“I want my tenants to have some hope in the future so they can be motivated enough to get out of bed every morning to go to work to pay my mortgages.”

“I absolutely love the situation we are in right now. It is so damn hard to qualify for a mortgage, forcing the perpetual renters to be forever priced out in a big city like 416 or Vancouver. At the same time, people with existing mortgages can enjoy this low interest rate for a long time. By the time rates normalize, the tenants would have paid off their properties.
I wish you luck being liquid. I would rather pay the bank 2.15% to use your money (for which you probably get 1.05%) and invest it in providing shelter for you so i can take your rent check every month and build equity for myself.
I always tell my tenants that i think real estate will definitely crash by at least 90% when i stop by to pick up my rent check. I even refer them to this blog. After all, i want them to have some hope in the future so they can be motivated enough to get out of bed every morning to go to work to pay my mortgages. It’s going to be a nasty CRASH, renters, a nasty CRASH.”

- Bryan at VREAA 15 Oct 2012 3:01pm

What’s the most remarkable thing about any market?
It’s that, regardless of conditions, for every trade there is both a seller and a buyer, each convinced that the other is doing the wrong thing.
- vreaa

40 responses to ““I want my tenants to have some hope in the future so they can be motivated enough to get out of bed every morning to go to work to pay my mortgages.”

  1. Debtholders get boosts to margins due to debt renewal gaps, bondholders get capital gains, and consumers get to consume.

    Everyone is winning here, in a way, except for a few minor details related to my favourite four letter word.

  2. Liquidity is always under-appreciated until market prices start dropping.

  3. Hey, here’s a happy story for you, a true one.

    Little old lady with big old Shaughnessy house decides it’s time to downsize.

    It turns out that during the time she’s getting it ready for sale, it’s discovered that there are two big oil tanks on the property. (Removing oil tanks is the seller’s responsibility.) One tank is under the current garage. Both have leaked.

    The buyer insists he wants them removed because he is planning to rent out the house for some time before he tears it down, and everything has to be “livable” for his “future tenants.”

    Total cost to senior citizen to have oil tanks removed? $120,000.

    New owner takes possession. House has been vacant ever since.

    Did he have trouble getting tenants? Or did he just lie to the previous owner about wanting to rent out the house?

    In any case, looks like the senior citizen is going to have the last laugh.
    Prices have already dropped so far that the new owner can’t ask even what he paid for it. If he sells it tomorrow, he’ll have lost $300,000.

    Would-be amateur landlords, flippers, and those who would prevaricate to little old ladies: beware.

    • She shouldn’t have looked for those oil tanks — never look for something you don’t want to find! But the buyer was absolutely right to insist on removal, no matter what. Who’d willingly take on that environmental risk?

      I sold an oil heated house this spring. My buyer asked specifically about the tank, as HE’D been burned for a cool five figures when an underground tank was discovered on a previous property of his. Of course, with gas to the survey, his plan was to immediately convert to gas upon purchase. Because gauges are unreliable and to make the adjustment calculations easy, my lawyer (with the buyer’s lawyer’s consent) called the oil company and had them fill the tank. My buyer wasn’t happy. Moral: Lawyers are hidebound. Instruct them not to fill the tank unless that’s what you want. Hey, I’d have gladly taken the oil for my Mercedes and saved the buyer his disposal fees, but transport and storage were an issue.

      • My understanding is that all properties here need to be inspected for the presence of oil tanks, and the lady I mentioned did the due diligence.
        They are the seller’s responsibility to remove, and she took that responsibility.

        I think the buyer’s claims that he wanted the property to be pristine for his tenants were ultimately perceived as bunk, and that’s part of what was upsetting to those who knew the senior citizen who sold the house.

        I know of other cases where buyers made all kinds of claims about wanting to move in with their families, etc., and then installed a caretaker or flipped the property.

        Wanted to say I have been greatly enjoying your posts in general!

    • “Or did he just lie to the previous owner about wanting to rent out the house?”

      So what if he lied? He would have the same problem if he were to sell. He could have easily framed it in the context of carrying a future liability, if that would have made it easier for this seller, but personally I would avoid emotional attachment to what is just business, which isn’t always nice or forthright.

      • “So what if he lied?”

        Well, having seen other people lied to in these situations, and having been on the receiving end of lies myself in a similar situation, I guess that just as your diction and syntax suggest you can’t see where I’m coming from, I can’t myself see where you’re coming from with a question like that.

