9 ms·

Toronto Condos: Should you rent or buy?

39 points by goldlist 11y ago

dangerboysteve 11y ago
The author did not factor in Condo fees or property taxes.
- kazinator 11y ago
  Factoring in condo fees should also factor in reasonable estimates of condo repair levies.
- frandroid 11y ago
  You're going to pay the fees through your rent if you're a tenant, so they're not a differentiator anyway.
kazinator 11y ago
> Myth 4: Renters throw cash away, at least owners build equity It's no myth, because you have to live somewhere. (Well, you could put your money elsewhere, and go live in a cardboard box under a bridge, but let's be realistic.) Owners are building equity with the money they would otherwise be completely throwing away on rent, and they got into that situation with just a little money down. (Depending on area), current rents are in about the same ballpark as payments on a new mortgate, but: 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up. 2) only the interest portion of a mortgage payment is thrown away, and it goes down over time. For the cost of the opportunity loss on your down payment, you're fixing the amount of a significant living expense that would otherwise continue to inflate, and you're getting a slice of that expense to go into equity that would otherwise be thrown out, and that slice gets bigger. The opportunity cost on the down payment is not bad, if the property appreciates! You have to think in terms of leverage: if the property goes up by 80K, and the down payment was 80K, that's a 100% growth! You put in 80K, and it doubled. And your rent expense was replaced by something better. If you compared the leveraged view to the stock market, the stock market doesn't look so good. You can use leverage in the stock market also ("margin"), but that's a heck of a lot of risk. I just renewed a mortgage for another term and the payment was supposed to go down (probably due to all the acceleration). Moreover, I declined that and kept it at the same amount. No way will a renter face a declining payment in the same area---not to mention that it would be irrational to refuse it.
- icebraining 11y ago
  You're forgetting the cost of being tied to a mortgage, in places where you can't just "walk away" from the property and have the debt released.
- jsuar 11y ago
  Wouldn't the counter argument be that what the renter doesn't make in equity they would make in returns via stocks?
  - toomuchtodo 11y ago
    As long as the renter is investing the money that would've been property equity in the stock market.
- jarek 11y ago
  > (Depending on area), current rents are in about the same ballpark as payments on a new mortgate, Not in Toronto, which is like the whole point > 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up Condo fees go up and up
  - toomuchtodo 11y ago
    > Condo fees go up and up Indeed. As a building ages, you can be assured that the condo fee will go up with inflation.
  - TwiztidK 11y ago
    >> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate, > Not in Toronto, which is like the whole point Then what is the rent/mortgage situation in Toronto? That was never discussed in the article. In my area rent is 2-3x higher than a mortgage, all I know about Toronto is that property values are high.
    - jarek 11y ago
      The early-90s harbourfront towers by Bay and Queens Quay rent studios/1bds for $1500-1600 incl utilities or buy for $400-500k + maint fees $500-700/month + tax + util
manishsharan 11y ago
Neither. I had to do it all over again, I would buy a detached house in the middle of boondocks ( like Mississauga, Brampton , Vaughn ,Markham , Richmond hill etc. ) . The supply of detached houses is limited whereas condos in Toronto are growing like weed. The detached houses have grown more in value and they are not encumbered with maintenance fees.
- OldSchoolJohnny 11y ago
  Detached houses could end up costing far more in maintenance. From experience.
  - eekfuh 11y ago
    One time maintenance fees versus monthly HOA fees that you are required to pay.
    - mfringel 11y ago
      That's true, but only in the most naïve sense. A house starts falling apart as soon as it's put together... and it keeps falling it apart, and you have to keep putting it back together. The distribution of expenses is lumpier with a house than with a condo, but it's certanly an ongoing cash outflow.
      - nasalgoat 11y ago
        Toronto is mostly made up of 100-year-old brick houses, so the maintenance is mostly soft stuff like painting, gardening, etc. unless you do major renovations. My last house I did, essentially, zero maintenance over a 10-year span except for a drain replacement ($2K). Every other expense was month to month expenses like heating and electrical. When I finally decided to sell, I replaced the crappy carpet, painted the walls beige and made a 5x profit.
        jarek 11y ago
        > Toronto is mostly made up of 100-year-old brick houses That's true for inner Toronto but not for the suburbs as manishsharan suggested. Newer developer-built-subdivision wood-frame rules out there.
chongli 11y ago
Myth #1: Toronto condos have outperformed the stock market by a long shot Isn't it disingenuous to include automatic dividend reinvestments in the price calculation for stocks but not include net income from rents reinvested into more condos?
- davenugent 11y ago
  Hey there, we assume that the condo you purchased you live in not as a rental property. The spirit of this post is to show that there isn't a straight yes or no answer to rent vs. buy...The shorter the time frame the less likely is you should own.
brewdad 11y ago
I take issue with the assumptions of the second chart. If we allow the author to assume 6-8% growth in the stock market over the 25 year period shown in chart two, surely assuming 0 change in value of one's condo over the same period is nonsense. Perhaps, I might allow for 0 change in "real" prices, but since the author is not making adjustments for inflation in his calculations, his assumptions suggest Toronto condos will be worth 40% less in inflation adjusted dollars 25 years from now. While this is one possible future, it seems incredibly unlikely given the optimistic outlook for his equities growth.
DMac87 11y ago
