Baby, we got a bubble!?

[radioheadmike]

Here's hoping you bought in a bidding war in the last six months or so, so they really have to make fools of themselves! (Or, conversely, you get your ass kicked and don't have time to talk crap here, given the three jobs...)

Seriously, that was awesome. That was such an unemployed liberal arts graduate gibberish that I actually had my cats run in from the other room to ask what was causing so much laughter! (Of course, I then had to put up with their 'you're even crazier than usual, Owner' looks, but it was worth the belly laugh!)

 

[Riverdale Rink Rat]

Seriously, that was awesome. That was such an unemployed liberal arts graduate gibberish that I actually had my cats run in from the other room to ask what was causing so much laughter! (Of course, I then had to put up with their 'you're even crazier than usual, Owner' looks, but it was worth the belly laugh!)

Nice try. <yawn>

 

[AKS]

Not hard to see that when there are more BMWs than Hondas on the streets. Apple store at Yorkdale Mall still have line ups, even during Noon.

Please don't judge people's wealth by the cars they drive. Some may have money (from their parents) but some buy be leasing and paying monthly mortgages on their car. Just because people drive expensive cars doesn't mean they are rich. They just like to have an "image" of richness. Even if they can't afford an expensive car, they will put their life savings to pay deposits for it.

 

[Josef]

Not hard to see that when there are more BMWs than Hondas on the streets.

Hondas are considered low end? My Civic costed a little over 29k.
Perhaps you meant Kia...

 

[simuls]

Just back for a quick dip...

I haven't posted on here for awhile as I found the arguments both for and against the bubble to be rather circular and after 15 months of following the discussion I started there was probably nothing new to add. The numbers were the numbers and it seemed like people who disagreed with the notion of a bubble were evangelical and almost faith-like in their disbelief of warning signs - regardless of how insane things got, regardless of empirical evidence, regardless of debt ratios, unemployment figures, immigration numbers and facts, the sky was never going to fall it was instead going to reach into the heavens. The Tea Party would've been proud.

I didn't go back and look at my posts to get an exact date, but I believe I was calling for a correction to begin sometime around May-ish 2011. I was wrong. Plain wrong. And I do believe I owe Condo George a coffee for that. Instead, I was 11 months too early and the condo correction (I was never discussing houses) started in April of 2012 - although the luxury market did start its correction in May of 2011, right on schedule. The numbers haven't looked good over the summer - of course this was written off by realtors as a traditional summer drop - except when you compare it to previous summers and not the month to month numbers. September just ended and I guarantee we will see some ugly numbers.

Just in my small neighbourhood of condos there were 30 open houses on the weekend and many of these units have been listed for more than 6 weeks, some for as long as 40 weeks (although you'd never know it as they are just being re-cycled because they are owned by realtors and they can put them up and take them off MLS so easily). These longer ones have also had price drops of approximately 15% and they are still not selling. This is also in a neighbourhood in which 2200 new condos will be finished in the next 14 months alone. Of which, approximately 60-70% are investor owned. Not good.

I believe we will see a correction to the tune of 20-30% overall and a return to prices of mid 2009, of course, this will depend on a neighbourhood by neighbourhood basis. The luxury market has already corrected by about 30% with many units going for the low 700's when they sold for 1100's and even brand new Peter Freed units that sold for 500 4 1/2 years ago and $700 2 years ago, are now going for mid-500's again.

A correction is happening (see Lifetime Development's latest deals on it's outstanding units and you'll understand how bad it truly is) and the only thing that might save us is renters and I just don't think there are enough of them. The immigration analysis you often hear from realtors is a load of garbage as Toronto's share of immigrants is shrinking (down to 40% from 50% 6 years ago with a shrinking total) and a small percentage come with enough money to affect our housing market in any major way.

