value analysis - rent vs purchase

Leveraging, renting vs owning, making an investment or buying a home?
gsp_
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Re: value analysis - rent vs purchase

Post by gsp_ »

Enjoying this discussion on a topic I know little about. Sympathetic both to JaG's high margin of safety inputs and of course Adrian's questioning of rather ambitious statements. :wink:

Don't own any RE. I do know a few people who are landlords and under the right conditions it's something I'd consider if the right opportunities came along. Not interested in doing handy work or dealing with tenants so would have to team up with someone who has those skills, possible candidates have come up from time to time. The argument has been made that investing in REITS takes all the extra work out of it but one notable issue is that rental income creates RRSP room(and the tax free compounding that comes with it) while investment income doesn't. As someone with very low RRSP room this appeals to me along with the potentially higher returns if one is well organized(as JaG appears to be). No interest in the current RE market climate but would be nice to be prepared if the right conditions show up. Plenty of idle cash waiting for distressed assets. Lots of questions for JaG, plenty to learn.
Just a Guy wrote:When they are appraised for financing, I usually get about 30% higher appraisals in this conservative market to achieve 100% financing (none of my money is at risk, and I don't use CMHC…my credit rating is at risk however if I had to walk away).
Under what conditions would you need to do this? What would be the repercussions(bankruptcy?)? Are investment loans treated differently from owner occupied ones? I thought walking away was very dificult in Canada as compared to the U.S. but don't understand what's involved.
2) I avoid the risk of local downturn by investing all over, not just in one city.
Do you hire property management companies or outside help to perform maintenance when tenants have issues? My current (amateur) landlord lives in another city and it's very costly for him to hire trades when issues come up.
Of course, people would be laid off (paycheque won't be safe, the market would tumble (stocks aren't safe), and businesses would close), so what exactly is safe (people still need places to live, making that less risky than the other three).
Without leverage. You mentioned having none of your own money in the properties, what's your leverage to equity ratio? That would seem to increase risk considerably. If I ever become a property investor it's unlikely I would get much if any financing, not a fan of debt. I figure a cash heavy investment is going to be most appropriate when rates are rising and many of the marginal (amateur) investors bail out at once.

Do you own anything in Qc? If so, what are your thoughts on the regulatory framework?

Thanks for any insight you can provide, enjoy learning from those with different experiences.
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Re: value analysis - rent vs purchase

Post by Just a Guy »

When you own real estate, you quickly learn that there are many sources of income. You get the rent, the interest is written off, you get capital gains, principle pay down, you can write off travel, tools, etc. (if you own multiple and they are used on the properties). Owning your own has a much better return than owning a REIT. Plus you know how the property is being managed and maintained.

If you are asking "when I would have to walk away", I've got no idea as I never have and can't really see myself doing it. The only way it would happen for me is if disaster struck and there was no cash flow in any of my properties...of course, for that to happen, most home owners would also be walking away from their houses, probably long before. My $75k places can pay for themselves for a lot longer than those 800k houses in GTA with no income.

As far as I know, and I've never really looked into it, my mortgage is backed only by the property. If I were to walk away, the bank could seize the house and report it to my credit rating...if the house was underwater, it's their loss.

If you have CMHC, then they pay the loss to the bank and can come after you for the difference. CMHC is insurance for the bank, not the home owner, a lot of people don't know that.

When I started, I did a lot of the work to save money and because I enjoyed it somewhat (that goes away pretty quick when you get a bad tenant who trashes your work). I've moved on to hiring people to do the work for me, the trick is finding reliable, trustworthy people...not so easy. You also have to watch the conflict of interest...if they represent two places, but have only one tenant, who do they push them towards...

Leverage is what makes real estate investing so profitable. You could buy one property for $100k (which makes $1000/month clear) or you could buy 4 places putting down 25% and make $4000/month paying some of that in interest, but not $3k worth.

Each month, your tenant pays off a portion of the principle, your equity slowly builds...in under 20 years the place is paid off and you had 75% of your equity paid by someone else.

