Toronto Condos: Should you rent or buy? • Hacker News Board

Re: Toronto Condos: Should you rent or buy?

#61

Post by DMac87 » Wed, Jun 03, 2015, 11:54 PM UTC

corcoran2015 wrote: post #29

DMac87 wrote: post #20

The assumptions made by the author are ridiculous, namely: - In the 10-year comparison, rents paid are not factored in at all. - In the forward-looking comparison, condo prices are assumed to be flat, mortgage rates go up (why? can't they be locked in now?), while equity prices go up 6-8% per year - Taxes are not factored in at all - capital gains on a primary residence are tax-free, while investment gains will be ta…

Great comment DMAC. The model shows what will happen if rates go up 1% and condo prices are flat. Rents paid are definitely factored in the model as are taxes. The investor is in a TFSA & RRSP which means capital gains are a non-issue. Property taxes cant be avoided though. Its a real advantage of investing in Canada to use the RRSP & TFSA vehicles. You're right, mortgages can typically be locked in for five years. B…

1. RRSP & TFSAs have limits much lower than the assumed contributions, so there are tax differences between the two alternatives. 2. Even slight tweaks to your assumptions (e.g. reduce investment returns to 6%, increase condo returns to 2%) equalize the two scenarios. If you're going to use such an ill-conditioned model, you really must spend significantly more time justifying all of its assumptions, or else show sensitivities to them.

Re: Toronto Condos: Should you rent or buy?

#62

Post by kazinator » Thu, Jun 04, 2015, 2:41 AM UTC

jarek wrote: post #53

kazinator wrote: post #45

Earlier quoted context omitted.

Someone pays all these things if you rent, and you're foolish if you believe that it doesn't pass down to you.

Well yes, the fees are priced in. But in practice it is far from unheard for apartments to be rented for less than cost of mortgage if you were to buy today plus all fees. This can be influenced by the owner having bought a fair bit cheaper, or the owner counting on capital gains for the main income from the property, or the owner simply being unable to find a tenant that would pay more. Ultimately the market decides…

Basically if it's cheaper for a renter to live in a place than for an owner to live there, then the owner must be coming up with the difference, thereby subsidizing the renter.

That is the basic condition that makes renting more attractive: can I rent a place for lower total monthly payments than buying a similar place in the same area.

That owner who doesn't live in the rented unit has to live somewhere else, and faces living costs there, on top of subsidizing the renter.

That situation can hardly persist for long; landlords may be willing to take it on the chin for a while (e.g. to get into the rental business), but not over the long term.

The rent will have to go up eventually to close the gap, or else the landlord will kick out the tenant and move in to save money. Or even sell the place (whereby the new owners may kick out the tenant).

Re: Toronto Condos: Should you rent or buy?

#63

Post by jarek » Thu, Jun 04, 2015, 7:04 AM UTC

kazinator wrote: post #62

jarek wrote: post #53

Earlier quoted context omitted.

Well yes, the fees are priced in. But in practice it is far from unheard for apartments to be rented for less than cost of mortgage if you were to buy today plus all fees. This can be influenced by the owner having bought a fair bit cheaper, or the owner counting on capital gains for the main income from the property, or the owner simply being unable to find a tenant that would pay more. Ultimately the market decides…

Basically if it's cheaper for a renter to live in a place than for an owner to live there, then the owner must be coming up with the difference, thereby subsidizing the renter. That is the basic condition that makes renting more attractive: can I rent a place for lower total monthly payments than buying a similar place in the same area. That owner who doesn't live in the rented unit has to live somewhere else, and fa…

> That situation can hardly persist for long

Something like 10 years and counting in Toronto. Markets can stay irrational for a long time.

> The rent will have to go up eventually to close the gap

Or, property purchase prices unable to be sustained by rent or buyers' income will fall.