To complement the general discussion from this year’s Real Estate Roundtable we had the expert panel tackle three situations that readers might find themselves in.
Post City: We have a question from a couple in their 50s in North Toronto with older children. They know the realities of the market, especially in their area, but they want to make sure their kids end up living near them. What is your best play from an investment standpoint? Save for a down payment for the kids or buy a property now and rent it out until they are old enough to buy their own homes?
Hilary Farr: I’d go with the second scenario. That's what I’ve done for my son. It’s worked out. You can teach them fiscal responsibility by facilitating the purchase of a home for the future. They should take responsibility for that property if you’re going to rent it. They start to learn about actually balancing it, taking care of property, taking care of the finances, and eventually, they have the option of selling it and making money and moving to somewhere else or moving in themselves. You’re getting into a market you know right now because who the hell can project what’s going to be happening whenever they’re ready to actually live in it.
Scott McGillivray: You’ve got more insight into this. My kids aren’t old enough to own yet. Typically the sound advice I would give is people make bad decisions in real estate emotionally. One of the worst things I think you can do is buy a property for your kids just because you want to buy a property for your kids. I think that whether it’s for your kids or for a stranger, you should make the numbers work. You should teach them a lesson in responsibility and because equity in market appreciation and force depreciation in your primary residence is the most tax-free money you’ll ever make in your life. As soon as your kids are of the appropriate age, they should have property under their names as a primary residence, hopefully living there.
If you want to lend them the money on some sort of favourable terms, I have nothing against that. I think that’s fantastic, but if you want to give them your money, you might as well just kiss it goodbye because you’re not teaching them anything by handing out money.
Hilary Farr: Hang on. Caveat to my scenario. He did not get the house free and clear. He got a house with a mortgage.
Scott McGillivray: How did he make the down payment?
Hilary Farr: No, that was my gift. I gave him the down payment.
Scott McGillivray: Is he able to repay you?
Brad Lamb: Scott, come on. You can’t buy your kid a house? Why do we work so hard here? Of course you’re going to buy your kid a house.
Hilary Farr: That’s probably the most bizarre scenario I’ve ever heard. No, of course he’s not going to repay me because I’m not going to ask him to.
Brad Lamb: You know, millennials are buying a lot of condos. We’re seeing parents as the main source of the down payment. It’s not a loan, it’s a gift. It might be five per cent, it might be 10 per cent, it might be 20 per cent. It’s a lot harder to get a career and make the kind of money, even 15 years ago that 25-year-olds used to. We see a lot of people, not kids, but in their 20s and 30s that have multiple jobs. They’re having trouble getting to the $100,000 a year mark, so they need help.
Dan Barnabic: I’d probably say it makes perfect sense to buy, provided that you have a 30 to 50 per cent down payment. If you happen to be in that position, you’ve got very little to lose because, even if the price were to go down, you would be able to wait for another cycle, should the economy tank.
Post City: Next, we have a single father who recently sold his house and is currently renting in Hogg’s Hollow but is looking to buy back into the market. He’s wondering if we’re close to the market topping out, and if so, should he wait it out before he buys so he can get a lower price? Or is the panel completely sure that prices will continue to rise for the next few years?
Paul Miklas: Show of hands. It’s unanimous.
Brad Lamb: I think we can all say we’re sure that prices will be higher a year from now. There could be external events that could happen in Toronto. I don’t know what they could be. They could change things, so no one can say 100 per cent.
Karen Stintz: What I would say, because I’m a renter now, is it makes absolutely no sense to continue to rent a house if you have the opportunity to buy back into the market. The money that you’re spending on rent, it is much smarter to be spending that money in equity. Maybe the price of the house will go up or down marginally, but it will never go down more than what he’s paying in rent.
Brad Lamb: You should never rent. It’s a bad idea if you can afford to buy.
Paul Miklas: You want to invest. You don’t want to miss this opportunity. He’s actually, unfortunately, missing the boat. Every day he sits in that unit is costing more money.
Brad Lamb: Your life is crappy in a rental.