        I think an awful lot of people in this city are telling an awful lot of lies about, in, during, and after real-estate transactions. In my view, indignation is a perfectly appropriate response.

      • I think what YVR is saying is that the tanks had to be removed regardless, and that the buyer was right to insist that the sale be contingent upon their removal. Bringing up the safety and health of future occupants (not to mention potential iability for a future owner), whether they be renters or otherwise, was a legitimate point for the buyer to make. It really doesn’t sound like she was lied to at all, at least not in any way harmful to her. Someday, someone will be living on that site. Thus, the tanks were an issue.

      • Believe it or not, I get the point that the lady needed to remove the oil tanks! It was her responsibility!

        Yes, of course for health and safety reason the tanks were an issue. The lady got that too! So do I.

        I thought this might be a tempting bear anecdote in terms of a buyer thinking maybe he’d made out like a bandit getting what he thought was an ace property, and actually now standing to lose a great deal of money.

        Let me just say many of us have now had, vicariously or directly, some experience of west side buyers talking about future tenants, or even future inhabitants, who never materialized.

        If anyone else has had experience of this, maybe you’ll know what I’m talking about. ANd if you don’t, here’s most of what I meant that post to be about:

        possibly deceitful specuvestors
        empty houses
        and the joy of seeing a specuvestor losing money even before the bulldozers start.

      • But……… she needed to remove the oil tanks. Do……….. you……… under………..stand? :)

      • “possibly deceitful specuvestors”

        I get what you’re stating Vesta. They may be “deceitful” but the house is just a thing. If she wants the house to be a legacy she could have set up a covenant in the contract.

        Actually, that’s not a bad idea at all. My hairbrained scheme is for a lawyer to rough in a covenant framework to ensure all inflation-adjusted gains from land value are expropriated and bequeathed to a land trust. Sure owners will get lower prices for their properties but they get the “intangible” benefit of knowing their plot of land will be absolutely void of land speculation for eternity. Sounds like a great legacy.

      • Hey, why don’t you tell me what I meant? — but please use words of just one syllable, because I’m sure my IQ is at least 100 points lower than Tsur Somerville’s. :)

      • Please play nice, everybody.

  4. See, this is the thing. I’m not convinced that tenancy is a zero sum game. I rent, and I get more for less monthly than if I bought the equivalent. But my landlord didn’t buy at today’s prices, so it sees cash flow, too. Were it to sell right now, it would take a big, taxable capital gain, and would have to find somewhere to reinvest the remainder in this environment of puny yields. And I wouldn’t buy this property at the cap rate it would sell for.

    If I was holding decent multi-unit property with a cost base from a decade or two ago, I don’t know that I’d sell either, for the same reasons. Stuff that makes sense in a frictionless cash market doesn’t always make sense in a leveraged investment with high transaction costs and interesting accounting issues of tax deferral, depreciation and the like.

    So we end up with a Pareto transaction. My landlord and I both benefit, neither of us would trade places with the other at today’s prices, and we’re (presumably) both comfortable with our investment portfolios.

    Two things: This doesn’t apply to amateur landlords with poor duplex conversions or SFH rentals that aren’t throwing off much cash. The only good time to own that crap is at the START of a long period of declining rates, and at a time of your life that you can do most of the maintenance yourself and pretend your time is cheap or free. And the original poster is an ass. He’s almost certainly not paying his claimed interest rate unless he lied about the nature of the property to his lender, and his attitude toward his tenants isn’t that of a professional service provider. I don’t throw it in his face every time he pays me my dividends — and I’d guess he’s paying me several or more times a month.

    • A homeowner is compensated for the calculated risk of his or her capital. I think that’s not zero-sum.

      A renter’s discount is an owner’s premium (as a prominent blogger stated) so seems to be more a transfer of wealth rather than any sort of economic benefit in net. Adding in intangibles without looking at the business case is part of what got us into this mess in the first place. Not disagreeing with you, just trying to frame an asset price bubble as it relates to long-term GDP growth.

      • Ralph Cramdown

        …and a renter SHOULD be paying a liquidity premium, even more so in a jurisdiction with rent controls and protection of tenancy.

