Toronto Condos: Should you rent or buy?

http://blog.wealthsimple.com/are-you-missing-out-on-torontos-condo-market/

by goldlist • 11 years ago

39 61 11 years ago

blog.wealthsimple.com

dangerboysteve• 11 years ago

The author did not factor in Condo fees or property taxes.

kazinator7• 11 years ago

Factoring in condo fees should also factor in reasonable estimates of condo repair levies.

frandroid• 11 years ago

You're going to pay the fees through your rent if you're a tenant, so they're not a differentiator anyway.

kazinator7• 11 years ago

Myth 4: Renters throw cash away, at least owners build equity

It's no myth, because you have to live somewhere. (Well, you could put your money elsewhere, and go live in a cardboard box under a bridge, but let's be realistic.)

Owners are building equity with the money they would otherwise be completely throwing away on rent, and they got into that situation with just a little money down.

(Depending on area), current rents are in about the same ballpark as payments on a new mortgate, but: 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up. 2) only the interest portion of a mortgage payment is thrown away, and it goes down over time.

For the cost of the opportunity loss on your down payment, you're fixing the amount of a significant living expense that would otherwise continue to inflate, and you're getting a slice of that expense to go into equity that would otherwise be thrown out, and that slice gets bigger.

The opportunity cost on the down payment is not bad, if the property appreciates! You have to think in terms of leverage: if the property goes up by 80K, and the down payment was 80K, that's a 100% growth! You put in 80K, and it doubled. And your rent expense was replaced by something better. If you compared the leveraged view to the stock market, the stock market doesn't look so good. You can use leverage in the stock market also ("margin"), but that's a heck of a lot of risk.

I just renewed a mortgage for another term and the payment was supposed to go down (probably due to all the acceleration). Moreover, I declined that and kept it at the same amount. No way will a renter face a declining payment in the same area---not to mention that it would be irrational to refuse it.

icebraining• 11 years ago

You're forgetting the cost of being tied to a mortgage, in places where you can't just "walk away" from the property and have the debt released.

jsuar• 11 years ago

Wouldn't the counter argument be that what the renter doesn't make in equity they would make in returns via stocks?

toomuchtodo2• 11 years ago

As long as the renter is investing the money that would've been property equity in the stock market.

jarek8• 11 years ago

(Depending on area), current rents are in about the same ballpark as payments on a new mortgate,

Not in Toronto, which is like the whole point

1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up

Condo fees go up and up

toomuchtodo2• 11 years ago

Condo fees go up and up

Indeed. As a building ages, you can be assured that the condo fee will go up with inflation.

TwiztidK• 11 years ago

> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate,
Not in Toronto, which is like the whole point

Then what is the rent/mortgage situation in Toronto? That was never discussed in the article. In my area rent is 2-3x higher than a mortgage, all I know about Toronto is that property values are high.

seivan• 11 years ago

Out of curiosity aren't condo fees based on the debt the condo coop has? In which it fluctuates based on current interests both on the loan as well as the condo fund?

mcdougle• 11 years ago

Disclaimer: I came to the comments first. I have not yet read the article.

From a purely mathematical perspective, it still depends on what your future plans are.

I purchased a property a couple of years ago, intending to live in it for a short period and then rent it out. I tracked all of the money that I've spent on the property, all of the money I've gained, and the general value (which I get from Zillow, although I know that's not necessarily accurate. If anything, though, the house is probably worth less than what Zillow says).

Note that this is a relatively new property (built in the 90s), which needed few improvements or fixes. So it's not like I've dumped thousands into renovations and so on, and it's not like a lot of expensive things broke with any kind of consistency. This is mortgage payments and basic home maintenance expenses I've tracked.

If I had sold the property within the first 1.5 years I'd still be out several thousand dollars despite the property's value increasing a little bit (I forget the exact number -- somewhere around $5k to $10k lost). I've only recently reached the break-even point, where if I sell now I'll have made money overall, and that's primarily because I found a tenant and have been making a profit on it.

The problems are:

1) The mistake most people make is that they look only at initial valuation and the final value of the sale. They forget to include the interest paid over the life of the loan, as well as any home maintenance costs. These add up!

2) Home values are not likely to increase 100% in the short term. If you plan on living in that exact spot for 10+ years, then yes, owning your home is obviously the correct choice. If there's a chance you might move in 5 years or less (even within the same city, to a better place or whatever) then you're probably at least as well-off renting, if not better because you don't have to worry about paying two mortgages during the move and so on. Obviously there're other variables involved, though.

BrainInAJar2• 11 years ago

But that's the myth. The delta between the total costs of renting and the total cost of ownership is wide enough that you can invest it in something that has much better returns than a condo. Even owning 50% of your mortgage payment gets thrown away at interest, plus your maintenance fees, taxes and the whole bit are also lost to the sands of time.

kazinator7• 11 years ago

Rental buildings also pay taxes and maintenance, and have mortgages with interest. These costs are passed down to the renters. All the blood-sucking leeches are there (the government, banks, and the building itself) plus one more blood-sucking leech: the landlord.

bello• 11 years ago

Not always. Sometimes renting might be a better deal than buying.

