“We’ve got a kid on the way and are looking at the rent vs. buy situation right now.”

‘nobody you know’ at VREAA 22 July 2011 10:34pm -
“We’ve got a kid on the way and are [looking at the] rent vs. buy situation right now.

If we continue to rent:
– Cost of housing is less than $1000 per month
– Commute to work is 5 minutes or less
– Wife can quit job, stay home with baby in early years
– RRSP and RESP savings continue uninterrupted
– Mortgage savings grow, emergency fund intact
– Disposable income allows for travel to visit family, enjoy life

If we choose to buy:
– Cost of housing rises to $2000
– Commute to work increases to 20-45 minutes + $100 or more in gas
– Wife forced to work, child placed in daycare system
OR
– RRSP and RESP stalled indefinitely
– Savings gone, emergency fund won’t be replenished if used
– Disposable income wiped out, new baby separated from grandparents

Five years from now we’ll have a nice little pile of cash, our kid will have spent their early childhood being raised by their mother, and we’ll be able to travel and have a bit of fun. My wife will go back to work, the kid will be in school and we’ll be able to buy what we need.

But if we are pressured into buying right away we’ll drastically increase our cost of living at the same time that our income is going down. Our finances would be brutally tight. If my wife worked she’d give so much of her net income to a daycare that she’d be working for minimum wage and all so we could have a place in an inconvenient suburb that required me to spend 5-8 additional hours per week in a car. We’d be stressed and unhappy, as we’d be reducing our quality of life just to fit in and join the excitable real estate chatter at family gatherings and work parties.

And the best part about renting now is that we’ll actually be able to buy a much nicer place in a few years even if prices don’t go down. So instead of being stuck in a condo we’ll have a real house. Yes, this requires patience and discipline, but we’ve got plenty of both. We’ll just have to put up with mortgaged bank tenants looking down on us for a while.”

20 responses to ““We’ve got a kid on the way and are looking at the rent vs. buy situation right now.”

  1. I agree with the sentiments in this post, this is pretty much the situation I am in too only I pay for rent.

    For years I have had the desire to buy a house and there is enormous pressure from my family (DAD) to buy a house.

    But now after months of studying the real estate market and the economic financial system we live in I have decided I am better off not owning a house, instead I should focus my effort on learning how to generate income from my savings, instead of spend a few hours a week doing maintenance on a house I will instead spend that time investing money, and getting good at generating income from a balanced investment portfolio. Hopefully I can get a portfolio that generates enough income to pay rent and achieves some capital appreciation.

    Has anyone on here used this strategy successfully?

    • Given the current economic situation, the 30 year bond market bull run, the huge debt super cycle since WW2, a 20 year stock bull market and a 10 year sideway market, I wouldn’t really bet investing is going to be easy to make money in. Unless you can devote a lot of time and energy and willing to take a lot of risks, it’s probably better for you to stick to conservative investment strategy, focus on maximizing income (earned and investment income), minimizing taxes, maximize savings and wait for house prices to fall, rather than relying mostly on high investment income stream and capital gains.

      • ams, I agree with your decision — owning a house can be a major time sink. There are more useful ways to allocate your time.

        However, I am not convinced that investing is one of them, unless you are very skilled, or have useful experience (e.g., working in a hedge fund). It is possible to earn decent income as a professional investor, and I know people who do so, but it is essentially a full-time job, not something you can do in a couple of hours a week. (Unless you are very skilled or experienced.)

        My conclusion after looking into this: the investment with the best returns is investing in myself. By this I mean strategic career moves to try to get the highest salary. I also like space889’s suggestions of trying strategies to minimize taxes.

      • @Space889 I agree that investing is probably very time consuming. Now that I think about the responses to my post I have refined my thinking.

        I hate to invest in things I don’t understand so from the age of 18 to 28 I invested in the thing I understood best myself.

        My investment was spending enormous amounts of time studying computer science, marketing, sales, accounting, the basic skills need to operate a business, and IT management practices. In the first 3 years after finishing university I had spent $25,000 on computer books crazy but true. I am sure @rusty would say that I would have been better off buying a house and watching it appreciate in value but he would be wrong because I loved every minute of reading hundreds of books on all things comp sci, IT management and geo politics. End result I have a consulting business where I am tax optimized and only work 100 days of the year generating 140K to 200K of revenue per year while being able to live anywhere in the world so I effectively own my job.

        My obsession with finance and economics was born around 2007 when I decided that I would stay in Vancouver, the plan was to live in Vancouver enjoy the great outdoors start a family, buy a house and put what I learned into hitting a home run with a product based business (still swinging for the home run have not hit it yet).

        What really pissed me off is that even though I had done something totally crazy compared to the average 28 year old (starting out as an immigrant kid with no connections and no money and lots of student debt). I still could not afford to buy a house in Vancouver (at this point I owned some commercial RE in Ontario) and had cash accumulating in the bank at a healthy rate. My definition of affordable is minimum 25% ideally over 50% down payment and prices close to fundamentals.

        My obsession with finance and economics became an addiction in 2008 as the world economy was blowing up. As of now I estimate that I have spent over 3500 hours reading finance and economics books, and blogs (for fun I wrote I wrote the CSI exam to see if I learned enough I had no trouble passing it).

        After 3500 hours of research I have learned how to tell if something is a bad investment. The problem is that I have no idea what the good investments in are, other than my business and myself are.

        I don’t have enough money to afford the seriously good money managers that know what they are doing and I know that the financial advisers at the banks, and insurance companies really don’t know anything that I don’t know and will probably not advise me on anything and just sell me some product from their company.

        It also seems to me that the markets are fundamentally corrupt and rigged against those who don’t have servers in the stock exchanges or friends in government or 100 million +.

