The K-Shaped Recovery (or the Perfect Storm that Missed)

January 27th, 2021 by Potato

In the clouds of the pandemic, a perfect storm was brewing for Toronto real estate. The units stolen from the residential market by AirBNB were coming back online, at the same time that immigration was suspended and a massive wave of unemployment and economic uncertainty swamped the economy, oh and the city was warning that the lost TTC revenue and extra costs might lead to a huge property tax hike (spoiler: they got a bailout and chose to cut services rather than increase taxes if it gets worse). In a sane world those should have been a handful of pins popping an already frothy real estate market, with an epic, sharp crash to bring us back to sensible price:rent and price:income levels — or at the very least an Alberta-style soft landing that takes the froth out.

But we don’t live in a sane world, and instead we have a K-shaped recovery. Except unlike the K-shaped recovery people talk about for people and the jobs market, where one group is having a really bad year with no light at the end of the tunnel yet (e.g., anyone whose livelihood revolves around music festivals, conventions, or personal services), while another has virtually uninterrupted income and lower expenses (e.g., many people who work primarily on a computer and who only had to go into the office in the first place because of a lack of imagination and will from their corporate overlords), in the real estate market it can be the same property with two divergent outcomes.

The rental market has taken a big hit in the downtown core, especially the microcondo segment that was most ghost hotel-y and the least fun to quarantine yourself in. Yet prices to buy those units have barely budged. In the burbs, rents are flat-ish, while prices have exploded higher.

And hold on to your butts, because the early indicators are making it look like the first half of 2021 is going to be an absolute ripper. Whether its low rates, or spending so much time at home that makes people want a house, or the freedom to look a little further afield if daily commutes may be off the table for a while, demand is surging, while the deferral cliff (that was one of the elements of the perfect storm that missed) turned out to not be such a big deal.

Now, if you’re just looking for a long-term place to live, then this likely doesn’t concern you — one more blip up on the chart of craziness, while renting continues to be a predictable expense. But if you’re in the FOMO game, or are looking to take a big risk on flipping a place this year, this is a big deal. It’s also so confusing and so hard to see coming, especially if the pandemic has left your own financials in shambles.

Where are people getting the money? How do they even have the energy to go rage-buying houses when things are so terrible?

Well, the upper leg of the “K” is doing just fine, if not even better than before, and they’re the only ones who buy houses anyway. So of course the market would be ripping, why didn’t I see it before?

Buuuuuut, immigration is still down. Tourisim is still down. Employment is still down. The perfect storm may have passed us by for now, with the upper leg of the K doing fine and dandy and as focused on real estate as ever, yet the storm clouds still look to be brewing out there, and are even weighing on the rental sector. If rents are down, why isn’t it affecting the purchase prices of the same units? Will this so-called fundamental stuff eventually matter?

Though rents are a big factor in the value of housing, a part of that to consider is the gearing involved: as rents race ahead, the added rent is essentially pure profit for the landlord (the beauty of a fixed-cost business), allowing a disproportionate increase in the price of the unit. As rents fall, the same should hold true in reverse: the price should fall by more than the decline in rents. However, investors can also speculate on future rents, while the rental market is basically a spot price. So if you believe that all the factors currently holding rent down are temporary, it may be rational to not cut your price by much, or even to down a big ol cup of FOMO FlavorAid. Conversely, if all the demand factors are down for the foreseeable future, and rent inflation may be muted for a long time, then prices should drop a lot — first to catch up with the lowered rent, and then to reverse the expectation for rapidly rising rent that had already been baked into prices.

As always, I look around and renting looks to be the smart move. The price:rent is IMHO more likely to be fixed in the long term by prices coming down than rents going up. But the market can stay irrational for a long, long time, and based on how the spring is setting up, a while longer still.

There’s a parallel in the Gamestop (GME) mania: with a long-term view, you may see a mostly bricks-and-mortar retailer with limited profit potential, worth nowhere near the current price. But short-term supply-demand imbalances (a mania combined with short covering, and options fuckery*) can drive the price up far beyond that, and it’s impossible to know the precise moment it will turn.

* – I believe the technical term is gamma squeeze but I don’t want to have to try to explain it.

Whether to Lease Your Condo in a Pandemic

November 21st, 2020 by Potato

Rents are dropping in Toronto, particularly for downtown condos (the market that had been driven up the most by the AirBnB crime syndicate phenomenon in the first place).

That raises an important question: what should owners of a vacant condo do? Advice is all over the map, from those who say to sell it while valuations are still high1, to those who say to rent it out tout suite to avoid cash burn, to those who say to do the opposite and hold off because rents will go back up one day but renting at a low price now will lock you in to covid rents until the tenant leaves.

Not so long ago when prices were increasing all the time, real estate bulls had the logic that the best predictor of the near future is the present, so better buy now before it gets even more expensive. Well, that argument can work in reverse too: better take the rent you can get now before rents drop even more — or to bleed money with a vacancy if they don’t go back up. On the other hand, Toronto real estate has always been a story of hope and bullishness over all comers, and unrelenting bullishness and irresponsible leverage has won every time so far, so why not one more victory for that unstoppable pair?

How do you even approach such an important decision with such uncertainty and completely opposing advice? Congratulations to the regular readers who said spreadsheets. Save us math, you’re our only hope!

First off, consider the two choices for renting the place out: early, or late. That will help frame the third choice of selling the place (or possibly buying more while prices are “low” because you can make multiple millions but only go bankrupt once so the risk-reward is clear).

Renting now is more-or-less certain what you’re going to get. The main uncertainty is how long your new tenant will stay in place (which is only a concern if rents to go back up substantially faster than rent control guideline increases). But you can pull a number out of a hat and likely not be too far off. These are downtown condos we’re talking about, even at a discount to market rent it’s quite unlikely a tenant will stay for more than 5 years (or that your intended holding period is that long).

