“I was losing sleep over my real estate becoming a capital trap, so we moved; sold in North Vancouver to rent in Kelowna‏.”

“I was losing sleep over the my real estate becoming a capital trap,  and of loss of equity, so we moved; sold in North Vancouver and rented in Kelowna‏. Attached is my calculations about how much money I would lose if we owned in Kelowna vs renting.”


[Monthly payments assume 100% financing at 4.5%, 25 year amortization, used above.]

“Now, further calculations taking into account the effects of Kelowna price drops”:


[**Plus not realizing a decrease in valuations of 10% this year.]
[Rent is paid in these calculations.]

Summary
By renting a house worth $500k instead of buying, we save $68,000 over 1 year. “

– from ‘John’, to VREAA via e-mail, 1 Oct 2011 [Thanks John. -ed.]

33 responses to ““I was losing sleep over my real estate becoming a capital trap, so we moved; sold in North Vancouver to rent in Kelowna‏.”

  1. You know why I love this story? Even when prices drop, people who once considered buying (and probably made a few failed offers in the past) will end up opting to rent. This is the experience in the US: people see the costs more than the benefits when markets turn illiquid. Funny dat.

  2. i save $18250 by not eating keg steak everyday. i would even save more if keg steak $ goes up x$ every year. wow, i found my $treasure.

    • Thanks, fred. We know we can always rely on you to give us the “Keg Steak” perspective on the data.

    • It’s more like.. food on the menu has “Keg steak” “starter” prices.

      For “Keg steak price” buyers get old, stale food from corner-mart, unless they pay a middleman specuvestor a tax of +100% (.. cause everyone wants to eat at the Keg and they are ) and this is “The Best” / Ahem….
      (Warning; some foul language)The Best

      Renters get the “Keg steak’ for ‘Keg steak price’ — savings are for not paying the markup tax … and getting good quality/

  3. I have too my dignity to be a renter, regardless the savings. I also have too much dignity to drive a ’77 civic, mohawk my hair, take from a foodbank, and shop at Value Village.
    This might be OK for some of you but not for me. Sure, call it hubris, but part of my sense of being an independent, fully functioning adult is to not have to cut a cheque to a landlord every month.

    • Being an adult is all about borrowing deep and cutting a cheque to a bank instead, so responsible.

    • This has to be THE stupidest argument for owning I’ve heard. Ever. And you have stiff competition.

      • well said Jesse. You know, I think most readers do agree with Diablo’s sentiment in some watered-down form. They would rather own and be done with the financial analysis of their own home. Sadly, that luxury does not afford itself at this extreme.

        That’s kind of the point of this archive. If it were just perma-renters with mohawks that haven’t grown up etc. that would be a different blog.

      • Agree, a completely different blog.
        The majority of bears who spend time reading and writing here are likely prospective buyers, many of whom, in “normal” times, would simply own their homes and be getting on with their lives. But the extreme nature of the market has distracted us. This is yet another example of the misallocation of human energy that occurs in speculative manias.

    • The irony here is that buying at current levels could easily lead you directly to the foodbank and dressing your children in Value Village specials.

    • diablo, you seem a bit insecure. But don’t worry, I hear that there are women who believe that size does not matter. Perhaps you should find one.

      • Diablo — About 80% of my wardrobe and about 30% of my home furnishings are from the Salvation Army or other thrift stores/sales that operated for good causes. Not everyone chooses new in order to feel dignified: I like knowing that what I have on my back and in my livingroom supported people who are homeless, in hospice or hospital, or at school. I drove an ’89 Honda for nearly 20 years and it worked out pretty well. And by the way, I’ve both rented and owned.

        Are all those people renting in Paris and Manhattan and in other cities around the world not “fully functioning adults”?

        Have you been victimized by a consumerist culture?

    • nobody you know

      LOL. I was recently ambushed by my family and endured what can only be described as a financial intervention. I got the “cheaper than rent!” lecture, followed by “get on with your life” and “it’s part of growing up”.

      I am the lone holdout among my siblings. all of whom recently purchased “cheaper than rent” strata units in the suburbs that cost far more than their old rental units in town. Their mortgages alone cost more than they used to pay in rent. And of course this does not include strata fees, insurance, property tax, repairs, maintenance and any potential future increase in mortgage payments if interest rates go up in the next 3 decades.

