“Condominiums in Toronto have appreciated at an average rate of 7% to 8% over the past 15 years. Condominiums also have the added attraction of requiring minimum cash up front until they are registered. It can take three years to build a condominium, so you can get away with putting as little as 20% down before you have to come up with the full amount.
The math is simple. You put $73,500 down on that condo and hope the value of the $367,500 condo jumps to $450,000 in three years, based on a 7% increase. That’s an $82,500 return and, even if you take out $20,000 for transaction costs, you are left with $62,500 profit, or an 85% return on your money in three years.
It’s attractive to many. Financial planner Ted Rechtshaffen has a client with a net worth of $2-million who owns seven condominiums.
“It is a strategy that has worked,” he says, adding the model could come tumbling down if interest rates rise. “If you strip it all down, it’s a highly leveraged strategy. If you are of the view that real estate only goes up, highly leveraged is a smart thing.”
- from ‘Into the arms of housing’, Garry Marr, Financial Post, 18 Oct 2011
[hat-tip SR]
From that same article:
“This real estate boom is over. It’s not crazy to invest now, but it’s not the best way to utilize cash.”
- Benjamin Tal, deputy chief economist at CIBC World Markets
Anyone who’s “of the view that real estate only goes up” is a fool, and so is this “financial planner”.
Tyee Bridge was on OnTheCoast with Steven Quinn today. About 10min before the end. Was interesting to listen!
http://www.cbc.ca/onthecoast/episodes/2011/10/19/young-adults-leaving-vancouver/
Great interview/discussion.
Must listen, all.
“If you are of the view that real estate only goes up, highly leveraged is a smart thing”
This is an oxymoron.
Yeah, I reacted to that sentence too. It shows a serious misunderstanding of the concept of risk.
It’s like saying “if you are of the view that there are no bullets in the chamber, pointing the gun at your face and pulling the trigger is a smart thing.”
“The math is simple. You put $73,500 down on that condo and hope the value of the $367,500 condo jumps to $450,000 in three years, based on a 7% increase.”
Instead the value falls to $200,000 and you signed a contract requiring you to buy it. Also, you did that 7 times.
Wow, that sounds too good to be true. You mean I only need to put 20% down with no cash or time commitment and I can sell it for a leveraged 7% return? Where do I sign up? Because I have some friends who work on Wall Street who would kill for the returns you’re proposing.
And the best part? Ted’s a financial planner.
Ouch. I worked in SoCal for 10 years before, during and after the bubble doing construction and property management for realtors, flippers and so on. One of our clients did the exact same thing and got burned owning 6 houses in Hemet that never got built. She is now a professional dog walker.
laughing my ass off
I was watching a Wall Street Week episode from after the market crash of 1987. They had Sir John Templeton on (widely viewed as the Warren Buffet of the day).
His closing comments were “(so long as you are not using leverage to purchase you investments you are going to be just fine.)”
Hard to think about that comment right now. Stock markets may be up and down but the number of average investors using any kind of leverage is tiny.
Real Estate on the other hand……..
Yeah. Sir John Templeton, prior to his death in 2008 at the age of 95, foresaw a severe deflationary wave that would take global RE to, by his estimate, 10% of its then current value.
He actually said something like “sell your house and buy it back for 10% of what it’s worth now”.
We don’t know anybody else who has such a catastrophic outlook.
Nicole Foss (The Automatic Earth) was on The Keiser Report several months ago. She predicted a 90% decline in the value of Canadian real estate.
Yeah, we stand corrected, she is indeed another person predicting such large drops.
We’ve featured her predictions here before:
Don Coxe: “I see a price bubble.” … Nicole Foss: “Me too, a very big one. I could see real estate falling 90%.”
VREAA 22 Dec 2011
I know a person and his wife in Toronto who started doing this way back in 2001 time frame, at one point in 2004 he was telling me that they had 2 million dollars worth of property. This man’s wife was a real estate lawyer so she was probably seeing these kinds of deals early and probably just jumped on some of the better deals. I have not talked to them in years so I have no idea if they are still doing this. They are pretty sharp so I would expect that they cashed out.
Or maybe he was the landlord of a friend who rented a luxury condo on Lakeshore in TO for $1600/mo in 1989. My friend eventually got a letter from the bank instructing her to forward the rent checks to them. This guy ‘owned’ six condos in the building. History repeats itself today in TO where the vast majority of pre-builds are purchased by investors.
Yuk Yuk, Nicole Foss, that’s a good one.
And we all know whe’s qualified to make these broad sweeping statements about real estate, right? She must have a background in economics or real estate development, right?
Guess again?
Her academic qualifications include a BSc in biology from Carleton University in Canada (where she focused primarily on neuroscience and psychology), a post-graduate diploma in air and water pollution control, the common professional examination in law and an LLM in international law in development from the University of Warwick in the UK. She was granted the University Medal for the top science graduate in 1988 and the law school prize for the top law school graduate in 1997.
Whoever gave her a microphone to spout off this bullshit should be replaced. She’s a career academic.
I have as much respect for these opinions as those who believe real estate will double in 2 years.
Somewhere between Nicole Foss, vreaa, etc. and the opposing bull argument lies sane, rational opinion.
So what you are saying is you admit your arguments are irrational?
I followed VREAA’s link and noted his (apparent) respect for Foss’s view. The fact that her views are internally consistent does not mean they aren’t fanciful in the extreme. Here are two words to explain why she is wrong:
Fiat. Currency.
As long as CBs can print money (and they can) there is no risk at all of anything but mild deflation. Inflation/deflation is always and everywhere a policy choice (see Jesse’s Cafe Americain, the most thoughtful financial commentator that I have yet found).