So you’ll have just 3 factors for how much money you’ll make: R, the current market rent; E, your expenses2, and Tr, the amount of time the renter stays, which is unknown but we’ll pin at 60 months.

So renting right away will give you: (R – E)*Tr.

So far so good. Now if you decide to wait, you’ll still have expenses, E, to pay to carry the place. You may have additional expenses that the tenant would normally pay for, such as utilities, but we’ll assume E stays the same for now. So you’ll be losing E for a period of time, let’s say Tv, the length of time until there’s a vaccine or widespread normalcy or what have you, and you get your once and future rent again. Let’s call that A. You’ll then get that for the remainder of Tr after Tv has passed.

Waiting then will give you: (A – E)*( Tr – Tv) – E*Tv

There’s a lot more uncertainty here: how high will A get, and how fast? All the way back to pre-covid highs by the spring? Maaaybe, but IMHO that’s unlikely because that was in part driven up by AirBnB, and pandemic aside, the city has finally moved to restrict AirBnB rentals. But maybe you laugh at my foolish hope in the rule of law and say that it will never be enforced, so that’s fine. Maybe you should consider the scenario where A isn’t all that much higher than today’s rent, R. And you also don’t know what Tv is going to be. It could be a few months, as some on the real estate blogs are saying, it could be a few years to get back up to pre-covid rents.

One approach to make the decision is to compare something mostly known today to an expected value of a bunch of possible outcomes. But before we do that, you have to stop and examine the risks. You could be “totally sure” of an outcome, but if being wrong would ruin you then you maybe shouldn’t take the risk anyway.

So some real estate investors are deep-pocketed with massive unrealized capital gains, so a year or three of vacancy doesn’t really phase them. Their advice to wait may mean little to the start-up specuvestor who expected the condo they stretched to buy to make money, not demand it while they are also financially strained from the pandemic. If 3, 6, or 12 months of that negative E term starts to look like bankruptcy, then you may need cashflow now even if it caps future potential gains (or you may want to look at selling while the selling is still pretty decent).

If you’re able to survive different outcomes, then you can do some math on expected value. How likely is the scenario where rent goes all the way back up in 3 months? How about the one where it takes a year? How about the one where you wait 18 months and settle for rent that’s the same or even lower than today? An expected value is just a weighted average of each of the outcomes, where the weighting is your guess on the probability.

You can plug all those in to a spreadsheet, and give yourself some information to work from.

Here’s an example of how that might work:

Pre-covid rent: $2250. Expenses: $1600/mo. Current rent: $1860.

Renting now would earn $15,600 over 5 years (at which point we assume the tenant with the cheap rent leaves and it’s ceteris paribus).

Rent later might have four equally weighted scenarios, say you wait a year for things to settle out and see where rent is at, and maybe it’s fully recovered, maybe partly recovered, or maybe you decide to wait a bit longer if things are on the upswing but still a bit below the peak, or maybe you get lucky and rent goes through a huge whip-saw and gets back to where it was in just 6 months.
1: Rent for $2250 after 1 year, vacant until then = -$19,200 + $31,200 = $12,000
2: Rent for $2000 after 1 year, vacant until then = -$19,200 + $19,200 = 0
3: Rent for $2250 after 18 months, vacant until then = -$28,800 + $27,300 = -$1,500
4: Rent for $2250 after 6 months, vacant until then = -$9,600 + $35,100 = $25,500
Average/expected value: $9,000

So here’s a spreadsheet, play with your own numbers and assumptions… but three of the scenarios above lost out to renting right away, even at a 17% discount. You have to have either very low expenses or very high hopes for a speedy rental recovery to make the case for waiting for the market to recover. Or fear a rent-controlled tenant will stay substantially longer than 5 years.



Psst, Potato!

Oh hey, it’s Italics Man, paying a visit from Nelson’s blog.

Yeah hey, expenses don’t matter.

And indeed, if you’re paying the same expenses whether you rent the place out or not, then you can drop that term in all the math: the only thing that changes between the scenarios is the revenue (though if your expenses change, such as having to pay utilities that a tenant would otherwise pay during a vacancy, that’s a different story). So we could simplify it down even further: look at the difference in rents and how long it takes to go from one level to the other. Taking $400/mo less means you lose ~2 months of rent every year. So if you figure a tenant might stay for 5 years at the lower rent if you rent right now, then your breakeven point would be to wait for 10 months for a full recovery. If that sounds unlikely, then you may as well rent now. Given that renting now means you don’t have to endure 10 months of highly negative cashflow, I’m inclined to think that renting now really should be the preference given these numbers, but I also think getting all the way back up to pre-pandemic rents in a matter of single-digit months is quite unlikely.

However, including a version with the expenses may be important when framing the decision. After all, in the case where you wait a very long time (#3 above), you not only made less money, you had a loss on the condo. Even in the other cases, waiting starts with a loss, which you need to be prepared for and see when making that choice — do you have that first $20k on hand to survive to the high-rent near future you predict? People are sometimes much more motivated to avoid losses than increase gains. When all the numbers are positive, the decision looks very different.

More importantly, remember that there was a third choice: selling and bailing. Here’s where it makes all the difference to look at the amounts with expenses versus just the difference in revenues. If your expenses are high enough, then either the choice of lower current rents or waiting for higher rents may have you staring at a big loss and an even bigger cashflow hole. That may mean selling into a slightly weaker-than-last-year market may be the way to go for you, to take your lumps now rather than bleed cash over the next year or two.

And of course, all of these numbers have more uncertainty than I’ve indicated. For the most part, I think I’m being generous to the owner considering delaying — I didn’t include any scenarios where they wait only to find rent has gone down further. It depends on your view of the market, but I have a hard time believing that after the year that 2020 has been that rents will be sharply recovering for downtown condos any day now.

