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January 26, 2017 | Bad Ideas

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.

“Huge fan of the blog,” writes Chris, “please don’t every stop! Every time I am ready to bid on a house I visit your site and remind myself to think rationally. As a 32 yr old father of 4 I am living the Garth Turner Rule of 90 and renting in the GTA.”

Hmm. Better a suck-up than usual. Chris must want something…

“However, I could do without the family guilt. (How can you force 4 kids to live in a 1500 Sq foot apartment???) I know you get tons of these questions but here goes. I have an opportunity to buy a cash-flowing Real Estate investment in Ottawa. Sure the capital may fluctuate, but the investment should generate income. Do I wait and see if the market drops, or move forward?”

This is actually an interesting email. First, our fellow blog dog understands buying in the GTA right now, with scant supply and rapacious, hopped-up buyers, is nuts. There are no bargains, only jumping in at the top. But he still feels guilt because (as we all know from our moms) Real Men Buy Houses. So Chris wants to prove his throbbing manliness by buying some rental thing 600 km away.

Second, did you notice the phrase, “cash-flowing Real Estate investment,” and the capital letters used? Aha. He’s been visiting one of those cultish property investment club web sites where some guy desperately hopes to sell you a $29 book because he’s “a multi-millionaire successful Real Estate investor who now wants to share his incredible secrets with you!” Yeah, right.

Clearly I can’t answer this question without understanding much more about C. But we do know he can’t afford a house in Toronto (and abide by the reasonable Rule of 90). He has at least four dependents at the tender age of 32. Ouch. There are six people in his space. And now he wants to swallow a bunch of debt to buy a rental in a city from which nobody ever returns quite normal, because it “should generate income.”

Chris. Dude. Let me slap you around a little. You’re delirious. The spring property rutting season has made your brain ferment. This is a bad idea on many levels.

First, even in Ottawa investment properties with good cap rates are virtually non-existent. It’s not enough to buy something, hope to rent it and maybe cover most of your expenses. The equity shoveled in there would be better off earning far higher returns in financial assets. After you add in financing charges, property tax, insurance, the lost use of your down payment, repairs, maintenance and an allowance for vacancies, there’s no profit. Trust me.

So the only real benefit is the potential for capital appreciation in the value of property. And forget that. According to local realtors house prices roared ahead by 1.5% last year. Yes one and a half, or about the rate of inflation. Compare that to 17% in Toronto and you can see that this market is not only stable, it’s got rigor.

Then there’s the issue of debt. You may not have real estate now, but neither do you have a mortgage. Those who do will certainly be facing higher renewal costs in the years to come – and enough of an increase that, should you buy, your cash-flowing property could easily turn into a cash-negative one.

Finally, how is this possibly going to help your family? By draining off potential down payment cash into some flop place on the Rideau so you can subsidize renters with government defined-benefits pensions will not get your brood into their own digs any sooner. The opposite. This may mean you never own a property where you actually want to live. Even if the Ottawa place appreciated, you have to sell to realize the gain – which involves paying out a fat commission, dealing with cranky tenants pissed they have to move, and waiting months for a greater fool to come along.

Oh, and Chris, did you catch the latest news from Royal Bank?

This year the hammer falls on Toronto real estate, it says. Just as the BC government eviscerated the Vancouver market and Hoovered out the speculators, causing a serious erosion, so the feds are about to whack the GTA after the 2016 stupidity.

“The likelihood of policy intervention to address housing risks in Toronto is increasing,” RBC economists warn. Meanwhile CMHC this week again raised its little red flag, suggesting government is preparing new measures to corral prices. “We continue to detect strong evidence of problematic conditions in Canada,” CMHC chief economist Bob Dugan says. “Price acceleration in Vancouver, Victoria, Toronto and Hamilton indicates that home price growth may be driven by speculation as it is outpacing what economic fundamentals like migration, employment and income can support.”

As if this weren’t enough, Canada’s economy continues to limp badly amid heightened concern the jingoistic bully in the White House will throw essential trade deals under the bus in his ‘hire American, buy American’ frenzy. In fact, he did it Thursday, as the Trump administration said it’s prepared to impose a 20% tariff on all Mexican imports – using the money (estimated at $10 billion a year) to build that massive, ridiculous wall along the border with its key trading partner. Such a tax is completely illegal under NAFTA rules. And without NAFTA, our Canadian goose is nicely sautéed.

So, Chris, give it up. Stop reading the REIN website under the covers. Take the app off your phone. Strip those frissons of guilt from your mind. There are better ways to feel manly.

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January 26th, 2017

Posted In: The Greater Fool

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