There are several factors which need to be taken into account, such as mortgage interest payments, opportunity cost of downpayment, property tax, tax deductions, property appreciation, etc. Khan Academy has an interesting video on this topic: https://www.khanacademy.org/economics-finance-domain/core-fi...

PS: Sure, if your property appreciates by a lot you'll make a large return. But what if it deprecates? People being overly optimistic about property appreciations were part of the reason/most affected by the housing bubble.

kazinator7• 11 years ago

Sometimes renting might be a better deal than buying.

As a life-long strategy, or short-term only?

Buying isn't "sometimes". There is usually a commitment there. You'd never say, "renting isn't looking so good right now; I think I will buy for six or seven months and see how renting is looking then".

hhw• 11 years ago

Interest + Condo Fees + Home Repairs + Property Taxes + Property Transfer Taxes + Realtor Commissions are throwing cash away every bit as much as Rent.

Mortgage payments are likely to go up the same way that rent does, or even more so. Interest reflects inflationary costs, so the same upwards pressures on rents would result in higher interest rates. Except with interest rates at record lows, just a small increase in interest can wipe out an owner's equity while a small increase in rent (which is also controlled in many markets) isn't going to impact a renter nearly as much. Also, rent generally reflects incomes more specifically than inflation in general, and incomes have been increasing at a much slower rate than inflation for decades.

Debt leveraging is debt leveraging. Doing it on housing isn't automagically safer than doing it on financial investments. Yes, variance on an individual stock can be higher than real estate (also depends on the particular stock), but a sufficiently diversified portfolio can reduce the variance to be in line with real estate or to possibly be even more risk adverse. Not sure why people think debt leveraging is automagically safer with housing; it simply is not.

kazinator7• 11 years ago

Someone pays all these things if you rent, and you're foolish if you believe that it doesn't pass down to you.

branchless2• 11 years ago

Think in terms of leverage. Next up: should I buy in Detroit - 2005 edition.

manishsharan• 11 years ago

Neither. I had to do it all over again, I would buy a detached house in the middle of boondocks ( like Mississauga, Brampton , Vaughn ,Markham , Richmond hill etc. ) . The supply of detached houses is limited whereas condos in Toronto are growing like weed. The detached houses have grown more in value and they are not encumbered with maintenance fees.

OldSchoolJohnny• 11 years ago

Detached houses could end up costing far more in maintenance. From experience.

eekfuh• 11 years ago

One time maintenance fees versus monthly HOA fees that you are required to pay.

ska• 11 years ago

That's really a different and more difficult question. In many cities (like Toronto) living in the "boondocks" as you put it vs. downtown is a pretty fundamental lifestyle change.

This comparison at least narrows the variables a lot.

branchless2• 11 years ago

Yeah and I'd buy Apple. Let me know when you get the time machine.

sanswork3• 11 years ago

Most of those places are no longer really the boondocks(4 of the 5 are a 30 minute drive to the core) and are priced accordingly. You're going to have to go out to north of Whitby or north of Stouffville these days if you want a cheaper place.

chongli• 11 years ago

Myth #1: Toronto condos have outperformed the stock market by a long shot

Isn't it disingenuous to include automatic dividend reinvestments in the price calculation for stocks but not include net income from rents reinvested into more condos?

davenugent2• 11 years ago

Hey there, we assume that the condo you purchased you live in not as a rental property. The spirit of this post is to show that there isn't a straight yes or no answer to rent vs. buy...The shorter the time frame the less likely is you should own.

brewdad• 11 years ago

I take issue with the assumptions of the second chart. If we allow the author to assume 6-8% growth in the stock market over the 25 year period shown in chart two, surely assuming 0 change in value of one's condo over the same period is nonsense.

Perhaps, I might allow for 0 change in "real" prices, but since the author is not making adjustments for inflation in his calculations, his assumptions suggest Toronto condos will be worth 40% less in inflation adjusted dollars 25 years from now.

While this is one possible future, it seems incredibly unlikely given the optimistic outlook for his equities growth.

DMac872• 11 years ago

The assumptions made by the author are ridiculous, namely: - In the 10-year comparison, rents paid are not factored in at all. - In the forward-looking comparison, condo prices are assumed to be flat, mortgage rates go up (why? can't they be locked in now?), while equity prices go up 6-8% per year - Taxes are not factored in at all - capital gains on a primary residence are tax-free, while investment gains will be taxable (eventually, even if buy-and-hold) - Mortgages allow an effective leveraged investment on home equity, so your gains (and losses!) on home values are magnified

It's a worthwhile debate, and there are merits on both sides, but such blatant bias has to be pointed out.