On the flip side, some people are worried about rent control and a tenant paying less than market rent for even more than my arbitrary 5 years. If you think you may get stuck for a decade or more you can try to convince yourself that it’s worth it to hold a vacant unit for an extended period of time. If you’re worried about being stuck with a below-future-market tenant for 12 years then you might be able to talk yourself into two whole years of vacancy (depending on the difference in rents, etc.). Of course, by that same logic you should have never rented over the past few years anyway, when downtown rent inflation was out of control — getting 10% less than you could get next year was a bad move if you were worried about the tenant sticking around for infinity years with rent control. As the magnitude of the gap between current and future rents widens then you may have an argument for tenants having more of an incentive to stick around – being just 10% below market may not have been enough to get them to forestall their life plan of moving from your 1 bdrm to a 3 bdrm in the burbs, but maybe a 17% would get them to hang around just to spite you? Still, I think there’s an underlying current of fear around rent control that leads people to make these suggestions to keep a place empty rather than make some money and house someone at the same time, rather than a serious economic analysis.

Anyway, feel free to check your own assumptions and situation, but I suspect that the best strategy is going to be to accept that the market sucks right now and rent anyway rather than prolonging a vacancy on hope, or to sell if your view on the long-term market has been changed.

1. While the downtown condo market has cooled a bit from the peak, valuations are still historically high, and astronomically high on a cap rate basis thanks to lower rent, as rents have dropped more than prices.

2. We’re not going to worry about inflation or time value of money to keep things simple, but yes, the costs would be expected to increase over time, with an additional big bolus of uncertainty from what property taxes will do after the sledgehammer that covid was to the city’s finances.

Naked Offers, Jumping off Cliffs, and Life’s Surprises

April 30th, 2018 by Potato

I’ve long lamented the use of so-called “clean” offers common in GTA bidding wars, where people bid massive amounts on a property with no conditions to protect themselves. It felt like the boy who cried wolf — for so long I’ve been warning people not to do that because in in the unlikely event something goes wrong, it can blow up very badly — damages in the hundreds of thousands can break a regular family’s finances. Yet for so long the market just kept going up and lending just kept staying loose and people ignored that advice.

Of course, at the end of the story there really is a wolf. And as the white-hot spring 2017 market cooled a bit, we got a few deals that couldn’t close and some court cases making the news. There’s a Reddit thread with hundreds of comments on this story, and at a quick glance most of them seem to be about the fact that there was no financing condition.

“But all the other offers are without conditions.”

Look, this is as close as you can possibly come to that cliche mom advice: if everyone else jumped off a cliff, would you do it too? If you actually need financing to close the deal, then you need a financing clause. If a rich person who doesn’t need financing or a foolish moister with a realtor whispering in their ear is bidding against you with a naked offer, then accept defeat (and subsequent teasing about being a forever-renter basement-dweller) gracefully, rather than jumping off the cliff with the rest of the lemmings.

I can understand that realtors are in a conflicted position, and are more interested in closing a deal than protecting their clients, so they collectively pushed the herd to this madness of unprotected naked offers becoming the standard, something you “had” to do when making an offer. But hopefully people will heed the warning of the judge in this case and stop that nonsense (though a cooling market may stop it naturally as bidding wars die down and people go back to negotiations with one prospect at a time). A part of me hopes the would-be buyers sue their realtor for pushing them to put in a naked offer when the deal was truly contingent on financing, but I suspect in reality it’s more likely the realtor will sue them for the commission lost when the deal fell apart, adding insult to injury.

And as long as I’m ranting and reminding people that there is risk in real estate: financing of a preconstruction is not guaranteed. If you’re not rich enough to have a substantial cushion to close even if the market value at completion is a fair bit below the price you contracted for (which you still have to pay), you’re not rich enough to play in pre-con.

I haven’t really blogged much about the real estate market: the core rent-vs-buy lesson hasn’t changed, and there isn’t much that happens in real-time to talk about. The 30% year-over-year gains of Spring 2017 have cooled, which not many were surprised at, and it will take years to see how it plays out from here. However, while I know that life is hard (very, very hard) to predict and forecast, there are a number of things that have surprised me:

    1. How fast the turn was, especially in parts of the 905. The market was totally coked-up-banana-pants-insane last spring. Then it wasn’t, and prices started to drop. The Stouffville case at the top of the post is an extreme example, but 10-20% decline in under a year is unheard of. For years when people tried to brush off the US housing bubble experience, one of my main points was that the subprime crisis was mostly an accelerant — even without subprime, we were still vulnerable to a crash, but that it would just happen slower. Instead, Markham is on track to out-crash Pheonix, Miami, and Vegas. Surprise! (Though this one comes with a bit of an asterisk as there was a government intervention in the form of the foreign buyer’s tax).

    2. That condos are holding up while detached prices tank. This one can likely be blamed partly on AirBnB, partly on people buying what they can afford after being priced out of detached houses in the frenzy. But that’s a complete surprise from what many who joked about Toronto’s official bird would have expected to see when the market started to turn.

    3. How many AirBnB units there are. I mean, Toronto wasn’t exactly lacking in hotel space for tourists from what I know. And the model of renting out a condo as a luxury hotel was, by all reports I’ve seen, a rather famous flop at the buildings designed for it (esp. Trump). Yet there are thousands of units in the city, despite being of questionable legality even before additional rules came out.

I’m sure there will be lots more surprises in the years to come.

The Rent vs Buy Decision

October 10th, 2017 by Potato


Housing is usually the largest expense in any family’s budget. Getting the decision right about how to pay for your shelter (and how much to pay) matters. Yet you don’t get to take a hundred cracks at it and learn by trial-and-error, all you get is time to do some analysis and make the best move you can with the information available to you.

Unfortunately, many people will spend more time comparing their cell phone options than comparing their housing options. This is partly because it’s also an incredibly emotional decision with lots of overly simplistic heuristics out there: many people look to buy once they are able to, without even considering renting for the long term. They’ll jump to comparisons of condo vs townhouse, or a mortgage affordability tool without even considering whether they should buy at all.

