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January 1, 2018 | The Predicament

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.

We are needed.

Mark and his squeeze must decide by Wednesday. The 32-year-olds are confused condo captives whose LL is messing with their heads. There’s now half a mill in debt and equity hanging in the balance, sauced with FOMO and hormones. We cannot fail him.

First, the back story. Two days before the end of the year, this came through:

“Hi Garth: I have been following your blog for some time and appreciate your thoughts and the entertainment value you provide me on a daily basis. Thank you for this, but I have a predicament.

“I work and live in downtown Toronto with my girlfriend in a Condo. I have rented it for some time now, all the while socking my money away. Neither of us have debt and each of us have above average jobs with an annual base salary of $100k each plus bonus’. My landlord has advised me that he is looking to sell the unit and we have the opportunity to purchase it privately. I have been going back and forth on the price however with B20 coming in and the risk of higher interest rates, the potential for increase in condo fees and the overall view of the Canadian economy I wanted to get your thoughts. We believe we can get the unit at under the current market value but I am wondering if B20 will really impact the demand/current market value in a meaningful way. I know the timing isn’t perfect but hell Garth, we’ve gotta live somewhere and rent isn’t very cheap these days for comparable units – think $2600+ a month. Living downtown allows us to only have 1 car. That plus the convenience is worth money to us and our lifestyle as well. We would likely need to borrow less than half of what we qualify for in order to complete this transaction so the risk is less than your average buyer but this B20 stuff and the potential negatives effects on the market certainly concern me. Would love your thoughts and guidance on our situation. Don’t worry – I have thick skin and won’t be liquidating my portfolio to get the deal done.”

Being desperately bored over the holidays, I responded. Give some numbers, Mark was told. Plus, are you gonna marry that girl, or what?

The unit’s worth $555,000 to $580,000, he replied, “but I’m trying for $528,000”. Between the two of them they have $470,000 in liquid assets, half of it in pension plans. Monthly fees and taxes are almost $800, and they plan on borrowing $480,000. He’s an insurance dude, while she’s in sales. No marriage on the horizon.

The unit is a two-bedder, two-bath jammed into 730 feet, with a parking spot. It’s in a fat tower overlooking the scenic railway tracks in DT Toronto. Here it is:

Today this arrived:

“We just met with the owners of our unit today. They are willing to sell the unit to us at $550,000 a discount of a minimum of $20,000 compared to market comps. The reason that he is willing to sell it at all is due to the fact that our rent is significantly less than the market rate. He said that he will kick us out and re-rent the place at the market value if he cannot get a minimum of $570,000. My understanding is that he cannot even do this nor could a new owner unless they or a close relative actually moved into the unit. In any event we are seriously considering purchasing the unit as we cannot find anything comparable for less than $600-$620k. At the end of the day we have to live somewhere and the price is well within our current means. Hoping to get your two cents before we make our final decision (we have 1 day).  I look forward to your thoughts and will continue to follow your blog religiously!”

Well, Mark, you’re being manipulated. The prickish LL cannot punt you to get more rent, as you correctly state. Yes, he can sell the place and, yup, if the new owner moves in personally, you’ll have to leave. But this is just a threat to force you into an instant buying decision while he avoids a 5% commission and the coming market hit.

The first question is simple. Are you financially better off to buy or rent?

The answer’s simple, too. To borrow $480,000 plus closing costs at 3% will amount to $2,400 a month. Condo fees and property tax are $765 and the lost investment value of your $70,000 downpayment (at 8%) is $465. So, that totals $3,640.

To rent the same unit in Telegram Mews costs $2,500 to $2,800 (several are currently on the market), even bigger, with two parking spots. Here’s a Kijiji ad:

Cool Two Bedroom + Den condo looking for amazing tenant 🙂 What’s cool is it has two car double parking. This is one of the two identical condo units in 8 Telegram Mews I list with a prime location and speculator amenities. My tenant is leaving January 31, 2018 and available beginning February 1, 2018. Perfect for couples with little ones, it has two bathrooms and in suite laundry, also rare two separate balconies, amenities includes outdoor pool, indoor gym, sauna, paid party room and more. Asking $2,800/month plus hydro, I require work reference and a credit report and $200 fob deposit for two fobs and additional $100 for each additional one… As bonus included: super cool landlord, super big smiles and warm welcome to you into your new home 🙂 Call me at 416.837.4965 or email for viewing.

So, buy for $3,640 a month or rent for $2,600 – a 30% reduction, using the extra $12,000 per year to fill both your TFSAs. Better yet, stay where you are and call the owner’s bluff.

In short, there’s only one reason why anyone would grab one of these boxes (the size of location of which make them wholly unsuitable for families) and that’s the potential for capital appreciation. But now that is uncertain, as the stress test reduces new-buyer demand from 5% to 20% (we’ll see) and mortgage rates drift higher over the course of 2018. Worse, the threat of B20 pulled forward demand into the final few months of 2017 in both Toronto and Vancouver, pushing condo prices into silly territory. Buying now, Mark, would be an unwise rolling of the dice. There’s no assurance of a capital gain, and reasons to expect a capital loss. Meanwhile you’re forking over 30% more every month to live in the same place – which sure as hell won’t be your Forever Home. Duh.

And did I mention the foolishness of sharing a deed and a mortgage with someone you’re afraid to marry? Dude. Wake up.

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January 1st, 2018

Posted In: The Greater Fool

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