        But what many landlords don’t understand is that every unit he’s competing with has a different cost base. The equivalent unit down the street could be yielding 20% return on invested capital at a rent at which our hapless landlord wouldn’t break even. These landlords are easy to spot on blogs, as they claim that the tenant pays the mortgage, taxes (they always neglect vacancy allowance)… The tenant pays the rent, and the landlord pays the expenses. These should reach an equilibrium including an adequate risk adjusted return for the landlord in the long run, assuming rational economic actors. But in the long run we’re all dead.

        In the short run many crazy things are done. Large landlords/morons in the US actually got loans that rents wouldn’t cover, to buy apartment blocks at negative cap rates, the excess loan being used to fund the mortgage shortfall until rents could be raised sufficiently to get back onside. Now who’s stupider in a situation like that, the experienced professional borrower, or the experienced professional lender?
        http://www.nytimes.com/2010/02/25/nyregion/25stuytown.html

      • “Now who’s stupider in a situation like that, the experienced professional borrower, or the experienced professional lender?”

        Not sure it matters much in net. The ACBs and inputs used to make a rational decision may be different, but the price is only a proxy for the economic benefit the asset produces.

    • “If I was holding decent multi-unit property with a cost base from a decade or two ago, I don’t know that I’d sell either, for the same reasons.”

      Perhaps you’re not imagining prices returning to those levels, or even below for that matter, which at the present time seems implausible for those who don’t account for austerity in the future.

      It’s very difficult to grasp the size of the world’s economic problems. What determines your outlook is being able to parse what governments can do and can’t do. Historically, they’ve always failed, and that’s something I’m willing to bet on.

      • Ralph Cramdown

        It’s taken me a long time to come to this conclusion, but I’m fundamentally an optimist on a macro level (micro, I’m a dyed in the wool cynic).

        For most of my lifetime, the pessimistic wailing has been continuous: High oil prices were going to crush the economy, the national debt was out of control (both in Canada and the US), trade deficits were worrisome, a rising economic superpower from the far East was becoming ascendant, Europe was a basket case. Lately it’s been all about how all this money printing was going to cause massive inflation, foreigners were going to stop buying our bonds causing our currency to collapse, defaulting debtors were going to cause asset price collapses (what, broad inflation AND broad deflation? Make up your mind, Cassandra!)

        My extended family isn’t rich enough that I can afford to put everything into something that hedges deflation and inflation, yielding nothing in the meantime, nor poor enough that we just work for wages and don’t care about our accumulated surplus. If the world goes to hell, I suppose we will too. In the meantime, we have to keep dancing. I am expecting a Canadian housing bust with all the knock on effects and investing to avoid that as far as possible. But a giant, worldwide bust that brings down civilization as we know it? I’m not going to eat my seed corn while I’m waiting for that one.

    • Don’t forget, there are some favourable tax implications for landlords in providing rental accommodations, even for a basement suite,

    • Ralph/all -> As said in other words above, the game only appears win-win if you ignore the landlord’s opportunity cost.
      Landlords could sell Vancouver properties, take the proceeds, and invest in sectors with far lower risk than Vancouver RE, with far larger yields, and/or higher chance of price growth.
      Fortunately for renters, very few landlords seem to be doing the back-of-the-envelope math.

      • Ralph Cramdown

        For a landlord to sell, he has to find another landlord to sell to (remember, I’m specifically excluding the wunderkinds who’ve turned a SFH into three units, purpose built rentals with, say, 6 or more units only, please). I’m seeing cap rates of 3.2 – 6%* in a brief perusal of stuff for sale. So the landlord sells, pays 18% capital gains tax on his adjusted cost base (i.e. he’s been depreciating the property at 4%/a or more) and??? Maybe you and I can find a nice diversified low risk portfolio that’s even more tax efficient than his rent roll was. But landlords like LAND, and distrust the stock market (doesn’t everyone these days?) And how many years at 6% will it take him to pull even with where he’d have been collecting the rents and not taking the capital gains tax hit?

        The outlook on multi unit residential has to be informed by a guesstimate on where rents are going to go. I don’t see Vancouver’s rents as being that high, and even if these properties briefly dip to 8 – 9 % cap rates, I suspect they wouldn’t stay there that long. I could be wrong, as I’m by no means an expert in this area.

        * Real estate agents are generally pretty optimistic on their stated cap rates at asking, but they don’t generally get asking, either.

      • “…But landlords like LAND, and distrust the stock market ”
        —-
        Agreed. And thus they avoid the wise move at this point in the cycle.

