It was about three and a half years ago that I wrote one of my most popular posts ever, called F— You, I’m Short Your House.
For those of you too lazy to click though, here’s the gist of it. House prices were insane in Toronto and Vancouver and Calgary and a few other markets as well. We were quite obviously in a bubble. Everything pointed to it including price-to-income ratios, price-to-rent ratios, the fact houses were performing much better than inflation, and temporarily low interest rates propping the whole thing up.
So I decided to put my money where my mouth was and used options to short the market. I shorted every Canadian bank (except CIBC for some reason) using long-dated put options. I entered into this trade when the banks were close to a 52-week low. It turns out I wasn’t the only one looking to do this.
After a few months of steady losses and real estate prices in both Toronto and Vancouver continuing their steady march upwards, I threw in the towel and took my loss.
It’s pretty obvious I was wrong with my bubble call. Both Toronto and Vancouver real estate prices are up approximately 50% since I wrote that piece, although growth has been much more muted in most other markets.
Speaking of other markets
I spent a little time looking into this the other day, and in the middle of my research I came to realize something. Most Canadian real estate markets haven’t done that well in the past few years.
Allow me to quote the best researcher I know, myself. From a Tweetstorm shortly before the New Year:
The average price of houses in markets that aren’t Toronto and Vancouver is $361,000. The median family income for Canada (in 2014) is $79,000. Thus, the average house costs 4.6 times income. Yes, this is higher than the traditional average of 3.5 times income, but not excessively so once we factor in record low interest rates.
A similar story appears in many different real estate markets. Values are going down, not up. In fact, over the last two years, the average price of a house has declined in Calgary, Edmonton, Regina, Saskatoon, Thunder Bay, Fredericton, Halifax, and Quebec City. Winnipeg’s home prices are largely flat as well.
Sure, these places aren’t tanking by any means, but they’re also not going up. And some of them are actually pretty darn affordable.
Take Winnipeg as an example. It has an average house price of about $280,000. In 2014 median family income was $79,850 (this was nearly $4,000 higher than in Vancouver, btw). Let’s round that up to $80,000 because I like nice round numbers. I don’t think assuming the average Winnipegger got a $150 raise in the past two years is outrageous.
Thus, the average house in Winnipeg is just 3.5 times what a typical family makes. That puts houses pretty much inline with historical price-to-income ratios despite interest rates being half of what they were just 10 years ago.
In other words, real estate in Winnipeg is quite affordable. Maybe even more affordable than 10 years ago.
The only real problem is you’d have to live in Winnipeg. Yet people do. Willingly!
More examples? Don’t mind if I do
Let’s do similar ratios for some other selected cities:
Some of these cities are downright affordable, with most trading under historical price-to-income ratios. And if you’re making the average salary in Thunder Bay or St. John, paying down the mortgage early should really be a snap.
Let’s compare that to some unaffordable cities.
It’s pretty easy to spot the two outliers on that chart, and there are also a few more overvalued markets out there. Hamilton/Burlington has become expensive, and I probably wouldn’t buy a place in Montreal when $1,500 per month can rent you a pretty sweet pad. Do the kids still say pad?
The bottom line
The three largest metros in Canada get all the attention. Everybody wants to live in Toronto, Vancouver, and Montreal. But like I’ve mentioned before, it’s a hell of a lot cheaper to live in smaller places — especially if you do a job that pays the same everywhere.
The anti-buy a house crowd is getting a lot of attention these days. For the most part, these people are onto something. It is cheaper to rent than buy in most markets, especially the expensive ones. But at the same time it’s also quite affordable to buy a place in a lot of medium-sized cities across Canada.
We bought a house at less than two times our household income, which saddled us with a mortgage so reasonable we’ve paid off 33.6% of it in the first six months of having it (and more since). We’d like to be mortgage free by 2019.
There’s nothing wrong with buying a reasonably priced house in an affordable market. The whole country isn’t out of control like Toronto and Vancouver. Like the United States, Canada has a few cities with crazy-high prices and a bunch in the middle that are quite affordable. Stick to the middle of the country when buying a place and you’ll likely do fine.
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Thanks to Canada’s massive real estate bubble, more and more people are comfortable renting. This is a good thing.
