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January 14, 2019 | The Question

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.

The economy is China is sputtering. The American government is paralyzed. The US president denies he’s a Russian agent. And Brexit’s about to blow up.

And how do stocks markets react? Yawn, basically. Small moves in the last couple of days following big advances provide more evidence a bottom was formed about the time you were thinking of eggnog, Donner and Blitzen. As this blog argued, markets don’t collapse without a damn good reason. A weird president is worrisome, but not reason enough to ignore corporate profits, consumer spending, expanding jobs and all the other reasons no recession lurks.

Markets sold off in the fourth quarter. Assets got cheaper. And compelling. Those who bailed foolishly turned paper losses into real ones. Those who ignored the noise were wise. Those who came here to tell you it was 1929 again have mysteriously vanished. It’s a pattern that never alters. Every correction is the end of the world.

But let’s ignore that, and talk about Darrin, of Cowtown. I present his case today, since he poses a question repeated over and again. Strange. The answer is so clear…

I’ve read your blog for years, trying my best to follow your advice when making financial decisions over the last decade, and have now hit a moment where I need a specific answer to a specific question I have.

As a 34-year-old married man living in Calgary. We have two young children and have lived in a townhouse for the last little while; we paid $330 000 for it when we bought it and listed it on Thursday to sell. We have recently put in an offer ($360 000) to buy another place and are will be finding out soon if we got it; it’s a foreclosure.

My wife says we should rent our townhouse, which would bring in about $1 700 a month. This would cover almost all of our monthly costs, which come in at about $2 000, including our condo fees that are $245 and taxes.

Here’s the question: Should we rent and deduct all the expenses (i.e. general cleaning and maintenance, repairs, local property taxes, mortgage interests, etc.) from our taxes and let it build equity, or should we just sell the townhouse and maybe take a loss due to the current housing market?

I have a feeling I know your answer, but I am wondering if you would ever recommend keeping a place and renting it out to help build equity. Thank you for all your help over the years.

First, Darrin, why would anyone ever want to be a landlord? Not only will you be subsidizing the person who leases your place (since it costs you more to own than you are receiving monthly), but you’re now obligated to look after this human. Yeah, just like a beagle. The heat and water have to work. The appliances, too. No safety issues. No outstanding repairs. Functioning toilets. And a tough time getting rid of someone, even if they don’t pay the rent. All so you can lose money? Huh?

However, there are five overriding reasons this is a Bad Idea. So go and get your wife and read the next paragraphs to her. That’s okay. We’ll wait.

One. The way to succeed at investing is to have money in multiple asset classes. That doesn’t mean two houses. By buying the new place and retaining the old you’re just doubling down on real estate exposure – and in a city where the market croaked years ago. As interest rates nudge higher, Calgary’s business core hollows out and oil stays wonky, why would you increase your reliance on it? Don’t be dumb. Diversify.

Two. The losses from renting are far greater than you think. Sure, it costs two grand a month to carry the place, but that doesn’t include the money you have locked in equity. If that’s $150,000, for example, the wad could be earning $750 a month if left invested in a retirement portfolio. Now your true losses are a grand a month – and I can guarantee the property will not appreciate that much (and could depreciate).

Three. Sure you can deduct expenses related to the rental property from your income, but not forever. The CRA has other ideas about that. Anyway, you must add the rental income to your own employment wages and be taxed at your marginal rate on every single dollar. In fact, this might push you into a higher bracket. Investment income in the form of dividends or capital gains comes with a big, fat, juicy tax break.

Four. Once you change addresses and rent out the house you give up your PR exemption. That means any future appreciation in the value of the property will be taxed as a capital gain. In Calgary, where most houses have declined in value over the past few years it could mean you have the worst of both worlds – no tax-free gain while living there but a taxable one when it’s rented.

Five. This is just bad financial planning. Why would you buy before you sell? In a lousy market like Calgary it could take a year to find a buyer, and meanwhile foreclosures continue to pile up. Why would you incur a pile of new debt instead of using the equity in the old place to finance the new one? And if you’ve got a stay-at-home spouse and two little screamers, you should be asking me about income-splitting and RESP investing instead of flipping houses.

Face reality. Your wife’s leading you astray, Darrin. (But you don’t need to read that to her.)

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January 14th, 2019

Posted In: The Greater Fool

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