Canadian Money Forum banner

1 - 20 of 39 Posts

·
Registered
Joined
·
11 Posts
Discussion Starter #1
I am in the market to buy a property in Mississauga and was contemplating either a Townhouse or a Semi Detached.

With the market going up every year and GTA being an area for new immigrants, I was wondering if a town house will be a better value to purchase. A few years from now when Semi Detached prices reach 700k+ range it won't be feasible for new immigrants/home buyers to purchase these and they might be looking for cheaper options. Townhouses will potentially be in the 550k-600k range, so won't a Townhouse which is going for 450k right now go more up in price than a 600k Semi Detached. And to play the devil's advocate here, even in the case of a real estate downturn the more expensive places will devalue further.

I plan to rent out the basement in both cases and with Townhouse maintenance fee of $300 odd the monthly payments will be around the same mark.

Any feedback on the theory?
 

·
Registered
Joined
·
7,412 Posts
I am in the market to buy a property in Mississauga and was contemplating either a Townhouse or a Semi Detached.

With the market going up every year and GTA being an area for new immigrants, I was wondering if a town house will be a better value to purchase. A few years from now when Semi Detached prices reach 700k+ range it won't be feasible for new immigrants/home buyers to purchase these and they might be looking for cheaper options. Townhouses will potentially be in the 550k-600k range, so won't a Townhouse which is going for 450k right now go more up in price than a 600k Semi Detached. And to play the devil's advocate here, even in the case of a real estate downturn the more expensive places will devalue further.

I plan to rent out the basement in both cases and with Townhouse maintenance fee of $300 odd the monthly payments will be around the same mark.

Any feedback on the theory?
Pretty naive to think this way. There are a lot of pros and cons about buying either. Also a warning about renting out basements.
Here are a few points:

1. Basements for tenants have to have separate ingress/egress to the outside in case of fire.

2. Most town houses are part of a Condominium Corporation and as such you are NOT allowed to rent to anyone (even to relatives), without full approval of the Condominium board.

3. Even if you ( by some stroke of luck) get approval by the board, there is the fire insurance hurdle you as owner have to jump through , and that may be very difficult and expensive. Most fire insurance underwriters may not want to take the risk.
Even if you manage to find a fire insurance company willing to give you fire insurance on a rental unit, most fiire insurance companies will insist on a full inspection for: smoke detector, fire extinguishers, stairways and heating safety. Carbon Monoxide detectors on every level are compulsory now.<
After all, it is YOUR Heating equipment and you can be held legally responsible for any :<
Burns, CO poisioning, etc, inside the basement apartment you are trying to rent.

4. Conversion costs of a ordinary basement for extra electrical-heating appliances.

5.city bylaws which may prohibit renting basements out to strangers. Plus property tax implications as the city MAY see this as COMMERCIAL vs residential housing. Your are renting for a profit after all.

6. Registering with the fire dept that another family or unrelated individual is living at the same address.

7. And..many other pitfalls as a result of renting out...
 

·
Registered
Joined
·
6,984 Posts
Aside from the stuff carver an pointed out about your basement plans (which always require proper zoning and permits).

I wanted to comment on people who complain about the condo fees. Condo fees are mandatory maintenance costs which you should always factor into your ownership. People think they "save money" by buying a single detached because they don't need to pay condo fees.

Wake up people. Your single detached still has a roof, siding, furnace, Windows, etc. All of which will eventually need repairs and/or replacement. None of these things are cheap to do. If you put aside $300 or so a month, you would save up enough money to do these repairs as required...just like the condo forces you to do, so that they can replace/repair the major things (roof, Windows, siding, boilers, etc.) that they call the common area.

When calculating maintenance on a home vs. a condo, these numbers should work out to be virtually the same but, with a condo you subtract part of the condo fees from your number. I say "part" because some condos also include some utilities in them. For this, you can add this to the rent you charge as the tenant gets the benefits of it which they wouldn't in a single family home.

Basically, if you know what you are doing, you should realize that condo fees are a wash when it comes to your calculations.

As a final thought, it's silly to buy properties at a high point in the market thinking that they'll always continue to rise because they have in the past...life doesn't work that way.
 