The key thing to know is that in some conditions renting can be the better way to go. There are many factors involved, and this is a long post that will touch on many of them, but if all you take away from this post is the knowledge that renting is not “throwing your money away” but can instead be the better way to pay for your shelter, and that you’ll have to analyze your own situation, that would be fine.

Step zero in your hunt for a place to live should be to evaluate whether you should be buying at all, or if renting may be a better move.

I’ve organized this post with headers and sections to help make digesting it easier, but be warned, it is long. This video covers most the ground I’m going to go over if you prefer video content:

The Core Financial Point

Imagine you had two houses/apartments side-by-side, identical in every respect. You could live in either one, the first being offered for rent, the second for sale. There are non-financial considerations in the choice, of course, but start with the financial ones so you know what to compare the intangibles against.

If the rental is being offered at $2,500/mo while you could buy the other for $250,000, you don’t have to get too far into the details of the math to figure that buying is going to work out better for you: you’d pay off the purchase price in a little over eight years with rent that high.

If the rental is being offered at $1,000/mo while you’d have to pay $1,000,000 for the purchase, it looks very different. If you have to pay 3% on your mortgage, then the interest alone would be almost three times the rent! Renting is superior here by a large margin.

These are two extremes, a price:rent of 100X in the first case, and 1000X in the second. Somewhere in-between those two extremes is a cross-over point, where it’s a break-even proposition to rent or buy.

Exactly where that point falls requires doing some more math, and will depend on a few key assumptions, but the first key point is that it exists: there is a point where prices get so high relative to renting that it makes sense to rent your shelter instead of buy it.

The second key point is that this is not some weird hypothetical situation: the price:rent in some of Canada’s largest cities is above the break-even and it is financially better to rent given many reasonable assumptions.

Comparing the Costs of Renting and Buying

You absolutely cannot just look at the mortgage payment and compare that to the cost of rent. There are many more components to the comparison: you have to look at the total cost of owning versus the total cost of renting.

As a renter, you may have to pay rent, tenant’s insurance… and that may be about it. Any savings you have over the ownership costs you can save and invest, as well as investing the downpayment.

As an owner you’ll have to pay for the property itself; if you don’t happen to have that much cash on hand, you’ll need to pay for a mortgage, which consists of interest (the cost of “renting your money”) and principal repayment. You’ll have to pay for upkeep (note that if you buy a condo that will be split into upkeep you’ll have to pay for directly and irregularly, like replacing the appliances, and the regular condo fees), insurance, property tax, and the transaction fees to buy and sell (and don’t forget that at some point you will be selling — often sooner than you may plan to).

These things are not going to stand still: rent will go up, as will the price of the house (unless it goes down), and money invested will earn some return. These are very uncertain values, so you will want to run the calculation a few times using different estimates to see how it works out. Find a few similar (or if possible, identical) units in your neighbourhood and do the math to see whether buying or renting makes sense on an apples-to-apples basis.

Here is the page for the rent-vs-buy calculator that offers that tool and goes into more detail on the factors. Preet Banerjee also has a rent-vs-buy calculator that includes a Monte Carlo simulation to run many different values of the different parameters. If you’re allergic to Excel, Get Smarter About Money has a flashy one, but note that it has a bug and does not properly compound the differences. The New York Times has one that lots of people link to, but firstly it’s made for Americans, so you have to do non-intuitive things like set your tax rate to 0, and secondly it just shows you the break-even rent, but not how meaningful that difference can be after compounding for some time.

Why Apples-to-Apples

I suggest you start with similar (or identical) places because that will give you the best gauge of whether your market favours renting or buying. For example, in North York (part of Toronto), price:rent can be so extreme (over 400X as of 2017) that a renter would be ahead of an owner by hundreds of thousands of dollars after just ten years. Once you see how skewed the prices are, and how favourable renting is, you can then take the next part in your housing decision: where to actually live.

If you were going to buy, you might have been looking at a 3-bedroom detached house, figuring that you’d save on some future transaction fees and just stretch for that, even if your family might not need the space for a few years. If you’re choosing to rent though, you might rent a 2-bedroom apartment for a few years first. Now it doesn’t make much sense to compare renting a 2-bedroom apartment to buying a 3-bedroom house in a rent-vs-buy calculator — of course the apartment will be cheaper. But that doesn’t mean that once you see buying is no great deal that you can’t then take that move to save even more money.

Similar logic applies for renting out part of a house: if it’s better to rent the whole house, then buying a place and renting out the basement is not suddenly going to make owning make sense.

It’s fine if apples-to-apples is not necessarily the actual decision before you, it still makes sense to do it to see what the price:rent is in the neighbourhood.

The Numbers Can be Huge

Near my daughter’s school there are several houses for rent in the $3500/mo range. That’s expensive, but Toronto’s an expensive place. Buying those same houses would run you around $1.5M in today’s market — even more expensive.

Let’s quickly run through the math: say you were going to buy one of these places for $1.5M. To have 20% down would be $300,000. You’d also need about $54,000 on hand for the land transfer taxes, title insurance, and legal fees.

So on the renter’s side: $354,000 to invest. A monthly rent of $3500 ($42,000/yr), and yearly tenant’s insurance of $420. Total of $42,420.

On the owner’s side: nothing to invest, a $1.5M house, and a $1.2M mortgage at 3.2%, for an annual mortgage payment of $69,634. The owner also has to pay property tax, about $10,500/yr. Insurance of $2000/yr. And they have to set something aside for maintenance and repairs – 1% is a decent rule-of-thumb, though some argue when prices are as high as they are in Toronto that over-states things (on the other hand, with trends the way they are now in the neighbourhood, tar driveways that need updating get replaced with interlocking, kitchens get upgraded far sooner than they wear out, etc. etc., so 1% may still be pretty close). So call it a $15,000/yr maintenance reserve. Total of $97,134.

