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June 22, 2018 | Up in Smoke

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.

Poor Jess.

The next time you think about buying a rental property because (a) real estate always goes up, (b) this will provide a nice, steady, no-risk, low-vol income stream for your retirement and (c) the idiot tenants will pay off the mortgage for you, think of Jessica. Here’s her note to me:

Long time reader since 2008. Widowed in April 2017 at age 40 and never looked after finances….. Currently my rental house is not livable, located in Edmonton. I sold it in Dec/2017 and 2 days before closing the house leaked and created flooding and damage. Now there is a mold issue and the insurance declined the claim due to it being vacant. No tenant. I owe 320,000 on the house and plan to sell it privately for 320,000. In essence they will take over the mortgage payments.

I paid 517,000 so already a loss but no longer want to deal with this house issue. I paid about 280,000 into the house so I’m ready to walk away from this declining liability….. There is no insurance on it so technically I can give the title back to RBC. As it stands, RBC where the mortgage is located) is unable to garnish my wages as I live in BC.

The bank is looking into skipped mortgage payments but if there is an outstanding balance they will ask me for repayment. I have asked RBC, what is the consequences of defaulting on the money owing?? I have also contact my lawyer to ask about the private sale process…. Any information or advise would be helpful.

Well, she can’t walk without consequences, of course. Other than bankruptcy. [email protected] will want her $320,000 back, plus the applicable mortgage break fee. If the bank has to chase Jess for any money, there will be legal charges added. And the missed mortgage payments will not be forgiven – banks are not charities – so they will have to be made whole. Finally, there’ll be legal fees involved in the sale of the house and probably a tad higher than normal since the premises are seriously damaged, constitute a health risk, and suitable protections must be in place for both buyer and seller. At least Alberta doesn’t have land transfer tax. Yet.

So, our blog reader (did she learn nothing in the past ten years and 3,055 posts?) will end up leaving at least $200,000 on the table, wiping out a significant part of her net worth. What a shame. And how avoidable.

It reminds me of Tim. I spoke with his parents yesterday. They’re trying to cope with a $300,000 line of credit they put on their house in Vancouver so their adult kid could buy a rental property in New Brunswick. Why, I asked respectfully, did you do such a dumbass thing? Because, dad replied, we all heard about a big shipbuilding contract going on there and houses looked cheap with rents going up. So Peter bought one and we helped.

Of course, the ship thing went pffft. Houses in Saint John resumed their century-long snooze and rents barely cover heat and hydro, let along financing. Meanwhile the LOC has increased in cost three times as rates rise, little Petey moved on to shack up with his GF in Toronto, and the NB house can’t sell. Plus, it’s 5,740 clicks away. Retirement just got pushed back a few years.

In Toronto last year over half of all condo sales went to people with no intention of living in them. These were investors, most of who believed they could rent the units out for enough to carry them and let the tenants pay the financing. Bad idea. The combination of property taxes (inflating) condo fees (seriously rising as buildings age) and mortgage financing means that four in 10 of these people have negative monthly cash flow. When the missed investment potential of the down payment is added in, that probably rises to 60% or better. Some investment, especially now that condo sales and values are cascading.

Rental real estate – unless it’s a multi-unit building in the right area with a decent cap rate – is a disaster for most people. This is exaggerated when the property is miles away, out of sight and vulnerable to damage, bad maintenance or tenants who do unspeakable things to plumbing.

Costs keep escalating while governments – especially in BC and Ontario – have decided to wage war on rentiers, tipping legislation mightily in the favour of tenants. Rent controls don’t take into consideration swelling expenses and renters can’t even be punted at the end of their legal leases, without (in some case) a tribunal hearing, legal action or cash settlement. Worse, rental proceeds are considered the same as employment income by the CRA, with every dollar potentially inflating your marginal tax rate. That compares poorly to the treatment afforded capital gains or dividends earned within a financial portfolio.

So why do people do this? Buy houses and condos to rent out, even now when capital appreciation is no longer there?

Habit. Because your parents did it. Or the stock market’s too scary. Maybe the cult leaders at REIN seduced you into it. Or Brad Lamb told you 14% annual returns were, like, guaranteed. Or it was the only real estate you could afford. Or Mom gave you the money, and was so proud when you signed up for an adulthood of debt.

Many reasons. Most of them awful. So, don’t.

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June 22nd, 2018

Posted In: The Greater Fool

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