Four months ago I bought a piece of real estate, and referenced it briefly here at the time. See? I’m normal. A cool property turns me on, too. Especially one which comes cheap with lots of unrealized potential.
This is a commercial building fifty clicks north of Toronto, and you may have noticed I’ve chronicled the escapade on another blog. The iconic heritage structure was in sad shape, like the owner, and apparently I’m a sucker for ancient piles of bricks as well as damsels in financial distress.
Anyway, it came to me at a big discount – which was a good thing, considering all the cash just expended on a total gut and restoration. This coming Saturday (I hope), after eight years of being shuttered and disintegrating, the Belfountain General Store in Caledon will open again. Of course, it’s not a nails-potatoes-bait-&-ammo kinda store. More your metrosexual-café-artisan-bakery-Harley-gelato-parlour place.
Plus there’s a 3-bedroom, 2,000-foot apartment above, also gutted and rebuilt, on an acre at one of the busiest tourist corners in the province. Come the weekend (I hope) about a dozen people will have new jobs, and I can stop spending my spare time painting, grouting and grimacing. Like any small business, start-up or gut job, it’s a gamble. One more in my long career of doing things most people consider reckless. Like getting elected twice. Launching ten businesses. Or touring the country for eight years giving speeches. Pissing off the prime minister, and losing my job. Or starting a pathetic blog.
I mention this simply to underscore the fact real estate isn’t a bad asset to own. For the past forty-five years there’s never been a time I haven’t owned some. Often it made me money, certainly not always. But there are rules to bear in mind that mitigate the risk inherent in a commodity that’s expensive to buy, costly to carry and can turn illiquid in a flash.
For example, never devote too much of your net worth to any one thing, even real estate – and especially residential housing. That’s where my Rule of 90 comes in, to ensure that as you age your exposure to a single asset diminishes.
Second, avoid the mistake so many moisters are making now – buying the flash instead of the location. You can put a designer kitchen in any house, but you can’t move the property. So always buy the worst house (if you have to) on the best street, in the right hood. Don’t have your head turned by a Wolf stove or polished cement floors or anything else trendoids have installed into a slanty semi on a dodgy street.
In fact, if you’re smart and have the means, you’ll never purchase a condo, a semi, a townhouse or row unit. Condos come with fees you can’t control and a myriad of things that can seriously affect your property value. Attached houses can be severely impacted by neighbours, have scrawny lots, common wall issues and are currently over-valued in hot markets, thanks to buyers who can’t quite afford a detached place.
In terms of financing, be careful. Eschew a one, two or even three-year mortgage term, no matter how cheap they appear. Rates are going up, not down. No, not this year. But certainly by the time your loan comes up for renewal. These days you can get a conventional, fixed-rate, five-year mortgage for about 2.5% if your credit’s good and [email protected] likes you. Given the fact the inflation rate is 2.1%, that’s pretty much free money.
Don’t leverage too much (5% down is insane), but then again, don’t be in too much of a rush to pay off a 2.5% home loan, either. Channelling money into a balanced portfolio instead of accelerating mortgage payments will make you more diversified, spread around the risk and let wealth grow efficiently and more predictably than putting it all into bricks. The current housing market is not sustainable, after all, and building up a nice liquid portfolio will give you more choices once the mortgage comes to term. After all, if the loan is at 2.5% and your investments average 6% or 7% over five years, why trash it?
Variable or fixed? The latter, of course. Never buy mortgage insurance at the bank, as this is about the world’s most expensive policy. Never make an offer without having arranged for a home inspection in advance. Never get into a bidding war. Always have an agent representing you when you start seriously shopping. Never buy from a FSBO, as they’re usually greedy, cheap people. Remember land transfer tax, especially if you live in 416 where it’s double. Get pre-approved for financing. Always. Start with the old listings first, not the new ones – there are never any bargains when a property first hits the market.
Never go to a real estate seminar. There are no secret tricks to making fortunes using other people’s money. But there’s sure a living to be made taking cash from people at seminars. Ignore foreclosures or powers-of-sale or tax arrears auctions. Nobody’s that dumb. Don’t buy in Toronto unless you have to. Don’t even think about it in YVR. Remember that despite what your parents tell you, no loan is ever free. You’ll pay in guilt and obligation.
Finally, be very worried if your spouse tells you he just purchased a dusty pile of disintegrating bricks with a heritage plaque nailed to the front. He’s lost it.
Call her Linda. She works at a bank in the rich little GTA burg of Oakville where the average sale price last month was $1,027,834 and 70% of all trades are for single-family homes. The juices run strong here. These days there are 253 listings for more than $2 million, in a town of just 180,000.
