I was fortunate enough to be interviewed for Rob Carrick’s column in the Globe and Mail on Tuesday, and because of the content of the article, I received no less than a half-dozen emails, phone calls, and Tweets from Realtors asking, “What the hell were you thinking?”
I had the audacity to admit (gulp!) that some young people in Toronto might benefit from renting a condo instead of buying one!
Egad!
I guess I’m naive, that’s all. As an active real estate SALES person, I suppose I’m supposed to SELL condos to every interested party, regardless of whether that’s the right move for them…
“Tell me you were misquoted in today’s stupid piece of drivel from Carrick,” read a text message on my phone first thing on Tuesday morning.
It was sandwiched in between two other messages, both saying something to the effect of, “Hey, great article, congrats!”
Positivity, please meet your cousin: negativity.
I’ve been reading Rob Carrick’s articles in the Globe & Mail for as long as I can remember. I don’t always agree with the content, but show me ONE columnist in any newspaper in the world where you do agree with everything, and I’ll probably show you a mirror…
I find Carrick’s articles to be extremely helpful to the younger generation, who likely aren’t reading the Globe & Mail anyways.
Carrick writes about a variety of topics, but it’s those on personal finance that I find the most relevant.
Maybe the majority of my regular blog readers happen to be business-savvy and successful, but think about how many people out there, whether they’re 18 or 88, don’t know what “compounded interest” means.
Think about how many people live paycheque-to-paycheque, and how many people don’t understand why making the minimum payment on their credit card each month will never eliminate the outstanding balance.
I’m constantly amazed by how ignorant people can be when it comes to personal finance, and part of me thinks that today’s young generation is in for a major wake-up call over the next few years.
As I discussed with Mr. Carrick last week, I find that today’s younger generation have had everything they’ve ever wanted at their fingertips, and they’ve never had to reach for anything.
Think about what it was like back when you were a kid, and you wanted to do a school project, say, on wolves. You went to the school library, and the public library, and you sorted through the card-catalogue looking for books on wolves, then you signed them out of the library, and went home to read them. You sifted through the books, wrote down “facts” on a piece of paper, and then organized those facts into a short summary, essay, paper, or what have you.
That’s how we learned to write.
Today, and yesterday, kids just type “wolves” into Google, and 10,000,000,000 web pages come up.
And you don’t even need to sit down at your laptop in your bedroom either (FYI – I maxed out at a stereo on my bedroom as a child; never had a TV, computer, or game system), since all this is available on your smart-phone or tablet.
Today’s 20-somethings have experienced immediate gratification their entire lives, through the most rapid advancement in technology that society has ever seen.
As a result, and I’m writing this after speaking with a 23-year-old who works in my office, and a 19-year-old who I coached in baseball for three years, today’s younger generation wants everything NOW, and they want the BEST as well.
As a result, many of these kids don’t know the value of a dollar, don’t know how to plan financially, and don’t want to spend two seconds weighing the pros and cons of different options, when they can just walk into the more attractive one immediately.
This is why I find Rob Carrick’s articles on personal finance so helpful.
If you’re a 40-year-old, who makes $900,000 per year, then OF COURSE you find his articles to be elementary, and unappealing!
But I was shocked to see the outcry this past Tuesday when Carrick wrote an article about renting condos instead of buying, and the cost savings potentially associated with doing so.
I was also shocked, although perhaps I shouldn’t have been, by the amount of Sh!t I took from industry “colleagues” who felt I was giving ammunition to the real estate bears.
Bears? Bulls?
Is this like Sharks & Jets?
I’m fully aware that Rob Carrick is a real estate bear, but that doesn’t mean I wasn’t going to speak with him. We chatted for a half hour about renting versus buying, and I was open, and honest. At no point did he misquote me in his article, as a couple of my colleagues had “hoped.”
Can’t I be honest and suggest that some people aren’t cut out for buying? However few that may be, and despite my consistent outlook that buying is probably a better option than renting, can’t I suggest that sometimes, the situation calls for a buyer to rent?
Last year, a young man came to me from my blog, and told me he wanted to buy a condo in downtown Toronto. He was looking to spend around $250,000, and was fully accepting of the fact that this would get him a bachelor condo, or a very small 1-bedroom. But it wasn’t until we were into our fourth or fifth email that he told me he was on an 18-month contract at a downtown financial services firm, after which he was likely heading back to Calgary.
I told him the truth: that buying probably didn’t make sense for him.
To purchase a condo and pay land transfer tax and legal fees, and then sell it in 15-16 months, with a 1-2 month closing, and pay realtor fees and legal fees, would more than likely be a break-even proposition.
What the hell is wrong with being honest?
I could not, in good conscience, tell this kid to purchase a condo in the downtown core, and forecast a 10% appreciation in 15-16 months so that he could break even.
I leased him a wicked loft for $2,000 per month, and he’s just coming up to the end of the work term, and as planned, he will head back to Calgary.
You can make numbers say anything you want, if you’re a bull, or a bear.
