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In my last post, I introduced my opinion of the extremes in real estate speculation. Today I want to give a specific example of what I mean by “funny math.” Armed with some very solid points, the doomsayers venture into the land of suggesting that all real estate ownership is foolish. Sell your home today if you haven’t already, wait for the market to crash and then go in for the kill. If you’re an established real estate investor who only buys at bottomed-out markets, please, take this advice.

 

However, for the rest of us, this may not be the best idea. In the aforementioned post, I already stated how cherry-picking numbers can lead to extremes in speculation. If it was a guarantee that the market should crash imminently like the doomsayers say it will, go for it. But it isn’t a guarantee. What has happened, however, is that some doomsayers are going so far to say that renting is always a better investment than buying (I’m talking about home ownership here – not professional real estate investing). This is just as incredulous as the opposite suggestion that buying is always better than renting or that home ownership is often less expensive than renting.

 

First of all, if someone ever points to mortgage payments (at least in today’s market) and paints the picture that it will be cheaper than a comparable rental, put up a red flag and add transfer taxes, land taxes, strata fees, buying the new couch that suits your new home, etc. Let’s be realistic, home ownership is expensive, but is it honestly a better investment, assuming a moderately flat or slightly increasing or decreasing real estate market, to rent?

The funny math employed by the doomsayers requires taking comparables and add all the costs I just mentioned. So let’s do this. I know my Langley rental market best, so I am going to take a rental straight from Craigslist and compare it to its closest match that recently sold.

 

A certain 3 bedroom townhome just off of 200th street and 72nd avenue is currently renting at $1350 + utilities. We’ll excuse utilities, because you would have to pay those with home ownership as well. Now, I’m not sure if this is a 1350 or 1500 sq.ft. unit. A similar 1350 sq.ft. unit sold in January for $325,000. A 1500 sq.ft. unit is currently listed at $345,000. Is it fair enough to assume we are looking around $330,000 for sake of argument here? Okay, good.

 

Now, with the rental, the only thing you are paying is the $1,350. Everything else that you need to pay, you would need to pay if you were a home owner. Good deal. With the home, however, with today’s best variable rates you are looking at a $1,200 mortgage if you can get that 5% down (30 year amortization). This is sort of a new home buyer situation – you’ll still need to be able to afford the $1,475 it would cost you if you were going to lock in for 5 years. But whether you are going variable or fixed, plan for this in your budget. Looks like a good deal.

 

But let’s get real. We’ll assume you came up with closing costs as your “start up budget”. Monthly, however, you are looking at your $1,200 mortgage + $140 strata fees + at least $2400 yearly taxes (we’ll say $220 per month for budgeting purposes).

 

So under this arrangement you could pay $1,560 a month if this home is turn-key. Keep in mind, this would be lower if you came up with a larger down deposit (likely from the sale of your previous home). Let’s compare this honestly now. You can chose to live in the same place, renting, for $1,350 (rented out by someone who probably had a larger down payment than you could muster), or you could pay $1,560 plus thousands of dollars in down payment ($16,500 to be exact) and property transfer tax ($0 if you are a new home buyer, $4,600 if you were not).

 

This what I call funny math. It doesn’t take into account your specific situation, it assumed one situation. It also treats this as an investment property, not a home. This is important. Doomsayers will allude to the idea that the consistent increase in property value does not exceed that of other investments. Of course this is true, but it has, historically, been a safe bet and better than most. But what is more important is that we are not comparing investing $1,560 in another investment, because no matter what, unless you live at home, you need a place to live. So the choice is actually pay $1,350 – either paying for or subsidizing someone else’s mortgage – and “wisely invest” $210 (probably in beer and pizza) or find a good deal and invest $1,560 and pay yourself.

 

I am not advocating any sort of home flipping scheme or even buy and hold strategies for investors, I am saying that if you are torn between buying and renting, do the math. Have your REALTOR® and mortgage broker give you the real numbers you need, but also do it yourself. Don’t assume you are living for $0 rent and can magically invest in something better. You can’t invest $1,350 into another investment when you are paying rent if you don’t have it. You are paying this no matter what. Wouldn’t you prefer to use that $1,350, add some extra, and in 25-30 years time, have the freedom to live mortgage free and then use what would have been your rent, for your new investment, whatever it may be?

