The Case Against Home Ownership

[LeBeau]

Since I"m technically homeless, I'm actually thinking of buying another condo in Edmonton but not so sure that I want to carry such a high debt load, we'll see.

Yeah considering where major Canadian cities are at with the housing bubble, I've been telling friends to hold off for now.

If you examine the charts for income to property prices, personal debt to income, etc. for Canada it's really out of whack and close to where the U.S. was just before the housing collapse.

I'm all for having some inflation hedges, and a condo where you can raise rents helps, but there's lots of other options for asset allocation beyond doubling down on real estate.

 

[Tigre]

I'm thinking 2 condos (which tenants will pay off) and one small house which I'd likely pay off myself, all of these properties would be in the same city and likely cost $250-325K.

Worth mentioning that you would be heavily exposed to the commodities cycle.

In the event that commodities prices go down, there will also be downward pressure on the CAD and local real estate.

So at the same time you're finding it less easy to pick up new work, your tenant is vacating and you won't get a good price if you want to offload one condo into a buyer's market.

Is there a strong reason for everything to be in the same city?

If you bought outside of Canada, you're partially hedged against a future drop in the Canadian dollar. You also have partial protection against any kind of legal claim on your assets (a divorce, a liability lawsuit etc).

 

[lavidaloca]

you can buy condos in Windsor, Ontario waterfront for in the $50,000 range. Albeit they won't be incredible places for that price. By waterfront I mean on the Detroit River. Houses are super cheap as well. I looked at a 6 bedroom that was 3000 or so square feet a couple years ago and it was listed at mid 100's.

 

[paninaro]

There's an awful lot of generalizing going on in this thread, and real estate markets really are local. For example, one poster wrote about interest rates going up and you being unable to make the payment -- well in the US, 30-year fixed rate loans are quite common, so you basically have no interest rate risk.

As for negative equity, that really depends on how much equity you had going into it (LTV - loan to value) and your outlook on the city you're in.

All that said, what I look at in any market is demographics. People need a place to live. Are you looking in a city where the population is growing? Is the construction industry adding enough housing to keep up with it?

The US overall added about 30 million people in the last 10 years (2000-2010 actually -- census data). That's like having the entire populations of Portugal, Greece, and Austria combined all showing up at the US's doorstep. Now I realize the growth is a mix of birthrate and immigration, but the fact remains -- 30 million more people needed a place to live now compared to 10 years earlier. That's a lot of houses. There are some US cities where the population grew by nearly 4% just in the last year.

So to me, I'd look at population growth compared to housing data. If population is growing faster than they can build houses, then those are cities where you're less likely to see negative equity situations. This all assumes those cities will stay at that level or continue to grow, so look at what drives the population. Investing in upstate New York, Detroit, etc can be risky as those areas are seeing population stagnation or decline as industry has moved away, and they were very reliant on specific industries.

 

[Tokyo]

All the negative points mentioned in this thread highlight an interesting demographic change. Which raises the question, if young people dont want to buy, and baby boomers entire net worth is locked up in their home, whos going to buy ?

 

[ElJefe]

I was only a student but decided to buy a flat because I was 1) overly eager and 2) wanted to "work" for myself, so to speak.

The trend where I live is increasing urbanization. In addition, I live right next to the university. I could pack 3 students into my flat, each of them paying a decent amount a month excl. utilities would give me a 25% profit margin after servicing the mortgage, condo fees and a healthy slice for depreciation of hardware (kitchen/bathroom/etc), in addition to the solid tax benefit from interest on debt

Problems are 1) the income is taxable (and I haven't reported anything) and 2) the other dwellers in the building can, if they desire, throw a stick in my wheel and require me to reside there myself.

 

[playa_with_a_passport]

I own an apartment for one reason: it would cost me around 25 percent more to rent the same apartment. If I move, I'll ret it, give a management company 10% to collect the rent and generally not worry about it.

Rent differentials are the thing to pay attention to when deciding whether or not to buy.

The decision to buy or not is highly local. In NYC with low vacancies and very strong tenants rights buying is a no brainier.