If you do things my way, you get 100% of the property paid by someone else, and a monthly cash flow...infinite return on investment. I'll admit, I don't always get 100% financing on the property itself, in those cases where I don't I use a heloc to pay the down payment (still 100% financing, but a little more paperwork).
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Re: value analysis - rent vs purchase

Post by adrian2 »

Just a Guy wrote:As far as I know, and I've never really looked into it, my mortgage is backed only by the property. If I were to walk away, the bank could seize the house and report it to my credit rating...if the house was underwater, it's their loss.
That's not how it works in most of Canada. If you do not know this, I'm sorry, but your statements about real estate investing become more questionable, IMHO.
CMHC wrote:In Canada, mortgages are typically “full-recourse” loans, which means the borrower continues to be responsible for repaying the loan even in the case of foreclosure. Lenders can take legal action to recoup money from the homeowner if a foreclosed home is sold for less than the amount owing on the mortgage. In some U.S. jurisdictions, mortgages are “non-recourse,” which means that borrowers can often walk away from their homes and the associated mortgage debt, leaving lenders with no recourse beyond the property.
Just a Guy wrote:Leverage is what makes real estate investing so profitable.
And that's where you can lose your shirt when market conditions change.
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Re: value analysis - rent vs purchase

Post by patriot1 »

gsp_ wrote: one notable issue is that rental income creates RRSP room(and the tax free compounding that comes with it) while investment income doesn't.
The flip side is that rental losses take away RRSP room and investment losses don't.

I'm talking about the income account, the capital account has no effect either way.
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Re: value analysis - rent vs purchase

Post by Stan_W »

Flaccidsteele wrote: Ugh. I didn't know about rent control in Manitoba. Thanks.
It's not that difficult to get around the rent controls in MB. I rented an apartment for the last five years and the lowest increase I had was 4.8%. The Tenancies Branch allowed all kinds of expenses as capital improvements as well as adding on every increase in utility rates or taxes to the 1.5% that was supposed to be the maximum.
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Re: value analysis - rent vs purchase

Post by Just a Guy »

Adrian, how many more qualifiers did I need to put on that statement?

I don't claim to know everything about real estate, I've never looked into walking away from a property because I never have had to, nor do I ever intend to. I've bought many properties that have been repossessed, but that's not the same thing.

When I buy my properties, I make sure I'm able to pay for them, even if the economy turns bad.

Weren't you the one complaining about personal attacks? So far, that seems to be your only input. I notice you didn't even clairify what the implications were, just stated I was wrong and therefor I probably know nothing about the subject.

Please stop the jabs and contribute knowledge.
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Re: value analysis - rent vs purchase

Post by patriot1 »

Just a Guy wrote: Please stop the jabs and contribute knowledge.
I would appreciate some from you. For example, an example of an actual listed property you consider a "buy", e.g
You could buy one property for $100k (which makes $1000/month clear) or you could buy 4 places putting down 25% and make $4000/month paying some of that in interest, but not $3k worth.
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Re: value analysis - rent vs purchase

Post by AltaRed »

This discussion, while way off topic from the original intent with respect to renting vs owning a home, i.e. principal residence, is interesting, but short on real life substance that can be validated/verified. It's the nature of the beast given lack of public data. Hence investors preferring real property and those preferring capital property really end up talking past each other and entrenched positions rarely change (I have occasionally had these same debates with extended family who cheerlead real property investments vs the rest of us who prefer the capital markets). Best not to have those discussions combined with alcohol.
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Re: value analysis - rent vs purchase

Post by Just a Guy »

Here's one my realtor sent me dec 1, You'll excuse me if I don't promote the city, or the MLS number, this one is of interest to me.

New Listing $79,900 104 10917 109 ST
2 Bedrooms, Status: Active. Residential

I do tend to get a little tired of having to "prove" they exist. The next step would seem to be, could you buy it for me?

I've told you what to do, how to do it, I'm drawing the line at showing you the places and creating more competition to buy in a very limited market. As I said there are only a handful across the country, never claimed there was a glut.

Feel free to call your realtor and get on a list.

Don't get me wrong altared, I also like the capital markets...they are my mortgage insurance package.
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Re: value analysis - rent vs purchase

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Just a Guy wrote:Here's one my realtor sent me dec 1, You'll excuse me if I don't promote the city, or the MLS number, this one is of interest to me.
New Listing $79,900 104 10917 109 ST
2 Bedrooms, Status: Active. Residential.
http://www.remax.ca/ab/edmonton-real-es ... 579678-lst
This unit requires extensive finishing & is not currently habitable.
Here is a habitable unit in the same building, apparently same size, for rent for $1,250/month:

http://www.padmapper.com/show.php?sourc ... 4&src=main

So how does that dump put $1K/month in your pocket?
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Re: value analysis - rent vs purchase

Post by Just a Guy »

You fix it up...surfaces renos are about $5000 in supplies (see above). Includes new cabinets, hardwood floors (15mm thick), new paint, etc.

Of course, I haven't had my guys look at it yet, but you only asked for a potential place. After renos, thanks to you, I tell them we could probably charge $1250/month.

If the building is solid, cosmetic work isn't much.

If you take rent at 1%, once renovated, the place should appraise at $125k, buy for under 80, renovate for 10, appraise for 125k and rent for $1250...