 

Maybe that $330,000 townhome is worth $165,000 or $330,000 or $660,000 or $1,000,000 in 30 years time. We can’t know. What we do know is that long term real estate has historically been a great investment. Paying rent can be great for transitions, or if you simply have a hard time getting into the market you need to be in (ie. you have to live in downtown Vancouver for whatever reason). But it is not a wise long turn financial strategy. While you shouldn’t let some smooth talking salesperson talk you into buying a home you can’t afford or pushing you into being the next real estate investor mogul, don’t let the funny math of the apocalyptic doomsayers negate the reality of historical numbers and balanced speculation.

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Upon referring a persuasive book to a good friend of mine, she admitted that she could be easily convinced of a wide range of ideas from any well-written book, whether it was “right” or not. This was a moment of honesty very few people can even admit to themselves, much less to others. Sometimes we agree with something we have read because we want to agree with it, or maybe it just “feels” right, or maybe it is actually true. The fact is, none of us have the tools to be experts in everything, but the problem is that we almost need to be experts in which “experts” we can trust. My first rule is if someone calls him or her self an “expert”, he or she usually isn’t.

 

Real estate speculation almost seems like Vancouver’s official sport. Everyone has an opinion and everyone seems to be an expert. It is safe to say that even in the last few years of troubling economic times, Vancouver has been the hottest market in Canada, and probably in the top 10 in North America. At times it can seem insane. Maybe it is. But this market has led to two speculating camps, both using what I call “funny math” to prove their point.

 

Don’t get me wrong, they are both convincing. Problem is, they are so convinced that they are right, that they ignore everything the other side says, when the truth likely lies somewhere in the middle (or is utterly unforeseeable either way). The two camps I speak of, in regards to real estate speculation, are the utopians and the doomsayers. Utopians believe that the market will forever keep rising and rising – there may be small corrections along the way, but Canada will always be safe and steady for real estate investment. Doomsayers, on the other hand, are always calling for the biggest collapse in real estate history – unaffordability cannot be sustained and the market is sure to dive at any moment.

 

Unfortunately, as real estate professionals, we sometimes get caught up in the speculation. It sometimes seems natural that we should should give our opinion on the future of the marketplace. But we shouldn’t. While we are professionals, we are also salespeople held to a code that we must put our client’s interest before even our own. It is almost entirely against our benefit to forecast a poor market. So when was the last time you heard a real estate agent say that he or she believed a downturn was coming? Utopians will usually quote population projections and livability quotients.

 

On the other hand, doomsayers generally advocate that their followers should rent until judgment day, when all the greater fools will get what is coming to them and those who waited can pick up the pieces of a crashed market (like many Canadians did on American soil). Doomsayers quote household and government debt numbers, unaffordability ratios and rising mortgage rates.

 

Unfortunately for both camps, they let their passion blind them and ignore the balance of the two. What ends up happening is that the general public doesn’t know who to trust. You can’t ignore the numbers of either. This isn’t a zero-sum game. You can’t tell people for 10 years that the market is going to collapse any day and expect credibility to last forever. You also can’t paint rosy pictures when history has continually shown the reality of real estate cycles, and the subtle or not-so-subltle warning signs for market corrections.

 

So do your own research and follow the money. You want to invest in real estate? Talk to a real estate investor who actually makes money buying and selling real estate. Not an author. Not someone who lives in New York or someone who wants to sell you something (like a book or membership to some exclusive club). Talk to someone you know has seen the market rise and fall. Want to buy a home? Understand that if you sell in the peak of the market, you will probably buy in one too. Same with a slow market. Don’t play the game. Buy and sell what you need. Get a good deal and let your REALTOR® do what they do best – sell your home for the best possible price and find you a home that matches your needs. They can inform you honestly about the past market and the current market – but REALTORS® are not soothsayers.

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