·
Registered
Joined
·
116 Posts
As a final thought, it's silly to buy properties at a high point in the market thinking that they'll always continue to rise because they have in the past...life doesn't work that way.
Do you think the market will cool eventually?

I'm in Vancouver area and it's completely out of control. A two-bedroom condo in an area just east of Vancouver are getting bids over and above $420,000 now.
 

·
Registered
Joined
·
6,984 Posts
I know the market will correct when interest rates rise and houses are no longer affordable. I don't know when that will happen, but interest rates can't and won't remain near 0% forever.

Go play with a mortgage calculator and see what happens to the monthly payments when interest rates go up...the historical average rate for mortgages is 8% for reference. Most people have no idea how fast that payment goes up for each 1% rate increase.
 

·
Registered
Joined
·
1,958 Posts
Windows, etc. All of which will eventually need repairs and/or replacement. None of these things are cheap to do. If you put aside $300 or so a month, you would save up enough money to do these repairs as required...just like the condo forces you to do, so that they can replace/repair the major things (roof, Windows, siding, boilers, etc.) that they call the common area.
As for major-type items to which JAG refers not being cheap to do, if buying a condo or any strata-titled property, be sure to obtain and read the minutes of all strata council meetings for at least a year previous. It will let you know if there has been concern expressed about common property issues.

For example, Vancouver has become famous (or infamous) for its "leaky condo" issues. In many instances, 5, 10 or 15 years after construction, whole buildings have started the leak and have required complete replacement of building exteriors and "rain screen" protection, which gets VERY expensive and cannot be covered by regular strata fees. In many cases, the council considers the matter, then calls in an "expert" to opine as to remedy and cost. The expert will usually recommend a second expert - an engineering firm with related expertise. Oft times, the engineers will recommend very extensive and expensive rehabilitation. When the report goes before council, everyone is shocked. Sometimes the response is to go with a relatively inexpensive patch job. A few years later, problems show up again. In fact, the initial problem was only covered up and now there is more damage. Another costly engineer's report (plus one for a second opinion) follows. The costs have skyrocketed and options are few. Every owner is then faced with a "special levy", in the tens of thousands of dollars, to solve the problem. I have not been there for awhile, but not long ago a walk through Vancouver's West End would reveal many buildings surrounded with scaffolding, screening, etc., remaining in place for many months, while repairs were carried out.

A West End condo owner I know received a special levy in 2008 to repair problems, including water ingress, in an underground parking lot. Her condo was about 480 square feet and, at the time, worth about $180,000. Her levy was $14,000. At that time, rentals were permitted in her building and going rent for the space alone was about $900/mo. at the time. She rented her place furnished, with cable tv and phone (injuncted from long distance) included. She provided cookware, linens, etc. She charged $1,200/mo. That levy wiped out about one year's rent. Of course she still had to pay her monthly regular strata fees, property tax, etc.

Another thing to keep in mind about the monster costs that can arise with condo/townhouse ownership is the mechanism by which a special levy can, in fact, be levied. Usually they cannot be decided upon by the strata council acting on its own. Council has to call a meeting of all owners and it is usual for any large expenditure to require approval by "special resolution", which may require something like a 75% majority vote. If the resolution fails, the problem goes unsolved and gets worse. If the resolution does pass, the minority feel they are victims to the tyranny of the majority and they resent being told they have to come up with big bucks and, if they don't, the strata corporation will file a lien against their title and, ultimately, seek an order for sale to enforce the lien. Ah, the joys of strata ownership.
 

·
Registered
Joined
·
10,361 Posts
FWIW, I would rather live in a strata arrangement than a freehold community where some owners are highly negligent of the maintenance of their properties. A close friend of mine lived in a freehold townhouse (actually rowhouse) development of 5 units. There were no 'rules' other than the party wall agreement so any one or more of the 5 owners could do as much or as little as they liked to their 'houses'. Imagine living with a derelict attached unit on one side and a flourescent pink unit on the other side. Semi-detached houses fit into this latter category. IF one buys a semi-detached, I would suggest it is better to buy new, or quite new, to avoid issues with negligent attached owners....and sell and get out before a degrading property next door affects you.

