks that normal financial math does not apply. The reality will hit them in the face and wipe away their youthful arrogance in short time. Ha ha ha then we will see who is strutting around Bay Street.
Geoff
at 11:44 am
That would be harmful to the economy at large, genius.
Lisa
at 4:04 pm
“If you bought a $300,000 condo, and it was worth $336,000 in three years, would you kick yourself for not having bought a different unit if you “knew” it would have been worth $345,000?”
And, even better, what if you bought the one you “knew” would be worth more in three years, but then in ended up being worth less than the one you would have preferred to live in?
Couldn’t agree more with this blog post. I bought where I wanted to live without any expectation of an increase in value.
Kyle
at 5:15 pm
I’ve made comments on this blog with similar sentiments, so i agree whole-heartedly with this post. The media and the population has become so price focused when it comes to real estate, which frankly isn’t the point of owning a home. Everyday there are dozens of news reports saying housing will rise crash, stagnate, be up 10%, be down 10%, etc. And people have started to look at them purely from a ROE stand point, which in my opinion is a bad approach.
A home is not like traditional investments and analyzing them like a commodity is a good way to make bad decisions. There are so many intangible factors that cause a house to be worth what it is worth. For the most part what makes a home great to live in (i.e. being in a great hood with great schools, great transportation, great amenities, etc) will also make it a good “investment”. But looking at homes quantitatively as a set of metrics that need to be optimized from a relative value stand point(i.e. $/sq ft vs average, replacement value, etc), is a good way to buy an underperforming dog that you aren’t even happy living in.
There is also the fact that everyone is focused one to two years out. If what your house is worth next year is going to prevent you from sleeping at night, then you really shouldn’t be an owner.
Chuck
at 6:51 pm
I’m looking forward to the day when people remember that a house is more than an ATM machine.
Great comments from people…
There are some immensely talented, creative and inspiring youth today. But there are an equal number that are so far out to lunch that it’s hard to hold out hope for them…
DavidP
at 1:23 am
I completely agree with everything…but the Patrician Grill on a Sunday??? David you’ve lived in the hood long enough to know that doesn’t exist.
David Fleming
at 11:38 am
@ DavidP
Shhhh! I’ve actually never been there! I always go to Jason George, never anywhere else. But I figured more people would know Patrician Grill. Is it really gone? I haven’t walked by there in a while, now that I live…..a block further down! 🙂
DavidP
at 11:45 am
It’s still there, but they don’t open on Sundays. 🙂
lui
at 10:21 am
I still think buying a “fix her upper” in a good location is still a good investment,of course if your handy with tools and friends who would help for a case of nice german brew….
Devore
at 10:24 am
When you’re spending multiple times your annual income on something, leveraged 20:1, how can it possibly NOT be an investment? WHERE you live is a lifestyle choice, but within your target area or housing style you have many choices, and they are not all equal. For some people the investment aspect will weigh more heavily, for some it may even dictate where they will buy and live, if they believe one area has more appreciation potential than another. For some it’s a place to crash and wolf down breakfast, for others it’s a showpiece.
The thing with places we live in is that we get used to them, their quirks, and how they limit and shape our choices very very quickly. It just becomes home. In that respect, at least, one place is almost as good as another. Sure, maybe you wouldn’t have met your current girlfriend if you lived somewhere else, but you’re foregoing all other experiences living elsewhere, even another floor, would have opened up. Due to the way human mind works (cognitive dissonance and all that), we MUST believe we live in the best possible world of the options we had available. If we lived somewhere else, our life wouldn’t just be different, it actually wouldn’t be as good.
And isn’t it funny that a “principal residence” is an investment when it’s going up 20% a year, quickly becomes just “a place to live” when the return on your ING high interest savings starts looking juicy.
AsianSensation
at 2:00 pm
Great piece.
Mikey is a part of the ‘entitlement’ generation and has warped expectations.
If he wants a sure-fire way to appreciate his $ by 5% put it into laddered GIC’s or ETF’s.
Otherwise David, you’ll be held responsible for putting him in something not giving him a 5% return.
Buy where you want to LIVE!
moonbeam!
at 9:55 am
Buyer’s remorse is a terrible thing, not to wish on anyone… whether because the property depreciates in value, or the neighbourhood (or neighbours) turn out to be problematic, or the property has defects, or the space itself isn’t enjoyable. Buying property requires a huge leap of faith…. with my own experience buying in Scarborough 11 years ago and not regretting it!!
Cory
at 11:50 pm
I agree with Geoff. A 21 year old guy shouldn’t be buying anything. I bought a townshouse when I was twenty one many years ago but that’s when real estate was quite cheap. Now to saddle yourself with a $250K plus mortgage at that age is just plain stupid.
George
at 10:14 pm
I can relate since I am 25 and I bought my condo 2 years ago in the suburbs. I chose by looking at proximity to work and by forecasting which location will potentially depreciate the least if the so called “bubble” bursts. Looking for appreciation, especially in the DT core right now, is craziness. I also put 20% down.
I think the guy that suggested renting makes a good point at THIS time for him.