Low to mid range rentals in NYC have very spartan amenities. You going to get a dirty white fridge and stove and white subway tiles in the bathroom. Landlord don't give a shit because there are literally 10 people waiting to get into that apartment. Shit that I watch on "House Hunter" that other Americans take for granted are rare in NYC rentals like granite counter top, dishwashers, stainless Steele appliances or back splashes.

secondly in NYC, rent-always-goes up. Even if you manage to snatch a rent regulated apartment, the landlord is allowed to raise the rent at least 1% above inflation rate for that year. If you are in a non rent regulated apartment, landlord can raise your rent at whatever price he wants to. You either pay up or move.

At least with a mortgage your monthly nut will stay the same until you pay it off.

Personally, I am not a fan of condos or single family homes because there are better ways of going about it. I am a big fan of multi-family homes, either duplex, triplex or quads. It takes a little longer to come up with the down payment and closing cost but you'll get the money back within 5 years.

 

[Vendetta]

Personally, I want to own about 4 homes worldwide, in each major region (Europe, Asia, North America, maybe South) all paid for in cash, no mortgages, and spend like 3 months in each one, moving around the globe as I choose, chasing the good weather or specific events.

That way I can feel like I have a home (which you never do when you rent) I can decorate as I please, buy large ticket items like beds and vehicles and big televisions etc, in each of these locations.

Friends and family members can use them for free when I'm not in them.

Also, you avoid paying large taxes if you aren't resident in a country for most of the time.

It's a win win.

 

[King Solomon]

To answer the question asked of me above,

the Denver metro area.

The sort of condos I mentioned are not high end, but they are not crap.

There are specific techniques to get into such purchases so you can get more home for your dollar.

 

[paninaro]

All the negative points mentioned in this thread highlight an interesting demographic change. Which raises the question, if young people dont want to buy, and baby boomers entire net worth is locked up in their home, whos going to buy ?

In most places, that's simply not the case. People change jobs, change family situation (divorce, marriage), die, retire every day. All those events result in people being in a buying or selling situation.

From the US Postal Service website:
"17% of Americans change addresses annually.
45 million people move each year.
Approximately one out of every six families moves each year."

Yes, not all of them are buying or selling (renting instead), but I'm sure a lot of them are.

 

[thirty-six]

Personally, I am not a fan of condos or single family homes because there are better ways of going about it. I am a big fan of multi-family homes, either duplex, triplex or quads. It takes a little longer to come up with the down payment and closing cost but you'll get the money back within 5 years.

Yep.

To answer the question asked of me above,

the Denver metro area.

The sort of condos I mentioned are not high end, but they are not crap.

There are specific techniques to get into such purchases so you can get more home for your dollar.

Could you recommend a good MLS listing (or whatever those real estate search engines are called) for Denver, or any other resources there might be for finding good properties? I'm interested in what PwaP mentioned above. A three-flat in the city would be my preference. Not sure what the housing market is like there at all, though.

 

[edlefou]

10 years ago I stacked cash and bought a house. It was a big struggle to save up for a 10% downpayment, but I scraped it together and have no regrets.

Monthly rents are currently ~$4000 in total, the home price has more than doubled, and the location is in high demand with renters. I lived in one of the units for a couple of years at first and did all the maintenance myself, but then I moved to Europe for 6 years and used a property management company. Now I'm back in one of the units doing a few upgrades before going abroad again later this year.

While I was living in one of the units I still had time to bang girls and go on vacations and work full-time, but there was definitely a chunk of time spent handling house-related matters. I love rolling up my sleeves and learning how to fix things, so I saved cash by doing the work myself. If you have to pay tradespeople, your maintenance costs are going to be a lot higher.

My experience with the property managers was ok, although there were a few minor slip-ups. They take care of all the administrative stuff, but it's good to have a family member or friend watching out for things as well. It might seem like everything is running smoothly, but that's only because you're halfway across the world and have other things on your mind.