There are a number of advantages to renting. It usually ends up being cheaper, since a renter doesn’t have to worry about maintenance, house insurance, and paying back a mortgage. A renter also has greater flexibility versus a homeowner, which is kinda a big deal in 2016. And renters won’t lose a big bunch of money if the value of Toronto real estate goes down. We’re already seeing Vancouver’s market collapse.
For many renters, home maintenance is the big expense they’re hoping to avoid. The general rule of thumb is home maintenance costs about 1% of the value of the house per year. It doesn’t all happen at once, but eventually you’ll end up spending that much.
I’ve also seen guides that say you’ll spend up to $10,000 per year in house maintenance. That’s not for a mansion either; it’s for a regular house in suburbia.
Using a percentage of value is a really dumb way to estimate home maintenance, at least in my opinion. My house is worth $195,000. The nicest house on my block just sold for $360,000. Will that house magically pay 2x as much for a new fridge, stove, hot water tank, or furnace? Not likely.
If there’s one thing Financial Uproar is all about, it’s shattering rules of thumb. I think many renters have gone too far the other way, and overestimate the value of maintaining a home.
Here are four ways to cut down on your home maintenance costs.
Don’t buy something with problems
I’m amazed how many people are willing to buy a house that has very obvious issues. Especially people who don’t know how to fix anything.
There’s an easy solution to this. Don’t buy stuff with obvious issues.
You don’t need to be a contractor to figure out a lot of this stuff. If the shingles are starting to curl, your house needs a new roof. If the siding looks like ass, it’s either going to need a coat of paint or to be redone. And so on. Most of this stuff is pretty simple.
Most people overestimate the amount of work they’re capable of doing. I think at least 50% of common household jobs can be done by someone with access to Youtube and a decent tool kit. But that doesn’t mean you’re going to do them.
Extend this to look for potential problems, too. A patio won’t need to be replaced as often as a deck, for example.
No cosmetic fixes
Many people spend large amounts of money on their homes replacing perfectly good things that don’t need to be replaced. They’re just dated.
The perfect example of this is the pink bathtub in my parents’ 1960s house. That thing is uglier than Amy Schumer’s face, but they have yet to replace it. And why would they? It still holds water. It doesn’t leak. The tiling around it is barely fading. That thing will be around long after we all die.
It’s probably the only pink tub left in the whole neighborhood. Everyone else has ripped out their tubs and replaced them with something newer, sexier, and less embarrassing when their friends come over.
It’s the same thing with kitchens, paint on the walls, flooring, and a million other things. It’s all getting replaced before it’s broken. Avoid that and you’ll cut down maintenance costs significantly.
Make long-term investments
My old house had a metal roof. I loved that thing. The company that installed the roof told me the shingles came with a 100 year warranty.
My current house has a nice new roof, because we followed rule number one when we bought it. But we have neighbors who are looking to get a new roof. They have two options. They can either shell out $6,000 for a new asphalt roof, or they can spend $10,000 and get a metal one put on.
If they plan to only live in the house another 15 or 20 years, the cheaper option would probably be best. But if it’s a long-term investment, the metal roof will cost far less per year of ownership, even if it costs more today.
Fridges can cost anywhere from $500 to $5,000, or even more. And get they all really just do the same thing. They keep your food chilly.
Fancy appliances don’t just cost more. They have more things that can break. I’m convinced this leads to a shorter life.
Think about it this way. Somebody buys a fancy washer that has all sorts of weird settings. One of the settings breaks. Instead of doing without, they go out and buy a new washer. The old one gets dumped to the curb, where it eventually becomes a home for raccoons.
You can buy 10 $500 fridges for the same price as a $5,000 one. Sure, it’s an extreme example, but the point stands. It’s way cheaper over the long-term to replace appliances with cheaper models.
Every now and again, it turns out one of my readers has themselves a good idea. It’s not just me. I KNOW, I’M SHOCKED TOO.
I think most people would like to decrease the cost of housing. I’ve pointed out an easy way to do that before, which basically consists of six words. Don’t buy so much damn house. You could also move from an expensive market to a cheaper one, which makes a lot of sense once you get married and therefore become lame.
A reader we’ll call James F. decided to do things a little differently. Here’s how he’s able to live for free.
First of all, James F. is much too revealing. Let’s go with J. Fisher instead.
Here’s what J did. He rented out rooms in his recently purchased three-bedroom, two-bath house in a medium-sized Alberta city.
He bought the place a few months ago for $179,000. It needed a bit of work, so he’s spent about $6,000 on renovations so far. He doesn’t envision any other big renovations until at least 2018.