You can tell me that I helped him “throw away” $36,000 over the 18 months, if you want, but you’d be ignoring the carrying cost af a $250,000 condo, which with 5% down, was about $1,200/month for the mortgage (perhaps $700 in interest), $400/month for maintenance and utilities, and $150/month for taxes.
The condo he leased for $2,000 per month probably would have cost him $450,000, which you might say was almost “twice as good” as what he could have afforded at $250,000.
Make no bones about it: I do generally feel it is a much, much better use of your money to BUY rather than RENT. But in certain situations, it’s the other way around.
Imagine my audacity in Rob Carrick’s article to say, “I don’t think it’s a bad move,” in reference to renting a condo.
I’m not going to pump up everything in Carrick’s article. Carrick says:
“Rent a condo and park all the money you’re saving as a renter in a nice, safe high-interest savings account held in a tax-free savings account. In the example just above, you’d save about $370 a month by renting. In a high interest account paying 1.25 per cent, you would end up with $22,894 after five years. That’s two-thirds of the way to a 5-per-cent down payment on a $600,000 Toronto house.”
There are two problems with this, in my opinion:
1) Where do I find a $600,000 house in Toronto?
2) There’s a decent chance that a $600,000 house in Toronto will be $750,000 or $800,000 in five years, so that “savings” will have cost you $150-$200K in tax-free capital gains, the likes of which can take you years to make from your after-tax employment income.
So no, I don’t agree with everything in the article, but I certainly don’t regret giving my two cents to a “market bear.”
At the very least, the ideas in the article, and the numbers and calculations contained within, should get the mind of a young person moving, and get them to consider that when they’re adults, they no longer receive the “new and improved” iPod every single year for Christmas like they did from mommy and daddy, and instead, they’ll have to decide whether $300 from after-tax dollars is worth spending on something that has the same function as that which they’re replacing.
But on the flip side, we have contributions like what my good friend and colleague from Re/Max Condos Plus wrote, and Tweeted @ me on Thursday, written HERE.
He ended with this:
“In summary, renting involves the worst economic outcome and also comes with the biggest risk.”
That is the most insane, inane, poorly-worded statement I’ve seen in quite some time.
It’s a blanket statement; an extreme hyperbole, which can be true some of the time, or false some of the time, but on the whole, is exceptionally generic and thus incredibly misleading. The situation he described had nothing to do with “risk,” nor was that word used during the text of the column, and the situation had nothing to do with “economics.”
It’s what makes the general public hate real estate agents.
I’ve prided myself on being honest and forthcoming on my blog. I try to see both sides of an argument, and often argue two sides of the coin. That is what I tried to help Rob Carrick with in his article.
My friend from Re/Max Condos simply demonstrated what the general public loathes about real estate agents, which is that they SELL, and don’t advise. They PUSH, and don’t guide. They are “salespeople,” and not don’t always act in the best interest of the client, who might actually benefit from renting, instead of buying. Every single situation is different, and there are no two situations the same.
I’m a real estate bull, make no mistake.
But I’m not dishonest, and I’m not going to make a blanket statement like, “Buying a condo is ALWAYS a better option than renting one, for every man, woman, or child, 100% of the time.”
I wish I could share with you the emails, Tweets, and phone calls I received from Realtors who were afraid I might somehow cost them (how, exactly??) a sale or two, or put the idea in the heads of the public that renting is a better idea than buying.
Are people really that impressionable?
IanC
at 8:31 am
That’s a great question.
My feeling is that if someone is not tuned in to finances and is buying for the wrong reason, your comments and the comments of the overstating author are not going to reach them.
Your realtor contacts should chillax.
Vincent Cheung
at 9:09 am
You are on the money. Renting can be better than buying depending on the situation.
Most real estate agents just want people to buy and sell, that is how they make money. Always a good time to buy and sell. THe shorter your time period the better since they can make money sooner.
Kyle
at 9:32 am
I agree with your analysis that in some cases renting is a better option than owning. Owning comes with big front end and back end costs. And it takes time for a house or condo to appreciate enough to make up for that sunk cost. So if you don’t plan on keeping the house for more than 3 years, renting can be a less risky option.
That said, i have very little respect for Carrick’s highly-biased, slanted and frankly terrible advice that he dispenses under the guise of financial advice. Ethical advisors try to inform by providing the full picture, pros vs cons, costs vs benefits, risks vs rewards. Rob Carrick on the other hand presents only the bears’ side of any argument. Does he ever point out the fact that over the long term owning has ALWAYS, beaten renting? He often challenges that house prices can’t rise at X% every year forever, but he and other housing bears seem to take Y% from a diversified portfolio to be a God given right. Let’s face it, as long as you’re a housing bear, you don’t ever have to be right to develop a following. You already have a critical mass of hopelessly frustrated home buyers, who will hang off your every word, so long as you feed them the typical bear mantras that house prices will eventually fall, and renting is better than buying. The entitlement and naivety of the 20-somethings you describe above makes his target readers even more susceptible to his skewed messages. These frustrated home buyers are looking for comfort and hope. That’s what Carrick and the other bears are selling not financial advice.