The assumptions made by the author are ridiculous, namely: - In the 10-year comparison, rents paid are not factored in at all. - In the forward-looking comparison, condo prices are assumed to be flat, mortgage rates go up (why? can't they be locked in now?), while equity prices go up 6-8% per year - Taxes are not factored in at all - capital gains on a primary residence are tax-free, while investment gains will be taxable (eventually, even if buy-and-hold) - Mortgages allow an effective leveraged investment on home equity, so your gains (and losses!) on home values are magnified It's a worthwhile debate, and there are merits on both sides, but such blatant bias has to be pointed out. Also: in the US, unlike Canada, there are tax benefits for a mortgage...
- hartator 11y ago
  +1. It's also assuming you are getting the same amount of money to invest in stock than to invest in your condo. Banks are more likely to finance your primary residence than your stock investment.
  - davenugent 11y ago
    leverage is leverage, can work for or against you. Returns in real estate have been elevated above long term mean returns through low interest rates and flexible government programs.. increased amortization rates, lower downpayments, higher CMHC eligible mortgages.
- corcoran2015 11y ago
  Great comment DMAC. The model shows what will happen if rates go up 1% and condo prices are flat. Rents paid are definitely factored in the model as are taxes. The investor is in a TFSA & RRSP which means capital gains are a non-issue. Property taxes cant be avoided though. Its a real advantage of investing in Canada to use the RRSP & TFSA vehicles. You're right, mortgages can typically be locked in for five years. But really people can check out the model and use their own assumptions: https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2NJZETddZG0oM3rVd6zLoV7g/edit#gid=1187439665 https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...
corcoran2015 11y ago
Hey I'm Tim, the author, really glad people are into this. Interesting situation in Toronto. Check out the model and input your own assumptions if you'd like! https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2NJZETddZG0oM3rVd6zLoV7g/edit#gid=1187439665 https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...
dblock 11y ago
There's something big missing: you can sublet your condo, therefore building income after it's paid off or to offset the mortgage. You will never be able to do this with stocks.
peter303 11y ago
The last time I bought was because I got tired of rent increases. Insurance and taxes do increase with time, but more slowly than rent.
hbbio 11y ago
The article is interesting but does not mention a few facts: - In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues (or: you cannot deduct your rent from your revenues). For instance, if you're renting a flat that you own but at the same time rent to someone the flat where you live, you'll be paying taxes on your rent income, but deduce nothing from the rent you pay. - Rented flats tend to be in less optimal condition that flats that you own. Since the utility of a flat is to live (in the best conditions available), it's sometime a good idea to invest in renovation works, plan changes, etc. for which the owner of a rented flat will see little value. And also it mentions but does not insist on one major thing. Taking a mortgage to acquire a property is a bet on future inflation. If inflation is/will be high is the next years, getting a fixed rate mortgage is a great opportunity (and there are little chances you will be able to get a significant mortgage for anything else than real estate). If inflation is low (or worse, we enter a period of deflation), renting is by far the best option. IMHO this criterion is by far the most important while deciding about rent vs. buy.
- pmelendez 11y ago
  > " In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues " I believe that's why the author limitted the discussion to Toronto's condos.
- Joeri 11y ago
  One thing easily forgotten with renting is that you can be kicked out. This can be extremely stressful. Then again, as a home owner you can be hit by surprise maintenance work, which has its own source of stress. But, on the other hand, as a renter you may not have much control over necessary maintenance work, and be forced to negotiate with your landlord through the court system. Trade offs...
g8oz 11y ago
The gold standard for this kind of comparison is the New York Times Rent vs Buy calculator. Note how relatively small changes in any one of many factors can result in very different outcomes. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=1 http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
- jarek 11y ago
  Note that it needs a few adjustments for Canadian market, the biggest ones being mortgage rates are usually not locked in longer than five years in Canada and mortgage interest is not tax-deductible
GigabyteCoin 11y ago
>Renters can build equity by building their investment portfolio. But you can't live in an investment portfolio. I get the point that the author is trying to make. The TSX has outperformed the Toronto condo market. But I would still invest in a home before I invested in the stock market for the same reason I invested in GPUs to mine Bitcoin instead of Bitcoin a few years ago. GPUs (as well as condos) are tangible. If Bitcoin (or the TSX) was worthless tomorrow, my GPUs and condos would still hold value. If the stock market was wiped out tomorrow, I would still have a place to live if I owned the property. I would hate to be in the situation of relying on my next monopoly money dividend to pay for the rent on a home which I do not own.
rolyatyasmar 11y ago
I live in Toronto, I own real estate but not in the city (largely because I cannot afford to buy). I've invested in income property a few hours out of Toronto in a small town that produces positive cash flow that I reinvest in the stock market. I rent a small, shitty apartment in the city. This has ended up giving me returns of excess of 60% per year on the money that I've invested. I'm always amazed at how overlooked this strategy is.
- nasalgoat 11y ago
  Is that small town a University town like Guelph or Peterborough?

