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Posted Case study

Rent vs Own…which is better?

Rising house prices could make you rethink buying a home.. Could renting be better today?  With the average home price in Toronto around $500k and the National average at $356k, renting might look more attractive.  And for certain situations, like short-term accommodations and retirement living, it does make sense.  But I’m not convinced that renting is right for most of us.

Some simple rules of thumb to remember when buying real estate:

  • you should plan on owning the home for at least 7 years.  This will amortize or spread out any associated expenses with the purchase or sale of your home.
  • buying for investment should be a long term play.. again, 7 years is usually long enough to take us through any economic cycle of ups and downs.
  • forgot buying for a quick flip.  Unless you are a professional renovator with a deep pockets, don’t try to imitate people on HGTV (yes, it’s another 4 letter word we shouldn’t repeat in public).
  • don’t buy at your maximum debt servicing ratios…. stretching yourself thin when interest rates are at record lows isn’t smart.
  • speaking of interest rates…. make sure to qualify yourself with an interest rate of 5.00% or higher.. this is a more realistic rate than today’s 3.09%… just plan for rates to go up… when they do, you’ll be prepared…
  • we won’t get into buying a rental property here… it requires more explanation.. but for many, it’s an even better investment than buying your principal residence… a topic we will discuss at a later date.

Type in Rent vs Own or Rent vs Buy on google, and you’ll find several recent articles on the subject.   This one, from the Financial Post, stood out…. it’s against owning.   The article explains that you will be better off, financially, if you rent…  They even give an online calculator to prove the point…. Okay, let’s take a closer look at this calculator…   Ah, there’s where we have a difference of opinion…. Their calculator assumes you can earn an annual 7.00% Return on Investment outside of Real Estate…   And they are using annual house appreciation rate of 2.00%.

Hmmm, how many people have made an average annual return of 7.00% in stocks, bond, mutual funds over the past 5, 10, 15 or 20 years???   Most the people I know are still looking to match the stock market highs of 2000 or recover their investments from the 2008 crash.    And using a 2.00% annual appreciation rate for real estate?  Come on, let’s get real!   Try typing in more realistic numbers like 5.00% investment return and 5.00% house appreciation and see what you get…   And that 5.00% investment return is being generous.    Real Estate becomes the winning choice…

We also have to factor in the intangibles.   Not having to worry about moving because your landlord is selling… and not having to move the kids…. and just plain pride of ownership… There is something to be said for owning your home..  People tend to care a little more about the home they own.

Here’s another article from the Globe and Mail that isn’t against owning but is advocating you save up a larger down payment.   I like the philosophy.   Wait and save… but don’t wait for house prices to go down… that just hasn’t worked… Timing the market is always a tough thing to do…So even if house prices fall over the next few years, you’ll probably end up spending more on your mortgage as these record low interest rates are expected to go up over the next few years..    Here’s a calculator I found through The Star’s Moneyville.   I typed in some numbers using today’s averages… rents, house price, mortgage rate, inflation rate, etc…. the results showed buying would save you over $400,000 over a 25 year period.    Try it out.. see how it would fit your situation.

Let me know when I can help.

Steve Garganis steve@mortgagenow.ca

416 224 0114

Posted 1 Comment on Bond rates up 0.30%…and 5 yr mortgages at 2.99% disappear.. for now. Interest rates

Bond rates up 0.30%…and 5 yr mortgages at 2.99% disappear.. for now.

Last week we saw 5 yr fixed mortgage rates hit 2.99% for the first time ever (these are full featured mortgages, not No Frills products).   But these rates didn’t last long… just 3 days later, bond yields spiked up and mortgage rates followed…  5 yr fixed rates now sit at 3.09%.

The 5 year Govt of Canada bond yields are up 0.30% since July 24th, and are currently sitting at 1.42%.  That’s a 26% increase in 2 weeks.  These bond yields have a direct effect on 5 yr fixed mortgage rates.     If bond yields continue to go up, we could see mortgage rates go up further.    Looking further ahead, the 2yr Govt of Canada bond yields provide us with a 6 month outlook…  they have also gone up from 0.93% to 1.16%, a 20% increase… if the yields stay at this level, we should look for rates to go up slightly…

Still, these are historical low rates… anything under 4.00% is ridiculously low…  We haven’t seen 5 yr fixed rates under 4.00% for over 40 yrs..  This isn’t time to panic…it’s still a great time to borrow money…

This seems to be an ongoing pattern.  Rates go up temporarily, then they drop… they go up, then they drop…    We’ve been stuck in this cycle for over 2 years.  But hey, who’s complaining?  Not anyone with a mortgage….not any real estate investors… this means money is cheap….. and it makes investing in real estate a very attractive option.