I would also pick a semi-detached that does not have a continuous roofline across both units, or even exterior walls. That way, a responsible owner can maintain his/her roof rather independent of the jerk next door. Similarly with paint colour and/or maintenance. I have owned 2 semis at different times in my lifetime. Both times I was in new construction and got out within 10 years before the poo started to hit the fan.

Lots of pros and cons to consider in both instancs.
 

·
Registered
Joined
·
116 Posts
I know the market will correct when interest rates rise and houses are no longer affordable. I don't know when that will happen, but interest rates can't and won't remain near 0% forever.

Go play with a mortgage calculator and see what happens to the monthly payments when interest rates go up...the historical average rate for mortgages is 8% for reference. Most people have no idea how fast that payment goes up for each 1% rate increase.
That's what I figured. I'm wondering what my plan of action is. I can't afford to do what I want currently, so should I just focus on paying off my condo? Or start stockpiling cash for the purchase of The Next Step? That's the current big dilemma.

If the interest rates do rise, cash is king and having it on hand will be beneficial.

But if the interest rates do rise ( and you're right, they will eventually ), I think the market will go flat, and there will be very few sales. That's what happened in 2011 when there was a slight correction. No one, unless they are forced to, will sell at a loss.
 

·
Registered
Joined
·
102 Posts
I lived in a townhouse condo for over 6 years and sat on the board the entire time. I would not buy another one to personally live in. There's alot of overhead especially paying the property manager in my case $70-80 per month per unit. That's alot of dough over the course of 6 years to simply arrange for contracting of work especially if you have the slightest capability to do this. Also others' problems often becomes the problem of everyone in the complex. You also are restricted in what you can do eg can't just build a fence without board approval. in my case there were several rentals and the board approved all of them as it was out understanding the board needed a good reason to deny an owner the ability to rent out. My neighbour did put in a basement apartment and got a permit and board approval. I. Our case our board was easy going but I've heard some boards are quite strict and like to show their power.
 

·
Registered
Joined
·
6,984 Posts
The difference between the interest rate rising and 2011 is that an interest rate rise will affect every mortgage holder at renewal time. A rough rule of thumb is for every 1% rise in interest, your monthly payment will increase $100 for every $100k borrowed.

You have a $500k mortgage and the interest rates rise a measly 2%, at renewal time can you afford an extra $1000/month to keep your home? Not sure that most people could, so it goes into foreclosure and gets sold for whatever the bank can get. Of course, the new buyers also can't afford the extra $1000/month,,so the price has to drop to the selling point where the mortgage is $1000/month cheaper, which means a big drop in the price.

So, you can wish that housing prices will remain flat, or that you can wait out the decline but, the truth is, you probably won't be able to afford to wait out the correction that an interest rate rise will force.

This is the main reason why I only buy properties that have sale prices well below market already, I build in the correction because, with the amount I own, I couldn't afford an interest rate rise if I didn't.
 

·
Registered
Joined
·
23 Posts
The chances of the interest rates increasing drastically is remote. They will rise eventually and at a pace that most people with mortgages can afford to pay.
House prices are rising in double digits in the GTA, due to low interest rates, slow increase in immigration and financial innovations. The average home ownership in ON is 70% and rising, why, because we like to own a home (physical, freedom, enjoyment, etc). There are some European countries that actually rent, about 70%.

There's too much volatility in investing in shares/equities, whereas I find the Real Estate over the long term is stable and steadily increasing.
Even if you don't invest in RE, I always find more joy in having my own home, rather than renting (and paying someone else's mortgage).
The average home in the GTA is rising by about $50k every year, so why wait till next year?

Rather than paying the condo fee, there's also the option of buying a Freehold Townhouse, where you are responsible for everything, similar to owning a Semi.
 

·
Registered
Joined
·
6,984 Posts
It doesn't take a drastic increase to hurt...let's say they do .25% a year...in a typical 5 year mortgage, the rate has jumped 1.25%. If it jumps a modest .5%/ year it's now up 2.5% at renewal...

For reference, the rate used to jump .25-.5% each quarter.

