How is "phantom rent" calculated?

[Xenosblitz]

I think the interest rate being higher than what you can get yourself at a bank makes the most sense. The other fees quoted does not go to the builder at all (its just collected by them, but will have to be paid out to third parties). For example, the interest rate quoted at 3.75% is in line with what I can get at a bank, so it is of little or no loss to me to pay that to the builder. Condo fees and property taxes will be paid regardless. There is NO principle repayment quoted in the occupancy calculation given, so the owner does not lose out. That is what got me so confused. There is no clear monetary loss to the owner as far as I can see.

I guess when I move into my pre-construction condo next year (possibly 2011...) I can see if the higher interest rate is the kicker that pisses people off or not. Because if the calculation given is correct, I don't mind paying occupancy fees at all, since I don't plan on selling it (which I believe is another downside of long occupancy periods).

 

[AKS]

I think the interest rate being higher than what you can get yourself at a bank makes the most sense. The other fees quoted does not go to the builder at all (its just collected by them, but will have to be paid out to third parties). For example, the interest rate quoted at 3.75% is in line with what I can get at a bank, so it is of little or no loss to me to pay that to the builder. Condo fees and property taxes will be paid regardless. There is NO principle repayment quoted in the occupancy calculation given, so the owner does not lose out. That is what got me so confused. There is no clear monetary loss to the owner as far as I can see.

I guess when I move into my pre-construction condo next year (possibly 2011...) I can see if the higher interest rate is the kicker that pisses people off or not. Because if the calculation given is correct, I don't mind paying occupancy fees at all, since I don't plan on selling it (which I believe is another downside of long occupancy periods).

What you're paying interest on for occupancy is not the same as what you can get at the bank. It is higher. The problem comes when people have locked in rates that will expire. If interest rates go up and you don't close. You lose your lock in rate. Also, the rate you get at the bank is lower than what you're charged (because they're charging you on short term rates which are higher than long term rates). Hence you're paying more interest than you need to. And you lose your low lock in rate if interest rates go up and your lock in rate expires. Also for those who have cash to pay down. They're unnecessarily paying for high interest rates they don't need to. That is the draw back for occupancy.

 

[JayBee]

What you're paying interest on for occupancy is not the same as what you can get at the bank. It is higher. The problem comes when people have locked in rates that will expire. If interest rates go up and you don't close. You lose your lock in rate. Also, the rate you get at the bank is lower than what you're charged (because they're charging you on short term rates which are higher than long term rates). Hence you're paying more interest than you need to. And you lose your low lock in rate if interest rates go up and your lock in rate expires. Also for those who have cash to pay down. They're unnecessarily paying for high interest rates they don't need to. That is the draw back for occupancy.

Generally, how much higher is the rate?

 

[AKS]

Generally, how much higher is the rate?

I'm not too sure. But I think currently it might be around 4.6%? Currently TD and CIBC posts 6 month mortgage as 4.6%. Back when I had to pay occupancy, it was around 6-7%. People who had locked in mortgage rate that was expiring soon was around 4.75% (expire because the building didn't close yet, so they couldn't get mortgage). But at the time, the mortgage rate was higher than that.

 

[rbt]

Generally, how much higher is the rate?

The legal rate is the Bank of Canada rate for 1 year mortgage. I've found in the past the builder will adjust the rate on a monthly basis.

Here is a history of the rates between 1980 and end of 2008:

http://www.bankofcanada.ca/pdf/annual_page52.pdf

 

[AKS]

Judging by the stats. I guess that's about right. 7.35-6.95%. They didn't adjust the fee structure though through the 8 months occupancy.

 

[Epi]

If the calculations above are correct, how is it that people complain about occupancy fees? The only downside I see is if you want to pay all cash for the transaction, or if you believe the interest rate will head upwards before you close. Correct me if I am wrong, but each of the above can be mitigated to some degree if you ask the builder if you can pay them the entire amount on occupancy and if you lock in your rate with a bank.

All other fees I see would have to be paid regardless if you owned the unit or paid phantom rent.

Simple. The building is not finished yet. So you are being forced to pay for an unfinished place which is still being constructed. So you may not actually move in yet (it's too dusty or loud or whatever) but you are paying for it. If you are currently renting, then this means that you're paying double!

Also, you're paying interest on a mortgage which goes absolutely nowhere. It disappears. If you were actually living there, then the interest you're paying to your real mortgage at least is part of the fees of getting a mortgage, and every month you pay that interest you're also 1 month closer to paying down the entire thing. But every month you pay these phantom rents, you are not any closer to paying off your mortgage.

Finally, if you're trying to sell your place, unless you paid for the assignment fee (up to $5000) when you originally purchased, you are paying money for a place which you are just waiting to sell and never use. Not everyone who chooses to sell early had the intent of flipping the place when it was done, especially if you bought it years ago (because the building was delayed or you bought really early) and circumstances in your life have now changed.


The last problem is, a lot of the times, it's not even the builder's fault you're paying these phantom rents forever. Sometimes the city is just slow in registering your building, because they are backlogged or maybe the 1 guy who does it is on vacation or sabbatical... or on strike.

 

[simuls]

Buying on a higher floor is one way to avoid a lot of this consternation (and a way to reduce the actual per floor cost you paid up front). Also, make sure you can rent out the suite upon occupancy - if you do that during the ghost mortgage part, you'll make out like a bandit because you can pocket the amount that would go towards your principal and then get a smaller mortgage when the unit is registered.

