Seeking Insights/Opinions on Rent vs Buy Scenario

Leveraging, renting vs owning, making an investment or buying a home?
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Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 13 Jul 2017 14:31

With our rental lease ending at the end of April 2018, we have a fork in the road approaching on whether we continue to rent or just buy a condo unit in the building we are currently renting in.

We are in the 5th year of our rental in the condo unit with the same landlord. In a previous thread, I had mentioned that during the renewal of our 1 year lease this year, our landlord was adamant that we needed to sign the lease with a box ticked saying the lease is terminated at the end of April 2018. He told us he was standardizing this for all of his rental units, and while we believe that, we also think it's because it will allow him to raise rents across his rental units above the government mandated increases. Since we pay below market rates of rent (currently $1310, which is anywhere from $200-$400 less than what we see as market rates), we assume that he will want to renew with us but with a hefty increase in the rental price.

As to why we agreed to the conditions of termination of lease on this year's 1 year lease? We could have gone month-to-month with the expiry of last year's lease, however we would be in a perpetual state of stress that in any given month, a 2 month notice would be given for eviction from the landlord for reasons of either renovating the unit or moving family members in to evict us. Signing the 1 year with the termination clause bought us 12 months versus an unknown quantity of time to figure out the situation.

For the past 4 years, we have been happy with the rental rate we have been paying as we felt it was a bit of a wash between buying and renting at the price we were paying. However, in a scenario where either our rent goes up by several hundred dollars or we find a comparable unit to rent in the area, it almost seems to make more sense just to buy a unit than to rent at prices over $1,600 per month.

We would like to remain in the area as it is very close to work, very close to the train, and close to the highway. It is also close enough to all of our family and most of our friends via the train or the roads. It's not a location we currently picture raising our children in when they get to school age, but let’s say hypothetically that is 5 years away. I think we would be fine with staying in this location for 5 more years before selling and moving on.

We have enough to probably put down up to $100k as a downpayment. The market price for the units we would want in our current building go for between $450,000 to $500,000. In a scenario where we purchase a $500,000 unit, we would put down $100,000 as the downpayment, and on a 5 year fixed at 2.8%, monthly payments for the mortgage alone would be $1,850 per month. Adding in estimates for property taxes, home insurance, and strata fees would push monthly payments to about $2,400.

Since payments toward principal would amount to $59,492 over 5 years on a fixed 2.8%, average monthly payments towards principal come in at $991 per month. Now, this is where I am not sure if I am thinking this through correctly. Assuming $2,400 per month is stable over 5 years, and since $991 per month is being “added” to the equity value of the condo every month, I subtract $2,400 from $991 and end up with an “out of pocket” expense of $1,409 per month.

So by the end of year 5 of owning, there would be $159,492 of equity in the condo and expenses paid out of around $84,540 ($1,409 x 60 months). Maybe round up to $90,000 to capture the initial costs of buying and whatever else I might not be taking into account.

The first level of thinking tells me that if I assume that my rental rate was $1,500 on average per month over the next 5 years, I would pay out $90,000 in rent. Based on today’s market prices, that’s probably too low. My projection is that rent per month over the next 5 years could range anywhere from $1,500 to $1,800 per month, or a total cost of anywhere between $90,000 to $110,000 over the next 5 years. Based on where market rates of rent have been going, I would imagine it’s on the higher end of that range than the lower. Therefore, it seems that buying would make sense, as I know that the total cost of owning will be $90,000 over the next 5 years.

Of course, this isn’t taking into account the market value of the unit and the range of either appreciation or depreciation of what the unit could be sold at in 5 years’ time. Based on the past 5 years, market value of the units seemed to have appreciated at about 6% per year. The baseline I use for real estate appreciation is based on Robert Schiller’s US housing data that shows that on average houses keep pace with inflation in the long term. The market value could also very much go down. I think this is the area that I am having trouble thinking through: how much would the market value of the unit have to go down to make it a better choice to rent over buying given the assumed numbers above?

My gut tells me that $500,000 for a 2 bedroom, 900sqft condo in a 6 year old building in Surrey is a bit rich, but the rising cost of rent is making me think through renting vs. owning.

Thanks for any insights and/or opinions in advance!

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by kcowan » 13 Jul 2017 14:49

As a fellow renter in BC, we have been without a lease after 2 years, meaning we have been month-to-month for 18 years. We still get the benefit of rent controls, and after 20 years we are well below market rates. I would check that out for your area.