Here are some takeaways:

1) You'll always be spending money to fix or update things in a home that you own. If you don't know anything about the work tradespeople are doing, they can fuck you hard and you won't know it. These expenses can be minimized if you do the work yourself.
2) It is possible to do be location independent and own a home, at least for a few years at a time, but you can't completely outsource all home-related business when you're living abroad. The longer you're away, the more things "pile up" for you when you get back.
3) Even if you have positive monthly cash flow from rental income, that should not be the only money you're living on. You need to have other income or reserves in case of fluctuations caused by emergency expenses, vacancies, etc.

Let me know if there's anything I can clarify or break down.

 

[thirty-six]

10 years ago I stacked cash and bought a 3 unit house for $360K in a very central location in a major Canadian city. It was a big struggle to save up for a 10% downpayment, but I scraped it together and have no regrets...

Excellent post, edlefou. Thanks for the first-hand account of owning a multi-family property. I'd love to know more about the numbers, to be honest. Cash flow, specifically. Did you have positive cash flow while you were living in one of the units? In other words, was the rent from the other two units more than enough to cover the mortgage, insurance, taxes, and maintenance? 15 or 30 year mortgage, at what rate? Was it difficult to find financing at a good rate with 10% down, or not? Also, you say your place has doubled in value, so I'm guessing you can't find too many three-flats for under 650-750k now in your area?

As for the negatives you speak of, having to outsource maintenance would be my downfall, as I'm not that handy. Additionally, I'd prefer to buy in an area where I don't have friends or family who could help me out with things, which would be another negative. Still, I think the positives outweigh the negatives if you can find a property where the numbers add up in your favor.

 

[edlefou]

I'd love to know more about the numbers, to be honest. Cash flow, specifically. Did you have positive cash flow while you were living in one of the units? In other words, was the rent from the other two units more than enough to cover the mortgage, insurance, taxes, and maintenance? 15 or 30 year mortgage, at what rate? Was it difficult to find financing at a good rate with 10% down, or not? Also, you say your place has doubled in value, so I'm guessing you can't find too many three-flats for under 650-750k now in your area?

Here's what the cash flows were like 10 years ago: with 2 out of 3 units rented, the income was around $2000 per month. My expenses were mortgage payments of $2000, municipal tax of $300, and utilities around $300 per month. The net cash flow was -$600, but there were other expenses like insurance and maintenance that were paid once a year or at irregular intervals. Let's say those came to around $3600 for the year, which works out to $300 per month. So the net net cash flow worked out to -$900. Basically, I was paying $900 per month to own a house instead of paying rent.

Today, the cash flows are $2700 per month in rental income with 2 of 3 units rented. I reamortized the mortgage so that my monthly mortgage payment is $800, municipal taxes are now $400, utilities are still $300 because the tenants pay for their own electricity now. Other expenses like insurance and maintenance fluctuate between $2000 and $3000, so let's say that works out to $200 per month. The net net cash flow is therefore around +$1000 per month.

When I'm living abroad, I get an extra $1500 in rent for renting out the unit I normally live in, and I pay $450 for the property managers and the government forces them to withhold around $300 per month in income tax.

As for your question about interest rates and financing, it was tricky to arrange the mortgage because most banks won't recognize the rental income when calculating your income to debt ratios, but I used a mortgage broker that got me a good rate.

Outsourcing the maintenance can turn +$1000 per month positive cash flow into a breakeven scenario if you need to renovate. If you have a brand new house or condo things should be fine for a few years, but after a while you'll have to replace appliances, redecorate, etc. You can be a slum lord and run everything into the ground in order to maximize cash flow, then sell the property when bandaid repairs won't do the trick any more, but that's not my style.

The other cool thing about owning a house with positive rental cash flow is that I was able to leave the corporate world. Even though I'm not balling like I was when I was making a six-figure corporate income, I can do whatever I want whenever I want and as long as I live frugally I can take an indefinite break from being a corporate drone to focus on my startup companies. Even if my startups never amount to anything, the house is still bringing in income and I can still sell it some day at a profit.

I'm only talking about an approach that has worked for me so far, even though it's been a motherfucking hassle sometimes. Home ownership isn't for everyone, but I'm happy I did it.