39 points by goldlist 11y ago

dangerboysteve 11y ago

The author did not factor in Condo fees or property taxes.

kazinator 11y ago
Factoring in condo fees should also factor in reasonable estimates of condo repair levies.
frandroid 11y ago
You're going to pay the fees through your rent if you're a tenant, so they're not a differentiator anyway.

kazinator 11y ago

> Myth 4: Renters throw cash away, at least owners build equity It's no myth, because you have to live somewhere. (Well, you could put your money elsewhere, and go live in a cardboard box under a bridge, but let's be realistic.) Owners are building equity with the money they would otherwise be completely throwing away on rent, and they got into that situation with just a little money down. (Depending on area), current rents are in about the same ballpark as payments on a new mortgate, but: 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up. 2) only the interest portion of a mortgage payment is thrown away, and it goes down over time. For the cost of the opportunity loss on your down payment, you're fixing the amount of a significant living expense that would otherwise continue to inflate, and you're getting a slice of that expense to go into equity that would otherwise be thrown out, and that slice gets bigger. The opportunity cost on the down payment is not bad, if the property appreciates! You have to think in terms of leverage: if the property goes up by 80K, and the down payment was 80K, that's a 100% growth! You put in 80K, and it doubled. And your rent expense was replaced by something better. If you compared the leveraged view to the stock market, the stock market doesn't look so good. You can use leverage in the stock market also ("margin"), but that's a heck of a lot of risk. I just renewed a mortgage for another term and the payment was supposed to go down (probably due to all the acceleration). Moreover, I declined that and kept it at the same amount. No way will a renter face a declining payment in the same area---not to mention that it would be irrational to refuse it.