What's hurt us - and this correction WILL cause a lot of hurt - is our lack of oversight on foreign investment. The Canadian, Ontario and City of Toronto governments have all failed miserably to protect an asset class that is just as important as any stock or company. If 60-80% of all stock purchases for any company on the TSX had come from foreign hands, the government would have been all over it and so would the media but they've turned a blind eye to this because housing is not supposed to be looked at as an investment. It is not something meant to be traded quickly or something to make a quick buck on because it's essential to the stability and civility of a society. While privately owned, housing is a social asset, something we've forgotten. All the jobs in retail, construction, design, trades, etc. that have been doing quite well and at least keeping this economy afloat are going to take a massive hit in about a year as many projects wrap up and their workers have no new projects to go to, nobody to interior design for, nobody to help fill a living room with furniture because we took 15 years worth of growth and slammed it into about 7. If you can hold on for another 8 years, you'll be fine and eventually it'll go back up again when the market's evened out. But if you bought at anytime between Jan. 2010 and now, you'll be underwater for at least the next 5 years. Longer if interest rates rise by more than 3 points.

 

[PaulTheMaul]

Hondas are considered low end? My Civic costed a little over 29k.
Perhaps you meant Kia...

Some still find Japanese cars inferior to German cars.

 

[UserNameToronto]

I don't know much about condos, but I am into houses.

Counterpoint:

I'm seeing quite a few duplexes out there for about $600,000, close to downtown, that rent for about $3300 monthly (say, one two-bed unit at $2000 a month and one single-bed unit at $1300 a month, where tenants pay utilities).

Figure a 3% fixed rate mortgage on one of these houses. At a 20% downpayment, the mortgage cost is about $2270 per month. Insurance would be $100 monthly, and property tax is $330 monthly.

So, the total cost for such an investment is $2700 per month and the total income is $3300 per month, which leaves $600 each month ($7200 for the year) to cover any maintenance or vacancy. I'm pretty sure for can buy a fridge, a stove, and a furnace for less than $7k so I think this should be more than enough to cover contingencies.

In the above case, even if maintenance costs $7200 per year, you still have the mortgage paid down by the tenants at a rate of $1100 per month or $13,126 in the first year. So you're making 11% on your $120,000 downpayment (and 9.7% if we include closing costs of $2000 and LTT of $16000). It goes up each year, as well.

Am I missing something here? Does the above case not seem reasonable? None of my stocks are paying a 10% dividend.

If the market crashes, I don't care so long as my tenants stick around. At the end of the 5 year mortgage term the balance is paid down to $410k, 32% below the $600k purchase price.

 

[Xenosblitz]

I don't know much about condos, but I am into houses.

Counterpoint:

I'm seeing quite a few duplexes out there for about $600,000, close to downtown, that rent for about $3300 monthly (say, one two-bed unit at $2000 a month and one single-bed unit at $1300 a month, where tenants pay utilities).

Figure a 3% fixed rate mortgage on one of these houses. At a 20% downpayment, the mortgage cost is about $2270 per month. Insurance would be $100 monthly, and property tax is $330 monthly.

So, the total cost for such an investment is $2700 per month and the total income is $3300 per month, which leaves $600 each month ($7200 for the year) to cover any maintenance or vacancy. I'm pretty sure for can buy a fridge, a stove, and a furnace for less than $7k so I think this should be more than enough to cover contingencies.

In the above case, even if maintenance costs $7200 per year, you still have the mortgage paid down by the tenants at a rate of $1100 per month or $13,126 in the first year. So you're making 11% on your $120,000 downpayment (and 9.7% if we include closing costs of $2000 and LTT of $16000). It goes up each year, as well.

Am I missing something here? Does the above case not seem reasonable? None of my stocks are paying a 10% dividend.

If the market crashes, I don't care so long as my tenants stick around. At the end of the 5 year mortgage term the balance is paid down to $410k, 32% below the $600k purchase price.