Secondly, how do your cash flows on purchase compare to what you have been getting on your investments. RE has been a great investment in BC. But had we sunk all our money into it, we could not have retired when we did without downsizing. So we are biased.
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 13 Jul 2017 15:11

In our situation, our read on the scenario was that we couldn't be sure that our landlord would not reno-vict or evict by moving in family with a 2 months notice if we didn't sign the 1 year lease. Since market rental rates are several hundred dollars more per month, and it's more of a landlord's market than a renter's market, we didn't feel comfortable going month to month.

Could you clarify what you mean by "cash flows on purchase compared to what you have been getting on your investments"? Are you asking what our cash flows from our income would look like in a purchase scenario?

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by nisser » 13 Jul 2017 21:03

I would use the calculator to figure out what the cutoff point is. I did it for you and got $1650 as the cutoff with the following assumptions:

20% down
500k purchase price
3% variable mortgage rate
0% marginal tax rate (set this to zero as we can't deduct interest)
standard realtor fee of 7%/3.5% of purchase price
3k property taxes
6k condo fees
5% stock return rate
2% inflation
2.5% rental increase and real estate increase

I think the biggest if is what do you think it'll happen to the real estate prices. This calculator can be wildly off depending on what happens to those (i.e. bubble bursts or bubble keeps inflating).

https://www.nytimes.com/interactive/201 ... ml?mcubz=2

Edit: As an aside, this is how I decided to buy in Calgary in 2014. Our buy cutoff was about 1800-2000$/month and at the time rental rates were easily 2200+ for the same place. We ended up being wrong as the oil crashed, vacancy rate soared as people moved out of hte province and similar properties dropped in value. Such is life.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by gobsmack » 14 Jul 2017 06:23

SkaSka wrote:
13 Jul 2017 15:11
In our situation, our read on the scenario was that we couldn't be sure that our landlord would not reno-vict or evict by moving in family with a 2 months notice if we didn't sign the 1 year lease. Since market rental rates are several hundred dollars more per month, and it's more of a landlord's market than a renter's market, we didn't feel comfortable going month to month.
Do not underestimate the value of a great tenant. My dad is a landlord and being a landlord is a huge hassle. It is not easy to find great tenants. If you are one, there is a huge incentive for the landlord to leave things just the way they are. This has happened to me a couple of times where a landlord indicated that he was thinking about increasing the rent but then quickly back-paddled once I said I would move out (and, at the time, this was in a hot market similar to Vancouver).

+1 for the nytimes calculator above. It is what I have used as well.

Have you considered moving out of Vancouver? I actually refused a job offer there precisely because of the RE market.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 14 Jul 2017 11:38

gobsmack wrote:
14 Jul 2017 06:23

Do not underestimate the value of a great tenant. My dad is a landlord and being a landlord is a huge hassle. It is not easy to find great tenants. If you are one, there is a huge incentive for the landlord to leave things just the way they are. This has happened to me a couple of times where a landlord indicated that he was thinking about increasing the rent but then quickly back-paddled once I said I would move out (and, at the time, this was in a hot market similar to Vancouver).

+1 for the nytimes calculator above. It is what I have used as well.

Have you considered moving out of Vancouver? I actually refused a job offer there precisely because of the RE market.
We have been great tenants: never missed a payment, never had a cheque bounce, take care of our unit, do minor repairs ourselves (lightbulbs, paint touch-ups, etc), stable jobs, no partying, and probably have contacted our landlord a total of twice per year each year.

What is making us think this all through is that we don't know if he is just going to raise rent for 2018-2019 by the provincially mandated amount, by $50, $100, or several hundred dollars more per month. This uncertainty is something we haven't had to deal with in the prior 4 years so we figure it's better to be proactive and think through various scenarios rather than getting caught with our pants down a few months away from April 2018.

I will fiddle around with the NYT calculator and do various scenarios to see what the range out outcomes might look like.

At this time we aren't really interested in moving out of Vancouver as we are close to work (10 minutes away each) and we probably have at least 5~10 years more at our current careers before we transition out to something else. So in the meantime, we are bound to our current location as it is convenient, both for work and life purposes.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by randomwalker » 14 Jul 2017 17:09

Why do you think your landlord would be able to raise your rent above the maximum allowable rent increase? Clearly a increase beyond the allowable would contavene the residential tenancy act of British Columbia. Your rent increase for 2017 should have been between 40 and 50 dollars and although the numbers for 2018 are not yer available they should be similar.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by FinEcon » 14 Jul 2017 17:51

randomwalker wrote:
14 Jul 2017 17:09
Why do you think your landlord would be able to raise your rent above the maximum allowable rent increase? Clearly a increase beyond the allowable would contavene the residential tenancy act of British Columbia. Your rent increase for 2017 should have been between 40 and 50 dollars and although the numbers for 2018 are not yer available they should be similar.
As the OP pointed out, fixed term leases are a loophole. One that should probably be closed IMO. Alas, I'm biased as I made sure to sign a standard tenancy agreement and benefit from what you describe above. The result is that I am double digit percentage terms below market rent and have been so for years. Whoever said renting isn't profitable isn't doing it right.