Darren
at 11:00 am
Define always Kyle. My parents bought at the peak of the last bubble and it took 16 years to BREAK EVEN. That’s just price, not factoring in anything else.
Kyle
at 11:30 am
Precisely, they are WAY ahead vs renting. I realize this is a massive over-simplification, but as you said they broke even after 16 years, whereas had they rented they would be down the equivalent of 16 years worth of rent. Since the time of breaking even (i’m guessing that would be about 9 years ago), they are now probably up at least 100%. Again had they rented they would be down the equivalent of another 9 years worth of rent.
Also i assume that by now they are close to if not completely mortgage free. So they now have a very large asset (purchased at 1989 prices), owned free and clear that has doubled and is continuing to rise . Had they been renters, they would NOT have a large asset, they would be down the equivalent of 25 years worth of rent and they would need to continue paying rent at 2014 prices. And would have to continue paying rent (rising with inflation) in perpetuity, so long as they want a roof over their heads.
Over the long term owning has ALWAYS beaten renting.
Geoff
at 12:12 pm
@ Kyle – only if they rented for 16 years. Lots of people move within 5 – 7 years of buying.
It’s also very easy to own a house that costs a lot more to maintain than repair.
Keep in mind, I do own my home. I just don’t think the answer is ALWAYS one thing or the other.
Kyle
at 3:24 pm
Agreed it is an over-simplification that doesn’t take into account owners who move. It was a simplistic analysis meant to illustrate buy and hold vs rent and stay. And yes, there are VERY remote one-offs such as house prices cratering and never coming back like in ghost towns or if decades of deflation were to happen, that could happen in the future. But what i actually meant to say is, “Over the long term owning has ALWAYS beaten renting…in Toronto”
Darren
at 1:07 pm
I’m on my phone so I can’t go into details, but with some simple math it was obvious (to me and my parents) that they would have been better off renting and investing the difference. By a mile. I agree that often buying is a good idea for the long term, but to say ALWAYS is not only false but shows an incredible lack of objectivity.
Kyle
at 3:01 pm
I would love to see that math, cause until you prove me wrong my comment stands (i.e. Its false, only when you prove it false, not when you say, “oh i recall once upon a time doing some simple math that convinced me i was right”). And if you want to talk about objectivity, you are focusing on the one year in the last 61 years, where there was a peak followed by a trough to try to prove some point (which by the way you have not proven). Whereas what i say holds strongly for the other 60 out of 61 years (and more than likely holds for 1989 as well, but i’m giving you the benefit of the doubt). I would say you are not the one being objective.
Regardless here is the simple math:
In the long term this notion of renters saving and investing the positive cash flow difference is pure bunk. Because this positive cash flow difference only exists for a very short time. Rent rises with inflation, while mortgage payments do not, so at some point rent exceeds the cost of the mortgage payment (i.e. there is now a negative cash flow difference). At this point, renters are no longer net savers/investors, and become net withdrawers from any savings or investments they may have accumulated up to that point (plus they have to pay tax on it). In fact at this point, i would argue that the owners become net cash flow savers/investors. Because conceptually they could start saving the cash flow difference between their locked in mortgage payment and the current level of rent. This negative cash flow gap continues to grow over time with inflation. It’s obvious that renters are not going to end up ahead. Ask anyone who has bought 10 or more years ago what their mortgage payment is and compare that amount to what it would cost to rent the same place. Like those that bought condos in 2004 when the average price was 183K and have $1000 mortgage payments. Good luck trying to rent an equivalent place for that little. And then really long term, once a mortgage is paid off, owners no longer have any cashflow out, whereas renters have a perpetual cash flow out that continues to rise with inflation. Now on top of that add in tax free house price appreciation, and accumulated equity, all things renters will never ever see. Now on top of that add in the return on the owners net savings from the time rent surpassed their mortgage payments. Sure there are some highly improbable events like a Detroit style house price collapse or Argentina like deflation, but in the context of the Toronto real estate market ALWAYS is a pretty accurate description.
Darren
at 12:24 pm
” And if you want to talk about objectivity, you are focusing on the one year in the last 61 years, where there was a peak followed by a trough to try to prove some point (which by the way you have not proven). ”
You are throwing around the word always. This above statement alone proves that using that word invalidates your argument. As for what I’ve not proven, do I need to actually prove to you that there was a peak in the late 70’s and again in the late 80s? Or do you deny this?
As for the stats, I’m not going to go recreating the math for you on a transaction that was done around 7 years ago. If you don’t want to believe me that’s fine. But I can tell you that I sold my condo 2 years ago and I now rent a place that’s about the same size in a better location. With the profits I made (I am not in any way denying that there is money to be made in real estate if wise decisions are made) I invested it. Not only has the money I’ve made from those investments paid for my rent, but I’ve made more money than my parents did in the 18 or so years they owed their home. Sure I paid taxes, but it’s a much lower rate than income tax and wasn’t very much. I think the lure of getting tax free gains from property is given too much weighting.