You're missing the fact that by putting 20% down, you're essentially 5x leveraged. Buying a stock outright will not have any leverage. If you levered up 5x on a bank stock, utility, or whatever else you can buy, you can achieve the 11% you've quoted. The question is whether the risk assumed on a 5x utility stock, on a risk adjusted basis, is returning more than the 11% on the property you quoted. I don't have the numbers, but maybe there is a finance/stock broker in this forum who can run the numbers, or at least provide his/her professional opinion.

 

[daveto]

I don't know much about condos, but I am into houses.

Counterpoint:

I'm seeing quite a few duplexes out there for about $600,000, close to downtown, that rent for about $3300 monthly (say, one two-bed unit at $2000 a month and one single-bed unit at $1300 a month, where tenants pay utilities).

Figure a 3% fixed rate mortgage on one of these houses. At a 20% downpayment, the mortgage cost is about $2270 per month. Insurance would be $100 monthly, and property tax is $330 monthly.

So, the total cost for such an investment is $2700 per month and the total income is $3300 per month, which leaves $600 each month ($7200 for the year) to cover any maintenance or vacancy. I'm pretty sure for can buy a fridge, a stove, and a furnace for less than $7k so I think this should be more than enough to cover contingencies.

In the above case, even if maintenance costs $7200 per year, you still have the mortgage paid down by the tenants at a rate of $1100 per month or $13,126 in the first year. So you're making 11% on your $120,000 downpayment (and 9.7% if we include closing costs of $2000 and LTT of $16000). It goes up each year, as well.

Am I missing something here? Does the above case not seem reasonable? None of my stocks are paying a 10% dividend.

If the market crashes, I don't care so long as my tenants stick around. At the end of the 5 year mortgage term the balance is paid down to $410k, 32% below the $600k purchase price.

You're missing a lot.

First, you've not reflected the lost opportunity cost of the investment return on your $120k downpayment.
Second, you've not reflected a higher interest rate upon renewal after 5 years (4%? 6%?)
Third, you're comment that the mortgage is "32%" below the purchse price after five years is a strange one. Since 20% of that came from your downpayment.

So let's look at this way.
We treat the LTT as zero, ignore the higher mortgage rate in 5 years, and ignore all transaction costs, maintenance costs, and any vacancy, and ignore any labour/time you spend on the property (purchase, handling tenants, etc)

Over 5 years (with a 25 year amortization) and a 5 yr mortgage term you pay $2270 mortgage monthly
Over 5 years you've payed down $70k of mortgage principle. So yes, pre-tax you've made 10% pre-tax a year on your 120k downpayment

This 10% pre-tax is taxed at your marginal income tax rate (unlike the more favourable income tax rates of various investments).

But consider if you face a 5% mortgage in your 2nd 5 year term.
Rental Income up $330 a month (10% over 5 years). So up $20k over 5 year term
Mortgage interest cost up $25k over 5 year term, (lower principle, but 66% higher rate)
So now you make $13k yearly on starting equity of $190k (ie $120k down payment + $70k principal paid down in first 5 year term)
7% (prior to your marginal income tax rate of 40%-ish)

We've not talked about capital appreciation. Some might be optimistic, but you should also consider a possible decrease in resale value. And if it holds its resale or increases, you'll face transaction costs of nearly 10% if you try to sell after 5 years, if you're put off by higher mortgage rates. And if mortgage rates spike, then who exactly do you think you'd be selling to?

Anyways...this is all just off the cuff writing for me. If you've not considered all of the above (and more) than woe betide you dropping 120large to leverage 5-1 into a market at its alltime price peak combined with its alltime mortgage low

 

[ducati0000]

I can tell you renting has gone up accordingly to those not getting into purchasing their new homes.Rental pricing has shown zero effect in slowing of the re sale market,in fact since most buyers are waiting or hoping to see a price drops are extending their leases in the mean time.As a landlord its not hard finding tenants.

 

[cdr108]

I don't know much about condos, but I am into houses.

