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Discussion Starter #1
Hi all,

Typical question.

Well, I did my own calculations, but I'm not a financial adviser, so I definitely have missed a few things. Please teach me. Never too old to learn.

Buying
  • Expenses = Mortgage payment, taxes payments, maintenance & renovation expenses
  • Investing = None (assuming any investments here would be extra money which would also be invested in the renting scenario anyways)
  • Profit = On sale, based on a value increase of 4% per year, minus all expenses due to selling and paying the remaining mortgage, if ever
  • Tax = No tax for the profit of the part of the property in which you live in, but will be taxed for the profit of the rented part of your property
Renting
  • Expenses = Monthly rent
  • Investing = Investing the difference between buying scenario's expenses and renting scenario's expenses (monthly rent)
  • Profit = From investments, based on a 9% per year over the long term
  • Tax = Will be taxed since you'll end up filling pretty quickly your TFSA and RRSP since the money you would have used for a down payment would instead be invested in this scenario
(Please take my numbers of 4% and 9% as if they represented the reality)

So, I get that when buying a property, you are leveraging your buying power and even though 4% may seem low compared to 9%, that's 4% on a big amount of money that you don't have (the value of the property).

I get that when buying, you should not plan on selling within the next 5 years because you'll mostly end up losing money from all the expenses due to buying and paying the mortgage (I'm not in the situation to do flips).

But then, from my calculations, after about 15-20 years, you start having a nice potential profit on that property and since the value increase is only 4% compared to 9% when investing, it starts being more interesting to sell that property and invest that money instead of keeping the property.

In fact, it will always be the case at some point in time as long as the CAGR on investments (minus taxes) is higher than the CAGR of the value increase for the property. So why don't we all end up selling our property and rent? (Or if your work income has increased a lot, you can leverage your money again by buying something bigger, or maybe the key is to use the huge advantage of a line of credit on the home equity at low interest rate and use that as leverage for growth investments?)

Well, that's what I plan to do : sell in 15-20 years and not buying back anything else. But I would not sell in order to invest the profit in 9% growth because at that time I'll simply retire and invest in fixed income like dividends. Or maybe I would not sell and instead I would rent both units (I bought a duplex). I'll figure out which option brings more fixed income at that point, but I still feel like I'll sell and buy dividend stocks, it's less management than having an income property.

What's wrong with my calculations? There's definitely knowledge that I'm missing about strategies, so please explain me what I'm doing wrong.
 

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Most Canadians move every 7 years. Cost to sell a house (layers, realtors, bank fees, etc.) break even is 7 years. Market is correcting across canada. There is a lot of talk about capital gains exemption being revoked to pay for covid.

movement is easier if you rent. Most houses, historically only maintain inflation value. Don’t forget the Interest on the mortgag, paid with after tax dollars.

propaganda says we all need to own houses, for most people it’s their only savings plan.
 

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15-20 years is a long time to wait for profit. It's also a long time for a property to depreciate. If you are staying in the same city, you won't be any further ahead, net profit or not. I know people who have owned homes in Vancouver and Toronto for decades. They will only be ahead if they leave those cities, otherwise they can't even afford to sell and move to a better house down the street, because the price difference between a new home and a 30 year old home is huge - up to 100% more, reflecting in part those 30 years of depreciation. But they don't want to move. Because they have lived there for so long and that is where family and friends are.

Not owning a home means less work and more freedom to do what you want. I haven't owned a home in over a decade and I don't mind not spending my weekends and summer vacations renovating. I also have more time to make professional/career gains. For some people, owning a home definitely a good choice, maybe most people. At least it is something tangible. But it definitely ties you down. And your cash flow. But you don't have to live through months like March either. Investing in the stock market is less work and in many cases more profitable, but can definitely be more stress.
 

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Ben Felix has done a video about rent vs buy. He suggests if one could rent annually for less than 5% of the value of the house, then it is better to rent than buy.


I think it is more of a lifestyle decision. Most people want to live in their own house, particularly if they have small children. A stock portfolio is more diversified and is likely to provide greater returns, but (unfortunately) we cannot live in it.
 

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The debate of rent vs. buy has been around as long as the choice has existed. The problem with trying to 'do the math' is that the math is always based on assumptions and you may be familiar with what 'assumptions do'. Make an *** out of U and ME.

No one who does not own a crystal ball can tell you whether doing one or the other today will turn out to have been a good decision 15-20 years from now.