        Buying a house and putting all my money into it would have freed me from dilemma of figuring out what to do with my savings because I would have worked to pay off the house in 5 to 8 years and get mortgage free.

        Now it seems to me that my options for my money are:
        A) Put my money into a grossly over valued housing and lose lots of it and I have worked too hard to let that happen.
        B) Put my money into the fundamentally corrupt politically rigged and manipulated public markets.
        C) Keep it in cash and let the bank gamble with it and loan it to fools who buy over valued real estate while my taxes “guarantee” the loans (current strategy)
        D) Spend it
        E) Try my hand at investing and see if I learn anything useful (I like learning and creating things not buying things in hope of selling them for more not really who I am the game just does not appeal to me but maybe I could grow to like it)
        F) Invest it in my business and work to increase my revenue to $300K per year while only working 60 days per year. Use increased time and cash flow to search for business model with a personal 25 million + exit where I bootstrap the business from the ground up.
        G) Raise money from investors for a on of the business idea that I have developed business models for then work 60 hour weeks 50 weeks of the year, be in perpetual raise capital mode, baby sit investors, loose my time to learn and grow, and then maybe exit if my interests are still aligned with the interests of the investors by the time an exit opportunity shows up.
        H) Keep learning more and see if I learn anything new to change my mind about what my options are.
        I) Leave Vancouver and hope that by doing so I don’t end up being obsessed about finance and economics any more.

        Now that I have written this rather long post in word it seems to be too personal and revealing to post online. But since veraa is collecting stories about the impact of the bubble and he has done such a great job setting up this blog which I am sure takes a significant amount of his/her time. I will share my story for sake of contributing to vreaa effort to capture the impact of the housing bubble.

        So I think without the Vancouver housing bubble I would have probably spent 3500 hours working on my building my business instead of getting addicted to learning everything I can about finance and economics.

  2. On the other hand, you could move to the interior and have all of the items on the list, including
    *owning* your own house with <$1000/month mortgage payments. My wife and I have done just that. We are currently paying accelerated bi-weekly payments that are lower than any rent in the LM for a 4-bedroom, 2-bathroom house in one of the best parts of town (including one of the best schools within walking distance) with a .25 acre yard.

    The trick, of course, is finding a job in the interior. And also learning that snow is not a sign of the apocalypse.

    • nobody you know

      I like the interior but we are where we are because of family. Otherwise I’d probably give it a shot.

  3. “the best part about renting now is that we’ll actually be able to buy a much nicer place in a few years even if prices don’t go down”.

    wrong. Your savings will never keep up with the pace of property appreciation. Each year you wait is a year further you get from home ownership. Has history taught you nothing? If you’re happy being a lifelong renter or having to move out of Vancouver when you want to buy then continue to rent. Sounds like you’d have a nice lifestyle without owning – but you put your child at a distinct competitive disadvantage to a homewoners child. Best of luck to you – and congratulations.

    • nobody you know

      It’s not just the savings, rusty. We’ll have two incomes instead of one, so we’ll be fine. For the record I’m in Victoria but if I was in Van I’d feel the same way. House prices cannot increase at this pace indefinitely or they’d consume over 100% of income which is of course impossible.

      And what does this mean: “you put your child at a distinct competitive disadvantage to a homeowners child”? How so? What is the “distinct competitive advantage” that a child has when they live in a mortgaged, rather than rented house?

  4. Rusty asked E.G.: “Has history taught you nothing?” E.G. probably knows only too well what Rusty apparently does not – that Vancouver could see a repeat of what happened between 1981 and 2005. In 1981, real estate prices peaked in Vancouver. In the years that followed, prices collapsed and they did not fully recover – in real (i.e., inflation-adjusted) terms until 2005. In other words, after 1981 Vancouver saw a quarter of a century of negative return on investment in real estate.

  5. is that what you’re pinning your hopes on? A repeat of 1981? How’s that been working for you so far? lol

    • yeah – facts are stubborn things. Regarding history – I would call your attention to the recent history of the US housing bubble & collapse. Harper is following similar US policies (see Greenspan & interest rates). Interest rates are insanely low and they are acting as teaser rates that will be jacked up, screwing large #s of people in Canada.

      On top of that, the US is most likely headed into a double dip & the Eurozone is collapsing. America is Canada’s single biggest trading partner. Oil combined with small population numbers saved Canada in ’08, but prepare yourself for what is coming. Getting overleveraged in a house is not a grand idea, just now.

  6. When you are talking about the years between 1981 – 2005, it was a time largely before the Internet. Most people around the globe had barely heard of Vancouver, until after expo 86. Now with globalization, many citizens around the world see Vancouver as a great place to live. Unfortunately, it is not a great place to make money(legally). We will wait it out in Calgary, and plan a move there later on when we can enjoy the city more.

  7. Rusty asked: “Is that what you’re pinning your hopes on? A repeat of 1981? How’s that been working for you so far?”
    My response would be to suggest that Rusty ask that same question five years from now.

  8. “Rusty asked: “Is that what you’re pinning your hopes on? A repeat of 1981? How’s that been working for you so far?”
    My response would be to suggest that Rusty ask that same question five years from now.”

    this suggestion has been repeated seen 2004. how has it worked out for the lot of you?

  9. In 2004, the Vancouver real estate market had not even caught up to 1981 inflation-adjusted prices yet. At current prices, the typical home costs 11 times median household income. This is clearly not sustainable.

  10. so why didn’t you buy in 2004 if it was such an obvious buyer market?

  11. Pingback: “Without the Vancouver housing bubble I would have probably spent 3,500 hours working on building my business instead of getting addicted to learning everything I can about finance and economics.” | Vancouver Real Estate Anecdote Archive

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