icebraining 11y ago
You're forgetting the cost of being tied to a mortgage, in places where you can't just "walk away" from the property and have the debt released.
jsuar 11y ago
Wouldn't the counter argument be that what the renter doesn't make in equity they would make in returns via stocks?
- toomuchtodo 11y ago
  As long as the renter is investing the money that would've been property equity in the stock market.
jarek 11y ago
> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate, Not in Toronto, which is like the whole point > 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up Condo fees go up and up
- toomuchtodo 11y ago
  > Condo fees go up and up Indeed. As a building ages, you can be assured that the condo fee will go up with inflation.
- TwiztidK 11y ago
  >> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate, > Not in Toronto, which is like the whole point Then what is the rent/mortgage situation in Toronto? That was never discussed in the article. In my area rent is 2-3x higher than a mortgage, all I know about Toronto is that property values are high.
  - jarek 11y ago
    The early-90s harbourfront towers by Bay and Queens Quay rent studios/1bds for $1500-1600 incl utilities or buy for $400-500k + maint fees $500-700/month + tax + util

manishsharan 11y ago

Neither. I had to do it all over again, I would buy a detached house in the middle of boondocks ( like Mississauga, Brampton , Vaughn ,Markham , Richmond hill etc. ) . The supply of detached houses is limited whereas condos in Toronto are growing like weed. The detached houses have grown more in value and they are not encumbered with maintenance fees.

OldSchoolJohnny 11y ago
Detached houses could end up costing far more in maintenance. From experience.
- eekfuh 11y ago
  One time maintenance fees versus monthly HOA fees that you are required to pay.
  - mfringel 11y ago
    That's true, but only in the most naïve sense. A house starts falling apart as soon as it's put together... and it keeps falling it apart, and you have to keep putting it back together. The distribution of expenses is lumpier with a house than with a condo, but it's certanly an ongoing cash outflow.
    - nasalgoat 11y ago
      Toronto is mostly made up of 100-year-old brick houses, so the maintenance is mostly soft stuff like painting, gardening, etc. unless you do major renovations. My last house I did, essentially, zero maintenance over a 10-year span except for a drain replacement ($2K). Every other expense was month to month expenses like heating and electrical. When I finally decided to sell, I replaced the crappy carpet, painted the walls beige and made a 5x profit.
      - jarek 11y ago
        > Toronto is mostly made up of 100-year-old brick houses That's true for inner Toronto but not for the suburbs as manishsharan suggested. Newer developer-built-subdivision wood-frame rules out there.

chongli 11y ago

Myth #1: Toronto condos have outperformed the stock market by a long shot Isn't it disingenuous to include automatic dividend reinvestments in the price calculation for stocks but not include net income from rents reinvested into more condos?

davenugent 11y ago
Hey there, we assume that the condo you purchased you live in not as a rental property. The spirit of this post is to show that there isn't a straight yes or no answer to rent vs. buy...The shorter the time frame the less likely is you should own.

brewdad 11y ago

I take issue with the assumptions of the second chart. If we allow the author to assume 6-8% growth in the stock market over the 25 year period shown in chart two, surely assuming 0 change in value of one's condo over the same period is nonsense. Perhaps, I might allow for 0 change in "real" prices, but since the author is not making adjustments for inflation in his calculations, his assumptions suggest Toronto condos will be worth 40% less in inflation adjusted dollars 25 years from now. While this is one possible future, it seems incredibly unlikely given the optimistic outlook for his equities growth.

DMac87 11y ago

The assumptions made by the author are ridiculous, namely: - In the 10-year comparison, rents paid are not factored in at all. - In the forward-looking comparison, condo prices are assumed to be flat, mortgage rates go up (why? can't they be locked in now?), while equity prices go up 6-8% per year - Taxes are not factored in at all - capital gains on a primary residence are tax-free, while investment gains will be taxable (eventually, even if buy-and-hold) - Mortgages allow an effective leveraged investment on home equity, so your gains (and losses!) on home values are magnified It's a worthwhile debate, and there are merits on both sides, but such blatant bias has to be pointed out. Also: in the US, unlike Canada, there are tax benefits for a mortgage...