As for the current value of my condo, I don’t believe there’s been any substantial increases in prices in my building in the last 2 years from what I can see. In fact I think prices might even be slightly lower. If David is interested in looking this up I’d be happy to give him the location in private and he can let us know.
If you’re so confident in your opinion then you should become an agent (if you’re not already one) and starting offering a service with “guaranteed rates of return” since real estate is “always” a good investment. I don’t doubt you’d have plenty of customers who was interested in investing in a “sure thing”. Maybe after a few years you might come to see the danger and irresponsibility of throwing around the word always.
Kyle
at 10:17 am
I couldn’t care less about what has happened to your condo on a 2 year time horizon. I said “over the long term”. Just because there have been historic peaks in the past, doesn’t mean renting has ever won, it just means the time horizon for owning to beat renting took longer during those periods. But make no mistake, if you look at the historic prices and rents of Toronto, you can pick any starting point, whether it was a peak or not, and over a long enough time horizon, OWNING HAS ALWAYS BEATEN RENTING. Let’s face it the real reason you aren’t providing any calculations or stats is because you’re flat out wrong.
Ask yourself in 20 years when you’re still waiting for the big crash, whether your monthly rent is still lower than the monthly mortgage payment you gave up 22 years before that, and whether the sum of all the rent you’ve paid would have been less than the sum of your mortgage payments over the same period. It’s pretty clear the answer is NO. With any normal inflation, the cash flow ALWAYS swings in favour of owning OVER THE LONG TERM. And there is nothing irresponsible about saying it because it is a FACT. Anyone who’s taken a basic accounting course can tell you that over a long enough time horizon an everlasting continuously growing EXPENSE (i.e. renting) is going to erode your balance sheet vs purchasing an appreciating ASSET (i.e. owning) is going to grow your balance sheet. And anyone who has taken an economics course will tell you that the NPV of a rental stream MUST be greater than the NPV of carrying that property, or there would be no such thing as landlords, and renting would cease to even be an option. You may be ahead by renting over the short to medium term (which all of your anecdotes have been based on) but longer term whether you choose to accept the fact or not, you’re going to be worse off.
As for your advice about me being a real estate agent:
1. I am not one
2. I already make as much or more than most top agents, without working weekends, evenings, or having to worry about seasons or cycles. Plus i get 4 weeks vacation, benefits and a pension. So um…No thanks!
3. You don’t have to be a real estate agent to make money from real estate. Over the last 11 years I have made about 250% on every penny i’ve put into OWNING real estate. Over the long term, it is highly unlikely any investment would return that after tax, after withdrawals to pay your rent.
4. If i were a Real Estate Agent, i would advise people to look at their primary residence, PRIMARILY AS A RESIDENCE, NOT AS AN INVESTMENT. Those that focus so much on the investment value of a home often end up doing financially dumb things, like trying to time the market. Such as all those sad people who paid high transaction costs to sell their places and rent, thinking they could buy back lower after the big crash. These same people now find themselves facing 2 choices: A) continuing to pay monthly rents that rise year after year and keep praying that house prices will come down some day by enough to cover all the rent they’ve sunk and their eventual transaction costs; or B) admit that trying to time the market was a bad idea and just pay the high transaction costs now and buy back in at prices higher than when they sold.
Paully
at 9:38 am
Are there are any condos today in Toronto that would carry for less than what they would cost to rent on a monthly basis right now? In most cases, when you add in CMHC fees, double land-transfer tax, legal fees, forgone income on the down-payment, reasonable maintenance and repair, and the future realty commission costs of selling the condo, the monthly rent is much less than the monthly ownership costs. The shorter the term of ownership, the larger the difference.
However, if prices continue to rise continuously at 5%, 7%, 10% or whatever, the total cost of ownership can still become less than the rent, since the capital gain erases the operating difference.
The flip-side is that if prices flat-line or start to fall, the capital loss magnifies the operating difference.
Either way, your RE agent complainers should recognize that they are still going to make their pound of flesh no matter whether the market is rising or falling.
joel
at 9:55 am
“They are “salespeople,” and not don’t always act in the best interest of the client, who might actually benefit from renting, instead of buying. Every single situation is different, and there are no two situations the same.”
This made me think that the investment industry in Ontario is very regulated and each and every transaction the seller has to show why it is a good fit for their client. This could be for an investment of 100K or 5K and they can lose their license if they can’t show why this is a good fit. Yet, as you are showing here, a real estate agent can sell a million dollar asset and not have to prove in anyway that it is a good fit for their client. I had never thought of it this way before, but it is kind of crazy.
Joe Q.
at 10:32 am
The RE industry gets away with a lot of stuff that would be prohibited or at least frowned upon in the investment industry. The promotional literature from some condo developers comes to mind — especially the stuff coming from developers with animal names, predicting specific ROIs.
ScottyP
at 11:29 pm
Come now, Joe Q. It’s very Brad, I mean bad of you to be insinuating that certain Lamb, I mean lame developers aren’t above Brad, I mean, above board. You should know it’s not good to Lambaste others.
Joe Q.
at 3:41 pm
David, I read the article when it came out, and thought your advice was eminently sensible (though I could see the flak coming from a mile away).