He was also smart when he bought the place, choosing something that was only a ten minute walk away from work.
Kijiji is the ticket for someone looking to live for free. All they do is put a post on there with only a minimal amount of spelling errors and all caps, and they’re in business. That’s exactly what James did. He quickly found a student at the local college who was willing to pay $450 per month for the room. She told her friend, who quickly snapped up the other room.
Because James is a big ol’ softie (and probably because he’s holding out hope for the threesome one day), he cut them a break and lowered their rent to $400 per month. So he’s getting $800 per month in total revenue. That’s probably a little low, but he likes his roommates, and like a lot of landlords, will discount the rent for a better tenant. This plan lets him live for free. He can afford it.
He’s approaching the whole situation from a business perspective, which is smart. He had each one sign a lease that specifically spelled out house rules. When you’re renting out a room, different laws apply versus renting out a whole apartment. In Alberta, the Innkeeper’s Act is the relevant piece of legislation, versus the Residential Tenancies Act.
One interesting thing about the Innkeeper’s Act is the landlord is totally allowed to seize your things if you’re a month behind on rent. FINALLY. I’VE ALWAYS WANTED TO SEIZE SOMEONE’S MEAGER POSSESSIONS.
Can he really live for free?
Enough chit-chat. Is James actually making any money doing this?
Excluding his house renos, he’s almost making enough to live for free. He’s got the following expenses that were all itemized for me on a spreadsheet because he’s 1403% more organized than I am. THANKS FOR SHOWING OFF, JERK.
- Mortgage: $657
- Taxes: $109.73
- Insurance: $100.26
- Utilities: $170
- Internet: $126
- Total expenses: $1,162.99
- Total rent: $800
- Cost to live: $362.99
So James isn’t quite living for free. He’s shelling out $363 per month to live in a three-bedroom place.
If James has a mortgage of 2.7%, and a total original mortgage amount of $143,200 (this assumes he put 20% down on the place), then $4,075 will be going directly to his principal in the first year. Which works out to $339.58 per month.
So James pays about $23 per month to live in his own house, plus a forced savings plan of about $340 per month.
Other things to consider
One thing about such an arrangement is how to handle the house in the eyes of the taxman. If he’s renting out rooms, James should be claiming that income on his taxes. He should also be able to claim a portion of the expenses, too, as well as depreciating down the value of the house.
But he can’t depreciate down the value of the whole house, since he only rents out two bedrooms. Confused yet? Good luck with that, poor sucker who does James’ taxes.
A lot of people in James’ situation just pocket the cash and don’t tell the government, for obvious reasons.
And then there’s roommate issues. James told me the story about how his
two hot potential side pieces respected members of his household decided they were going to get a pet. He immediately put a stop to it. He figures these issues aren’t a big deal as long as you’re firm, cover it in the lease, and get it out in the open immediately. It also helps if you hate cute kitties.
Why do you hate me, James?
He also recommends spending a little time with potential roommates before making the commitment. If they’re annoying and you hate them five minutes after meeting them, chances are that feeling isn’t going to change. If you can’t envision being their friend, then avoid them.
The bottom line
I realize that for some of you, sharing your house with a couple of college co-eds is literally the worst thing ever. But there are also people out there who like the idea of having people around. And I guarantee most of you like the idea of being able to live for free.
We’re all renters for LYFE, right guys?
I know I sure am. I hate home ownership more than the taxi drivers hate honesty. Buying a house is a terrible use of capital. That money could be put to work in more productive ways. Owning also restricts your ability to move for a better job, which the average millennial does four times a year. And we all know Canada’s in a massive housing bubble.
GOD. Nobody even likes you, italics man.
Don’t you own a house?
Well, yeah. But I like being part of the crowd.
One thing I’ve stressed over the years is living where it’s cheap. If you’re making a salary that’s pretty consistent throughout Canada, it’s silly to live in Vancouver, Toronto, or anywhere else super expensive. It’s better to live in cheaper markets.
That got me thinking. Just how much bang can you get for your buck across Canada? So I decided to look. Here’s what $1,500 per month gets you across Canada.
Here’s what I was looking for:
- Apartments only
- Has to be located relatively near downtown. No suburb crap for us.