People need to understand the implications of basic math and stop fooling themselves.

As for owning your own home, when you factor in your interest payments, your maintenance, and the fact that the average person moves every 7 years in Canada, you'll find the average Canadian homeowner is doing nothing more than renting from the bank while agreeing to take on all the costs and risk. The "paying someone else's mortgage" argument shows, once again, people don't understand the basic math involved. In 7 years, when you factor in all costs and appreciation, most homes barely break even if they don't in fact lose money...so you're actually no further ahead financially. Your "equity" is all eaten up, just as if you'd paid rent.
 

·
Registered
Joined
·
6,984 Posts
I've got no idea what's going to happen or when. All I can say is that, when interest rates do rise, real estate is going to get very interesting. I never expected interest rates to get this low, I don't think anyone did. I can't see them going much lower, and the Feds have hinted they'd like to raise them for years...but still haven't.

I'm sure I'm not the only one who realizes what'll happen if rates go up...then again, the government may decide to just blow things up quickly, something like what happened in the states, hurt one generation and get things reset... Governments have done some pretty stupid things in the past, and there's no good way out of this mess that I can see.

Best to pay down your mortgages to a level that's sustainable. Even if nothing happens, you won't be worse off. Renting may be the best option unless you find a deal but, as I said, this my continue for years.

Personally, I buy well under market value or not at all.
 

·
Registered
Joined
·
12 Posts
I've got no idea what's going to happen or when. All I can say is that, when interest rates do rise, real estate is going to get very interesting. I never expected interest rates to get this low, I don't think anyone did. I can't see them going much lower, and the Feds have hinted they'd like to raise them for years...but still haven't.

I'm sure I'm not the only one who realizes what'll happen if rates go up...then again, the government may decide to just blow things up quickly, something like what happened in the states, hurt one generation and get things reset... Governments have done some pretty stupid things in the past, and there's no good way out of this mess that I can see.

Best to pay down your mortgages to a level that's sustainable. Even if nothing happens, you won't be worse off. Renting may be the best option unless you find a deal but, as I said, this my continue for years.

Personally, I buy well under market value or not at all.
Home ownership is an emotional decision for many people so if it was just down to simple math, i would agree with you fully but it's more than that.

I spent a good 7 years on the sidelines waiting for a market correction in Toronto and it never happened. Now, i totally agree with you that those people who think that a rise in interest rates isn't going to impact the market are just fooling themselves. Or folks who believe is neverending growth!

For the past year and a bit i was lurking around the market looking for a bargain and what i realized is its so easy to get itchy/antsy/emotional when you see something you like or you viewed 30+ places and just want to get it over with. I finally bought a 2bed/2bath 2-story loft in downtown toronto at a price that was $150-$200 per sq. ft. lower that all comparable units in the area. Main reason for such a discount? Condo fees are high and roughly $170 more than market avg per month. Which isn't nothing, that's roughly $10k extra condo fees over a 5 year term.

HOWEVER, for me the deciding factor was to buy a unit at a significant discount to market comparables ($150+k) and pay the higher condo fees for now. It is not simple but if you are proactive and get on the board of your condo, there are opportunities to lower fees. Obviously places where fees are high due to with massive lawsuits or serious repairs are going to be a tough sell no matter what (stay away from that!!!), in some cases its the fat contracts that someone negotiated or expenses that some condos do not need which can really change the situation over a few years.

Interest rates will rise but with a relatively flat economic outlook in Canada for the next few years, it's unlikely to be a drastic increase.

So to end my personal rant:
1. Budget accordingly and anticipate an increase in interest rates over the next 5 years.
2. Don't buy at the top end of market value hoping for crazy returns.
3. Finally, minimize emotions where possible :)
 

·
Registered
Joined
·
116 Posts
I've got no idea what's going to happen or when. All I can say is that, when interest rates do rise, real estate is going to get very interesting. I never expected interest rates to get this low, I don't think anyone did. I can't see them going much lower, and the Feds have hinted they'd like to raise them for years...but still haven't.

