Renting is much maligned. Nesting spouses hate it. Helicopter parents are embarrassed by it.  Society misunderstands it.

Especially these days when anyone can buy a house – even if you have no savings – renters get an undeserved rap as misfits. I mean, doesn’t everyone want to be in debt? What right has a tenant got living in the same condo as the owner next door, paying far less per month, enjoying the same amenities, and yet having total mobility and liquidity?

Well, the good news for people who understand why renting is a totally legitimate option is that 2010 will bring even lower housing costs. Rents are going down and the number of available units is going way up. Three reasons: (1) unemployment has thinned the ranks of young workers who traditionally rent, (2) hundreds of thousands of couples sagely decided to buy houses when they were the most expensive, and (3) the real estate market will get a bit ugly next year, turning a lot of speculative owners (especially of condos) who wanted to be flippers into reluctant landlords.

Already started, of course. The national vacancy rate has jumped by 27%, with more accommodation available in almost all urban centres. And P/R ratios are rising everywhere.

As I have said before, a truly rational investor right now would sell residential real estate at the top of the cycle, astutely invest the capital for growth, then rent digs in a market of falling costs, only to rise as a wise vulture in a year or two. Seems even some landlords are coming to this conclusion:

Hello Dr. Garth: My wife and I own several income properties in Brantford, Ontario – a small, blue collar city that has been ravaged by the recession.

It has becoming increasingly difficult to find quality tenants due to the proliferation of renters who have purchased homes in the current low interest rate, high amortization, and zero-down environment.  At the same time, the cap rates for investment property have plummeted resulting in very high market values of rental properties.  I have no idea why investors are paying so much for investment properties…there is no way they are producing any respectable cash flow at the prices they are paying.  I can only assume the low interest rates have goosed this market too.

I am tempted to sell all of our properties to these crazies that are paying way too much and take the capital gains (approximately 200 grand).  The only problem is…where do I then invest the proceeds?  I try to keep my money in the following percentages: 40% in rental property, 40% in paper investments (stocks, fixed income), 15% in cash and 5% in other assets such as automobile, etc.

The rental properties provide diversification and relatively safe cash flow, not to mention the tax write-offs.  But as much as I love fixing toilets, interviewing lowlifes and going to the tribunal…I can’t help thinking it would be a good time to sell.  Add to that the coming HST harmonization and smart metering, which is going to kill me on utility costs, and the future doesn’t look as appealing for rentals.

I know you prefer to feature the questions of delusional dipsticks from BC, but I though this might be an interesting case study for the blog dogs. Cheers mate, Bluey.

Well, Bluey, I think you already know the answer. Cheap money has convinced a lot of myopic people they should be buying up all kinds of real estate, even the kind which won’t generate enough money to carry itself. Mind you, these are usually small and unsophisticated investors, because the big guys are bailing out – one reason commercial real estate in the US looks like this:

So, selling and reaping your capital gain is a grand idea. You may not have this opportunity again in your lifetime. Your investment portfolio, however, sucks. Having 40% in investment real estate is vastly overweight since this tends to be an illiquid asset with a relatively low ROI. And 15% in cash is three times too much.

Over the next few years I’d be loading up on preferred shares paying me 5% or 6% in tax-advantaged income, sector ETFs in areas like energy, commodities and health care. I’d stash $20,000 in a TFSA next month between you and your spouse, and chunk it into equities – well-correlated growth stocks that can ride out what promises to be an explosive year. Remember that asset allocation accounts for about 90% of the return a portfolio gives, so include some short-term corporate bonds inside that TFSA or your RRSP (for tax-free interest). And if you have the contribution room, you might also consider creating an RRSP mortgage. Alternatively if your principal residence is paid off, use some cheap leverage to create a tax-deductible mortgage and augment the dynamic investment portfolio.

But, mostly, sell the apartments to a greater fool.

Fortunately, they’re everywhere.

Related: A renter gloats in Vancouver

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