Karen Stintz: Why is it crappy?
Brad Lamb: How much money do you spend on renovating the bathrooms and painting and new art? Zippo. What happens is two or three years go by, you waste your life by saying I’m going to wait, and it all passes you by.
Hilary Farr: That’s absolutely true. People keep looking at investments and the dollar return and the rest of it. Yes, tick-tock, I mean, life is short enough. Don’t do it living somewhere that you’re not comfortable.
Barry Cohen: They say the biggest rise in prices are the three years before the biggest correction. We’re in 10 per cent zone. So is this year one or is year one the one we’re coming into? Time will tell, but I think that it’s a short two to three years. We’re looking really good and very attractive.
Elise Kalles: The market goes in cycles, but look back, it always has gone up. I mean, even if it goes down eventually, they’re not making more land. It’s a home
to live in, and it’s always going to do better than the volatile stock market. This is an investment in your lifestyle, definitely. And to rent, as far as I’m concerned, is throwing out money.
Scott McGillivray: She’s right. The market goes up and down all the way up, right? We know the fluctuations are going to be there, but any correction within the market is completely recovered within 10 to 12 years. A home is different than an investment property because you always need somewhere to live. You can throw away your money on rent or you can build equity in a home. You’re in the same market when you’re an owner, whether it’s going up or going down. Don’t freak out over it, go on with your life, personalize your space, build memories, do the things that give you value in your life.
Post City: And now we have a retired couple who own their home in Thornhill. The mortgage is paid, and they’ve been considering a move to a condo, perhaps in the Don Mills area closer to the city but not downtown. They’re in their 70s. They’re ready to downsize. Does it make more sense financially to sell their home and buy a condo? Or should they sell their home and rent a condo and use the money from the house to supplement their retirement?
Elise Kalles: No children at home?
Post City: Empty nest.
Paul Miklas: Thornhill’s a great part of the GTA. Looking at somebody in that age category, if they’re looking for lifestyle, I would say, yes, come out of Thornhill. If you come down to the Don Mills area, you’re going to buy a condo, and the amenities in Don Mills are outstanding with Shops at Don Mills, Edwards Gardens, the 401 and the DVP. Movement-wise, it’s more conducive to the lifestyle that they’re planning on as older people. I would say, yes, it’s a great time to sell.
Barry Cohen: I think that with growth in detached houses that will be up 15 per cent this year, they should keep their house. They should rent it out, have the income and rent a condo. Don’t buy the condo, so that one will subsidize the other and the growth would be greater than their house.
Hilary Farr: I would go with that scenario too. Plus it means that, when they make the move, they have manoeuvrability to say this isn’t actually what we want when they’re far away from their friends and their support system they’ve had for however long in Thornhill.
Barry Cohen: They probably want the condo for lifestyle. Now they can have their cake, growth and detached house and a lifestyle of a condominium.
Scott McGillivray: I would say this is less of opinion and more of metrics. It’s this couple’s simple equation that they should be running and let the numbers do the talking. Rent their house only if it creates positive cash flow. If it’s a negative flowing asset, then take that money out. Look at the cost of financing a condo with 20 per cent down loan to value at a five-year fixed mortgage rate, add condo fees, utilities. What’s more: renting it or owning it?
Whatever is the cheapest of the two scenarios, go with that and you’re going to be financially better off with either of those scenarios. Ideally, you would keep the detached home but not just based on the equity growth because that’s speculating, right? If you’re getting paid every month to keep it then it’s still a good investment. Otherwise, sell it, take the money and finance the condo if it makes sense to buy it.
Elise Kalles: But you become a landlord, and they call you when the washing machine isn’t working.
Hilary Farr: It gets you out of the condo. You need to have something to do in your retirement. You learn how to be a DIYer.
Brad Lamb: It depends on if they can afford to do any of these things. They probably aren’t working any more if they’re 70. They may need to use the equity from their house to live. They might have to rent the condo if they plan for 15 or 20 years more of life.
For more of the discussion on where the Toronto market is headed, see yesterday’s Real Estate Roundtable main story.
