Ask Nelson: Should I Buy a House

Ask Nelson: Should I Buy a House

Cory writes in:

Really enjoy reading your blog posts. My girlfriend and I are moving to Saskatoon as she’s going to law school. We wanted to buy a place there seems like there’s a variety of options up to 330k with a basement suite to rent out to help with that. Some friends say rent some say buy… not sure if you have an opinion as I know the Saskatoon market has dropped off in the last couple years so in my head right now would be a decent time to buy.

I’m going to assume Cory is that little weiner kid from Boy Meets World and his girlfriend is the lovely Topanga. YOU DON’T DESERVE HER. The law school thing even fits. I am 100% convinced this is true.

While I like Cory’s leaning towards a basement suite, it does make this question a little more complicated to answer. First, let’s tackle the main issue.

Should they buy a house?

We’ll split this part of the analysis into a couple different sections, talking about buying a house in general and then doing a half-assed analysis of the Saskatoon market.

Generally, I believe people should buy a place only if they plan to stay there for a decade or longer. Sure, some people have made solid gains owning over a short period of time, but those results are mainly driven by luck. Real estate does tend to go up over time, but on a year-to-year basis its performance is about as reliable as your slacker friend’s promise to help move furniture. I’M STILL WAITING, JERK.

It also costs a lot to dispose of real estate. You might luck out and get a hot market when it’s time to sell, which makes it far easier to sell that place yourself. But it’s far more likely to be a crummier market when it’s time to sell; meaning you’re stuck paying a Realtor 5% to sell the place. At least pick one who wears a short skirt, Cory.

And then there are home maintenance costs, taxes, insurance, and so on. All of those add up, although I’m convinced they don’t need to be as much as other people spend. Who cares if your bathroom is a little outdated? Just think about the money you’re saving and I guarantee an old sink will look much better.

As for the Saskatoon market, the median sales price in January was $330,000. That’s down a bit from all-time highs of just over $350,000 in mid-2015, but is up substantially over a five- and ten-year period. Median family income in Saskatchewan’s capital is just over $80,000 (according to 2015’s census data), putting the market at just over 4.1 times what the average family makes. This is a reasonably valued market, especially with a five-year mortgage setting you back about 3% a year.

Keep in mind, however, that Saskatoon’s unemployment rate is higher than Regina’s. It is growing smartly, with a year-over-year population increase of 7%. The relatively high unemployment (especially for a government town) gives me pause, but only a little.

Overall, I’d say the Saskatoon real estate market is fairly valued. If Cory and Topenga plan to stay for a while I don’t hate the idea of buying a house today. Now onto the basement suite issue.

Should they get a suite?

Buying a suite is often not a very suite deal for a newbie landlord.

(Ducks as tomatoes come flying in) Yeah, probably deserved that.

It’s a little harder than the average person thinks to be a landlord. Without a working knowledge of your province’s residential tenancies act, you’ll have dirtbag tenants walking all over you in no time. Even with a good grasp of the law, it still takes balls to stand up to somebody who’s breaking the terms of their lease. Amateur landlords don’t recognize the importance of doing the proper paperwork, which often comes back to bite them square in the ass.

I don’t want to discourage my new best friend Cory, because it’s very possible for him to get into the basement suite game. And I firmly believe basement suites are great for first-time landlords, since sharing a set of walls with your landlord will generally dissuade would-be scammers. He just needs to do things right and he’ll be fine.

A bigger concern might be what the missus thinks about sharing a house with strangers.

So, should he do it?

Buying a place is a big decision. Cory has a million variables to consider, including whether he should invite Nelson to the housewarming party. I won’t bring a gift and I will vomit somewhere, but other than that I’ll be an A+ house guest.

The good news is he plans on doing it smart and getting a little revenue to offset his housing expenses. This will help insulate him from shifts in the market. As long as he commits to owning for a while (and keeping that sweet, sweet rental stream going), then there’s nothing wrong with buying today.

If you’d like your question featured on the ol’ FU machine, contact me and we can make that happen. I won’t even charge!*

*Not charging tax of $29.99 applies

The Easy Way to Build Your Own AirBnb Empire

The Easy Way to Build Your Own AirBnb Empire

So last week we talked about AirBnb. I told you kids about how I had a garage I was interested in converting into an apartment, which had the potential to do a 40% annual return. That, my friends, is the very definition of succulent.