Counterpoint:

I'm seeing quite a few duplexes out there for about $600,000, close to downtown, that rent for about $3300 monthly (say, one two-bed unit at $2000 a month and one single-bed unit at $1300 a month, where tenants pay utilities).

Figure a 3% fixed rate mortgage on one of these houses. At a 20% downpayment, the mortgage cost is about $2270 per month. Insurance would be $100 monthly, and property tax is $330 monthly.

So, the total cost for such an investment is $2700 per month and the total income is $3300 per month, which leaves $600 each month ($7200 for the year) to cover any maintenance or vacancy. I'm pretty sure for can buy a fridge, a stove, and a furnace for less than $7k so I think this should be more than enough to cover contingencies.

In the above case, even if maintenance costs $7200 per year, you still have the mortgage paid down by the tenants at a rate of $1100 per month or $13,126 in the first year. So you're making 11% on your $120,000 downpayment (and 9.7% if we include closing costs of $2000 and LTT of $16000). It goes up each year, as well.

Am I missing something here? Does the above case not seem reasonable? None of my stocks are paying a 10% dividend.

If the market crashes, I don't care so long as my tenants stick around. At the end of the 5 year mortgage term the balance is paid down to $410k, 32% below the $600k purchase price.

i'd like to know where these $600K duplexes close to dt that get $3,300 monthly income are?
i think you're overly optimistic for the income on said properties, or to get such income the properties would be worth alot more.

good residential rental properties are earning around 3% ROI as far as i've seen.

ps - there are some good blue chip stocks paying 5% dividends.
if leveraged 5:1 as in your example, that would be 25% return.

 

[CN Tower]

I don't know much about condos, but I am into houses.

Counterpoint:

I'm seeing quite a few duplexes out there for about $600,000, close to downtown, that rent for about $3300 monthly (say, one two-bed unit at $2000 a month and one single-bed unit at $1300 a month, where tenants pay utilities).

Figure a 3% fixed rate mortgage on one of these houses. At a 20% downpayment, the mortgage cost is about $2270 per month. Insurance would be $100 monthly, and property tax is $330 monthly.

Property taxes should be double
You need to budget for management fees
You need to budget for vacancies & bad debts
You need to budget for repairs (your turnover costs when the tenant moves out are probably a couple grand at least)

This probably brings your mortgaged return down to about 3%-4% which seems like a reasonable return and consistent with the risks and effort involved in owning a single property. You can probably get 5-6% from a high quality REIT without lifting a finger and with superior liquidity.

 

[UserNameToronto]

Thanks for your replies all.

i'd like to know where these $600K duplexes close to dt that get $3,300 monthly income are?
i think you're overly optimistic for the income on said properties, or to get such income the properties would be worth alot more.

good residential rental properties are earning around 3% ROI as far as i've seen.

ps - there are some good blue chip stocks paying 5% dividends.
if leveraged 5:1 as in your example, that would be 25% return.

I'm not sure I would be able to get any bank to give me 5:1 leverage on a stock portfolio. 1:1 or 2:1 sounds more common. Even if I were, the "25% return" wouldn't be the case, as the leverage would be subject to interest. A stock loan might carry 4% interest which would just be covered by the 5% dividend.

Here are 2 I've seen: http://www.realtor.ca/propertyDetails.aspx?propertyId=12407806&PidKey=-1879184715 ,
http://www.realtor.ca/propertyDetails.aspx?propertyId=12450048&PidKey=-860670339

Property taxes should be double
You need to budget for management fees
You need to budget for vacancies & bad debts
You need to budget for repairs (your turnover costs when the tenant moves out are probably a couple grand at least)

This probably brings your mortgaged return down to about 3%-4% which seems like a reasonable return and consistent with the risks and effort involved in owning a single property. You can probably get 5-6% from a high quality REIT without lifting a finger and with superior liquidity.

http://www.realtor.ca/propertyDetails.aspx?propertyId=12407806&PidKey=-1879184715

http://www.realtor.ca/propertyDetails.aspx?propertyId=12450048&PidKey=-860670339

For property tax, $330 per month is spot on for these properties.