The astute observer will note the cash flow from this optionality comes from a contractual advantage that is payable each and every month in after tax dollars. In SkaSka's case, the optionality has been removed from his tenancy agreement(s).

http://vancouversun.com/news/local-news ... e-loophole
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 14 Jul 2017 18:45

The options that were laid out on the table by our landlord appeared to us to be:

1) Refuse to sign a 1 year lease with the termination of lease ticked off, going month-to-month.

2) Sign the 1 year lease with the termination of lease ticked off.

As described in my initial post, we could have gone with option #1. However, landlords have the right to evict if they are going to renovate the unit or move family in, given 2 month's notice. In option #1, we would have protected our rent-controlled rate per month, however we would be exposed to the risk of an eviction with only 2 month's notice. Of course, when that eviction would come is unknown: it could happen the first month or possibly never.

And at this point, it is purely speculative that our landlord is going to raise rents to comparable market prices. Perhaps he may not. Perhaps he may not increase it at all.

However, given the information on hand, our hunch is that the rental rate increase is going to be somewhere between the government mandated increase at the lowest end and all the way to market prices at the highest end: I think that range is somewhere between $1,360 - $1,700.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by freedom_2008 » 14 Jul 2017 20:19

Flex month-to month lease is better for tenants in most cases. In multi-unit/apartment buildings, there is normally no real danger of landlord taking units back, but less so for suites in private homes, and private condos.

For month-to-month lease, while the landlord can give two months notice (plus pay back one month rent as compensation to the tenants), there are issues for landlord. In addition to rent increase control, the tenants only need to give one month notice if they want to move out, and tenant turnover is a major job/cost to landlord. So your landlord might wanted the fixed term lease for other reasons (than avoiding rent control).

One way to handle this for OP, while keeping an eye on the housing market, is to start talking to your landlord early, say half year or 4 months before the lease end date, to let him/her know that you would like to stay and could sign another year lease, but only if the rent increase is less than $xx. The response from the landlord could make your decision easier and you still have lots time left.
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 14 Jul 2017 22:16

freedom_2008 wrote:
14 Jul 2017 20:19
Flex month-to month lease is better for tenants in most cases. In multi-unit/apartment buildings, there is normally no real danger of landlord taking units back, but less so for suites in private homes, and private condos.

For month-to-month lease, while the landlord can give two months notice (plus pay back one month rent as compensation to the tenants), there are issues for landlord. In addition to rent increase control, the tenants only need to give one month notice if they want to move out, and tenant turnover is a major job/cost to landlord. So your landlord might wanted the fixed term lease for other reasons (than avoiding rent control).

One way to handle this for OP, while keeping an eye on the housing market, is to start talking to your landlord early, say half year or 4 months before the lease end date, to let him/her know that you would like to stay and could sign another year lease, but only if the rent increase is less than $xx. The response from the landlord could make your decision easier and you still have lots time left.
Thanks for the suggestion on early contact!

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by FinEcon » 15 Jul 2017 12:21

SkaSka wrote:
14 Jul 2017 18:45
As described in my initial post, we could have gone with option #1. However, landlords have the right to evict if they are going to renovate the unit or move family in, given 2 month's notice. In option #1, we would have protected our rent-controlled rate per month, however we would be exposed to the risk of an eviction with only 2 month's notice. Of course, when that eviction would come is unknown: it could happen the first month or possibly never.
It could be my error but the way I read your original post in this thread and the other one you linked from before, it sounded to me like you were softly coerced or tricked through implied brinkmanship into signing the fixed term option on 'renewal'. If that's not the case you erred, plain and simple. Exercising the owner use is not easy for most landlords because it's pretty restrictive and needs to be done in good faith. In that case, you get compensated when you are displaced and if they do so outside of good faith, you are entitled to additional compensation and the other party has a valuable, registered, fixed asset so you're going to get paid.

Moral of the story is don't give away free or cheap options, seek them out and take them wherever you can get them. Don't triple down on a minor error with rental agreements and buy an overpriced condo.
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by Quebec » 15 Jul 2017 14:05

SkaSka wrote:
13 Jul 2017 15:11
Could you clarify what you mean by "cash flows on purchase compared to what you have been getting on your investments"? Are you asking what our cash flows from our income would look like in a purchase scenario?
I think what Keith means is something like this:

Your calculations show that ''the total cost of owning will be $90,000 over the next 5 years'', whereas rent would be ''anywhere between $90,000 to $110,000 over the next 5 years''. So it's pretty similar in terms of cost.