Both the renter and owner have the same utility bills, as the houses are otherwise identical, and their other lifestyle expenses (from food to vacations to retirement savings) are not a factor.

In the first year alone, the renter is ahead by almost $55,000 in terms of cash flow. Part of the mortgage payment the owner paid would go towards building equity in paying off the house, but then the renter would also have (at 7% returns) another $26,719 in investment returns — the opportunity cost of having the downpayment sitting as house equity instead of invested.

We can keep going year-by-year to see how the numbers add up, but it’s clear just from the first year that the renter is way ahead financially. You may have non-financial reasons for buying, but there’s no way most people would put a $55,000/yr price tag on “pride of ownership.”

And you may say that ok, buying a million-dollar house in Toronto is nuts, but I knew that at “million-dollar house in Toronto” so how does that affect me? If you’re also looking at price:rents of over 400X, you’ll also find that renting is a much better way to go, even if it’s $1000/mo vs $400,000 on a condo. Run the numbers for your own situation and don’t assume that buying will be the better way to go, or that it will be close enough that you can let non-tangible factors make the decision – the numbers can be huge.

Also note that if you were to naively just compare the mortgage payment alone to the rent, they are not that far off — the mortgage is $69,634 to $42,000 in rent — especially if you factor back in the nearly $32,000 in principal repaid. But the other factors can’t be ignored.

What About Appreciation and Leverage?

Note though that in this comparison I do not need to add leverage to the renting side — while real estate gives you access to far more leverage than you could get as a renter buying ETFs, leverage adds risk and you don’t need it.

When you run the calculation for a longer period of time, your assumptions about the future appreciation of the house price matters a lot to the comparison, especially with leverage involved.

If we’re in a bubble and prices decline, then of course renting is going to win, but that may not be the way that this irregularity in the market gets corrected.

Toronto house prices were up double-digit percentages last year; if you believe that kind of insane growth will continue, then the comparison is very one-sided: a leveraged investment with an incredible rate of return is going to be a good thing. If you truly believe prices will continue to go up double digits then go out and buy five houses with as much leverage as you can scrounge. However, trees don’t grow to the sky: even if there isn’t a full-on housing crash, it’s highly unlikely that these rates of price increases will continue — and there’s no way to be sure in advance. A more conservative guess might be closer to the rate of inflation, which is about what housing has done over the very long term. You can even play with the spreadsheet to find what rate of appreciation is “baked in” to current prices, see where that puts prices a decade hence, and ask yourself if that makes sense.

To try to justify the price movement as something other than the madness of crowds, some people have tried to compare Toronto or Vancouver to pricier markets like New York or London. We may think of New York as a kind of archetype for cities: Toronto is like New York in that it has transit and a dense urban centre with financial and research and technology jobs with some kind of arts scene — maybe it is the next global cities and prices will keep going to the stratosphere. A helpful framework is to invert the comparison: if Toronto is like New York in some ways, and therefore should have prices closer to New York’s, how is New York similar to Toronto? Put that way, you may say, “Should New York have prices similar to Toronto’s?” and your mind goes “Whoa, it’s New York, it’s nothing like little Toronto!”

Invest the Difference

Another big point in the rent-vs-buy comparison is that the renter gets to invest the downpayment and any difference in annual costs. Earning a decent return (the default in the calculator is a 7% nominal or 5% real return) is another factor that makes renting a good move. However, if you don’t know how to invest, and your only alternative to buying is sticking your money in a savings account, then it’s harder to see how renting will work out. People often ask “How do I invest my money to get a decent return like that?”

I’ve written a book and created a course specifically to help guide people through how to do that.

Just like with the point on making apples-to-apples comparisons, you don’t have to invest the difference if there are non-financial considerations. For instance, you could have a more fulfilling and balanced life by investing most of the difference, and using the rest to take an extra vacation or eat out more, or buy a car, or rent a place that’s even nicer than what you could afford to buy — whatever fits your life.

Non-Financial Factors

The financial comparison has a lot of factors and is important, but really it’s just the start to frame the decision. There are lot of non-financial factors and pros and cons to buying and renting, and you can always spend more for something — money is there, in part, to spend — just make sure that the intangible benefit you get is worth the cost paid (and for that, you have to start with the financial comparison to set the stage).

Owning Pros:

  • Pride of ownership
  • Security of tenancy
  • Easier to renovate/control of property
  • Leverage

Renting Pros:

  • Flexibility
  • Lower financial risk (no maintenance risk, no liquidity risk, diversified portfolio)
  • Lower cash flow (don’t have to invest the difference)
  • Can look to only meet current needs (non apples-to-apples comparisons)

(And the cons are mostly inverses of the pros: renting has less security of tenancy, no pride of ownership, and having to work with a landlord and their whims; owning has cons of a lack of liquidity and financial risks)

Risk and Life Trajectory

Imagine the path or the trajectory your life is to take: you’ll live in this starter house, then sell it and move to this forever house; you’ll get this job then move to this city to take this promotion; you’ll have these kids at this time.

Housing can play a big role in that life trajectory, and a crash in the housing market (or even a “soft landing”) can have big effects on that trajectory. If you own your house and need to move for a new job, or to get more space for kids, there are huge transaction costs. If you haven’t built up enough equity, you could be stuck. You could be forced to sell at the worst time by a job loss or transfer, or a divorce; your plan to upgrade the starter house may not work if the market declines and the equity ladder you thought you were climbing turns into a snake.

Renting gives you a lot of flexibility: you can move to follow a job, split up, or upgrade with very little in the way of notice or transaction fees. If renting costs less, and you’re saving up the difference for larger financial cushion, it also gives you flexibility and resiliency to accept lower income (for illness, job loss, mat leave, or to go back to school). It will let you take more risks at work, which might help you get out of a bad or shady situation, or more aggressively chase a promotion or new opportunity, even start your own business.

