Baby, we got a bubble!?

[ILuvTO]

To paraphrase part of CN Tower's post that I was, or had intended, referring to was that if he purchased R/E at $ 1,000,000 and the price went up to $ 1,100,000 or down to $ 900,000, it won't bother him because he is in for the long haul.

When I made reference to this type of argument, then, various number crunchers started mentioned ROI and other such concepts ignoring completely opportunity cost concept.

If you were to recalculate your figures with, say, 50% downpayment, then the results wil be entirely different.

There seem to be 2 different types of investors -- like myself, in for a long haul. Give a hefty downpayment, have a positive or very small negative cash flow. Others who go by the text books, calculate ROI and other concepts and hope for a quick spike in the prices for their salvation.

If you have to put more than 25% down to realize positive cash flow than it is a bad investment IMO.

 

[cdr108]

If you were to recalculate your figures with, say, 50% downpayment, then the results wil be entirely different.

There seem to be 2 different types of investors -- like myself, in for a long haul. Give a hefty downpayment, have a positive or very small negative cash flow. Others who go by the text books, calculate ROI and other concepts and hope for a quick spike in the prices for their salvation.

of course the numbers are different, but the result is the same.


the majority of new construction dt TO condos just do not make sense from a financial point of view.

ie. 550 sq ft condo, no parking - cost $360K (approx $650 psf) ; 50% dp of $180K leaves mortgage of $180K
4.5% 5-yr fixed 25 amortization mortgage = $996 = ~$327 principal + ~ $669 interest

cost to carry per month = $1,646:
mortgage = $996
condo fees = $300
property tax = $250
insurance = $100

estimated montly rent for 550 sf condo = $1,400;

so as an owner who put 50% dp, one is subsidizing the condo rental by $246 per month:
NOI = -$246 * 12 / $360,000 = - 0.82 %

back to the previous scenario where one put 20% dp:
NOI = -$844 * 12 / $ 360,000 = - 2.8 %


==========

AGAIN, best case scenario, if one bought outright with cash, no vacancies, no management costs to lease unit out, etc:

ROI = $1,400 * 12 / $360,000 = 4.6%
NOI = $750 * 12 / $360,000 = 2.5%



i'm not saying all R/E is bad, but buying with negative returns is the definition of speculative;
and currently buying in dt TO condo at $650 psf based on 20% dp with 4.5% 5-yr term / 25 yr amortization, where rental rates haven't changed much in the past 10 years, is speculative.

what further concerns me with buying at these prices:
* after the initial 5-yr term, assuming one hasn't accelerated mortgage payments, the principal will only be reduced by 10%
* 5 years from now, it's pretty much guaranteed that rates will be at least 1% (100 bp) higher, if not more
* even though the principal is lower, the higher rate will result in the same, if not higher, monthly mortgage payments
* other carrying costs like condo fees, taxes and insurance will be higher
* rent control in Ontario ... The 2011 guideline is 0.7 per cent

 

[cdr108]

A Leaside veteran sees a busy market ahead

it seems even seasoned agents are seeing less than positive things ahead


http://www.theglobeandmail.com/life...eran-sees-a-busy-market-ahead/article2299661/

carolyn ireland
Toronto— From Friday's Globe and Mail
Published Wednesday, Jan. 11, 2012 10:05PM EST

Economists, policy makers, international publications – and now bank presidents – are casting their eyes towards Toronto's seemingly unstoppable real estate prices and warning that the market's next move may be down. But in the broader market, all kinds of people are planning their own next moves.

The earliest signs are that the spring market – which actually starts in February – will be brisk again this year.

“I'm supposed to be on vacation but I haven't stopped working all day,†said Patrick Rocca, broker with Bosley Real Estate Ltd. in Toronto.

When I talked to him by phone while he was in Florida earlier this week, he was hopping onto the other line to help a client navigate the purchase of a $1.1-million house on a good street in the Leaside area.

The property wasn't on the multiple listing service but the seller's agent had let Mr. Rocca know it was available.

After Mr. Rocca talked to his client and called back to strike a deal, another offer was already on the table.

“The property is not even on the market and you have buyers,†says Mr. Rocca.

That left Mr. Rocca's buyer trying to decide whether to increase his offer.

That middle tranche of the market – between about $550,000 and a little above $1-million – still belongs to the sellers.