      When I pointed this out I got a blank stare followed by “but we don’t want you renting forever”. There’s a real blind spot when it comes to understanding the true cost of owning vs. renting. It’s impossible to have a rational, informed discussion when the people you’re talking to have their own set of imaginary facts. Like when they told me that “real estate doesn’t go down in price”, which is demonstrably false. When I mentioned that it had in fact gone down many times in the past and we happened to be witnessing the greatest global real estate correction in living memory I was met with more blank stares. They were clearly embarrassed for me that I had such an odd set of beliefs and eventually just gave up and talked amongst themselves about their futures flips and dream houses they would build with their imagined profits.

      It should be noted that all of them purchased in the last 18 months, and none of them have sold or profited. Two of them arrived in cars gifted by my parents, as they can’t afford a car now. The fact that they can’t afford basic transportation now that their “cheaper than rent” condos are draining their bank accounts is lost on my parents who rewarded them for “getting on with their lives”. Two of them also spent most of the last year without functioning kitchen appliances and could not cook and/or store perishable food items to feed their families because again, the “cheaper than rent” condo cost so much they couldn’t even afford a $100 craigslist special. And again, they were bailed out when Santa Claus delivered shiny new appliances. I guess that’s also “part of growing up”.

      Like diablo, they have “too my dignity to be a renter” and their “sense of being an independent, fully functioning adult” is to pay a bank every month, rather than a property management firm.

      • nobody you know – > Remarkable story, and very well told; thanks.
        Will headline, obviously.
        I like the way you portray being an outsider at what was essentially a cult gathering, getting the ‘blank stares’ whenever you are insane enough to question the cult’s central tenets.
        The cult really is based on ‘belief’, isn’t it? All actual evidence contrary to the belief is ignored.

      • nobody you know

        vreaa, I never bring up real estate around them but it is THE topic when we’re all in the same room together. It didn’t used to be this way. And most of the people in the room have worked or did work for a financial services company so they should be able to do the basic math and realize their error.

        I’m not against owning, and I don’t believe that real estate needs to be cheaper than rent to be worth buying. Sometimes when you pay more you get more. And I understand that they’re building equity so long as the prices stay high and they do the required repairs and maintenance to at least keep the place worth what they paid for it. The problem right now is that the home equity being built up is more than cancelled out by the drastically higher costs of owning They’re betting on indefinite price increases because in reality they can’t afford these places and will need to sell sooner rather than later. They’re all talking about selling even though they only bought in 2009. And they all imagine they’ll buy something bigger and better with their profits.

        As for my parents, I don’t know what they’re thinking. This is an emotional issue for them and they feel like realty savants because their modest home is worth more than they paid for it in the 80s. They’re financially bailing out their kids who borrowed house-sized mortgages for their starter condos, and pressuring their other kid to do the same. I don’t get it.

      • As Rusty/Rollie explained in the past, you got the blank stares because they could not believe that you don’t know that it’s 2011 and this is Vancouver and thus it’s different here. Maybe when you grow up, you will get it.
        🙄

      • “I don’t believe that real estate needs to be cheaper than rent to be worth buying”

        If you’re an investor, if renting is cheaper than owning, HOW DO YOU THINK YOU’RE MAKING YOUR MONEY?

        Gawd damn, bro.

      • nobody you know

        “If you’re an investor, if renting is cheaper than owning, HOW DO YOU THINK YOU’RE MAKING YOUR MONEY?”

        jesse, I agree that it would be a bad investment if renting was cheaper, but some people are willing to pay more to be able to knock down walls, change the floors etc. So for those folks, it may be “worth buying” as long as they’re making an informed decision and think of their housing an an expense rather than a money making scheme. That’s all I was getting at.

        As for me, I won’t buy until it’s cheaper because I plan on purchasing a small multi-family building and living in it. This may take forever to find with prices being what they are, but I’ve worked in the trades and property management for a long time and want to make use of what I’ve learned. I think we’re on the same page and no, I won’t be overpaying. Unfortunately I’ll be waiting a very long time to do this and have to be the loser renter until the right place comes up. Right now nothing in this town (I’m in Victoria) really pays for itself.

      • “but some people are willing to pay more to be able to knock down walls, change the floors etc”

        I understand that some people will put a premium on ownership etc. This is nothing more than a “consumer surplus”. The biggest “aha” moment you will make in understanding real estate markets — at least markets that have begun to revert to where prices and rents produce adequate returns for investors — is that investors will, eventually, set the marginal price. That people decide to pay more will, obviously, drive up market prices, but it doesn’t change the underlying business case for investing in real estate (unless you’re speculating on higher prices).