I personally find Rob Carrick’s writing quite reasonable (he discusses far more than just RE). The key thing is to remember that he is a columnist — not a financial advisor. His goal is to write columns that people are interested in reading. In that context, being a bit contrarian or provocative is part of the job.
Jamie Johnston
at 5:54 pm
Thanks for using the word ‘friend’ in such a positive fashion with the implication that we are dishonest. Yes we do advise clients in terms of renting vs. buying. We told all of our investor clients to rent out their units and not sell them as Assignments to the detriment of our Brokerage last year. We also handled more rentals than sales in 2013 and certainly more rentals than Bosley. Our position has always been that you should buy if your time horizon is 4+ years. We do lots of rentals for students, doctors, and executives who are only in Toronto for a couple of years. If you read the first line of my blog, we talked about renting as a personal preference and of course time frame factors in. The Carrick article was based strictly on economics.So was ours.
Geoff
at 6:14 pm
“… “You should always buy if your time horizon is 4+ years…”
This just proves my point – it’s never going to be an always this or an always that proposition.
Personally I don’t understand why it automatically more sense to spend $1.5M to buy a house than rent one for 49 months but not for 47 months.
ScottyP
at 11:36 pm
Ya gotta admit tho Jamie Johnston, the line “In summary renting involves the worst economic outcome and also comes with the biggest risk” was pretty freakin’ dumb.
Darren
at 10:04 am
I can’t reply directly to the above message from Kyle but there he goes using the word always again. Ask people all over the USA and many other countries if they agree with that. Canada isn’t that special. I can give numbers. But you need to define what “long term” is. If we are to assume that everyone buys a home, buys something well within their means and keeps it until they die I would absolutely agree with you. But we live in a time where people take on maximum debt and move an average of 5 years. If prices rise forever as they have recently then it won’t matter, but prices cannot go up much further. Interest is about as low as it can go. There a very good chance that people who bought recently will lose money. But you can believe in your absolutes if you wish. My plan is working out very nicely for me.
Darren
at 6:47 pm
Ok Kyle,
Now that I’m home and not typing on a phone here’s some numbers for you as you requested. You stated that you’ve made lots of money over 11 years. Good for you, genuinely. But pretty much anyone who invested in real estate in the last 11 years has made good money. Myself included. That trend cannot continue. Home ownership is higher than it’s ever been. Debt levels are the highest they’ve ever been. Interest rates are the lowest they’ve ever been. It’s up to the individual to decide what they think the future holds, but I don’t see the next 11 years having growth approaching anything like what we’ve had for the previous 11.
Since you’ve said 11 years, I’m going to use 11 as my “long term”. I’m going to use the example of my condo that I sold 2 years ago. Using the dollar figures I had at the time (money available for down payment if I were the one buying it, the sale price, etc).
I’m comparing to where I rent now which is pretty much the same size but is in a better location.
I left the rent cost consistent over those 11 years for simplicity. For the same reason I left the monthly condo fees/taxes/ulitities the same too. We all know that those go up with regularlity, especially electricity in the near future.
I’m actually locked into my rental rate for 5 years, so I wouldn’t see an increase until year 6. I don’t think it will be very much as I’ve got a great relationship with my landlord, but I’m confident whatever it would be would be less than the increased monthly costs were I an owner in my old place.
So here it is:
I would have had a down payment of $180,000 and I would be buying the place for $318,000
Here’s the breakdown
Investment of $180,000 at an average rate of return of 7%
At year 11 value of $378,873.35 for a profit of $198,873.35
Cost of renting over 11 years. $1400/month.
Total cost of $184,800
Home purchased at $318,000 with down payment of $180,000
Monthly mortgage $653.08. $700 month Taxes/Condo Fee/Utilities
comes to $1353.08
Over 11 years that’s a cost of $178,606
Of that $37,815.40 has gone to principal and $48,391.02 has gone to interest.
If we assume a rate of increase over the next 11 years of 2% per year for property values that would put the value of the home at $395,393 for an increase of $77,393
Here’s what I’m left with renting
$198,873.35 Investment Income – $184,800 Rent = $14,073.35 left over
$14,073.35 + $180,000 starting investment is $194,073.35 in my pocket
With owning I paid
$180,000 + $178,606 in mortgage/ownership costs = $358,606
$358,606 – $37,815.40 paid towards principle = $320,791.05
If I were to sell my home here’s what I’ve got
$395,393 home value
Subtract what you’ve paid ($180,000 + $178,606 in mortgage/ownership costs = $358,606)
= $36,787 profit
Add back what you’ve paid in principle
$36,787 + $37,815 = $74,601.98 in your pocket
So after 11 years I would be $119,471.37 better off by renting. This does not even take into the high transaction costs of buying and especially selling!
NOTES:
I did not deduct taxes from the investment. Depending on how you invest and what your other sources of income are the taxes potentially could be close to zero. Even in the worst case scenario it would not be anywhere near signifacant enough to be a deciding factor.