Where agents and sellers have noticed a chill is at the high end of the market. Houses listed above $2-million in Rosedale, for example, have been slow for several months.

“That's where it usually starts and it trickles down,†he says.

He advises people who are thinking of selling to do it sooner rather than later. Of course, some people will say real estate agents always take that view, but Mr. Rocca offers his reasons.

Among people who are talking to Mr. Rocca about selling, he says some are worried about their jobs or their marriages. The fear of higher interest rates is also looming.

“What I'm seeing a lot of is tremendous debt,†he says.

At the same time, the financial turmoil Canadians see in other countries is increasing their anxiety.

“The reality is, the world' crumbling around us.â€

 

[drewp]

Rent increases for 2012 are at 3.1%, and the average 550 sqft condo rents for 1550-1600.

Property taxes roughly are 1500 a year, and maintenance fees are around 52 cents a square foot.

 

[KA1]

Cdr 108, your calculations have become 'dated' after a subsequent post by Drewp. Current FMV rent for a 550 sq ft condo is around $ 1,500-1,600 and not $ 1,400 estimated by you. Perhaps, you might wish to, once again, re-do your calculations.

Regardless, one thing is quite clear. If you go with a bigger deposit, then, negative cash flow, if any, will be 'peanuts'. That particular individual will have better chances of survival than others if and when interest rates increase or when R/E prices are steady or even a bit down. There will no bubble burst for this type of investor -- for example, myself. ROI and NOI concepts are completely irrelevant.

That brings me back to the earlier comments about a post by CN Tower -- that started this latest round of discussions. For a long term investor, short term variation in R/E prices is inconsequential. You will make your money eventually.

'Interested', whenever he wakes up, will confirm this statement.

And one more thing. Always give due respect to CN Tower's posts. His posts are always rational and reasonable.

 

[steve_toronto]

i don't see how what CN Tower said is an endorsement to randomly buy R/E?

if one bought a principal residence, there is no incoming cash flow.

if it's an investment property, there should be cashflow, but is it positive or negative? - that is FUNDAMENTAL !
any seasoned R/E investor (not specuvestors or flippers) will tell you positive cashflow will help one ride the tides when the market turns down.

the majority of new construction dt TO condos just do not make sense from a financial point of view.

ie. 550 sq ft condo, no parking - cost $360K (approx $650 psf) ; 20% dp of $72K leaves mortgage of $288K
4.5% 5-yr fixed 25 amortization mortgage = $1,594 = ~$524 principal + ~ $1,070 interest

cost to carry per month = $2,244:
mortgage = $1,594
condo fees = $300
property tax = $250
insurance = $100

estimated montly rent for 550 sf condo = $1,400;

so as an owner, one is subsidizing the condo rental by $844 per month

==========

if one assumes the unit was bought outright with cash, zero vacancies, no management costs to lease unit out, etc:
ROI = $1,400 * 12 / $360,000 = 4.6%
NOI = $750 * 12 / $360,000 = 2.5%

referring back to CN Tower's dividend bank stocks; their dividend yields are around 3.5-4.5% (assuming CDN big 5 banks).

there's much greater liquidity, less transaction costs, preferred income tax treatment (dividend income vs. rental income), plus stop losses are able to be put in place should one needs/wants to sell immediately.

The number may be quite different:

Take a newly sold condo in CP1 as an example: it is 580 sqft, sold around $380K. The property tax is $150, the condo fee is around $300. The rental for a similar unit is around $1650.

Assume the investor puts 25% downpayment, and takes a mortgage with 5year fixed term at 3.4%, 30 year amortization. Then the number is as follows:
Cost:

mortgage payment: $1,260
property tax: $150
condo fee: $300
Total: $1,710

Rental Income: $1,650

Yes, it is negative, but not as bad as your numbers suggested. Note that all the above numbers are real or realistic. Considering the fact that $450 of the mortgage payment is applied towards the principal balance, it does make some sense.

 

[cdr108]

Rent increases for 2012 are at 3.1%, and the average 550 sqft condo rents for 1550-1600.

Property taxes roughly are 1500 a year, and maintenance fees are around 52 cents a square foot.

could you please supply the data for this.
i have not seen condos that sell for $650 psf get rental rates of $36 gross/year.

identical units that have been sold and leased at the same time are the best comparables.

 

[KA1]

How can anyone not be speculating in this market? Do you see any reasonable deals to be had? Something where the mortgage would equate to 3-3.5x the average household income assuming a 25% down payment?