Personally, I believe in buying but NOT buying something I could not afford if things went to hell in a handbasket as they say. The biggest mistake I see homebuyers making today is buying more house than they need and having a huge mortgage they could not afford to service if one or the other partner lost their job. A couple in their 30s, both earning good money, do not NEED a McMansion to live in and yet that is what most seem to want to buy.

So my point is, if buying, buy SMART. Buy only what you can afford without being 'house poor'. As an example, there is a young couple near me who sold their condo in Toronto and moved to a small town. They work primarily from home with one of them needing (pre-Covid) to go to the office an average of 1 day per week. They bought their 3 bedroom house here for $100k CASH. No mortgage to worry about.

Now tell me if they made a wise choice if say one of them was currently out of work due to Covid?
 

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Discussion Starter #6
Good, so both of you guys also think that it's better to invest instead of buying, so I'm not wrong thinking that owning a home is not that big of a deal, even if it's leveraging money. Yes, I've also heard about that break even point after 7 years.

Ben Felix has done a video about rent vs buy. He suggests if one could rent annually for less than 5% of the value of the house, then it is better to rent than buy.

I think it is more of a lifestyle decision. Most people want to live in their own house, particularly if they have small children. A stock portfolio is more diversified and is likely to provide greater returns, but (unfortunately) we cannot live in it.
Thanks, that's interesting, lots of good information. It confirm many of my assumptions. Still, that 5% rule is an average rule through all Canadian properties. I'm trying to figure out my own situation. For example, how do I use that 5% since I've bought a duplex? I use the 5% rule on the price of my property, then I subtract the net profit from renting a unit? If I do that, I end up about exactly on the frontier of the buy-rent decision.

If I do a full list of all the parameters I'm taking into account in my Excel for the calculation of the cash flows and net profits :

Buying
  • Value increase of the property
  • Current income of the rented unit and expected increase over the years
  • Mortgage rate (assumed fixed through all the years as I cannot predict what will happen in 5 years)
  • Initial down payment (which is used as an investment of the renting scenario)
  • Mortgage value (the exact value which includes CMHC since I had less than 20% down payment)
  • Annual taxes
  • Maintenance and renovations
  • Initial renovations (since I have a lot of renovations to do in the 1-3 first years and in the renting scenario that will be invested)
  • Expected profit on the initial renovations (as if I wanted to flip the property)
  • Buying general costs (notary and all that stuff)
  • Selling commission cost
  • Selling general costs (notary, inspection and all that stuff)
  • Taxes on the profits from selling (for the rented unit)
Renting
  • Renting cost and excepted increase over the years
  • Initial investment (all the money I can invest since I don't have to do a down payment nor renovations nor notary expenses, etc.)
  • Investment of the difference between all the recurring costs of buying and the costs of renting
  • Taxes on the profits from investments
Then, I looked at the archives for my specific property type (plex) in my specific sector in order to have an idea of the expected value increase of my property over the years. I used the median value since I think it's a better metric than mean value. The archives only goes for the past 11 years, so I guess I'm missing the worst years. Over the past 11 years, the median value increased by 92%, which is about 6% CAGR. That feels pretty high so I looked at the worst 5-year return and it was 18%, which is about 3.3% CAGR. In the scenario of my initial post, I went for 4%.

For the investments, it's also pretty hard to estimate the CAGR, but I had more data on my hands than what I had for the property value increase. I used SP500 index even though I'm currently outperforming even NASDAQ index. That's because if I use the returns of NASDAQ of the last 10 years, there's no question that renting & investing was better than buying. Since I don't know what will happen in the next 15 years, I prefer being more conservative on my expectations.

Based on this : S&P 500 Historical Return Calculator the SP500 has returned a median CAGR of about 6.5% for its 10-,20-,30-,40-years rolling returns. In the scenario of my initial post, I went for 9%.

With that 4% & 9% scenario, my conclusions are that I should have never bought the property.
If I use 3% & 6.5%, then buying was a good decision only if I hold that property for at least 26 years and the best sell point is after 32 years
If I use 5% & 6.5%, then buying was a good decision only if I hold that property for at least 11 years and keeping the property is always more profitable as long as that 5% value increase is sustainable
If I use 5% & 9%, then buying was a good decision only if I hold that property for at least 15 years and the best sell point is after 26 years

If I plan to retire in 15 years and travel around the world, then there are no many cases where buying was truly a good choice. I still have to figure the scenario of renting the unit I currently live in.