 

[unknown variable x]

Buying on a higher floor is one way to avoid a lot of this consternation (and a way to reduce the actual per floor cost you paid up front). Also, make sure you can rent out the suite upon occupancy - if you do that during the ghost mortgage part, you'll make out like a bandit because you can pocket the amount that would go towards your principal and then get a smaller mortgage when the unit is registered.

Verrrry imprtant you have ur lawyer check and explain if ur able to rent during intriem occupancy. You should have them check this during the 10 day cooling off period. A lot of developers don't allow this (it still does happen without them knowing). It some cases going against the clause can void the contract alltogther

 

[Xenosblitz]

Thanks for the responses! I'm definitely a lot more prepared than before for my occupancy, which unfortunately, is nowhere close...

 

[vultur09]

Also, you're paying interest on a mortgage which goes absolutely nowhere. It disappears. If you were actually living there, then the interest you're paying to your real mortgage at least is part of the fees of getting a mortgage, and every month you pay that interest you're also 1 month closer to paying down the entire thing. But every month you pay these phantom rents, you are not any closer to paying off your mortgage.

I don't believe that you understand basic mortgage financing concepts. Interest is interest- it's the cost of money and goes nowhere whether it's an interest only mortgage or interest on a credit card debt. If you aren't amortizing it you aren't paying down your mortgage. If you are amortizing it then your payment goes up. If it makes you feel better throw a few hundred bucks a month into a cookie jar during interim occupancy and make a bigger down payment once you close. It's the exact same thing. It never ceases to amaze me how many people fail to grasp these simple concepts.

And you are living there! The building must have a valid certificate of occupancy otherwise you wouldn't be allowed to take possession of your unit.

 

[vultur09]

Also, make sure you can rent out the suite upon occupancy - if you do that during the ghost mortgage part, you'll make out like a bandit because you can pocket the amount that would go towards your principal and then get a smaller mortgage when the unit is registered.

Huh? You think that the rent you can generate (while the building is still under construction yet!) will greatly exceed the phantom rent? And you want a stranger occupying your brand new home right before you move in?

Where do you guys come up with this stuff!

 

[simuls]

Huh? You think that the rent you can generate (while the building is still under construction yet!) will greatly exceed the phantom rent? And you want a stranger occupying your brand new home right before you move in?

Where do you guys come up with this stuff!

By being very practical and having done it with no problems. Pretty much everything is covered under Tarion for the first year, so anything that happens (which if you choose your tenant wisely will be nothing) will be fixed. I did this (had the permission in my contract) and the excess rent I collected (even though I gave them a free month because they were living in a construction zone), paid the ghost mortgage and enough extra to pay off all my closing costs. Once it was registered (it took 10 months), the rent still paid for all the costs for the next 2 months, then i moved in. I saved thousands and didn't have to live in a construction zone where alarms went off all the time, no gym, etc!

 

[vultur09]

I did this (had the permission in my contract) and the excess rent I collected (even though I gave them a free month because they were living in a construction zone), paid the ghost mortgage and enough extra to pay off all my closing costs. Once it was registered (it took 10 months), the rent still paid for all the costs for the next 2 months, then i moved in. I saved thousands and didn't have to live in a construction zone where alarms went off all the time, no gym, etc!

You gave up 1/12 of your revenue stream and still saved 'thousands' in 1 year after covering all occupancy costs? That sounds extremely unlikely unless you put down a 50%+ deposit on the unit in which case you're just forgoing 'thousands' that you could make in a comparable investment such as a REIT (comparable but diversified risk). Furthermore, TARION does not cover you for damage caused by a tenant.

I wonder whether you are counting all the costs associated with the unit or overlooking the fact that you got a property tax bill a few months after you moved in that canceled out your windfall....

 

[Epi]

I don't believe that you understand basic mortgage financing concepts. Interest is interest- it's the cost of money and goes nowhere whether it's an interest only mortgage or interest on a credit card debt. If you aren't amortizing it you aren't paying down your mortgage. If you are amortizing it then your payment goes up. If it makes you feel better throw a few hundred bucks a month into a cookie jar during interim occupancy and make a bigger down payment once you close. It's the exact same thing. It never ceases to amaze me how many people fail to grasp these simple concepts.

And you are living there! The building must have a valid certificate of occupancy otherwise you wouldn't be allowed to take possession of your unit.

My point is, the building is unfinished. Not everyone actually wants to live in an unfinished building. Look at all those people in Murano North who are living through a flooded building thanks to construction.

Because of that you are paying extra fees and it's a waste of money if you're living elsewhere (paying off another mortgage or paying off rent).

If you're renting elsewhere or already paying down a mortgage you actually cannot put money into your cookie jar because you don't have the extra cash to spare. So really you're coughing up extra money that you will never get back that you cannot benefit from one bit. At least if you were actually paying down your mortgage, perhaps that interest payment is a result of you having a locked in rate for the next 5 years (which can be good), or you aren't paying off a mortgage or rent elsewhere while paying additional fees.

Alternately, if you were buying to rent out the place (aka you're an investor/landlord), then since most places don't let you rent out beforehand, this means that you're paying extra money that you may or may not have to wait for up to a year while collecting no rent, and not making your mortgage any smaller in the end. Again a sucky situation.

If you can't grasp these simple concepts then that's pretty stupid. Maybe you work for a bank... or a developer.