- Preference will be given to Kijiji ads with more pictures
- Limiting the search to Canada’s 10 largest metros
- Exactly $1,500 per month will be hard to find, so I just wanted to get close
Without further adieu, let’s get started, going from west to east.
One in and we’ve already blown our budget out of the water. Now watch me justify it. Financial Uproar: it’s just like the other PF blogs.
Basically, it goes something like this. It’s hard to find an actual apartment in Vancouver that’s worth living in for less than $1,500 per month. Most of the ones in my range were bachelor’s suites, which really should be called suites at all if you think about it. Blew your mind there, didn’t I?
Anyhoo, let’s talk a little bit about this place. It’s 600 square feet with a decent balcony. It has one bedroom, one bath, and has been recently renovated. It’s by a park and golf courses and has a bunch of stores a close walk away, which I guess is important to y’all.
Overall a pretty crummy value. But it’s Vancouver. We probably should have saw that coming.
I lived in Calgary a few years ago, and let me tell you, things have changed. A ton. Yowza.
This place is located close to downtown, with two beds, two baths, a big balcony, and within spitting distance of a grocery store. It’s new, has high-end finishing, a washer/dryer set inside the unit, an exercise room, and even an underground parking lot. In short, it’s pretty damn nice. A much better value than Vancouver, anyway.
Ah, Edmonton. All of Canada is pretty close to the Arctic Circle. Edmonton is actually inside of it.
At least you’ll stay warm inside this two bedroom, two bath 1,227 square foot condo. It’s within walking distance of all sorts of amenities, and includes a game/fitness room, as well as a basketball court and tennis court. I hereby challenge all of you to a game. (Loses 52-0) Best two out of three?
I used up my cold weather joke before getting to Winterpeg. This was a mistake.
The picture isn’t so impressive, but the place sounds pretty nice. It’s got three bedrooms, two baths, a pool and a dishwasher. It’s located right downtown too, just a few minutes walk away from the Manitoba Legislature. Also, rent of $1.492 is an oddly specific number.
Justin Trudeau will be your neighbor. 100% guaranteed.
The pictures on this ad suck too, but it seems like a pretty neat place to live. It’s got two bedrooms, 1.5 baths, and you’re all the way up on the 18th floor. Now you can literally look down on people instead of just figuratively looking down at them. Progress!
I used to think the stories of Hamilton being a dump were exaggerated. Then I visited. Now I know better. My “tour” of Hamilton included a bar “that used to be a Hell’s Angels bar”.
OOH, TRENDY. This condo has two bedrooms, one bath, and all sorts of exposed pipe and brick like you see in those HOLLYWOOD MOVIES. It doesn’t have as much in building amenities as some of the newer buildings featured, but it does have in-suite laundry and is located very close to downtown. It’s also exactly $1,500 per month, the only one in this list to match our arbitrary price point.
I have to admit, Toronto did a little better than I expected. I actually found an apartment close to downtown for $1,500 I’d actually live in.
I mean yeah, it’s not great. It looks older, and certainly doesn’t have much in terms of amenities. Included in the features are things like “various rent payment options” and “recycling program in places”. OH BOY. But it’s not such a bad place. I’ve certainly been to worse. Hell, I’ve probably lived in worse.
Insert your own BlackBerry joke here. I’m lazy.
This place looks a little older, but it’s big, has lots of in-building amenities, has a nice location in downtown Kitchener, and has a bunch of stores and whatnot around it. It seems to be a pretty well maintained building too. I’d certainly squat there illegally while the normal renters are out of the country, but I expected a little more.
J’utilise un programme de traduction pour sonner tout de fantaisie. Ne soyez pas Hatin ‘, haineux.
This place is located right beside McGill, which will impress the one of you reading this who actually went there (Justin Trudeau and I are tight). The unit has two bedrooms, two baths, a nice view, a rooftop lounge, high end finishings, and so on. It’s a nice unit, but the location is the real plus. You could easily exist without a car.
Quebec City was a little harder to find, since most of the Kijiji listings are in French only. Frenchie bastards.
This is a three bedroom place in a good neighborhood (but a little far from downtown), with the kinds of amenities you get when you pay $1,500 per month in places that aren’t Toronto or Vancouver. Parking is extra, but it’s okay. Ballers like you can afford it.
And that’s about it. If you stay away from Toronto or Vancouver, you can live in a pretty sweet place for $1,500 per month. The best bang for your buck is probably in both Quebec cities, but Alberta has also become surprisingly affordable. Special mention to Winnipeg and Quebec City, which were able to offer three bedroom places. Nelly needs a room for his cat, yo.