Even though I gave 7% a year on the investments, I’m actually around “year 8” of that 11 year hypothetical plan putting me well ahead of 7%. I know things can turn around but 7% is a perfectly reasonable expectation for an average return.
Before you suggest that my 2% a year increase is too low, I’ll remind you about my parents buying at the last peak. Who sold 19 years later at an average yearly increase of less than 1%.
Did I sell to “buy back in after the crash”? No I didn’t. There were other factors that caused me to sell, I just evaluated what I’d do afterwards and buying again made no sense unless I found the PERFECT place. I’ll be honest, I’d quite like to own a home. I am on a mailing list with David for potential homes. But so far nothing has been good enough to convince me to most. But if I don’t find anything that’s cool. I’ve taken several absolutely awesome, dream vacations since I sold. Something I couldn’t have done if I hadn’t sold and won’t be able to do anymore if I purchase.
Clearly had I bought something similar to what I sold at that time, I’d be much worse off. Does that mean all real estate purchases are bad? No it doesn’t. But it also means that your use of the word “always” because you’ve had nothing but good fortune is extremely foolish.
Darren
at 6:56 pm
Oops. These 3 lines were not supposed to be in there:
With owning I paid
$180,000 + $178,606 in mortgage/ownership costs = $358,606
$358,606 – $37,815.40 paid towards principle = $320,791.05
I just rephrased the way I was explaining it and forgot to delete those lines.
I’d also note that I didn’t factor in here the possibility of any unexpected costs like a Special Assessment. I think that many of the newer condos, including the one I lived in will require work on their exterior windows within a a decade or so which could trigger a Special Assessment in poorly run buildings.
Kyle
at 10:34 pm
Your assumptions are completely unrealistic: you’re going to include the Investment bull market (tax free no less) but assume housing is flat, and you’re going to assume your rent stays the same for 11 years. Ok,if that helps you sleep at night that’s fine. But even with your highly suspect assumptions, you need to check your math. When you sell your house you get your 180k down payment back in your pocket, for a total of 254,601. Meaning you’re better off owning than renting by over 60k.
Kyle
at 10:42 pm
As well the reason I use ALWAYS is because it is a mathematical fact, which is also well supported by Accounting and Economic concepts, as I’ve thoroughly explained above ad nauseum. My own good fortune was just a by product of that math. What would be extremely foolish would be to ignore math, and continue to be willfully blind to the concepts I’ve laid out.
Darren
at 10:42 pm
You need to read thoroughly. I addressed all those things in my posting.
Kyle
at 10:44 pm
Clearly you haven’t because you’re saying when you sell the house you only have 74,601 in your pocket. Did the down payment fairy take the 180k?
Darren
at 11:23 pm
Down payments do not go into escrow while you are living in your home ready for pickup the day you decide to sell.
You are correct however, I made a mistake.
Bought at $318,000
Sold at $395,393
Outstanding on mortgage to bank $89,608
Cheque from the bank on closing (without taking off realtor fees) $305,785
COSTS of ownership
$180,000 down payment and $178,606.
This means you SPENT $358,606 to live there which means you are behind $52,821
Darren
at 11:30 pm
Man I wish you could edit these.
So in the house scenario, I walk away after 11 years with $305k, most likely $290k after realtor fees. My portfolio gives $378k.
Of course as you stated you can put numbers that are high and low. As I expected you think my numbers are bogus. In my opinion I think 2% over the next 11 years is unrealistically high and I think 7% for my portfolio is unrealistically low. But only time will tell. But as I’ve shown, if the numbers are a certain way owning a home might not be worth it. I know, my family went through it. You can refuse to believe me all you want, but the 19 years of ownership my parents had simply was not worth it because they bought at the very peak. If they bought the same place 6 or 7 years later they would have been laughing. That’s life. But your use of “always” is wrong.
Kyle
at 11:18 am
You need to just give it up. You’re wrong again, your accounting is even more dubious than your assumptions. Under the housing scenario you walk away with 305K (or 290K after fees) free and clear and had a roof over your head for 11 years. Under the renting scenario your portfolio may be worth 378K, but unless you can live in your TFSA, your bank account is lighter by the total of your rent of 184K. Anyway you slice it, you’re down by renting. Just because you can delude yourself by selectively including expenses in one scenario and then ignoring them from the other, such that you’re comparing apples to oranges does not make you correct, it just makes you delusional. Like i said owning ALWAYS comes out a head.
Darren
at 7:30 pm
What are you smoking? Who cares what I paid in rent? What matters is the dollar amount I’m left with when I sell or when I liquidate my portfolio.
Just because you think the numbers are bogus doesn’t mean it’s wrong. YOU are wrong by saying owning ALWAYS beats renting. It doesn’t. That is simply ignorance based on your specific experiences. I’ve lived through a real life scenario that was much worse than the hypothetical one I’ve described.
Kyle
at 8:09 pm
“Who cares what I paid in rent?”
LOL I prove you wrong (yet again) using your very own example and you have a tantrum. Sorry the truth hurts. On the bright side you have all those nice memories from those vacations you’ve taken.