I won’t likely pursue this, for a number of reasons. First off, I’m kinda lazy. I don’t want to go and babysit a unit like that. Go somewhere else, you damn kids. I prefer more passive sources of income. And perhaps most importantly, after a short discussion with someone who is reasonably aware of local zoning laws, I was told my chances to convert my garage were slim to none. Interestingly, however, my chances of converting it into a bedroom or home office were good. Perhaps I’ll keep that in mind for the future.

It’s easy to argue I’m going about the AirBnb business the wrong way. If I was serious about it, here’s what I’d do.

All about protecting capital

Most people don’t have thousands of dollars to spare, just sitting around to convert space into something that can be rented out. Hell, most people don’t have space for their mountains of crap, never mind guests. Actually, I take that back. Most of us have too much damn space. We just like stretching out, that’s all.

Think about all the expense of buying a condo to rent out this way. You’d have to scrounge up at least 5% down — although 20% is more likely — spend money on insurance, taxes, and all the furniture it takes to make such a place happen. In a market like Toronto or Montreal, you could be looking at $100,000 just to get started.

That’s nuts, especially when we consider the uncertainty surrounding these types of places. At this point, most cities don’t care much about folks renting out apartments like hotel rooms. This could change, especially in cities that have high local taxes on hotel stays. The government always gets their cut.

The far easier way is to simply rent a place on a monthly basis and then use it as your base of operations.

The biggest advantage is it lowers the cost of entry. All you need to come up with is first month’s rent, last month’s rent, and cash for furniture. Instead of spending $100,000 to start, you’re looking at a bill of less than $10,000. Hell, if you’re a Craigslist master, you probably won’t need much more than $5,000 to get going.

Just stay out of the intimate encounters page, champ. ACTUALLY NO TAKING A HOOKER BACK TO YOUR AIRBNB PLACE IS GENIUS.

It also allows you to be nimble. Pick a bad location? No problem. You’ll lose one or two months rent, max. That’s far less than paying some broker 5% of the value of a condo to get rid of it. Being nimble is a good thing.

Expansion potential is much better, too. Earnings from one unit can easily be reinvested in another, which allows you to start building up an empire with very little capital out of your own pocket. Landlords like it too; it’s much easier to sue a business guy with some assets than a random dirtbag who rents an apartment.

Or, better yet, partner with your local landlord. Offer to do all the work for 33% of the profits. Or 20% of the profits. Whatever works for you. It’s better to take an even lower return in that situation, simply because you have no capital at risk. It’s the same concept as using seller financing, which is the ticket.

Wrapping it up

I’m a little skeptical this whole AirBnb thing will continue forever. I have nothing against the concept, I just think local governments will eventually ask these folks to start coughing up the same taxes hoteliers pay. This immediately eliminates AirBnb’s competitive advantage.

But there’s nothing stopping you from getting on the gravy train. The best way to do so is to keep as much of your money firmly inside your wallet. Capital is precious; use it wisely.

Should I Convert My Garage Into an AirBnb Place?

Should I Convert My Garage Into an AirBnb Place?

Ah, AirBnb. Because apparently you kids are too good for hotel rooms now. God I hate you so much.

There are a number of advantages to staying in someone’s place. If you’re traveling with your annoying mother-in-law, at least she gets her own room in an apartment. In theory, having a kitchen will save you money versus eating out (but in reality you’ll just throw up your hands and go to Wendy’s because vacation). Somebody’s place will often be cheaper and quieter than a comparable hotel room, too.

Converting space into a short-term rental is also a fantastic way for the average Joe to make a few extra bucks. Some of us are quite willing to temporarily share our extra bedroom with a stranger in exchange for money. Others take it a step further and will rent out their whole place, temporarily relocating so nomads from Australia have a place to smoke a literal shit-ton of weed eat their Vegemite. And then that stuff gets stuck in the couch cushions.

The Australians are the worst people on the planet. You can quote me on that.

I’m probably not willing to go that far, even though I could easily rent out my place by the night and crash in my parents’ basement. But I have been tossing around the idea of converting an unused garage into an AirBnb rental.

The deets

So I’ve got this garage, which is approximately 15 feet by 15 feet. It has power but it’s unheated. It’s located on the back of my property, and it’s currently being used to house yard tools and some other miscellaneous crap. I don’t park in the garage because there’s no automatic garage door opener and I’m too lazy to get out of my car and open the thing, especially in the winter. So I park on the street like a hobo.

