Cottage or Stock – which is better for the long-term?
Last month a reader asked the Globe and Mail which would be the better long-term investment: a cottage or a stock like Royal Bank. He had bought a cottage in 1974 for $26,000, now worth about $250,000. Wow – almost a ten-fold increase.
The financial reporter dug deep (see Recent News Stories). If the reader had bought $26,000 of Royal Bank stock in 1975 (data not available for 1974) and let it grow (like keeping his cottage), his account would now be worth – get ready – $4.5 million! (Buying TD would have yielded $5.4 million.) Subtract as much as 20% for taxes paid on the dividends and his net gain would still be $3.2 million.
Speaking of deductions, the $250,000 cottage isn’t all money in the bank. Subtracting the $56,000 spent on maintenance and renovations and annual property taxes ($2,000 in 2012; let’s say $1,000/year avg), his net gain would be around $50,000.
The moral of the story is NOT ‘don’t buy a cottage’. It is that real estate is not a slam-dunk for building wealth. Buy the cottage or buy whatever, but do the math so you know what the true cost is going to be. Then ‘don’t worry, be happy’.
Owning or Renting – which is better for the short term?
Unless you are an investor, the question of renting or owning is not answered by math alone. However, for most people faced with the choice, money is limited so it would be smart to know what the math says. To simplify the argument and make it relevant to first-time buyers in particular, we’ll focus on a 5-year time period.
Example: A young couple debates whether to buy or rent a 1-bedroom condo downtown.
There are numerous buildings with multiple sales and leases since the start of the year. I randomly selected Front St. and picked the building closest to Bay St. that had at least 6 sales and 6 leases of 1-bedroom units since the start of the year (7 sales 9 leases). It is a 15-min walk from Union Station.
Average sale price: $313,257. Average lease: $1,703/month
Average maintenance: $444. Average property tax: $2,028
(Interestingly, the 1 bedroom condos at the foot of Yonge St. had an average sale price of $326,125 and average lease of $1,571. Investors here would be paying more but getting less! My theory: size matters. The Front St. condos are larger.)
Downpayment: $50,000, mortgage for $267,864 (includes standard CMHC insurance) on 5 year term @ 4%, 25 year amortization
Closing costs (legal, land transfer tax, etc.): $3,200 (conservative estimate; assumes first-time buyer saving almost $5,000 on land transfer tax alone)
Monthly cost: $2,022 (mortgage, maintenance, property taxes)
Monthly cost: $1,703
Renting saves $319/month. (For simplicity, rent increases and ownership cost increases (maintenance, property taxes, repairs, etc.) deemed to be offsetting.)
At the end of 5 years
A popular argument for buying a condo is to “get into the market” and “build up equity”. So let’s say our young couple is looking to sell the condo and buy a house.
Market value of condo, if it goes up 10% over the 5 years (despite risks of a market correction): $344,583
Selling commission at 4% + HST: $15,575
Sale prep and legal costs: $2,000 (conservative)
Owner: net cash on sale for downpayment on a house = $90,622
The renter invests the downpayment, closings costs, and the monthly savings conservatively and earns 5% per annum.
Renter: net cash in account for downpayment on a house = $89,619
A dead heat. Which is the better route for a young couple?
What do you think? Go to Facebook/Real Life https://www.facebook.com/pages/Real-Life/458905084151458 to post your comments. Look for the blog title “Making choices: watch out for unintended costs and consequences”.
Advice to condo owners who want to buy a house
Think about selling now and renting for a while. You avoid the risk of falling prices and you’ll save faster for a bigger downpayment.
Choosing a realtor to sell your property
Does McDonald’s make the best hamburger? They sell the most, advertise a lot, and have billboards. (Full disclosure: I am a regular McDonald’s customer!)
Same for agents. The listing agent has an important role, but it will likely be one of the other 30,000 agents out there who brings the eventual buyer. What counts is how many buyers come to see your property, how much they are willing to pay for it, and how much ends up in your bank account.
Volume has little to do with the quality of advice you receive, the marketing of your property, and the negotiation for the best possible price. Since it can be hard to tell how well you are doing on these things, my best advice is to hire someone you trust, who has integrity and treats you like family. And like family, they won’t charge you the conventional 5% commission. That’s unnecessarily high.
Choosing a realtor to help you buy
My best advice is the same – find someone you trust. This means he won’t let you buy something you shouldn’t. He will keep you honest in what you say is important to you. He won’t let you suffer getting to work and back home because you fell in love with the granite counters. Granite you can buy. You cannot buy faster transit or less traffic or more time with your family. And because he treats you like family, if you are a first-time buyer he will share his commission with you. (The past 5 years my average cash rebate to buyers is over $3,000.)
I been asked how a realtor can act in the best interests of both sellers and buyers when the two have competing interests. In my case, I am clear whose side I’m on at all times.
When sellers are my clients, I strive to maximize their returns. I expect buyers to rely on their agent to protect their wallets. When the buyer is my client, I expect sellers to rely on their agent to protect their assets. When other agents are more focused on ‘getting the deal done’ than on protecting their client’s best interests … well, on my side we thank them.
When I am the listing agent and an unrepresented buyer comes along, I am most helpful and will gladly prepare an Offer. However, I advise unrepresented buyers to speak to their lawyer before signing. TREB allows dual representation but I’m not comfortable with the inherent conflict of interest.
Real Estate Sales Representative
call or text: 416 436-5851
Ongoing research and commentary
Since January 2012 I have been tracking 2 bedroom 2 bathroom condos in 3 areas, and 4 bedroom detached homes with family room and 2-car garages in 3 areas. In each newsletter I show the rolling 13-month median selling prices. I also show the Terranet-National Bank House Price Index for Toronto (GTA). This index is the equivalent of the highly respected and much quoted Case-Shiller Index in the US. It helps to filter out the considerable noise in the Canadian real estate market.
Housing (aggregate of detached, townhouses, and condos) is almost back to where it was last year. That it fell for half of last year was somewhat of an industry secret. Knowing what the curve will look like next year and the next few years is like knowing the weather. There will be good weather and bad weather, with the risk of severe weather when and where you might least expect it.
No sign yet of a significant price drop in condo prices that some analysts expect, despite the time-to-sell being in a historically high range of 25-40 days.
The relative under-building of houses could be a major factor in sustaining prices. North York homes generally are on larger lots in mature neighbourhoods, but the price difference could be due as much to closer commuting and public transit.
- Bank of Canada says housing market cooler, still a risk Tor Sun Jun 26
- Did Poor Math Skills Cause Subprime Meltdown - Wall St Journal June 24
- Cottage vs Stock G&M Jun 7, Jun 21
- Canadians obsessed with real estate, poll suggests CBC News Jun 20
- Sky-high Toronto condo numbers renew fears of overheated market G&M Jun 10
- Canada's lucky to come late to the housing-crash party G&M Jun 13
- Report sees 'downside risk' in Canada's housing sector G&M Jun 7
- A soft landing for housing sales, but prices up in the air G&M Jun 5
- Canadian homes among most overvalued in OECD ranking G&M Jun 5
- This is not your 1990s housing market G&M Jun 4