- the source for market opinions


August 22, 2019 | Dr. Garth

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 Dr. is IN.

I have been regularly reading your blog for the last 6 months. It’s been a great source of information, as well as self-reflection. At 35, married and 2 kids, I have realized I am far behind in terms of net worth compared to some your other readers. Our household income is around 250K. Total savings including RRSP and TFSAs is around 200k. We have been renting a semi in GTA for 2000 for the last 3 years, while the average rent in the area for semis has gone up to 2,600.

I have been holding off buying a house, though wife really wants to, for the last year or so. However recently there has been an opportunity that is making me rethink. There is a builder in Milton offering a zero percent mortgage for the first 3 years, on semi costing around 780K, with 15 percent down payment. I am thinking it’s a sound investment to buy that property, rent it out (I have researched, others are renting these properties for 2700 a month- which covers the entire mortage) while I continue to stay in my current rental (saving 600 every month vs the market) till my landlord decides to kick me out (potentially a year or 2 from now).

Would love to get your thoughts on this? Am I making a big mistake buying a year or so before a recession? Thanks a bunch for all your awesomeness! Your blog is such a great resource. Thanks, Raheel.

Okay, R, if your Toronto-dwelling wife wants a house, why would you even consider buying a rental for other people to live in, way out in Milton where there are probably bears? Just because it sounds cheap? Because the mortgage rate is 0% for thirty-six months?

Then give yer head a shake. Fuzzy thinking will get you into trouble. Bigly. First, the interest you’d save over three years – about $32,000 – is already priced into the house. This is a sales gimmick, the same as reducing the selling sticker on the property. But it’s not much of a discount – just 4%. A little dickering without the 0% mortgage would get you a better deal.

Second, you’d lose money. Even a 0% mortgage plus property tax and insurance equals at least $2,800 a month. Add in the lost opportunity cost of your $120,000 downpayment, and the true cost is $3,400 – far less than rent. Third, this is a naked new-build house. No trees. No deck. No grass. No backyard. What kind of tenants will you attract? Fourth, as a rental from Day One any gains in value will be taxed as capital gains. If you sell in a year or two, profits will be considered business income and taxed at your marginal rate. Fifth, this is in Milton. Get a grip. It’s probably snowing there already.

Of course, this little insanity would also consume more than half your liquid net worth while plunging you into debt of more than $600,000, and delivering negative cash flow. But on Sundays your wife can go out to weed the yard. That should work out well.

First off, I’d like to thank you for the nightly reads. Your blog was recommended to me by my father and now I’m hooked. It is usually where our conversations end up (did you read Garth’s blog today!?) My wife and I (30, married a month) have approximately 50 k sitting in our TFSA in a high interest saving account. I’ve been advised by my…financial advisor that we should not be invested in any ETF’s right now since we are planning on using this money to buy our first home and that we can’t risk losing it by investing it in the market. I am finding it difficult not being invested in ETF’s since like you mentioned in your NOPE blog on August 20th, ” High-interest savings accounts barely pace inflation, and rates of return will be falling even lower in the months to come”.

Since our parents who would like us to stay close by, and rates being at 2.5-2.99%, we believe the next quarter or so may be a good opportunity for us to get into the housing market. With that being said, are there any other investment vessels we can consider besides HISA that won’t eat up a portion of our investments if a recession does present itself? Thanks for your help and all of your advice…Please feel free to use me in your blog, this moister has thick enough skin lol. Thanks, Steve.

I hope so. Bad idea. You’ve got fifty grand between you, have been married a few weeks and plan on buying a house within three months? How can you be 30 and be so naive? Unless you make a huge joint income, you’ll never qualify for enough (given the stress test) to buy more than a concrete box in some desolate tower – which you can rent for far less. This is a pathetic amount of money for two working adults to have accumulated. Did you blow it all on a honeymoon to Nevis? And how do you know if this union is going to work? Is this your bright idea, or hers? Do you really want to lock yourselves into a steaming pile of debt (and a potential nightmare getting out if the thing blows up)?

As for your question, keep the money in the HISA if you’re seriously house-horny. If not, the entire $50,000 invested for a year might earn enough to buy a new couch. Then you’ll have a place to sleep.

Hi Garth, I follow your blog and investment advice frequently. I’m contemplating helping my 32 year old son buy a house in Toronto.

I delayed over the past 10 yrs thinking major corrections were likely to happen but the opposite occurred and the prices soared. There is much talk of a looming Canadian recession so wondering if we could be on the cusp of a correction? Naturally he has a long term horizon for the house value so wondering if we should just jump in. Thanks, John.

There’s no recession looming, except in the media headlines. The economy is fine. Unemployment is low. Companies are making money. Little inflation. Robust consumer spending. Sure, a slowdown is inevitable after a decade of growth, but it’s not even close yet. When it comes, house prices will decline. So why not wait? Maybe by then your adult, middle-aged child will then be able to stand on his own. Like you did.

Gotta go. Tee time.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

August 22nd, 2019

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published.

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.