Yet, after all that analysis, yes, renting is less job and in many cases it is more profitable, but in my sector people in the kind of unit that I have are all owners, they don't rent it. Even if I would've been able to find one for rent, I would never know if at some point the owner would decide to stop renting it and I would have to move out. I would also have to follow their rules (example : no pets) and I would have to be happy with what I'm getting instead of making projects for renovations to my own taste. I would have to make sure that I can deal properly with the owner about the yearly rent increase.
 

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Discussion Starter #7
The debate of rent vs. buy has been around as long as the choice has existed. The problem with trying to 'do the math' is that the math is always based on assumptions and you may be familiar with what 'assumptions do'. Make an *** out of U and ME.

No one who does not own a crystal ball can tell you whether doing one or the other today will turn out to have been a good decision 15-20 years from now.

Personally, I believe in buying but NOT buying something I could not afford if things went to hell in a handbasket as they say. The biggest mistake I see homebuyers making today is buying more house than they need and having a huge mortgage they could not afford to service if one or the other partner lost their job. A couple in their 30s, both earning good money, do not NEED a McMansion to live in and yet that is what most seem to want to buy.

So my point is, if buying, buy SMART. Buy only what you can afford without being 'house poor'. As an example, there is a young couple near me who sold their condo in Toronto and moved to a small town. They work primarily from home with one of them needing (pre-Covid) to go to the office an average of 1 day per week. They bought their 3 bedroom house here for $100k CASH. No mortgage to worry about.

Now tell me if they made a wise choice if say one of them was currently out of work due to Covid?
I agree with that.

I'm doing the maths simply because it's unfortunately in my engineer's personality and I'm currently working in a company where our job is to build a software which is used for financial projections, so I'm even more biased for the value of calculations and simulations of scenarios. When we do calculations, we input a few parameters that gives us one scenario. Since we don't know the future, the goal is to run a huge amount of scenarios and then do a statistical analysis on the output of all of those scenarios. That's how big companies use that software in order to help them in their financial decisions. Once you have a nice distribution of all the possible future scenarios, the only remaining parameter is your risk tolerance. You decide of your risk tolerance and then you take decisions based on the scenario that statistically fits that risk tolerance.
 

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I agree with that.

I'm doing the maths simply because it's unfortunately in my engineer's personality and I'm currently working in a company where our job is to build a software which is used for financial projections, so I'm even more biased for the value of calculations and simulations of scenarios. When we do calculations, we input a few parameters that gives us one scenario. Since we don't know the future, the goal is to run a huge amount of scenarios and then do a statistical analysis on the output of all of those scenarios. That's how big companies use that software in order to help them in their financial decisions. Once you have a nice distribution of all the possible future scenarios, the only remaining parameter is your risk tolerance. You decide of your risk tolerance and then you take decisions based on the scenario that statistically fits that risk tolerance.
LOL, and how many of these scenarios you do have Covid in them? I'm well aware of statistical analysis MrBlackhill AND of its shortcomings. At the end of the day, buy or rent, you place your bet and take your chances.

I retired at 43 and have travelled around the world. I owned (as in no mortgage) a home when I retired and have owned every home I have lived in since with one exception. I have also made profit on each home I owned. I've never had to accept any risk of not having a roof over my head. You only need to decide your risk tolerance when a risk exists.
 

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Discussion Starter #9 (Edited)
LOL, and how many of these scenarios you do have Covid in them? I'm well aware of statistical analysis MrBlackhill AND of its shortcomings. At the end of the day, buy or rent, you place your bet and take your chances.

I retired at 43 and have travelled around the world. I owned (as in no mortgage) a home when I retired and have owned every home I have lived in since with one exception. I have also made profit on each home I owned. I've never had to accept any risk of not having a roof over my head. You only need to decide your risk tolerance when a risk exists.
All of them. All financial scenarios include a recession probability.

All financial models are to the asset level, millions of assets, and for example electric utilities even include lightning probability, vegetation management, summer fires and recession, just to name a few.

And about retiring at 43 and traveling around the world and having no mortgage, it's not given to everybody, but I'm glad you had that chance.

Risk exists in every single decision you make every single day.
 

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Buying a house is a lifestyle choice that shouldn't be based on the numbers alone. If you don't want to do chores and maintenance then don't buy a house. You can spend a lot of money calling in a contractor every time something needs to be fixed.

If you like puttering around in the garage, mowing the lawn, and fixing things when they break and want a place that you can call your own then you may be more suited to ownership.
 