The flexibility does have a downside: there’s less security of tenancy. Your landlord might sell the house out from under you, forcing you to move. Many people want security, and that’s fair — but at what price? Security of tenancy is often over-valued, and while flipping and reno-victions do happen, they’re often after tenants have had several years with a place.

Moreover, the risks of security of tenancy are risks of inconvenience, whereas the risks of getting stuck in an underwater house may be rarer but have much larger severity: they can completely derail your life trajectory.

Renting Mindset

Some people don’t see their rental home as truly theirs, and that’s a bad mindset to be in. Owners move every few years on average, but while they’re in that transient house or condo, it’s theirs. Treat your rental the same way. Find a rental you want to live in, don’t just get the cheapest place you can find and count the hours until housing Armageddon finally arrives. Hang your pictures and paint the walls. Remember: renting is still better even if house prices don’t crash — at these price:rents, all that’s required is that they not go up at insane rates. It will take years for a correction to come, if it does at all.

And don’t let choosing to rent your housing derail your life trajectory: kids can be born into rental household (I do have one myself) just fine.


Many myths and mantras have developed over the years with regards to housing, and they can be tough to shake. Here are a few dispelled:

Throwing Your Money Away

Versions include: “renting is throwing your money away” “pay your own mortgage instead of your landlord’s.” “rent will include all those costs like maintenance and property tax and interest because landlords make money.”

Working through the rent-vs-buy math above should put this to rest — there are many costs involved in owning that are “throwing your money away”. Yes, landlords aim to make a profit renting their units out, but it doesn’t mean that this is a guarantee, a natural law that man cannot break. It is possible to mis-price a rental (or to be primarily a speculator).

A clever way I’ve heard it put: You can rent your house, or you can rent the money from the bank to buy it. Either way you’re paying rent.

Or if you prefer more clever sayings to combat a meme, consider this: buying food is just throwing your money away. Why don’t we all grow our own food?

Forced Savings and Building Equity

A very common point in favour of buying is to say that you build equity by buying, that it’s forced savings. This is true, but can be myopic because it’s not like renters can’t build equity in other ways.

You have to look at the whole picture. Consider chips. At one store you give me $10 for a bag of chips and I give you $2 back in the form of loyalty points that you can later redeem for cash. You get to eat a delicious bag of chips that’s all yours and you got $2 worth of points back, that’s good, right? Forced savings! Building equity! Not all of the money is “thrown away”! But if you can just buy the bag of chips for $5 from another store you’re better off — you can hold on to $5 out of your $10 separate from the purchase of the chips, rather than just $2. There’s no “return” or “forced savings” in the second case, and the full amount paid for the chips is “thrown away”, but you put out less to begin with. In both cases you get delicious chips. In one case you paid a higher total cost, but got something back.

If you need to be threatened with homelessness to save — which is what “forced savings” really means — then you need to call a money coach, not a realtor. After all, homeowners need to save, too: for repairs to the house if not retirement, so you can’t rely just on forced savings. And having the flexibility of lower cash flow can be important in emergencies.

For those who say that “real” people don’t save the difference: yes, people often have trouble saving and investing intelligently. But we’re not talking about the general population, we’re talking about you and your choices: the fact that you’re here means you’ve self-selected to be more likely to have your financial house in order.

Landlords and Yield-on-Cost

Part of why people rent houses for ridiculous price:rents is because while you have to choose between buying at today’s price or renting at today’s price, many landlords paid a much lower price many years ago. They don’t consider the current yield, they think in terms of yield-on-cost, which might be quite good (and I’d be totally open to buying my place at the 2003 price).

You Have to Buy to be an Adult

You may “need to buy before having kids” or “to really be a grown-up”, but these are just social norms from a past generation. Babies don’t care whether the roof over their heads is owned or rented, all they care about is their parents’ love (and the cold glow of the tablet computer). If you want or “need” a detached house with a yard for your kids or fur-babies, you can still have that as a renter. They’re rarer than studio apartments, but still an option.

Make Renting Work for You: Everything is Negotiable

There are definitely some cons to renting. On balance renting is quite possibly the better move for you, so consider some ways to try to mitigate those cons.

Remember that rules and tenant protections vary by province. I’m most familiar with Ontario’s (I live there) and to some extent Alberta’s (where tenant protections appear to consist of a bar napkin with “screw you, renter scum” scrawled across it). Moreover, remember that everything is negotiable, and landlords are (mostly) people too.

Long Leases

A big concern people have when deciding to rent is the security of tenancy and potential rent hikes. Moving isn’t fun at the best of times, and it’s especially exhausting if you’ve just had a kid.

Long leases are a potential solution that hardly ever gets talked about. In Ontario, tenants automatically get to stay and become month-to-month tenants after their lease (typically 1 year) expires. You may get to stay for as many years as you want, with rent increasing by provincially controlled inflation, but the concern is what if the landlord wants you out? What if they want to sell, or push you out in some other way (say the unit is being renovated, or that their close relative needs it, or they sell the building)?

As a month-to-month tenant, you could be forced out with relatively short notice for these reasons.

To mitigate this, you can sign a longer-term lease: 2, 3, even 5 years — longer than many homeowners end up sticking around. In Ontario, as long as you have a lease in place you have the place, even if the landlord wants it for personal use; even if they sell, the new owner has to take you on at least to the end of your lease. If you sign a long-term lease and you end up wanting to leave early, you may have to pay the lease out (depends on how fast the landlord can find new tenants and what rent they will pay), the cost of moving would likely still be less than an owner would have to pay in land transfer taxes and realtor commissions.

Many landlords want long-term tenants, and would likely be thrilled at the prospect of a longer lease, but hardly anyone I know actually asks for one.

Renovations and Improvements

You can hang pictures and paint the walls in a rental. You may have to paint them back when you move out, but you absolutely can personalize your rental within reason to make it your home. Now owners will sometimes personalize to the next level with renovations. As a renter you can avoid all the construction dust and just find a place renovated the way you want in the first place, and move easily when it no longer suits you.