“I am one of those [email protected] (the green one) and I have been reading your blog for years,” Linda says. “Although I get a little defensive when I read how you characterize most of us, I wanted to write to you (finally after pondering for 3 years) to tell you how it really is in our culture.”
Normally, because I love the sound of my own typing, this blog gives you my view on our weird world. But I think this [email protected] has something worthwhile to say. So here is the letter she sent to me yesterday, right around the time her branch was closing for the day. As you will learn, she’s in charge of dishing out financial advice and mortgages. What may surprise you is that she cares.
“I lose sleep over clients who take all of their liquid savings and even some from their parents to over pay by thousands buying paper/glue/wood-chip particle homes in Oakville for $800-$1million? Yes I am a Financial Advisor in Oakville, your favourite town.
“I’ll tell you a story that had me up at night last week:
“A married couple who currently live in a modest town house in Oakville worth maybe $600,000 from the Banks perspective however from this clients, they seem to think it is worth $700-$730k depending on how low they price it (hoping for a bidding war!)
So they found their dream home up the street – listed for $979,000.
“They end bidding $110,000 over-asking! They won the home! Omg!! Original Formica kitchen, parquet flooring, a pool!
“Frantically, we put the new deal together to have it approved. There is a slight issue though. They did not do any type of condition on the sale of their home and waived their financing condition right away.
“The bank went to appraise this property they put an offer in on and it was appraised $30,000 less than what they offered! (PP: $1,090,000 AV: 1,060,000. The clients were super pissed we didn’t appraise this house or their current home “properly” whatever that means.
“You need a down payment of $215,000 on a purchase price of $1,090,000 for a conventional 25 year amortization mortgage. $872,000 at the rate of 2.55% your monthly payment is an eye watering $3,928.
“Now they need an additional $30,000 because the appraisal came in lower so now their total down payment needed (not even including the $20,000 land transfer tax due on closing!) so this total rises to $245,000. Well… if a bank appraised their property for $600k, they owe $480,000 – what are the chances of someone buying this property at $720,000 which is the amount needed to make this deal work otherwise the deal is dead?
“It has been pretty obvious on why they are not appraising these properties at the bidding war prices. No major bank wants their names in the newspaper as a potential reason as to why the housing market is so crazy and over-inflated.
“I advised against this deal from the very beginning for several reasons, not just lack of cash and so many variables that could go wrong. I should mention their income is amazing but they are at 42 percent TDS due to RRSP, car and school loans for their kids. All of these debts are staying while they move to their dream home yet their homeownership expenses are rising.
“I know what I am about to tell you goes against everything you have been telling your blog readers about Bankers, that we are out for the kill and will do just about anything for a sale. Well, I am an “old school” banker who came before the money-hungry “Advisors” we have now. I would love to show you my credentials some time.
“Believe it or not, I did all I could do:
“I tried to talk them out of it. I wanted to show them the facts and the benefits of staying right where they are.
“I showed them my Andex Chart to show them house prices are not normal like this. Talked about inflation/deflation/depression.
I even spoke of index funds and low risk ETFs they could invest their RRSP cash into (too risky! She said)
“Anyway – the purpose of my email was to tell you a story from the “field” and to let you know REAL bankers have a heart and take the responsibility of telling their clients what decisions are good/bad. They do exist!
“Love your blog and I share it with my co-workers and less house horny clients all the time! It has not affected my business in any negative way because there are people out there who know this cannot continue, it is basic supply vs. Demand.
“Rates will go up one day and I love being told “oh yah not for awhile though” from the 55 year old couple who just signed a 30 year amortization mortgage for $800,000 as it basically means they don’t give a shit about tomorrow, they just want what they want today. Worry later!
“Keep it up Garth! You do have little minions sharing your word to the masses outside of this pathetic blog. Signed, Banker with PFP.”
This story is remarkable because it is commonplace. Society, like this blog, bristles with accusations that immigrants, Chinese dudes, speculators and 1%ers are responsible for turning houses into commodities, bloating prices as never before.
But Linda knows better. We’re in the midst of a fadish frenzy propelled by people obsessed with real estate, unafraid of debt and financially suicidal. That’s why risk has spiraled higher, yet most are blind to it. Why high prices bring only higher prices. It explains panic buying, reckless desire and a world in which average people can no longer afford average homes. Unless they willfully imperil their families.
The people in this tale inflated their existing home’s worth, then inflated the price of the next one. Already with a heavy debt level, they added more. They ignored advice. Succumbed to emotion. And if the market stalls, turns, corrects or just stagnates, their reward is stress and loss. Every day we’re doing this to ourselves. Any day now we shall start regretting it.
Keep fighting, Linda.