Darren
at 9:02 pm
I see. So if someone offered you a choice between two envelopes of cash, you’d rather take the envelope with $300k that was the profits of real estate than the envelope of $370k that was made somewhere else. Interesting…
Kyle
at 9:28 pm
Nice try. Your envelope example, only proves that investments that return 7% leave you with more than housing returning 2% – well duhh!!! That’s not the debate! The debate isn’t whether you would have more by earning 7% on investments (while being homeless), than if you bought a house that earned only 2%. Houses provide shelter and return. investments only provide return, so if you want to compare apples to apples (something you are incapable of doing), then of course you have to factor in the rent you paid – again duhhh!!!! And once that rent is factored in, using your own example and your own numbers, YOU HAVE PROVEN THAT I AM RIGHT, NOT ONCE BUT TWICE. But clearly the truth is either too much for you to comprehend or too much for you to bear, so i will end it here. Cause frankly i’m starting to feel bad for you.
Darren
at 10:50 pm
Haha. Don’t feel bad for me, try looking into the mirror!
The only thing you’ve proven to me is that you’re a fool. For some reason to seem think that if I invest, I am doing so as a homeless person? WTF??
It’s simple as this.
Buy a place and spend $358,606 and end up with a cheque for $305k when you sell.
Rent a place and spend $364,800 and end up with a cheque for $378k when you cash out.
So by spending an extra $6200 I got back an extra $73k. That’s an additional profit of $66,800.
And don’t forget, I was allowed to live in my rental during that time! I didn’t spend those 11 years looking at it from a cardboard box nearby.
Kyle
at 4:23 pm
OMG how many times can you get this wrong?!?! I wasn’t going to reply because I felt bad for you, but now I would feel even worse if I let you remain as confused as you are. You clearly don’t know the difference between a cashflow and an expense. The down payment and the principal paid down comes back to you when you sell, rent on the hand never comes back to you, it truly is spent and gone. To treat these the same in your “spent” calculation can only be called denial math. The TRUE cost of home ownership is mortgage principal and maintenance or $130k, which returns to you 305k after you sell (234% return), the cost of rent is 185k, which returns to you 379k (205% return). See even with you stacking the deck, you’re still worse off financially.
Good bye
Kyle
at 4:54 pm
Should say mortgage interest and maintenance not mortgage principal and maintenance
Darren
at 5:40 pm
You need to buy a game of monopoly and use the piles of fake cash to see this in action.
The monthly cost of owning and the cost of rent are within a few thousand dollars of each other over 11 years.
You got that? You essentially pay the same monthly fee to live in your place if rented or purchased.
Nobody is giving you back your down payment when you sell. It was an expense that you paid to the previous owner. All it did was reduce your monthly payments and future interest charges.
In the case of investing that 180k, it’s generating income.
You WILL have more money in this scenario renting. Nobody is giving you a thata’boy bonus cheque after you pay the bank the 69k you still owe them.
You asked me for numbers and I have given them proving without a doubt you have no idea what you’re talking about.
If you think I’m wrong why don’t you give me the same courtesy and break down all the numbers, step by step.
This is truly shocking to see.
Kyle
at 12:05 pm
I have broken down all your numbers to prove you wrong not once but three times now.
“Nobody is giving you back your down payment when you sell. It was an expense that you paid to the previous owner.”
Wrong, the new buyer will pay you. Look at it from an accounting standpoint when you buy a house:
Cash (Asset) -180
Property (Asset) +318
Mortgage Principal (Liability) -138
Change to Equity 0
The downpayment stays on your balance sheet as the difference between your Property and the Mortgage Prinicpal. There is no such thing as a downpayment expense as you claim here: ” It was an expense that you paid to the previous owner”. When you sell your Cash goes to +305 and that difference between your Property and Mortgage Principal disappears as both go to 0 (i.e. comes back to you). Downpayment and Principal paid never go to your income statement as an expense. Get it?
Now look at what happens when you pay rent:
Cash (Asset) -185
Rent (Expense) -185
Change to Equity -185
It leaves your balance sheet and goes to your income statement as a LOSS. So no one needs to write a thata boy cheque for owning, because you are converting cash into home equity by paying yourself, not some landlord. So maybe you have more by renting, but it cost you more in expenses to get there and as a percentage return you were worse off. LIKE I BROKE DOWN ALREADY ABOVE.
Arshes76
at 1:47 am
If the rentor has income to pay for the rent the balance sheet won’t be affected. I assume no bodies jobless in all these lovely examples.
Darren
at 10:08 pm
You’ve proven nothing of the sort. All you’ve proven is that you’re a mathematical dunce.
I can’t believe anyone can be so obtuse when the numbers are right there. You’ve convinced yourself that it’s ALWAYS better to buy than rent that you’ll see what you want to see.
Heck, there’s tons of rent vs buy calculators out there that will show you when it’s better to rent depending on the circumstances.
I am not sure how I can convince you of something you are determined to not to believe. I’m going to ask for some third parties to come and see who’s right here.