I have two conversion options. The first is to turn it into a big bedroom without a bathroom, allowing people to come inside the house to empty their bladder. This obviously isn’t ideal, but it’s definitely the cheaper option. The more permanent solution is to put a bathroom inside the new unit.

The cost difference between the two options is massive. To convert my garage into a big room could be done as cheaply as $5,000, assuming I did a bunch of the work myself. I’ve been told $10,000 is a more realistic number, but let’s be conservative and say it would set me back $15,000 to do the cosmetic changes needed.

Compare that to putting in a bathroom. No garage I’ve ever been in has built-in plumbing, which means you have to create it. This involves removing some of the concrete floor in the garage and putting in pipes. Then you need hook up the plumbing to the main water line.

I’m relatively lucky; the water and sewer lines to my house run in from the back alley. They’re about 10 feet away from the garage. This makes connecting to them much easier than if they came in from the main street in the front of the property.

Still, this won’t be cheap. By the time it’s all said and done, I’d probably be looking at an initial investment of $40,000. And that’s assuming I could get permission from the local government in the first place. That’s hardly a slam dunk.

Return potential

The good news is most of the costs would be borne up front. Additional utility costs would be $200 per month, maximum. Since short-term rentals are a labor-intensive business, we’re looking for a better return in exchange for our time.

My town does a brisk tourist business in the summer. Approximately half a million people visit annually, with the majority of those visits coming between the Victoria Day and Labor Day long weekends. Hotels have close to 100% occupancy during those months with the average room costing between $150 and $200.

Say I priced my rental on the low end of that range and got 80% occupancy during those 3.5 months. 110 days at 80% occupancy times $150 a night gives us revenue of $13,200 annually without doing any work at all during the winter months. If I could rent the place out a third of the time for the remaining 250 days a year and earn just $100 a night doing so, this would create an additional $8,250 in revenue.

All-in the unit would generate $21,450 in top line sales. I’m going to assume $5,000 a year in expenses, which I think is a little high, but whatevs. This leaves us with $16,450 in profit before taxes, a return on investment of 41.13%

Oh baby. I’m a little bit hard right now, guys.

Will I do it?

At this point, no. Both me and Vanessa have full-time jobs, and although cleaning up the unit wouldn’t be a terrible burden we’d still have to use some of our precious time to do so. I’m more interested in passive sources of income at this point.

But it’s a terrific idea for somebody who has a little more time on their hands. And the best part? You don’t even need $40,000 to get started. Tune in next week and I’ll show you how you can get your own AirBnb business up and going for a fraction of the cost.

Introducing The Financial Uproar Too Much House Equation

Introducing The Financial Uproar Too Much House Equation

Math? Nobody told me there’d be math!

Shut it, italics man. We don’t have time for your shenanigans today.

Rant time. I’m sick of seeing people (including those of us who should damn well know better) consistently justifying buying too much house.

We’ve seen all the same arguments. Moving is expensive. I want my dream home. We’ll grow into it. All that matters is I can easily afford the mortgage. Hey, I need a sex dungeon in my basement.

Okay, maybe not that last one.

Most people can’t afford extra space. It comes down to that. Think about the average home buyer. They take out a fat mortgage which takes them 20 or 25 years to pay. If they do save any money, it’s 10-15% of their income. A lot of them are a few weeks without a paycheque away from being screwed.

Low rates have also pushed our expectations through the roof. People regularly pay 3x or 4x their gross income for property, justifying it by saying “hey, at least I didn’t pay 6x!” It’s the low-tar cigarette argument.

Extra space doesn’t even make economic sense (unless you monetize it, of course). If the average house costs $200 per square foot to put up (which is way too low, btw), a 12×12 spare bedroom costs $28,800 just to build in the first place, never mind furnish, heat, or finance. That spare bedroom that you use five times a year could end up costing $50,000 over the life of a house. It would be way the hell cheaper to foot the bill for your mother-in-law to just stay in a hotel five times a year.

The too much house equation

I’m strictly opposed to people who can’t afford it buying too much house. When I am GOD (and I will be one day, mostly likely on Tuesday), I will forbid it from happening.

How can we determine if someone has too much house? I made up a formula. Don’t worry, Italics Man, there’s hardly any math at all.

It goes like this: if your mortgage is greater than your liquid net worth (which excludes your principal residence), you can’t have too much house. It’s that simple.