I'm sure I'm not the only one who realizes what'll happen if rates go up...then again, the government may decide to just blow things up quickly, something like what happened in the states, hurt one generation and get things reset... Governments have done some pretty stupid things in the past, and there's no good way out of this mess that I can see.

Best to pay down your mortgages to a level that's sustainable. Even if nothing happens, you won't be worse off. Renting may be the best option unless you find a deal but, as I said, this my continue for years.

Personally, I buy well under market value or not at all.

Much like investments, I'm in it for the long haul. But being near Vancouver, the only detached homes for a reasonable amount of money are 1.5 hrs out of downtown. My mortgage is very reasonable, it's the amount of rent in the area. The thought of paying someone else's mortgage bugs me, and that's why I own.

The area I would like to buy, the condos ( 2bed, 2bath 850-900sq feet ) are selling for $450,000. Insane. I think I'd be doing myself a major disservice by moving there in this market.
 

·
Registered
Joined
·
6,984 Posts
My mortgage is very reasonable, it's the amount of rent in the area. The thought of paying someone else's mortgage bugs me, and that's why I own.
I always like this arguement...

Okay, think of this scenario...you buy a place that is overpriced. You pay your mortgage, then the market corrects so your equity has decreased (in reality you're renting from the bank, and not really building up anything). Even if the prices don't decrease, factor in how much the house costs when you factor in all the interest on top of the original price, and you're really doing very well. The bank is your landlord and you are responsible for all repairs and maintenance.
 

·
Registered
Joined
·
12,720 Posts
Yeah, you go from renting a dwelling to renting a few hundred thousand dollars, and taking on a lot more financial risk. Not to say that owning is never a good idea, just that it is not always a slam dunk to own vs rent.
 

·
Registered
Joined
·
1,958 Posts
Not to say that owning is never a good idea, just that it is not always a slam dunk to own vs rent.
Probably owning in Toronto or Vancouver is a slam dunk, over the long haul, which should always apply to real estate. Yes, I have done a few "flips", but always recognizing that the market can turn on a dime and one should be prepared to hold said flip for years, so it should also be able to support itself as a rental.

Looking at Toronto and Vancouver over the long term, i'll offer a couple of examples. In 1945, my parents bought their West Vancouver house, on a large corner lot, with views to downtown, the west side, UBC, etc. They paid $8,500 and sold for $11,500 in 1950. The house was a heritage house, moved from the lot in the 1980s. The lot was then subdivided into 3 lots, each with a current BC assessed value of about $1.5 million. That’s just for the land. My parents took their $11,500 and bought a house in Lawrence Park in Toronto for $20,000. It too has appreciated nicely. Some ups and downs, yes, but somewhat more up than down.

For those who suggest that owning is unwise and simply a matter of replacing renting a house with renting money from the bank, let me observe that there are few landlords who hand over the keys to the house after 20 years or so, saying you have paid enough, and the house is now yours. But bank mortgages tend to get paid off, and the house becomes yours, whether you like it or not. Moreover, unlike rent, which tends to rise with inflation, the principal secured by a mortgage tends to be paid down instead of increasing. It does not get adjusted upwards to keep pace with inflation.

Take my folks’ Lawrence Park house. Their 5% mortgage was paid off in the 1950s, but let’s say it wasn’t. Let’s say they paid $5,000 down on the house and negotiated a mortgage of $15,000. Hell, let’s go wild and say they obtained an interest-only mortgage and, to this day, in 2016, they still have never paid off a dime. So what? How much of a struggle would it be to make the monthly interest payments today on a $15,000 note at 5%? Paying rent on that same house would be a tad more. I recently did a bit of online nosing around and found a house on Cheltenham Ave., not far from their place, said to be currently under a one-year lease for $8,500 a month. Hmmmm.

Then we have the oft-repeated admonition that the present low interest climate cannot endure for long. It is subject to climate change and a warming in interest rates. We are supposed to be quivering in fear. It will bring about the denouement of the housing market and life as we know it. Baloney.