For those of us with a pension or if you are heavily invested in stocks, bonds or mutual funds, then you won’t like these low rates as they are keeping your Return On Investment very low……  Personally, I have some money in mutual funds and some stocks…..I started with my RRSP in 1990…. they were supposed to be a safe, long-term investments…. The only problem is, I’ve never made any positive return… Sound familiar?   The only ones making money are the Fund Managers (with their 2% Management fees) and Investment Advisors (with their 5% or 6% Deferred Sales Charges).

I lost my appetite for stocks and mutual funds, in 2000… the year of the dot com, dot bomb, internet stock market crash… the markets have been a roller coaster ride ever since… I got off that ride in 2004 and have never looked back.

If you’re looking for investment strategies in mortgages and real estate, drop me a line or give me a call… I’d be happy to share some of my knowledge and experiences of others that are enjoying positive returns elsewhere.

Steve Garganis

416 224 0114  steve@mortgagenow.ca

 

 

Posted Mortgage Tips

‘Stock investing is dead’, says World’s largest Bond fund manager.

For those of you that have made little or negative returns on your mutual funds and stocks, this statement might sound familiar.  Bill Gross is a founder and managing director of PIMCO,  They manage over $1.7trillion of securities.  His latest Investment Outlook paper had some very strong statements.

He says the historic 6.6% return on the stock market is more of a ponzi scheme.   And we shouldn’t expect the stock market to keep up with the real cost of living.   WOW!… strong words, but coming from someone who manages more money than several countries GDP,  we should pay some attention.

So if stocks and mutual funds aren’t cutting it and aren’t going to cut in the future, where do we turn?   There was no clear answer given in Mr. Gross’ article.   But maybe it’s time to look elsewhere…  There is one investment that has proven to stand the test of time.  Real Estate.  Real estate doesn’t have to appreciate in value to generate a positive return…but of course, it usually does.  How’s that you say?  Well, let’s take a close, but simplified look.

If you bought a property for $300k and put a $60k or $70k down payment, rented the house out, and paid your mortgage off in 20 or 25 years (by the way, the average time to pay a mortgage in Canada is between 12 and 17 years), you would own a tangible asset worth $300k.   And let’s not forget the rental income that just keeps being generated each and every month, year after year…. We can use any number for this but a realistic rent on a $300k property would be in the $1300 to $1600/mth range.  But remember, rents go up with inflation… so we should also expect rents to increase with cost of living.  And if they don’t increase, then inflation isn’t an issue…

Yes, the first 5 years or so, may not see a positive cashflow.. maybe even a negative one… but any loss could be written off against your income… and eventually, you would be in a positive position as your mortgage balance decreases.

Real estate investments scare most of us.  We don’t understand what’s involved.  We imagine the worst… the possible tenant from hell, that doesn’t pay for 6 months or destroys your property….or buying the money pit and having major repair bills, or mortgage rates going up making our payments unaffordable.     But in reality, if you are careful with your property selection, put the time in to manage and watch your property, and are careful with tenant selection, you will be with the majority of investors that see their investment perform well… you will build equity in your property as the mortgage gets paid over time.    And hopefully, the value of your property will only go up…

Maybe it’s time to invest in something we can see, touch and take care of….  instead of a piece of paper like stocks shares or mutual funds.  There’s a growing number of Canadians that are fed up with the stock market and mutual funds… fed up with paying 2% management expense ratios or 6% deferred sales charges only to come out with a negative return….  How may of us have been forced into mutual funds or stocks because we’ve been told to invest into RRSPs to reduce our taxes and invest for retirement?   Has that formula really worked for anyone?  If you want to look at something different but certainly not new, then take a look at real estate… you may be pleasantly surprised.

If you need help with understanding mortgages and how financing an investment property works,  please feel free to contact me.  I’m always happy to help.

Steve Garganis