Kyle
at 9:36 am
Look, don’t get your panties in a knot. You stacked the deck with an example so ridiculously implausible as to be statistically irrelevant and yet you still failed (not once but three times) to prove me wrong. For what? To try to prove that in some fictional land, where people are allowed to put 180K in their TFSA, where landlords don’t care about profit (even when vacancy rates are at historically low levels) and where only homeowners pay utilities and renters get those for free, that maybe just maybe there is some 0.001% chance that i am wrong to use the word “always”. Seriously if it means so much to you to be theoretically right (even when practically speaking you are 100% wrong), then fine, let me rephrase – Over the long term owning has ALMOST always beaten renting. There you feel better now?
Now as for being a mathematical dunce, let me remind you that you are the one who seems to think that someone who pays 180K, pays down 48K in principal and made 37K in profit, will only have 74K when they sell. I think you need a little more practice with that Monopoly money. Have a nice day.
Darren
at 7:56 pm
“You stacked the deck with an example so ridiculously implausible as to be statistically irrelevant and yet you still failed (not once but three times) to prove me wrong. ”
If my family can experience 1% growth in their home over 19 years, then 2% over 11 years is not even remotely implausible. If we were to have a downturn over the next several years then negative growth over the next 11 years would become the norm. Just because you’ve experience nothing but boom years doesn’t mean that it will always be that way.
As for the investment returns, a 7%/year average return on a balanced and sensibly managed portfolio over a long term is completely reasonable.
“For what? To try to prove that in some fictional land, where people are allowed to put 180K in their TFSA”
I’m not using any “fictional” land. I’m using real life examples here in Toronto. I’m making assumptions with variables for sure. I’m using numbers I think are realistic for the years ahead. You might think they are unrealistic which is fine. Other numbers would yield different results. Only time will tell.
I never mentioned TFSA. You did. Using the TFSA would be part of any prudent financial plan, but it would only be a small part of it. If you bothered to read properly what I have written you would see that I did address taxes. Yes there would be taxes due but they are not as high as many might think. It some cases, depending on how much other income you have it would be close to nothing. Have you heard of a dividend tax credit?
I also did not factor in the large costs of buying and especially selling. So to make the numbers a bit easier for you to swallow, how about the have taxes owed for investing and the costs of buying/selling cancel each other out?
“where landlords don’t care about profit”
Again if you’d read what I wrote properly you see I already addressed this. Sure rents will go up but so do maintenance fees and property taxes. For simplicity I didn’t raise those on my example either which you are overlooking. I could add inflation to both sides of the argument. The numbers would be different but the conclusion would be the same.
“where only homeowners pay utilities and renters get those for free”
There are many places you can rent with utilities included. I know, I live in one. Have you even bothered looking it up?
“maybe just maybe there is some 0.001% chance that i am wrong to use the word “always”. Seriously if it means so much to you to be theoretically right (even when practically speaking you are 100% wrong), then fine, let me rephrase – Over the long term owning has ALMOST always beaten renting. There you feel better now?”
It’s a considerably higher than 0.001% chance. The only reason I have been arguing with you is to make you realize that using the words always when there are so many unknowns involved is incredibly foolish. Unfortunately I don’t think I have nor would I ever succeed in that. You’re going to have to experience in real life I think.
“let me remind you that you are the one who seems to think that someone who pays 180K, pays down 48K in principal and made 37K in profit, will only have 74K when they sell.”
Again your reading skills are failing you. I said you would have $305k, not $74k.
Jonathan
at 12:23 pm
My god, you two are both idiots – missing details and faulty math all around. Even assuming you have the underlying details correct, you are not doing the calculations correctly.
If you assume you buy a condo for $318K with $180K down payment and an initial mortgage of $138K, and the ending mortgage balance of $90K is correct, then net proceeds of a sale for $395K (ignoring LTT, realtor commissions, etc.) would be $395-$90=$305K. However, the carrying costs (interest+fees+taxes) were $141K over 11 years, so the net proceeds are only $305-141=$164K. This is less than the $180K investment, so you actually lost money ($164-$180=-$16K) owning the condo.
On the flip side, if you invest $180K at 7% for 11 years, you end up with $379K in total capital. Subtract rent of $185K and you end up with $379-$185= $194K, or a small profit of $194-180=$14K on your initial investment.
Of course, the condo buyer has to pay land transfer tax at purchase and commission on sale and the investor has to pay taxes, and it’s really not apples to apples to assume a 2% growth in house prices but a 7% return on investment. Also, the renter can use ongoing investment profits to cover the rent, while the condo buyer needs to keep putting in extra money to cover fees+taxes in the hope that the appreciation will make up for it later.
Krupo
at 8:27 pm
Love the back and forth above. It’s a comment-based-version of this other article:
http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/would-you-be-better-off-financially-renting-or-buying-a-home/article11952313/
As always, there are MANY assumptions both here and in the academic exercises which can swing the answer either way. Also keep in mind stability (are you likely to move jobs frequently, possibly needing to move) as a factor. People in Kitchener-Waterloo who bought homes while things were going well for RIM would have a good word to add on that front.