I have owned a number of houses in Vancouver and lived in 3. One I bought as a home in 1979 for $110,000, assuming a B of M first mortgage of about $60k with 3.5 years left on it at 10.25% interest - a very good rate at the time. Real estate was booming, despite interest rates in the 11% range. Soon the place was worth well over $200,000 so I borrowed $120,000 from the Bank of BC, granting a second mortgage to secure a revolving line of credit at prime + 1.75%. I used the money to buy other houses in Vancouver. Soon the prime rate started to rise. The rate was always set on Thursday. Every Thursday it would go up by a quarter point, often a half or three quarters. In my home we started calling Thursdays “Black Thursday”. In no time the prime reached an astonishing 22.75%! Anyone here old enuff to remember that?

At that time, an investment property I owned with a partner had a Fidelity Trust $20,000 first mortgage at 10% and the rest was borrowed on our revolving lines of credit. I was paying prime plus 1.75%, so my rate was 24.5% - about $25,000 a year on a mortgage of $100,000. The CA who worked for me was from Israel. He said that in Israel there is no such thing as a mortgage because inflation is always rampant. He said the interest rate would be out of sight if one could borrow. He was convinced that was occurring in Canada. He predicted the prime would hit about 40%. There were dire warnings to that effect…that the rate would just keep rising. My partner and I were delighted to replace our line of credit with a mortgage on our shared investment house from Household Realty Finance at 23.99%. Yippee! We locked in at a low rate!

So yes kids, there was lots of pain felt back in them days. Many, many were crying the blues, saying that was it for the housing market forever. Prices would never get back to those early 80s prices. Only a fool would ever buy even a personal residence or any other real estate again, blah, blah.

I saw my own house go from $110,000 in 1979 to about $275,000 in 1981 and down to about $140,000 by late 1983. Easily cut in half. But, I decided against suicide. Could not think of a nice, clean, painless way. Interest rates dropped to a very reasonable 12% or so over the rest of the decade. I sold in that climate in 1989 for $525,000 - almost a five-fold increase in just 10 years, despite all the interest rate bloodletting and attendant gnashing of teeth. That $525,000 was land value at the time. The house was a tear down and is now long gone. I checked with BC Assessment online a few minutes ago. The assessment? Land $2,994,000 and buildings $1,803,000. for a total of $4.8 million. I know, not an “investment”, but a fair rate of return whatever you care to call it. Tax-free to boot if a principal residence.

As a corollary to the exciting times precipitated by a surging prime rate, it was a good time to be a Vancouver real estate lawyer, not just conveyancing. When prices were on the rapid rise, it was not unusual to see an interim agreement signed for a sale, say at $100,000, with a closing 90 or 120 days hence. Well, come closing, the property was now worth $125,000 and suddenly the vendor becomes decidedly reluctant to sell and give away $25,000. Time for a specific performance lawsuit! The flipside was a couple of years later when prices were on the downhill. With a deal signed at $250,000 today, the value might be $190,000 come closing. Few people feel really good about honoring a commitment to pay $60,000 over market. So, again, all kinds of machinations would go on over forfeiture of deposits, more actions for specific performance, damages, etc. All good clean fun.

So, back to my original point, cities like Vancouver and Toronto, and perhaps half a dozen others in North America, can be pretty safe bets over the long term. I am not sure I'd want to be a first time buyer in either Vancouver or Toronto today and I think sitting on the sidelines a bit won't hurt. Regardless, however, of any coming "correction", I think today's prices in both cities will come to look cheap in another 25 years or so.

The quote below raises a valid point.
You have a $500k mortgage and the interest rates rise a measly 2%, at renewal time can you afford an extra $1000/month to keep your home? Not sure that most people could,...

This is the main reason why I only buy properties that have sale prices well below market already, I build in the correction because, with the amount I own, I couldn't afford an interest rate rise if I didn't.
That should be basic lore to getting into real estate. Envision an absolute worst case scenario and ask yourself if you can weather it. If yes, then go for it. When in doubt, stay out.

There are no doubt still living many Vancouver real estate "investors" from the 1980s who lacked either the intestinal fortitude or the financial capacity to get through the tumultuous times and either lost or gave up Vancouver houses. They find themselves living in a mobile home park in the hinterland, looking up the BC assessment values on what was lost. That would not feel good.
 
1 - 20 of 39 Posts
Top