I spend an unreasonably large amount of time on reddit. Like, a lot. One of my favourite subs is the teeny-tiny Personal Finance Canada. OMG. People who are smarter than I am, sharing their opinions and advice coupled with the occasional post that ignites feelings of jealousy or schadenfreude.
Anyways, last week this lovely gentleman in Richmond Hill (NOT Toronto, as he makes abundantly clear) has decided to buy a condo and asked the sub some advice. Here are his details:
Government job making $80 000/yr
$10 000 student loan
And here are the condo details (averaged over 5 years and accounting for tax and condo fee increases):
$300 000 pre-build (ready in 2016)
$30 000 interest-free down-payment loan from parents
$30 000 to be saved up by the completion date
Mortgage: $1 150/mo
Condo fees: $350/mo
Prospective rent (in 2016): $1500
Monthly cash flow: -$250
His plan is simple: Rent it out for 5 years (2021) and then sell it. He maintains that this is an investment because his parents have made a killing on real estate over the past 20 years. Ignoring closing costs, property transfer tax, real estate fees, rented condo insurance, potential pre-payment penalty/mortgage rate increase (if he doesn’t sell it after 5 years), and (unlikely) capital gains tax, after 5 years the condo needs to be able to sell for $298,800 in order to break even”. The collective reaction of the entire subreddit was something like this:
The entire thread is delightful but here are my favourite nuggets of reasoning that this guy gives to “prove” that his “investment” is sound:
[My parents] say that just like them, there is no shortage of people in the developing world looking to escape, and given the rapid economic growth happening in the developing world, there will always be people lining up to enter the country. My parents believe that a big part of the reason why Canada did not suffer a real estate crash is because Canada accepts more immigrants per capita than the US does. […] They strongly believe that immigration almost guarantees real estate growth since more people equals more places needed to live. […] I have seen my two immigrant parents come with nothing, earning exactly average family incomes, make a killing in real estate, whereas I have seen many of my friends parents be renters all their life and have nothing but government checks in retirement. […] I also forgot to mention my parents home was bought for just $497K in 2005! Unbelievable returns for doing literally nothing but paying down a mortgage.
Immigrants are not moving into brand new, one-bedroom condos in Richmond Hill for $1200/mo. Also, OMG, who cares about your parents? If this was a such a great deal, why aren’t your parents buying the condo?
Mortgage plus condo fees plus taxes gives me a monthly operating cost of around $1715 just as you mentioned. I can rent this property for around $1450 a month based on my research. This means (to me at least), that condos NEED to go up for this to be worth it. Am I wrong? […] A strong rental market to me equates to a strong real estate market. Provided the condo can be easily filled with tenants, it will retain it’s value as a property, meaning it will appreciate in value. Isn’t this true?
WHAT DOES THAT EVEN MEAN!?
The issue I have is that I just don’t know how to do the math. There are so many variables, how do you account for all of them? Math was never my strong suit.
Based on my research, I expect the condo to sell for at least $340,000 in 2021.
Then, the insane, ridiculous, refusal to admit opportunity cost:
I don’t count the opportunity cost of investments not made, because it’s not something that’s available to me at this time, since I don’t have the knowledge or time to actively invest. Unless you all are willing to point me in the right direction, stock markets and equities are totally out of the question, so it cannot be an opportunity cost in the calculation. […] I am an individual with zero knowledge of the stock market, so how is it reasonably possible for me build a properly diversified stock portfolio? I am not prepared to listen to a couch potato website. I don’t even know who runs it. What if the site shuts down? It seems ridiculous to invest based on what a website tells you to invest in. […] Honestly, I am forgoing nothing because I wouldn’t do that. My family has had pretty bad experiences with stocks and equities so it’s something that I wouldn’t be interested in. I don’t consider it an opportunity cost. […] What you all seem to be willing to ignore is that no matter what, not a single dollar of my money will be going into the equities market. Period. Under no circumstances will that be the case. It’s something I’ll never do, so it’s not an opportunity cost.
Finally, without admitting defeat, he changes his plan from from “operate the business” and having an “investment property” to “I’d the market sours, at least I’ll have a place to live without paying down someone else’s mortgage with my hard earned money.” <—- HIS RENT IS ONLY $750!
Also, if you scroll through his other posts, he starts to give people investment advice. And harps on the people who gave him advice about not buying a condo. Sigh.