The condensed form of the formula is: LNW > Mortgage

I don’t care how much you tell me you’re going to grow into the house. Or that it’s your dream home. Or that you can afford it. The answer is still no if you couldn’t conceivably sell off everything that you own and pay for the place.

(That’s a bad idea, of course, but it does nicely guard against people buying too much house)

People tend to forget that real estate you live in is a pretty crummy investment. You have to spend money each year to maintain it. The government taxes it. You can’t deduct any associated expenses. And it tends to only slightly outperform inflation over time.

And then, people make this investment even worse by buying too much house. It truly boggles the mind.

Buying a house isn’t an investment. It’s nothing more than a big-ass consumer purchase. It’s a big purchase that makes sense in certain markets at certain times, while not making sense other times. Like in Toronto or Vancouver today.

This is the end

We constantly rag on people who buy too many video games or finance vacations, but we cheer people who make a similar mistake with their houses. The fact is the easiest way for the average person with only a small net worth to save more is to cut their fixed expenses, starting with housing.

You might think my too much house formula is too strict. Fine. Loosen it a bit, see if I care. The point is we’re all collectively buying too much house, and it’s killing our ability to save.

This is a Smart Way to Buy a House

This is a Smart Way to Buy a House

When it comes time to buy a house, traditional thinking goes something like this.

“You need a good Realtor guiding you though the whole process. It’ll make buying a house so much easier to have someone you can trust in your corner.”

This doesn’t go over so well in reality. Back when I was a Realtor, I sold some friends a house. They came in with an offer at about 10% under asking. After telling them that wasn’t going to happen, I asked what their bottom line was. And they refused to tell me, saying it would weaken their negotiating stance.

(They ended up buying the place for about 4% under list price. A win, I guess? I dunno.)

A lot of people only begrudgingly use a Realtor when they buy a house. Sure, the average Realtor clearly knows more about houses than a typical home buyer. Even a crummy Realtor is far more knowledgeable than 80% of first time home buyers. Have you met the average home buyer? They’ve got the intelligence of an empty Coke can.

But there are plenty of criticisms towards Realtors, too. Many refuse to show houses that don’t offer full commission. Others will lose enthusiasm about six houses in. Most just care about getting the deal done. And if the deal goes smoothly, the hourly wage often eclipses $1,000 an hour.

What’s a buyer to do? Sure, you could ask around and find a great agent. Or you could do things the easy way and just use the listing agent.

Why use the listing agent? 

I really liked what Reddit user Absolute2014 had to say about the topic.

reddit realtor

(Click vigorously to embiggen)

This strategy is so simple and so brilliant I just had to share it. Well played, Mr. Absolute2014, IF THAT IS YOUR REAL NAME.

It’s clear he’s talking about the Toronto market, but it makes sense no matter where you live. The listing Realtor wants activity. They want showings. And if you show up, they’ve got the potential to show you different places. You probably don’t want to take them up on that, but they don’t know that.

Remember how real estate commissions work. A listing agent negotiates a fee. If a pesky buyers’ agent shows up, they’ve got to split that fee in two. And as one four-year-old once told me, sharing is for suckers. That dinosaur was HIS, DARGBLOOMIT. Yes, I know a four-year-old that talks like a 19th century pirate.

If you exclusively use the listing agent, he isn’t forced to split that fee. I guarantee he’s going to push your offer harder than a competing offer.

Still, do your due diligence

There is one problem with buying a house this way.

The selling agent has to dance a tricky line between representing both the buyer and the seller in such a situation. What they’re supposed to do is try to write up a contract that’s fair to both parties while keeping each side’s confidential information a secret.

Reality doesn’t usually work out like that. Most agents disclose confidential information back and forth all the time. They’re just sly about it.

“I like this house. I’d be willing to pay $225,000 for it.”

“I think a reasonable counter-offer in this situation is $225,000. Jimbo does need to buy a house.”

As long as both the buyer and seller are happy, nobody cares. And the Realtor gets both halves of the commission.

Also keep in mind a selling Realtor may be more inclined to keep certain information about the house private in an attempt to protect the sellers.

Let’s wrap it up

I think this whole strategy is a really smart way to buy a house. I’ve already tried it with one Realtor in town, telling them “if you have any listings where the seller wants out bad, come and talk to me.” I’ll let you kids know how it works out.