Management fees are zero. DIY.

Budgeted $600 per month for bad debts, vacancies, and repairs, per my original post.

 

[UserNameToronto]

Thanks once again for your replies.

You're missing a lot.

First, you've not reflected the lost opportunity cost of the investment return on your $120k downpayment.

Not sure what you mean - the $120k would return 10%. I suppose I could keep it in the bank at 2% or buy dividend stocks at 5%, but every investment has an opportunity cost.

Second, you've not reflected a higher interest rate upon renewal after 5 years (4%? 6%?)

Agree - I think this is the kicker. The first 5 years are cashflow positive and quite profitable, but the biggest risk in this "deal" is years 5-10.

Third, you're comment that the mortgage is "32%" below the purchse price after five years is a strange one. Since 20% of that came from your downpayment.

It's only relevant for getting a mortgage refinancing. The Bank won't lend me $410k on a property that's worth less than that. Prices have to fall massively for this to be the case.

So let's look at this way.
We treat the LTT as zero, ignore the higher mortgage rate in 5 years, and ignore all transaction costs, maintenance costs, and any vacancy, and ignore any labour/time you spend on the property (purchase, handling tenants, etc)

Over 5 years (with a 25 year amortization) and a 5 yr mortgage term you pay $2270 mortgage monthly
Over 5 years you've payed down $70k of mortgage principle. So yes, pre-tax you've made 10% pre-tax a year on your 120k downpayment

This 10% pre-tax is taxed at your marginal income tax rate (unlike the more favourable income tax rates of various investments).

But consider if you face a 5% mortgage in your 2nd 5 year term.
Rental Income up $330 a month (10% over 5 years). So up $20k over 5 year term
Mortgage interest cost up $25k over 5 year term, (lower principle, but 66% higher rate)
So now you make $13k yearly on starting equity of $190k (ie $120k down payment + $70k principal paid down in first 5 year term)
7% (prior to your marginal income tax rate of 40%-ish)

Don't disagree with any of your math here. I suppose if I wanted to "juice" the return, I could pull equity our at year 5 and refinance at an LTV of 80%. But mortgage rates will be higher then, and depending on rent increases, the return may not be as good.

We've not talked about capital appreciation. Some might be optimistic, but you should also consider a possible decrease in resale value. And if it holds its resale or increases, you'll face transaction costs of nearly 10% if you try to sell after 5 years, if you're put off by higher mortgage rates. And if mortgage rates spike, then who exactly do you think you'd be selling to?

For me this would be buy and hold. I assume prices are flat.

To be honest, one of the appealing bits about an investment like this is being able to borrow money at 3%, eg, inflation level. It's free money.

Anyways...this is all just off the cuff writing for me. If you've not considered all of the above (and more) than woe betide you dropping 120large to leverage 5-1 into a market at its alltime price peak combined with its alltime mortgage low

Hard to argue with this. Wish I had a time machine and could go back to 2009 to buy instead. Though that's when this thread was created, oddly enough.

You're missing the fact that by putting 20% down, you're essentially 5x leveraged.

I'd say the cheap money is the best part!

Buying a stock outright will not have any leverage. If you levered up 5x on a bank stock, utility, or whatever else you can buy, you can achieve the 11% you've quoted. The question is whether the risk assumed on a 5x utility stock, on a risk adjusted basis, is returning more than the 11% on the property you quoted. I don't have the numbers, but maybe there is a finance/stock broker in this forum who can run the numbers, or at least provide his/her professional opinion.

Indeed, this is the very sort of analysis I'm doing now.

 

[James]

Are you certain that you can get a $2,000 two-bedroom rental and a $1,300 one-bedroom out of either of these properties?