But thanks for showing that my prediction that you wouldn't be satisfied proved true as well.

I suppose buying apple back when Steve Jobs came back would have been a stupid move in your opinion as well...better to buy it today than back then right?
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Re: value analysis - rent vs purchase

Post by randomwalker »

patriot1 wrote:
Just a Guy wrote:Here's one my realtor sent me dec 1, You'll excuse me if I don't promote the city, or the MLS number, this one is of interest to me.
New Listing $79,900 104 10917 109 ST
2 Bedrooms, Status: Active. Residential.
http://www.remax.ca/ab/edmonton-real-es ... 579678-lst
This unit requires extensive finishing & is not currently habitable.
Here is a habitable unit in the same building, apparently same size, for rent for $1,250/month:
I wonder how much the previous owner paid for the unit before their tenant rendered it uninhabitable? I guess that's where owning multiple units would be a good thing, a sort of diversification against risk. Of course that may be a misunderstanding of risk and perhaps I'm confusing it with price volatility and therefore owning fewer units is actually the way to true wealth creation.
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Re: value analysis - rent vs purchase

Post by Just a Guy »

From the looks of the picture, it was a flood. If it was a burst pipe, that's not bad, if the roof leaked, that's something else...I'll know more when my guys report.

As I said, if the building is in good shape (and no mold), it could be a winner. I usually take things down to the drywall I buy, this one just need some drywall added (but I save on the demolision costs, so it could be a wash). Of course, I also have to check the neighbourhood out, what the condo is like financially, and a bunch of other things...

I personally like owning multipl units. If I get a bad tenant, and the place is trashed, expenses come out of my pocket until it's fixed and rented again. With multiple units, the profits from the others offset the non-income producing unit. Also, you need to own multiple units to get the tax benefits.
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Re: value analysis - rent vs purchase

Post by nisser »

It's not "just a flood" actually. If you knew where that was it's in a very sketchy part of the town (I spent 4 years very close to there). You are not going to get 1100$/month there and the people you get are the ones that will pee on your carpet and leave the tap on while they're chilling on the couch high as a kite.

It's probably what happened last time
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Re: value analysis - rent vs purchase

Post by Shakespeare »

If you knew where that was it's in a very sketchy part of the town
That was my impression and I left there in 1976.
I spent 4 years very close to there
Royal Alex?
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Re: value analysis - rent vs purchase

Post by nisser »

Yes, I lived on the other side by the stadium but it's all the same shade of shady.
You can find many HOUSES on the 112th avenue there for 100k, but they're all shoddy condemned-looking that no sane person would wish to sleep in. It may sound great but I very much doubt you'd make any money long-term.

To put it in perspective, 95%+ of all homicides in Edmonton occur in a 2km radius from the Royal alex hospital and that property happens to be in that radius.
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Re: value analysis - rent vs purchase

Post by Flaccidsteele »

Just a Guy wrote:You fix it up...surfaces renos are about $5000 in supplies (see above). Includes new cabinets, hardwood floors (15mm thick), new paint, etc.

Of course, I haven't had my guys look at it yet, but you only asked for a potential place. After renos, thanks to you, I tell them we could probably charge $1250/month.

If the building is solid, cosmetic work isn't much.

If you take rent at 1%, once renovated, the place should appraise at $125k, buy for under 80, renovate for 10, appraise for 125k and rent for $1250...
Hi JaG. Thanks for this information. I found it very useful.
Just a Guy wrote:But thanks for showing that my prediction that you wouldn't be satisfied proved true as well.
I wouldn't bother with this. Consider the Warren Buffett quote again. He's not a real estate investor per se, but the quote applies to all conversations about unconventional methods of building wealth:

"It's like an inoculation. If it doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference. They just don't seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he's applying it five minutes later. I've never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn't seem to be a matter of IQ or academic training. It's instant recognition, or it is nothing." - Warren Buffett

It took me a long time to understand the amount of wisdom in this quote. It's completely true.

It is impossible to speak with a person, who has a confirmational bias supporting conventional methods of building wealth, regarding unconventional methods of building wealth. And vice versa.

Indoctrinated confirmational biases are impossible to change.

There will always be objections. Always. Whack-a-mole always.

I know it sounds obvious. And it should be obvious. But it isn't.