hartator 11y ago
+1. It's also assuming you are getting the same amount of money to invest in stock than to invest in your condo. Banks are more likely to finance your primary residence than your stock investment.
- davenugent 11y ago
  leverage is leverage, can work for or against you. Returns in real estate have been elevated above long term mean returns through low interest rates and flexible government programs.. increased amortization rates, lower downpayments, higher CMHC eligible mortgages.
corcoran2015 11y ago
Great comment DMAC. The model shows what will happen if rates go up 1% and condo prices are flat. Rents paid are definitely factored in the model as are taxes. The investor is in a TFSA & RRSP which means capital gains are a non-issue. Property taxes cant be avoided though. Its a real advantage of investing in Canada to use the RRSP & TFSA vehicles. You're right, mortgages can typically be locked in for five years. But really people can check out the model and use their own assumptions: https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2NJZETddZG0oM3rVd6zLoV7g/edit#gid=1187439665 https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...

corcoran2015 11y ago

Hey I'm Tim, the author, really glad people are into this. Interesting situation in Toronto. Check out the model and input your own assumptions if you'd like! https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2NJZETddZG0oM3rVd6zLoV7g/edit#gid=1187439665 https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...

dblock 11y ago

There's something big missing: you can sublet your condo, therefore building income after it's paid off or to offset the mortgage. You will never be able to do this with stocks.

peter303 11y ago

The last time I bought was because I got tired of rent increases. Insurance and taxes do increase with time, but more slowly than rent.

hbbio 11y ago

The article is interesting but does not mention a few facts: - In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues (or: you cannot deduct your rent from your revenues). For instance, if you're renting a flat that you own but at the same time rent to someone the flat where you live, you'll be paying taxes on your rent income, but deduce nothing from the rent you pay. - Rented flats tend to be in less optimal condition that flats that you own. Since the utility of a flat is to live (in the best conditions available), it's sometime a good idea to invest in renovation works, plan changes, etc. for which the owner of a rented flat will see little value. And also it mentions but does not insist on one major thing. Taking a mortgage to acquire a property is a bet on future inflation. If inflation is/will be high is the next years, getting a fixed rate mortgage is a great opportunity (and there are little chances you will be able to get a significant mortgage for anything else than real estate). If inflation is low (or worse, we enter a period of deflation), renting is by far the best option. IMHO this criterion is by far the most important while deciding about rent vs. buy.

pmelendez 11y ago
> " In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues " I believe that's why the author limitted the discussion to Toronto's condos.
Joeri 11y ago
One thing easily forgotten with renting is that you can be kicked out. This can be extremely stressful. Then again, as a home owner you can be hit by surprise maintenance work, which has its own source of stress. But, on the other hand, as a renter you may not have much control over necessary maintenance work, and be forced to negotiate with your landlord through the court system. Trade offs...

g8oz 11y ago

The gold standard for this kind of comparison is the New York Times Rent vs Buy calculator. Note how relatively small changes in any one of many factors can result in very different outcomes. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=1 http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

jarek 11y ago
Note that it needs a few adjustments for Canadian market, the biggest ones being mortgage rates are usually not locked in longer than five years in Canada and mortgage interest is not tax-deductible

GigabyteCoin 11y ago

>Renters can build equity by building their investment portfolio. But you can't live in an investment portfolio. I get the point that the author is trying to make. The TSX has outperformed the Toronto condo market. But I would still invest in a home before I invested in the stock market for the same reason I invested in GPUs to mine Bitcoin instead of Bitcoin a few years ago. GPUs (as well as condos) are tangible. If Bitcoin (or the TSX) was worthless tomorrow, my GPUs and condos would still hold value. If the stock market was wiped out tomorrow, I would still have a place to live if I owned the property. I would hate to be in the situation of relying on my next monopoly money dividend to pay for the rent on a home which I do not own.

rolyatyasmar 11y ago

I live in Toronto, I own real estate but not in the city (largely because I cannot afford to buy). I've invested in income property a few hours out of Toronto in a small town that produces positive cash flow that I reinvest in the stock market. I rent a small, shitty apartment in the city. This has ended up giving me returns of excess of 60% per year on the money that I've invested. I'm always amazed at how overlooked this strategy is.

nasalgoat 11y ago
Is that small town a University town like Guelph or Peterborough?