Also: in the US, unlike Canada, there are tax benefits for a mortgage...

hartator• 11 years ago

+1. It's also assuming you are getting the same amount of money to invest in stock than to invest in your condo. Banks are more likely to finance your primary residence than your stock investment.

davenugent2• 11 years ago

leverage is leverage, can work for or against you. Returns in real estate have been elevated above long term mean returns through low interest rates and flexible government programs.. increased amortization rates, lower downpayments, higher CMHC eligible mortgages.

corcoran20152• 11 years ago

Great comment DMAC. The model shows what will happen if rates go up 1% and condo prices are flat. Rents paid are definitely factored in the model as are taxes. The investor is in a TFSA & RRSP which means capital gains are a non-issue. Property taxes cant be avoided though. Its a real advantage of investing in Canada to use the RRSP & TFSA vehicles.

You're right, mortgages can typically be locked in for five years.

But really people can check out the model and use their own assumptions:

https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...

DMac872• 11 years ago

1. RRSP & TFSAs have limits much lower than the assumed contributions, so there are tax differences between the two alternatives. 2. Even slight tweaks to your assumptions (e.g. reduce investment returns to 6%, increase condo returns to 2%) equalize the two scenarios. If you're going to use such an ill-conditioned model, you really must spend significantly more time justifying all of its assumptions, or else show sensitivities to them.

refurb• 11 years ago

why? can't they be locked in now?

Canada doesn't have 30 year mortgage terms like the US. The max is 10 years and many people lock in for 5. However, with the low interest rates, many, many folks are doing the low teaser rates for 1%/year and renewing each year.

typedweb• 11 years ago

Canada has a First Home Buyer tax credit of $5000, AFAIK.

jcdavis• 11 years ago

Fixed rates mortgages are mostly a US thing, from what I can find Canada (like most of the world) has very limited access to them for long-duration mortgages.

Just a small nit, for the most point I agree with your comment that this is a pretty biased view

corcoran20152• 11 years ago

Hey I'm Tim, the author, really glad people are into this. Interesting situation in Toronto. Check out the model and input your own assumptions if you'd like!

https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...

dblock• 11 years ago

There's something big missing: you can sublet your condo, therefore building income after it's paid off or to offset the mortgage. You will never be able to do this with stocks.

peter303• 11 years ago

The last time I bought was because I got tired of rent increases. Insurance and taxes do increase with time, but more slowly than rent.

hbbio• 11 years ago

The article is interesting but does not mention a few facts:

- In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues (or: you cannot deduct your rent from your revenues). For instance, if you're renting a flat that you own but at the same time rent to someone the flat where you live, you'll be paying taxes on your rent income, but deduce nothing from the rent you pay.

- Rented flats tend to be in less optimal condition that flats that you own. Since the utility of a flat is to live (in the best conditions available), it's sometime a good idea to invest in renovation works, plan changes, etc. for which the owner of a rented flat will see little value.

And also it mentions but does not insist on one major thing. Taking a mortgage to acquire a property is a bet on future inflation. If inflation is/will be high is the next years, getting a fixed rate mortgage is a great opportunity (and there are little chances you will be able to get a significant mortgage for anything else than real estate). If inflation is low (or worse, we enter a period of deflation), renting is by far the best option. IMHO this criterion is by far the most important while deciding about rent vs. buy.

pmelendez• 11 years ago

" In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues "

I believe that's why the author limitted the discussion to Toronto's condos.

Joeri• 11 years ago

One thing easily forgotten with renting is that you can be kicked out. This can be extremely stressful. Then again, as a home owner you can be hit by surprise maintenance work, which has its own source of stress. But, on the other hand, as a renter you may not have much control over necessary maintenance work, and be forced to negotiate with your landlord through the court system. Trade offs...

g8oz• 11 years ago

The gold standard for this kind of comparison is the New York Times Rent vs Buy calculator. Note how relatively small changes in any one of many factors can result in very different outcomes.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

jarek8• 11 years ago

Note that it needs a few adjustments for Canadian market, the biggest ones being mortgage rates are usually not locked in longer than five years in Canada and mortgage interest is not tax-deductible

GigabyteCoin• 11 years ago

Renters can build equity by building their investment portfolio.

But you can't live in an investment portfolio.

I get the point that the author is trying to make. The TSX has outperformed the Toronto condo market. But I would still invest in a home before I invested in the stock market for the same reason I invested in GPUs to mine Bitcoin instead of Bitcoin a few years ago.

GPUs (as well as condos) are tangible. If Bitcoin (or the TSX) was worthless tomorrow, my GPUs and condos would still hold value.

If the stock market was wiped out tomorrow, I would still have a place to live if I owned the property.

I would hate to be in the situation of relying on my next monopoly money dividend to pay for the rent on a home which I do not own.

rolyatyasmar• 11 years ago

I live in Toronto, I own real estate but not in the city (largely because I cannot afford to buy). I've invested in income property a few hours out of Toronto in a small town that produces positive cash flow that I reinvest in the stock market. I rent a small, shitty apartment in the city. This has ended up giving me returns of excess of 60% per year on the money that I've invested. I'm always amazed at how overlooked this strategy is.

nasalgoat3• 11 years ago

Is that small town a University town like Guelph or Peterborough?

Toronto Condos: Should you rent or buy?

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