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Homes are not investments, they are places to live. Even rental houses are not really investments in the long term. Out of all the places I own, I buy and own for the cash flow, not the capital gains. I expect the prices to remain close to what I bought them at, but I Buy below market. If they don’t, I don’t really care because they make money each month, if they didn’t they aren’t an investment. If, for some reason, they make capital gains, that a bonus, but can’t be accounted for when I buy them. They could drop in price very easily as well. Then again, I won’t lose money if they do because they are paid off using opm, unlike a home.

ive also rare seen a person who actually made money on a home. Sure, they sell it for more than they paid, but did they factor in all their actual costs over the years they lived there? Did they replace the doors, windows, roof? Did they do major landscaping or something that they forgot about because it was just a normal expense at the time? Many people fudge the numbers to feel good at the time.
 

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The math on this question isn't that difficult, but all the math in the world doesn't account for human nature. That's the real difference in the outcome.

While the owner is forced to make their mortgage payment for 25 years, and always somehow finds a way to pay it, the renter always finds a way to make an excuse to not invest regularly to make that math work. "I can't invest this month because I need a new washing machine", or "There's no way I can invest this month because my son needs tuition", etc, etc, etc. The collection of excuses are greater than anyone can list.

So after 25 years the renter is still paying the rates of the day, while the owner has finished paying off his mortgage and never has to make another payment. They are now blessed with an abundance of cash to start investing. The renter has to continue to pay the full load of rent subject to inflation and it's a wheel they'll never get off.

Only the very, very committed can make renting pay better than owning. It's human nature.

ltr
 

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I fail to see how a paid off mortgage would change the list of excuses you attribute to a renter. People usually spend to their income, it’s why they always complain they need a raise...the problem will be there for home as well as renters because they are human being, not because of their households.
 

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Discussion Starter #15
The math on this question isn't that difficult, but all the math in the world doesn't account for human nature. That's the real difference in the outcome.

While the owner is forced to make their mortgage payment for 25 years, and always somehow finds a way to pay it, the renter always finds a way to make an excuse to not invest regularly to make that math work. "I can't invest this month because I need a new washing machine", or "There's no way I can invest this month because my son needs tuition", etc, etc, etc. The collection of excuses are greater than anyone can list.

So after 25 years the renter is still paying the rates of the day, while the owner has finished paying off his mortgage and never has to make another payment. They are now blessed with an abundance of cash to start investing. The renter has to continue to pay the full load of rent subject to inflation and it's a wheel they'll never get off.

Only the very, very committed can make renting pay better than owning. It's human nature.

ltr
I agree that the "advantage" of a buying a property is that it's a "forced savings" because you have to pay that mortgage, no matter what. Or sell.

On the other hand, I also think that it's pretty easy nowadays to do some "simili-forced savings" with automatic withdrawals going into investments. One can setup that, every month, xxxx$ is withdrawn to be deposited in an investment account. Therefore, that money cannot be spent elsewhere. Though, I agree that if ever you face a situation where you need money, taking that money out of the investment account is much easier than taking it out of a property value. (But you could still always be in debt if you keep using the home equity line of credit)

With investments, I feel a bit safer because if ever something really bad happens, I can use that money, whereas on the other side I would have to sell my whole property in order to have access to extra cash (in a scenario where the required money is much more than the emergency fund). Also, with investments, if ever I decide I want to live a bit more in the present and paying myself a few travel trips, I can and it will only affect my savings for the future and my retiring plan, but with a mortgage, you are stuck with that payment for 25 years so you cannot decide to change your balance between living the present vs saving for the future (not as much as the other scenario).

I mean, that's another subject which needs some thinking : finding the perfect balance between saving for the future and living in the present. I'm personally more about living in the present because I don't know what will happen in the next year (and I like extreme sports & activities like skydiving), but living in the present means less savings for the future (unless all the activities that thrills you are all cheap). On the other side, I'm pretty bored with my career and I'm seeking opportunities to become self-employed in a domain that thrills me (with decent income) instead of being employed which means doing stuff "for the good of the company". Therefore, I also want to retire early to escape that life. But in my current financial situation, I cannot have both. So, like most people who aren't doing 6 figures, I make frustrating and depressing choices so that I can have a balance between a bit of living in the present and a bit of saving for the future. I should not complain though, as I am in a financial situation which is way better than the Canadian median.
 

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..... but in my sector people in the kind of unit that I have are all owners, they don't rent it. Even if I would've been able to find one for rent, I would never know if at some point the owner would decide to stop renting it and I would have to move out. I would also have to follow their rules (example : no pets) and I would have to be happy with what I'm getting instead of making projects for renovations to my own taste. I would have to make sure that I can deal properly with the owner about the yearly rent increase.
That is exactly a lifestyle choice, a completely valid approach. I would view any returns on the house as icing on the cake. Let your portfolio do the job of getting you to retirement.
 