        In other words, fine, pay more because it has value to you, but that does not make it an astute financial investment. Sorry if I came across a bit stark here. This is an important issue.

      • Yeah, that extra amount one is prepared to pay to own over renting is probably best referred to as an “ownership premium”.
        It varies from person to person.
        You could perhaps argue that, for some people, it could reasonably run as high 25% or even 50%.
        Currently, in Vancouver, it is very high, often over 100%.

      • Yeah the “ownership premium”. The biggest takeaway of the pwnersehip premium is that it does not change the business case. In its essence property investment is akin to investing in a utility — housing is a utility of sorts and, as an investor, I would give it as much stock as a water works or an electric company, but without diversification for the small-time landlord.

      • nobody you know

        Yeah, the ownership premium here is one I’m not willing to pay. And it seems to be ignored when calculating rent vs. buy by most people I know as I’m frequently told that they’re saving money since their mortgage is lower than their old rent payment. Somehow strata fees, property tax, insurance, repairs etc. never seem to count as a housing expense in their minds. And then they wonder why they’re broke all the time.

    • pricedoutfornow

      Why not lie? I had some friends come visit us from out east this summer. They just assumed that we own our 2 bed, 2 bath condo that we rent for a whole lot cheaper than it would be to buy at this point. I didn’t bother to correct them and get into the whole “it’s cheaper to rent” argument. Sure a lie of omission, but in the end, who really cares?

  4. Lastt night I saved $2,900 by not drinking the 1959 Chateau Petrus. – – Now I can go pay my rent on my $1.5M condo . . .

    Seriously though – – this is pretty much the analysis that people have to see. In the next 10 years, prices will not increase in Vancouver. They can’t – This is because any recovery in the economy will be offset with corresponding increases in interest rates. These interest rates will increase the cost to carry real estate and reduce prices. We are at the tail-end of an interest-rate driven asset price inflation. There is no more ammunition out there to make the market increase. Analysis like this above needs to seriously be understood by people who are thinking of buying.

    When prices are rising – Real Estate is a good investment but in flat to falling prices – stay away or at least understand the implications.

  5. In case you missed it: http://www.globaltvbc.com/video/news+hour+oct+7/video.html?v=2149930262&p=2&s=dd#video

    At 18:40, family who is renting instead of owning. I never knew renters could be so articulate. Usually I just picture smelly low-lifes who smoke weed.

    Big thanks to Global for providing some stories in-line with what many readers here are experiencing and concluding.

  6. Hubby and I are thinking of reducing our rent further and from time to time view apartments around $1000 p/mo in Van. Perhaps we’ve been desperately unlucky but everything we’ve seen is horrible – the buildings and suites. And the people we’ve come across! Mant building managers or owners and tenants have been so weird. Except for one chinese lady who let us in to a suite and then disappeared forever, all of the managers fall over themselves to have us as tenants. $1k p/mo is a lot of money in my world and to see just generally crap places at this price range is sad. If anyone has a line on a decent 1 bed in Van under $1100, please let me know!

    • Downtown Vancouver is way overrated, unless you gotta be right there in the city try going a little further east, or over the bridge to North Van.

  7. “We know we can always rely on you to give us the “Keg Steak” perspective on the data.”

    yeah, same for your followers can always rely on you to pray for 80% crash!

  8. Hi,

    I think the choice of buying vs renting is specific to the situation. My wife and I just purchased a house (with illegal bsmt suite) with a legal carriage house in Kelowna. We worked out the financials and with the rent we can get from both the basement suite & carriage house, we can cover our mortgage entirely. We are going to live off of her paycheck and bank mine every month so that in 5 years we will have saved up enough to buy a larger home (with a bsmt suite of course) and keep this house as a full rental. We spent 5 months looking for a place and were very discerning – often turning down places with all the bells and whistles for a more modest, older home with revenue potential. I am in my mid-thirties and we even took a year off to travel (backpacking) so its not like we hit the lottery. We made the choice to buy because it made sense financially not because it was “our time to become homeowners”. We’ve taken a risk and I really believe that you need to take some risks in life for the potential to be rewarded (and I’m a naturally conservative guy).

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