  5. If it’s such lucrative business, why aren’t more rental units being built?

    • The owning and the building are different. Rentals are get-rich-slow, condos are get-rich-quick. If you can build one, you can build the other.

  6. I tell my landlord every day that the market is different here, there’s too much HAM for a crash, they aren’t making any more land, we have skiing AND beaches. After all, I want him to have a reason to get up every morning and go to work so he can buy me new water heaters, pay for a new roof, pay my property taxes, mow my lawn, fix my appliances and send a plumber when I clog the toilet. Real Estate only goes up landlord, ALWAYS goes up.

    • Poor landlords…How do they sleep at night reading the news about declining properties prices YOY and month to month? It is not that much yet, just a few % per a year but anyways it should be hurting – to get a negative cash flow on a slowly declining asset…And the property tax rise every year is not the happy news either.

    • LOL!!!

  7. Terminalcitygirl

    Oops fail. Hey where’s my last comment?

    Friends of Gordo and the Liberals are desperate to get out…
    http://thetyee.ca/News/2012/10/15/Kinsella-Mansion/

    • Good link. Our favorite RE booster is featured, “In any downturn, luxury homes tend to be more cyclical than starter homes. In the slowing market the luxury homes tend to get hit harder,” Somerville said.

      Wrong AGAIN, Tsur. In all the recent RE busts around the world, it is the lower end properties that are hit first, the high end with the deeper pockets and more sympathetic bank managers lag. That guy is getting simply pathetic!

  8. This was an obvious troll post. I am surprised that vreaa fell for it.

    • I ignore the way the argument is presented — interest rates are very low, there are people who have invested at high prices who think they are making a good investment because it cash flows and they can raise the rents at around inflation every year. From that pov I think it’s a worthy anecdote — I see this exact argument made with absolute sincerity.

    • I highly doubt renters will pay more of their income for rent. Exploitation has its limits. Chart

    • bubbly -> fair comment, but we’d submit we didn’t “fall for it”, so much as headlined it as an example of a position which we believe to be fallacious.
      Regardless of what you think regarding the origin of the story, there remain people in Vancouver, circa Oct 2012, arguing that position.

      • OK. Maybe my choice of words wasn’t perfect. But I stand by my statement that this post is just a troll. You should not feed trolls. All troll positions are fallacious, from “you can’t make more land” to “all renters live in basements”.

  9. Hey I rent in an nicely kept complex of older 3 story buildings in port coquitlam . I get a copy of the strata meeting minutes every month and peruse to see who’s been leaving trash / feeding the squirrels again.

    Anyway it seems all the plumbing in the 8 buildings will soon need to replaced.at a cost of over a million. Plus a new boiler , $300000 and the buildings should also be repainted , six figures.

    We rent a 2 br for under $1000. However our landlord has owned this unit since the seventies so he is good , but if I had bought recently Damn I would be not a happy camper!

  10. I just extracted some Craigslist rental listings from Oct 1-13. The results:

    1 Bedroom (650 Listings)
    2 Bedroom (713 Listings)

    The under $1000 listing segment has the highest share for both bedroom types and from a quick glance at the photos, many are basement rentals— most are pretty clean too.

    I’m not sure what to make of it, but it’s an interesting observation.

  11. While Bubbly is correct in that this is an obvious troll post, the motivation for making such a post is reason enough for VREAA to highlight it. I’ve seen many alleged landlords showing up in bearish RE threads at the G & M and elsewhere expressing similar sentiments. Things like, “Thank you for paying my mortgages renters. Because of you I’m financially independent at aga 43! Whatever you do, don’t buy now. Please keep renting!”

    I can think of a few of possible explanations:

    1) The comment is left by an over-leveraged amateur (accidental?) landlord who is terrified that even a modest price correction will wipe him out. He therefore feels the need to mock and ridicule anyone who believes a crash is imminent, as he worries such heretical talk poses a threat to his bottom line.

    2) The comment is posted not by a landlord but by a nervous homeowner who feels threatened by bearish opinions due to his financial and/or emotional dependence on the value of his home.

    3) The comment is left by a mortgage broker or realtor who hopes to drum up public sentiment against tighter mortgage rules. He therefore poses as a greedy landlord boasting that the tighter lending standards play right into his hands, making it easier to squeeze his tenants.

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