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So after 25 years the renter is still paying the rates of the day, while the owner has finished paying off his mortgage and never has to make another payment. They are now blessed with an abundance of cash to start investing. The renter has to continue to pay the full load of rent subject to inflation and it's a wheel they'll never get off.
This is very true and it is why most people buy homes. However, as I stated above, it is also a bit of an illusion. Decades down the line, your home won't be worth as much as you think because of depreciation and time moving on. There are plenty of people who own their homes for 40+ years and live in them until they die. Those homes are torn down as often or more than they are renovated because they aren't worth anything if you don't invest in them. Maybe that's good enough, but it's hardly a cash rich retirement. Owning your home is good, but if it's all you have, you will probably find yourself slowly selling off your equity or downgrading to afford to continue supporting yourself.

It is possible to work hard, invest in yourself, advance your career, be flexible/mobile, build your capital, and rent, and when you are ready to settle down at mid-life, have a huge chunk of capital to potentially buy your house outright. Although, with mortgages at 2.3-2.5%, if I bought a house today I would almost certainly mortgage, even though I have a lot of capital saved up from a couple decades of investing. You have to be smart and trust in yourself. Some people are smart enough to not trust themselves and take alternate routes.
 

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Homes are not investments, they are places to live. Even rental houses are not really investments in the long term. Out of all the places I own, I buy and own for the cash flow, not the capital gains. I expect the prices to remain close to what I bought them at, but I Buy below market. If they don’t, I don’t really care because they make money each month, if they didn’t they aren’t an investment. If, for some reason, they make capital gains, that a bonus, but can’t be accounted for when I buy them. They could drop in price very easily as well. Then again, I won’t lose money if they do because they are paid off using opm, unlike a home.

ive also rare seen a person who actually made money on a home. Sure, they sell it for more than they paid, but did they factor in all their actual costs over the years they lived there? Did they replace the doors, windows, roof? Did they do major landscaping or something that they forgot about because it was just a normal expense at the time? Many people fudge the numbers to feel good at the time.
I generally agree with all of that but there are always exceptions. When I buy at $100 and sell at $200 after 6.5 years I am quite sure I made money on that regardless of maintenance, improvements, etc. made over that time. When I buy brand new at $100 and sell at $135 after no maintenance or improvements in 3 years, I'm sure I made money on that.

The answer is as you said, buy below market to begin with. That makes making a profit a whole lot easier. Instead, what I see many people doing is buying a house someone else is going to make profit on.
 

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True, but when you spend $100, then another $10 to paint , $25 for cupboards, $10 for landscaping, all of which you wanted for a better quality of life and enjoyment, when you sell at $135, you’re still losing money you ignored.
 

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True, but when you spend $100, then another $10 to paint , $25 for cupboards, $10 for landscaping, all of which you wanted for a better quality of life and enjoyment, when you sell at $135, you’re still losing money you ignored.
I don't think we are disagreeing at all. I wrote buy at $100 and sell at $135 with NO maintenance or improvements. That was a real life example of a condo we bought 'off plan' in BC and then sold before moving to Ontario. Even after our cross Canada moving costs, agent fees, lawyers fees, etc. we still made profit on that sale. Primarily because we bought off plan which was the lowest cost possible and prices immediately started to rise once occupancy was possible.

Our current house in a small town in Ontario was chosen because the area had the biggest 'bang for the buck' when ti came to what we could get for our money. Prices have risen over 100% in the 11 years we have lived here as more and more Boomers have left the GTA in retirement and pushed prices up all around Southern Ontario. Previous to our buying here, a house could easily sit a year or more on average before selling. Now when a house goes on sale in our little town of 3000 population, they usually don't take more a week or two to sell and some are selling over asking price.

But we have spent money on considerable improvements since moving in. So even though I know we could sell a double what we paid, I would not say we would make a profit on the sale YET. We have reached the end of all the improvements we wanted to make to make the house into our ideal HOME but we would probably have to wait another 5 years or so before the price will rise enough that we will be in a position to make a profit if we sold.

I think what we are both saying is that you have to be realistic about when a house becomes profitable depending on how much you invest in the house in the meantime. I agree many people are not realistic about that. But I will take exception to a broad statement that it is 'rare' to see someone who actually made money on a home. I truer statement I think would be to say that many people do not make a profit on a home sale. Rare is a step too far methinks.
 
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