 

[thirty-six]

Thanks a lot for breaking it down.

As for your question about interest rates and financing, it was tricky to arrange the mortgage because most banks won't recognize the rental income when calculating your income to debt ratios, but I used a mortgage broker that got me a good rate.

That just doesn't seem right. Good thing you got it worked out with the broker you settled with. I'm hoping that that's not standard practice, though. I'd also hope that in today's market, money talks. If you've got a sizable down payment and good credit, hopefully you can shop around until you find the right terms.

Today, the cash flows are $2700 per month in rental income with 2 of 3 units rented. I reamortized the mortgage so that my monthly mortgage payment is $800, municipal taxes are now $400, utilities are still $300 because the tenants pay for their own electricity now. Other expenses like insurance and maintenance fluctuate between $2000 and $3000, so let's say that works out to $200 per month. The net net cash flow is therefore around +$1000 per month.

If you can swing these numbers, it doesn't make sense not to do it. Finding the right property and securing the terms you need to make it happen are paramount.

The other cool thing about owning a house with positive rental cash flow is that I was able to leave the corporate world. Even though I'm not balling like I was when I was making a six-figure corporate income, I can do whatever I want whenever I want and as long as I live frugally I can take an indefinite break from being a corporate drone to focus on my startup companies. Even if my startups never amount to anything, the house is still bringing in income and I can still sell it some day at a profit.

Very cool and enviable, indeed.

I'm only talking about an approach that has worked for me so far, even though it's been a motherfucking hassle sometimes. Home ownership isn't for everyone, but I'm happy I did it.

Seems like you've done well for yourself. Cheers.

 

[Que enspastic]

So family has suggested they might buy a one bedroom flat in London, have me pay off 1/3 of the mortgage, they pay the rest.

I'd get a 1/3 stake in the equity. Or something like that.

Makes more sense to keep money within the family than have it dissipate into a landlord's account.

 

[edlefou]

As for your question about interest rates and financing, it was tricky to arrange the mortgage because most banks won't recognize the rental income when calculating your income to debt ratios, but I used a mortgage broker that got me a good rate.

That just doesn't seem right. Good thing you got it worked out with the broker you settled with. I'm hoping that that's not standard practice, though. I'd also hope that in today's market, money talks. If you've got a sizable down payment and good credit, hopefully you can shop around until you find the right terms.

I'll give you a bit more detail: where I am, banks look at debt service ratios and they typically want the ratio of your mortgage payment to your gross income to be no more than around 32%. For a $2000 monthly mortgage payment, that means you need to have a salary of $75K. 10 years ago my salary was in the $60s, so it was beyond my borrowing limit. As far as I was concerned it was a no-brainer given the rental income, but the banks have rules about when they can recognize rental income when qualifying you for a loan. I looked at scenarios where I would borrow to the max on a first mortgage, then get a high interest rate second mortgage for the rest, but fortunately the mortgage broker was able to make something work without having to resort to that. I still got a good rate, but it was tricky because I was outside my borrowing range.

When I reamortized the mortgage last year, I was able to shop around because now there's a ton of equity in the house.

For those who are considering home ownership, remember that once you have a decent amount of equity built up you can borrow against that. So if you want to buy more properties in the area or a love shack in Thailand it's easier to do, whereas if you've been a lifelong renter until that point you would have to scrape together a downpayment and convince some pencil-pusher at the bank to give you the privilege of paying them interest.

 

[edlefou]

So family has suggested they might buy a one bedroom flat in London, have me pay off 1/3 of the mortgage, they pay the rest.

You should consider getting a 2 bedroom and renting the other bedroom to a roommate. Having a roommate is not ideal, but for some people it can be a good way to have someone else paying the mortgage. I don't know how old you are, but if you're still at the age where you can handle living with other people, you should think about it. 500-800 quid a month in extra income is nothing to sneeze at. There are lots of junior Finance people in London working 18 hour days, so they wouldn't be around that much when you want to bring bitches over. Or you could rent it to a wing man.