I don't.

So you can go on and on about how people shouldn't be sitting on the sidelines, but realize that not everyone wants to become a slave to their mortgage.

ILUVTO, last time when I had replied to your post, you had taken an offense. When I had offered an apology, you had tersely rejected it stating that it was not a sincere apology -- whatever that means. Now that you have replied to one of my posts, I, therefore, presume that you have realised the folly of loosing temper over posts on this thread. As such, I am replying to your post.

3-3.5% of $ 50,000 is one thing and 3-3.5% of $ 100,000 is another.

No, right now, I do not see any reasonable deals but there were a few in the past -- FIVE and Pace. There will be deals again in a few year's time.

Canderel has proposed a condo on their recently acquired property at 480 Yonge Street. I have already placed an order with my R/E for a unit on S/E or S/W corner. I don't know in what state the economy will be in a few years. Unless the economy is really really bad, I will be ready with a hefty downpayment. Location is ideal --within the walking distance to subway and Loblaws -- a heaven for foody's. A perfect location.

One does not have to be a slave to the mortgage for too long. All one has to do is to make a determined effort to bring it down. Here below are a couple of hints:

Subscribe to Money Saver magazine and get all the money saving ideas. Stop buying tickets for the perinnial losers -- Maple Leafs -- and then end up in the sports bars and become 4th quarter coach over a barrel of beer. If someone really wants to watch grown up men fight, there is a free show in town. Watch wrestling on TV every Monday and Friday nights. That's how one will, eventually, stop being a slave to a mortgage.

 

[cdr108]

The number may be quite different:

Take a newly sold condo in CP1 as an example: it is 580 sqft, sold around $380K. The property tax is $150, the condo fee is around $300. The rental for a similar unit is around $1650.

Assume the investor puts 25% downpayment, and takes a mortgage with 5year fixed term at 3.4%, 30 year amortization. Then the number is as follows:
Cost:

mortgage payment: $1,260
property tax: $150
condo fee: $300
Total: $1,710

Rental Income: $1,650

Yes, it is negative, but not as bad as your numbers suggested. Note that all the above numbers are real or realistic. Considering the fact that $450 of the mortgage payment is applied towards the principal balance, it does make some sense.

could you tell me who's offering 3.4% for 5 yr fixed term?

of course when the amortization is increased, it lowers the monthly mortgage cost.
$150/m property tax for $380K condo seems quite low ... has it been assessed for 2012?

 

[interested]

Rent increases for 2012 are at 3.1%, and the average 550 sqft condo rents for 1550-1600.

Property taxes roughly are 1500 a year, and maintenance fees are around 52 cents a square foot.

Drewp, wouldn't taxes be closer to $2100? 85 cents or so/$1000 valuation and the average 550 sq.ft. condo on resale around $250K. I believe around 52 cents/sq.ft. maintenance is correct.

 

[drewp]

Casa Condos is a real good example. Firenze model at 495sqft sells from anywhere between $325000-$345000. Rent on average for this unit is $1550-$1600. Property taxes are $1690/yr assessed in 2011, and maintenance fees are $255 a month.

Your right my property tax equation was off. It should be closer to $1800-$2000 a year......long day!

 

[steve_toronto]

could you tell me who's offering 3.4% for 5 yr fixed term?

of course when the amortization is increased, it lowers the monthly mortgage cost.
$150/m property tax for $380K condo seems quite low ... has it been assessed for 2012?

cdr108, I have just closed a mortgage with TD one week ago at 3.4% for 5 year fixed term.
Yes, $150/m property tax for the unit is an actual number in the assessment for 2011, though it may be subject to increase. Note that the market
price for a condo at CP1 at the last assessment is not as high as it is today.

 

[drewp]

Property taxes will be assessed this year for the 2013-2016 period.

 

[adeel]

could you tell me who's offering 3.4% for 5 yr fixed term?

of course when the amortization is increased, it lowers the monthly mortgage cost.
$150/m property tax for $380K condo seems quite low ... has it been assessed for 2012?

FYI, you can get 5 yr fixed rates around/under 3% with at least one big bank, and lower if your willing to go with lesser known (but no less secure) lenders

 

[drewp]

Cdr, Bank of Montreal is currently advertising 2.99% 5 fixed year rate. www.ratehub.ca is a great site to search the latest mortgage rates from all banks, and private lenders.