However, if you have specific needs or desires, remember that everything is negotiable. You can renovate a rental, you just have to work it out with the landlord. I myself have split the costs of adding a dishwasher with a landlord when a house we wanted didn’t have one in the kitchen. More substantial renovations are possible — around the corner from me a fixer-upper went for way below market rent in exchange for the tenants putting in the sweat equity of renovating it (the landlord paid for materials). In The Wealthy Renter, Alex Avery describes a case where someone worked with the landlord to renovate the kitchen, coming up with a unique long-term lease that had provisions for paying the tenant back for the work if the tenancy was ended early.

It’s important to remember that renovations are usually a lifestyle expense. We like to tell ourselves that they’re “investments” and that when a place is sold a new buyer will pay more because of the renovations, but in 15 years a buyer will look at the kitchen you upgraded and decide it’s dated and has to be redone just as much as they would have for the previous one you replaced. So it’s ok then to spend money renovating a rental to make it more enjoyable for you even if it’s not “yours” – you can’t fool yourself about the investment value up front, but that doesn’t mean it isn’t worthwhile in some cases to put the time, effort, and funds into renovating your rental home to make it fit your life.


We can talk about large systematic issues, speculation, household debt, regulations, and all that jazz, but this is the main point I want you to walk away with: you have options in how to go about arranging for your shelter and largest expense. You have to live somewhere, and the rent-vs-buy decision for your neighbourhood is the only one that matters for your life. For many Canadians, especially in Toronto and Vancouver, renting may be a much smarter choice.

For more, check out this discussion from Because Money, and of course the rent-vs-buy spreadsheet.


I’ve written a lot over the years on the housing market and the rent-vs-buy decision. I wanted to try to summarize it down to one post that I could point people to when the matter of “step zero” came up. To try to keep this post as “the one”, I will likely edit it several times after publishing as I realize I forgot some things, could organize it better, or explain parts better.

I also believe that Toronto (and Vancouver) is in a massive real estate bubble, and that the current price: rent imbalance will be solved by prices going down… one day. But it’s not going to be fast. Note that coming out better as a renter does not depend on prices going down — just on the cashflow differences and alternative investments out-performing house appreciation in the long term. I don’t talk about the macro picture here, or issues of foreign investment (which may be another source of why someone might rent a place out for less than it costs to own) or interest rates increasing or how or when things might correct. Because all that stuff is too high-level. When you’re looking to put a roof over your head and are at step zero of the house-buying process (should I buy at all?), you can’t make your decision dependent on a housing crash that may or may not come, or may be half a decade in the future if it does. It may be folly to compete in a bidding war for a house with price-insensitive capital, and it may be easy to talk in broad strokes about the doom (or future global primacy) over the horizon… but you have to live somewhere, today, which means seriously considering renting and looking at the options available to you today.

Burn Your Mortgage

August 12th, 2017 by Potato

So this is going to be a review of Burn Your Mortgage, and TLDR, it’s mostly going to be me ranting and nitpicking so if you don’t want to get into that, just know that most of it is fine but there are some particular issues. This image sums it up:

Figure from page 9 of Burn Your Mortgage. The caption reads: Canadian real estate prices have been trending upward over the past 25 years. That’s more than we can say about the stock market over this same time. A commentary is superimposed showing that the stock market return goes off the scale of the real estate one before the halfway point in the data displayed, proving the caption wrong.

Before getting to the book itself, some quick background on the tale. Sean is famous for buying a place, living in the basement, renting out the rest, and working super-hard to pay off the mortgage before he turned 31. The Sean Cooper Story boils down to: guy makes $150-200k/yr, lives cheaply in a basement apartment, saves up $500k over 7 years. Yawn. Oh wait, he didn’t just save and invest that money: he bought a house and then burned the mortgage. Now that’s a marketable story!

The biggest problem with Cooper’s story is that it happened at all. In the book and several articles, Sean has said that the reason he was so motivated to burn his mortgage was because of his mother and how she struggled to pay off the mortgage. He had a nearly irrational fear and distaste for debt.

So what should a debt-averse single person who is frugal and content living in a basement apartment do? Rent, of course! No, wait, I meant buy a house you don’t need! Then you can rent out the top floor while you live in the basement apartment, adding risk, losing your principal residence exemption, stressing about the mortgage and pouring everything into paying it off. I have referred to this as Cooper’s Folly.

Indeed, back when Sean first set off on the journey I pointed out that renting out the top floor of his house wasn’t as good a deal as he made it out to be — he was effectively paying something in the neighbourhood of $800-900/mo to live in a basement apartment based on the numbers he was publishing, which is what basement apartments cost anyway. In hindsight, the Toronto real estate market has been on fire, but because he didn’t stay crazy levered, he actually would have been wealthier if he had just rented a basement apartment, saved himself some stress and worry over debt and space heaters, and invested in a diversified portfolio (thanks to the markets also having a great 5-year run — over 12% annualized for an aggressive e-series portfolio vs ~9%/yr for Toronto real estate).

Anyway, this is just the background to the book: Sean bought a house, rented most of it out, lived frugally, worked an insane amount, and paid off the mortgage in 3 years (or, because the downpayment was also significant, the alternative title might be “local man works three jobs, lives in basement, saves $500k over 7 years.”).

The first chapter relates that story, and talks generally about buying a house, while barely even analyzing whether anyone should be buying a house or if renting might be better in their situation. Where it does touch on the topic, it does an egregiously bad job of it, so if you happen to know something about how to compare the options it comes across as extremely biased towards buying. The figure above says volumes about the dismissive tone towards renting and investing. He takes a dig at bears (throwing shade at Garth Turner in particular), but then sets up a strawman version of the rent-and-invest thesis to then make a show of toppling. Sean ignores interest in the rent-vs-buy comparison (implying it’s insignificant), then on the same page says that mortgage interest is a compelling reason to pay down your mortgage (implying it’s an important factor). Within a few pages he talks about the power of leverage as a reason to buy over renting (indeed, 2 of his 8 pros to buying relate to leverage)… then excoriates the reader to not use leverage and burn the mortgage.

