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November 21, 2016 | The Afflicted

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Well, time for some more of those fake letters that income-challenged deplorables in the comments section swear I make up, You wish.

“I’ve read your blog for years,” says Randy, not quite sucking up enough, “but have never written in so I thought it might not be a bad time to start.

“My girlfriend and I have tried to balance where our money goes but are unsure now with the doom and gloom of the housing market. We’re both 32, make about 100k a year each (for a few years now) and have accumulated about 100k (in liquid assets) in the past couple of years, while we own condos in downtown Toronto (350k) and downtown Victoria (360k). The latter is where we currently live.

With the changes coming to mortgages and the housing market my question lies with the Toronto condo. It’s currently rented out and roughly breaks even @ a rate of 2.74% (we are locked in for 2 more years).  We make $400 a year. Would the inevitable rise of the rate when we remortgage make this an unsound investment or should we consider the appreciation a factor?  We bought it for 320k and have about 270k left on it, valued roughly around 350k. Any info would be greatly appreciated :)”

First, Randy, you’re not covering costs on this condo. Not even close. You might be up four hundred bucks in rent over mortgage payments, monthly fees and property tax, but that fails to take into consideration the $50,000 you put down when you bought it. Invested inside your TFSA instead, it would generate more than $3,000 in taxless returns – which means the condo is actually giving you a negative yield.

As for the appreciation (up $30,000 in the last three years), that’s a middling 3% return, fully taxable. Worse, if you sell the place and pay the standard 5% commission, your capital gain is reduced to $12,000, with the annual return descending into GIC territory – 1.2%. Plus, if the unit’s vacant for a few months between tenants, or gets trashed, or ends up hit with a special assessment or a hike in condo fees, you’re pooched.

In fact, without consistent, robust, mindless appreciation in the capital value of a condo, it’s impossible to make any money as a landlord. But it’s real easy to lose it. And I haven’t yet even talked about (a) rising interest rates and the certainty your mortgage will renew at a far higher rate or (b) the recent mortgage stress test carving out a huge chunk of the condo-buying crowd.

A single rental condo unit 4,500 km away on which you are already losing money is a really bad idea, R. What were you thinking? Bail before it eats you.

Now, here’s Cory and Denise, writing in from the Socialist Republic of Rachel:

“My wife and I love your blog, and are real estate investors in Edmonton and have been liquidating our portfolio for a year. We’re firm believers that real estate is in a bubble. Our question for you, should we sell the last two properties? They are our personal residence with a lower suite and a duplex that we’re in the middle of converting to a 4 plex.

“Our home costs us $900 a month with $50,000 of equity in it. If we go rent elsewhere, we are looking at $12-1500/Month. The Duplex is cashflow neutral as is. We would renovate to the sum of $80,000 to convert to a 4 plex and then it would cashflow $1200 a month with 4 suites and $150,000 equity in this one.

“We have $88,000 in cash and $191,000 in mortgage investments @ 12% – first position mortgages coming due in 2017. We only take a salary of $50,000 a year from my wife’s company. Zero debt other than the two mortgages on the two properties. 336k with a 2.1 variable and the second at 322K with a 2.69 fixed. My wife is turning 34 in Feb and will be off work with our first child in Mar and I’m 36 in two weeks. I don’t take a wage, work on the mortgage investments and reno the properties.

“We have our personal residence up for sale, we’re getting close to an offer. Should we take it?”

Real estate investors, eh? Well, you suck at it.

The bottom line is you have debts of $658,000, at interest rates destined to rise. Plus, Edmonton’s a real estate dead zone with zero chance of any property appreciation. Complicating the situation, most of your liquid assets also at real estate risk, invested in residential mortgages – and Cory doesn’t have an actual job. Oh yeah, and Denise is about to check out to have a kid.

Sell the single-family house and rescue your fifty grand in equity. Wriggle out of the mortgages the moment they come due. Invest the funds properly. Then move into the duplex, broom the renovations, go find real employment and collect a little rent. You’ll have another mouth to feed soon, so get your priorities straight.

The moral of these two tales: real estate’s as much a disease as an asset class. Too easy to slip into, too facile to finance, too cloaked in misinformation, too often the choice of the naïve. The coming reset will bite.

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November 21st, 2016

Posted In: The Greater Fool

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