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July 24, 2018 | Lofted

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.

“I’m a long time reader of the blog and finally in a financial situation to follow some advice,” says Timothy, which is good, because he needs it.

“I have zero debt after aggressively paying it down over the years.  Bought a condo/loft a few years back right in downtown Toronto, worth $725-750k, remaining mortgage 300k.  Zero investments (personal debt was the priority), TFSA/RRSP contributions untouched.  I have a defined-benefit pension plan and make just over 100k salary.

“The options I am considering:
1.  Sell the condo, invest the 400k and come visit you as I don’t feel comfortable managing that amount of money with my limited knowledge in the market.
2. Stay put in my Condo.  My unit is a 1 bedroom hard loft in King West, and many tell me this area/unit won’t follow the typical market fluctuations the looming rate hikes should create.  Though I am having a hard time believing there is much more room for equity growth for a 1 bed, 1 bath condo worth 750ish K.
3. My GF (also owns a condo with about 300k equity in it, rents it at $800 monthly profit) and I have been looking at houses in the Beaches area.  I’m not sure if I want to buy, it’s more her dream, but again, many people I know keep telling me the Beaches are never going down in value, and get in now, it’s a great investment.  However, while dropping into some open houses, 1.2 million doesn’t go very far in that area and I just can’t wrap my head around spending/incurring that much debt for a house that needs an incredible amount of work before I could be happy living in it.

“Ultimately I’m just trying to make the smartest financial decision for my future, I’m fine with renting vs owning, but concerned about getting out of the market and finding my buying power significantly less down the road if the Beaches/King west area continues the growth.  Also the rental market in the beach area comes at a serious premium, but I’m a firm believer of living where you play and jointly renting with the GF will reduce my monthly bills over our current situation by about 1k. Any advice is much appreciated!”

I wrote Tim and asked how the GF can make $800 renting a one-bedder. “So her unit is worth about 500k,” he replied. “Her mortgage + prop taxes is about $1100 monthly.  Condo fees $400 and Insurance $50.  She has a mortgage balance of approx $175k remaining. She is just moving in a new tenant at $2500 (fully furnished unit).  She has not in the past claimed as a taxable income, but will most likely going forward.  I pay the majority of the bills on my unit, about $2300, while she pays me $1000 per month.”

What’s wrong with this picture? Lots.

First, Tim has only one asset, no liquid investments, no financial reserves and a house-horny GF. Never a good combo. That might be tolerable, but she’s in the same situation and thinks her unit is a money machine. Such delusion. Added to the overhead of $1,550 per month is the $1,750 which the equity could be generating in a balanced portfolio. So the true ownership cost is $3,300 a month, for a loss of $800. In addition, the rental income must be added to her existing income and taxed at that marginal rate (she’s now a criminal). The loss, then, is even greater.

As for Tim, he’s correct to expect little or no growth on a one-bedroom loft that cost three-quarters of a million. (We have lost our way…) The city is a forest of condo cranes with huge new supply coming down the pipe. Can Tim & babe stay in a small loft forever? Unlikely. But spending $1.2 million on a dodgy house in the hipster east end is hardly an intelligent move – even if she sees the light, sells her unit and combines it with his equity.

That would leave them with a $500,000 mortgage and an unrenovated, largely unlivable house – so another hundred or two in debt would be added. Now the couple would have a bigger borrowing, no liquid assets and a single shared asset. Worse, they’re not married, which adds more risk. If one person walks, it guarantees the real estate must be liquidated, regardless of market conditions.

So, dilemma. They can’t really live long-term in either condo. Capital appreciation on those units is unlikely. Jumping to a semi is a huge leap. And yet, on paper, the two of them own $1.2 million worth of real estate with $700,000 in equity. It’s a classic lesson in why buying condos is an idiot move for most young people, leading to more complication as life inevitably evolves.

So a good option is to sell both and invest. Turn the $700,000 into a million in five or six years and buy the single-family home in the moribund, rate-slowed market that lies ahead. Wait and see if the relationship holds. Decide if you want a family. Get used to having the security, flexibility and promise of holding financial assets. Revel in mortgage freedom. Set up individual accounts and grow funds tax-free as well as a joint non-registered vehicle. Rent a unit from some sucker who doesn’t understand he’s subsidizing you. Stop drinking the DT loft Kool-Aid. And get the misguided waif to read this blog.

That should fix everything.

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July 24th, 2018

Posted In: The Greater Fool

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