MegaMaid from Spaceballs. She’s gone from suck to blow!

After that, the rest of the first section is generic advice on frugality, with a lot of lists… Most of it is fine, but parts of it read weirdly. To take one particular example, he suggests that you could save $500/yr on gas by planning your trips better and driving more efficiently. I spent $400 total on gas last year. Yes, I don’t drive much and have a pretty efficient car, but even with a normal car getting 10 L/100 km, that would take about 4500 km/yr of “extra trips” to get that kind of savings — it really just isn’t realistic. Similarly, who spends $1000/yr on taxis (actually, more than that, if they can save $1000/yr by cutting back or splitting with friends)? A lot of what he talks about in the frugality tips are outside his expertise and it shows.

Weirdly enough, there’s only ~4 pages on work ethic and time management. This really could have been almost the whole book, as the side hustle thing is a huge part of how Sean did what he did and is within his circle of competence to talk about. In some of his better times, Sean made more in a month (on top of his regular job!) than I made in a year as a grad student.

Let’s not understate this: he’s a very hard-working guy. He worked 80+ hr weeks for years at a time — not just a few months holding the world together while his wife was sick or ahead of a major deadline. And he kept that grind up without burning out.

Part of why I didn’t like the book is because of the massive missed opportunity there — I kept expecting to hear how I could also burn my hypothetical mortgage by hustling to earn more than my day job income, and how to fit all those hours in a day and avoid burning out. But the formula for success remains a secret. There is a side hustle appendix at the end, but it’s almost an insult, full of vacuous tips like “Childcare: Look after other people’s kids.” Yes, that is seriously the entire tip. He also suggests donating plasma for money, but there are only two clinics in Canada that do that (Moncton and Saskatoon), and Canadian Blood Services does not and will not pay for donations (though Wayfare is only alive because of the work of ~200 blood/plasma donors, so please do that one anyway). The rest of the list serves similarly as a brainstorming session with no regard to practicality — and clearly isn’t the way that he did it.

Anyway, from the generic middle we come to the FOMO section:

“Although foreign buyers help prop up the economy, many locals are finding themselves being priced out of the market. It’s probably wise, if you’re in the financial position to do so, to buy now while you can still afford to.”

Yep. He also suggests turning to the bank of Mom & Dad, so they can tap a HELOC on their house to help you buy one. Or buy with a friend (“great way to build equity and get your foot in the door” — BTW there will not be a giveaway as I threw up on my copy).

Only late in the chapter, after fanning the FOMO, does he include a note of temperance: “Buying a home is a good long-term investment — most of the time. But it doesn’t always make good sense. (With a book title like Burn Your Mortgage, I bet you weren’t expecting me to say that.) In fact, you may jeopardize your financial freedom if you buy a home before you’re ready and end up selling it within a year, say.” I for one, could have done with a lot more temperance.

The book pays a fair bit of lip service to buying what you can afford and staying within your budget, so it seems like a huge gaping hole that it’s not until much later that he does actually provide a rule-of-thumb on what affordable means. Though that gets immediately undercut because after introducing the figure for affordable, he says to spend more in a pricey market (no justification on how that’s still affordable, or why you couldn’t spend more of your income in a less hot market).

There’s actually a lot of detailed information after that on buying a house, features of a mortgage, and getting wills and insurance, and there’s a lot of promise here… except the FOMO stuff makes it hard to recommend. Not just on getting in before being priced out, but things that are very Toronto/Vancouver red-hot market centric like going in with a “clean” offer, or a bully offer for good measure.

Here’s where I want to take a bit of a side-bar discussion: this is a dumb thing to do. If you actually need financing to close, then you have to including a financing condition, because if for whatever reason you can’t get a loan (which could be due to an unforeseeable event like changes to mortgage regulations or a weak appraisal), you can’t close and are liable for damages that can be costly without that condition as an out.

Realtors put a positive spin on this and call it a “clean” offer, but you might as well call it a “naked” one (and that gets into another sidebar about the incentive to make a deal happen vs. protect a client). Now, in a flaming hot real estate market (such as Toronto has seen up until recently), those are the lengths buyers have been driven to. So if you want to give advice to people that helps them “win” a bidding war and get a house, you have to be pragmatic with the prevailing conditions and suggest they put in a naked offer. And that’s one approach and I get that and it’s fine — but it should also come with the appropriate warning label, and at the very least acknowledge that most readers in the country are not facing such dire competition and can proceed with more sense.

The other approach is to try to give people unpopular advice to protect them, in which case you can acknowledge that the stupid thing is happening, and tell people not to do it. It’s a small risk, sure: most deals close and the buyer finds a way to finance; most pre-construction purchases end with the market flat or higher and a buyer is able to get a mortgage and close. But in a book that also suggests buying life insurance for young healthy people, this is a comparable risk and deserves similar discussion. As a bestseller, it could have helped turn the tide on foolishness. Besides, in markets where you “have” to go in with a naked offer and completely expose yourself to the risks of not being able to close, the price-to-rent might favour renting anyway.


Burn Your Mortgage is mostly harmless. The lead-in ignores the alternatives and serious risks involved in buying, it has a strong pro-buying bias throughout, and there are better sources to go to for frugality hacks, budgeting advice, and side hustle tips. But if you’re going to buy a house anyway, the middle section does have a fair bit of handy information on what’s involved in the purchase and financing process. To be fair I’ve focused on nit-picking the other sections, so the truly helpful middle chunk is not reviewed in detail.


And just as this post was being put up, this from the Star: “Others, who bought unconditionally, have discovered they can’t get the financing to meet their purchase obligation. In some cases, the bank appraisal has come in at a value below what a purchaser agreed to pay, leaving the buyer scrambling to make up the difference.”