The point is you’re living like a baller on $1,500 per month in most places across the country. If you can live in a really nice place for $1,500 per month, then it shouldn’t be that hard to find something reasonable for $1,000 or even less each month. Assuming you have equal employment opportunities everywhere, the lesson is simple. Live where you can get the biggest bang for your buck.
This was fun. I think I’ll do a part two sometime, looking at smaller communities.
Only 120 more payments and that house is all yours, baby!
Because I am a sucker for punishment, I have subscribed to my local town’s rental Facebook page, where local landlords and tenants meet up to talk about how they’re both worse than cancer on a stick. Landlords hate tenants because you damn bastards never pay on time, and tenants hate landlords because they won’t make reasonable repairs like demolishing the house and building a brand new one.
And I hate them both because I just can’t choose one.
Okay look. I’m a landlord, so I’m generally sympathetic to other landlords. I understand that tenants can be annoying. But for the most part, I find tenants pretty reasonable. They just want to be left alone, a request I’m usually happy to oblige. They complain when it’s time to fix something because that’s one of the main perks of being a tenant. You don’t have to fix shit.
Some tenants just aren’t happy with this arrangement, and lust to buy themselves a house. I get that. I’m a homeowner (inserts plug for the 19th time), and I think it’s great. It wasn’t great when I had to fix my own damn leaky tap, but that was an easy fix. I like being able to customize what I want and knowing I’m not going to have to move for a long-ass time. Getting the mortgage paid off will be pretty sweet too.
Certain prospective homeowners just can’t get themselves a place, no matter how hard they try. Some just can’t afford to save the down payment. Others scrape together the needed 5% down, but have garbage credit. Some have even done things right, only to be screwed by the new mortgage rules.
If these folks can’t qualify the old-fashioned way, they’ll start looking for alternatives, like the popular concept of rent-to-own. Here’s why such a deal is a terrible idea for a seller.
Huge buyer advantages
From a buyer’s perspective, a rent-to-own is the world’s greatest thing.
A regular real estate transaction lets you take control of a property with as little as 5% down. That kind of leverage is only possible when buying houses. You can’t get that far in debt when buying anything else, luckily.
A rent-to-own deal is even better. You take possession of a house with zero down.
As we all know, something is bound to go wrong with the house at some point. The furnace will need to be replaced. The washer will spring a leak. The roof will cave in when fatass Santa Claus visits. It’s an inevitable part of home ownership.
Most homeowners have a little bit of cash tucked away for such an oc–sorry, couldn’t even finish that with a straight face. Most homeowners find a way to muddle through such commitments, usually be charging up their credit cards. A select few have emergency funds.
The average rent-to-own person doesn’t have the ability to make it through an event costing thousands of dollars. They’ve barely got the ability to make it through an event costing tens of dollars. So they throw up their hands in frustration and move out. These people are good at making bad choices. It’s what they do.
The owner now has to find a new tenant and fix the crap the old tenant left behind. What a great deal.
Increased rent…at a cost
To compensate for this risk, landlords will either insist on some sort of down payment/security deposit, or extra rent. Such extra rent tends to go towards the equity the buyer is earning in the property.
This works, at least in theory. In reality, charging extra for rent just sets people up for failure and makes them bitter.
Imagine paying $200 extra each month for a rent-to-own contract. Yeah, you’re building equity, but you’re also barely scraping by each month. Not that you would have been smart with that money–after all, you’re a rent-to-own person–but still.
The next thing you know, you’re looking at some $1,000 repair bill you can’t afford. So you go to the landlord/owner, and ask for a bailout. You cash out your equity, and you’re back to stage one.
How is this a good deal for the landlord? The whole point of such an exercise is the tenant is supposed to build equity, not piss it away.
Even if this doesn’t happen, charging someone extra rent means they’re less likely to pay on time. It’s true for you, me, or Johnny McDirtbag.
Just don’t do it
Rent-to-own contracts are a terrific deal for a buyer. They get to control real estate with a very minimal investment, even if the interest rate is higher.
They’re a terrible deal for a landlord. You retain all of the liability with very little benefit. And the relationship doesn’t tend to end well. Owner financing is a far better deal. At least when you do that, you transfer the liability to the buyer.