But you also write that ''by the end of year 5 of owning, there would be $159,492 of equity in the condo''. This of course has not appeared magically, but simply consists of the downpayment plus the portion of the mortgage payments going towards the principal. Also, I think this assumes zero change in the condo market value.

If you keep renting, this $159k can instead be progressively invested in a diversified portfolio of stock and bonds. The return on that diversified portfolio may be greater or smaller than that of 'investing' in your condo over a particular period. There is no way of knowing in advance. But if it was me, I would not buy in what -- seen from the other side the country -- seems to be a bubble RE market, more or less ready to pop, with the intention of holding for only 5 years.
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by kcowan » 15 Jul 2017 14:36

We considered buying last year because we were facing major disruption as the landlord replaced the floors on our patio and inside and we had to move everything anyway. We were going to downsize to North Van (Victory Ship Way) to another ocean view place. The cost would have been $6.09/sq.ft. per month and our current costs are $1.71 so we decided to handle the disruption with grace! They replaced wall-to-wall carpet with engineered hardwood. It cost us $800 in movers fees.
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 15 Jul 2017 20:54

FinEcon wrote:
15 Jul 2017 12:21
SkaSka wrote:
14 Jul 2017 18:45
As described in my initial post, we could have gone with option #1. However, landlords have the right to evict if they are going to renovate the unit or move family in, given 2 month's notice. In option #1, we would have protected our rent-controlled rate per month, however we would be exposed to the risk of an eviction with only 2 month's notice. Of course, when that eviction would come is unknown: it could happen the first month or possibly never.
It could be my error but the way I read your original post in this thread and the other one you linked from before, it sounded to me like you were softly coerced or tricked through implied brinkmanship into signing the fixed term option on 'renewal'. If that's not the case you erred, plain and simple. Exercising the owner use is not easy for most landlords because it's pretty restrictive and needs to be done in good faith. In that case, you get compensated when you are displaced and if they do so outside of good faith, you are entitled to additional compensation and the other party has a valuable, registered, fixed asset so you're going to get paid.

Moral of the story is don't give away free or cheap options, seek them out and take them wherever you can get them. Don't triple down on a minor error with rental agreements and buy an overpriced condo.
Our read on the situation was that since our landlord insisited and claimed to be standardizing this throughout all of his rental units, if we declined to sign with that condition checked, we would have risked antagonizing our relationship with our landlord.

While we would have gone month-to-month, we didn't feel comfortable having an annoyed landlord who could evict us with 2 months notice.

Perhaps we should have risked that scenario and gone month-to-month, however we didn't like the stress we would have felt in that scenario given the information we had on hand and what we projected the relationship with the landlord would be given that scenario.

I'm not sure we made the optimal decision, however it is what it is so we're looking forward trying to be prepared for various scenarios before April 2018!

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by patriot1 » 16 Jul 2017 08:57

The BoC has just increased interest rates for the first time in seven years. Effective Tuesday, BC will have its first NDP government in 16 years. They (as well as their partners the Green Party) have promised to take measures to cool off the RE market and to increase protections for renters.

These ought to factor into any rent vs buy decision.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by fraser » 18 Jul 2017 12:29

I do not have insight into the BC Market. We live in Calgary. Just over four years ago we signed a six month lease on a condo in anticipation of buying a condo or what is called here a villa bungalow.

We rented for four years. Why? First of all the market was going south. Second, the financials simply did not work. We considered buying into the complex where we rented. We knew the price, the tax, the condo fees, everything. The owner was making just under three percent. Well she would have, except for the 30K or so assessment and the three-six months of forced vacancy to due condo repairs. That meant zero profit for four years. There was another $5k assessment for security systems just as we left.

So, we did buy last month-not a condo though. Bottom line was that the equity from our previous home (after tax) paid for our rental and paid for a great deal of our travel over four years. Twice a year, two-three months at a time.

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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by freedom_2008 » 27 Oct 2017 12:23

Hi SkaSka,

Hopefully the new legislation to close fixed-term rental loophole will help you:

http://www.cbc.ca/news/canada/british-c ... -1.4374057
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Re: Seeking Insights/Opinions on Rent vs Buy Scenario

Post by SkaSka » 27 Oct 2017 14:07

I'll report back in the new year when we start feeling out a renewal lease with our landlord how it plays out :thumbsup:

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