This forum contains the absolute wrong audience for your opinions on real estate. Completely wrong audience.
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Re: value analysis - rent vs purchase

Post by SQRT »

AltaRed wrote:This discussion, while way off topic from the original intent with respect to renting vs owning a home, i.e. principal residence, is interesting, but short on real life substance that can be validated/verified. It's the nature of the beast given lack of public data. Hence investors preferring real property and those preferring capital property really end up talking past each other and entrenched positions rarely change (I have occasionally had these same debates with extended family who cheerlead real property investments vs the rest of us who prefer the capital markets). Best not to have those discussions combined with alcohol.
+1. Like someone once said a bit like religion or politics. Lots of ways to make money or lose it.
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Re: value analysis - rent vs purchase

Post by Just a Guy »

Flaccidsteel,

I think you may be overstating it a bit. I know many of the people on this forum from another board, I'm not new to the online world, and many of them are open minded and share a great deal of knowledge.

Of course, there are always those who fear and ridicule other ideas, and that's their right.

I've been investing (both securities and real estate) for a long time, I've run companies my entire life. I, and others, would say I've done well at all three. You don't get that way by being intimidated by others and their criticism of your ideas. It does tend to wear on me, but not in the way most think. I share my knowledge to try and help others, I don't try to profit from it because I think people really should be taught how to make money other than a paycheque (and how to avoid hiring "experts" who'll just lose their money for them while getting paid).

I was forced to start a business out of school because there were no jobs when I graduated. I knew nothing about investing (my parents didn't know, and I was never taught in school) until I got injured at work and realized I wouldn't be working for a long time. I was lucky, I learned fast (not to say I made a lot of money fast, there were some very lean and scary times), but I was successful. I had bought my first rental just before, against all advice...but I had done the math, and it showed there was virtually no way to lose money on the deal. I trusted the math, not my family and friends who had nothing but horror stories.

When I look at people around me, I see myself years ago...one accident away from disaster. To me, I have to try to help them. Probably greater than 99.9% of them, I know, will never even try to do what I tell them to, but I do have a handful I know I helped.

Life wasn't all rosey, I've had my share of bad tenants, I've lost all my investment when I bought stocks that went against my philosophy, I nearly closed my business when I was injured, but overall I've been very lucky. I don't get emotional about anything, bad tenant, fix the place up and go again, bad investment, learn from it...it's all the price of education.
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Re: value analysis - rent vs purchase

Post by kcowan »

Just a Guy wrote:... I don't get emotional about anything, bad tenant, fix the place up and go again, bad investment, learn from it...it's all the price of education.
Good attitude. That will serve you well and your education from the school of hard knocks will too. :thumbsup:
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Re: value analysis - rent vs purchase

Post by Flaccidsteele »

Just a Guy wrote:Flaccidsteel,

I think you may be overstating it a bit. I know many of the people on this forum from another board, I'm not new to the online world, and many of them are open minded and share a great deal of knowledge.

Of course, there are always those who fear and ridicule other ideas, and that's their right.

I've been investing (both securities and real estate) for a long time, I've run companies my entire life. I, and others, would say I've done well at all three. You don't get that way by being intimidated by others and their criticism of your ideas. It does tend to wear on me, but not in the way most think. I share my knowledge to try and help others, I don't try to profit from it because I think people really should be taught how to make money other than a paycheque (and how to avoid hiring "experts" who'll just lose their money for them while getting paid).

I was forced to start a business out of school because there were no jobs when I graduated. I knew nothing about investing (my parents didn't know, and I was never taught in school) until I got injured at work and realized I wouldn't be working for a long time. I was lucky, I learned fast (not to say I made a lot of money fast, there were some very lean and scary times), but I was successful. I had bought my first rental just before, against all advice...but I had done the math, and it showed there was virtually no way to lose money on the deal. I trusted the math, not my family and friends who had nothing but horror stories.

When I look at people around me, I see myself years ago...one accident away from disaster. To me, I have to try to help them. Probably greater than 99.9% of them, I know, will never even try to do what I tell them to, but I do have a handful I know I helped.

Life wasn't all rosey, I've had my share of bad tenants, I've lost all my investment when I bought stocks that went against my philosophy, I nearly closed my business when I was injured, but overall I've been very lucky. I don't get emotional about anything, bad tenant, fix the place up and go again, bad investment, learn from it...it's all the price of education.
Thank you for sharing this. Great perspective. :thumbsup:
adrian2 wrote:How many times did Donald Trump and/or his companies file for bankruptcy?
Edit: I now understand that this appears to be something known by Association fallacy.
Wikipedia wrote:Association fallacy: An association fallacy is an inductive informal fallacy of the type hasty generalization or red herring which asserts that qualities of one thing are inherently qualities of another, merely by an irrelevant association.
It's also a corollary to Godwin's Law in the sense that if an individual has success employing an unconventional, leverage-based techniques in real estate, they will eventually be compared with Donald Trump.

Interesting.
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