Category: Real Estate

I’ve often thought that an interesting game would be a simulation that takes you through a few decades of a real estate investor’s career. Yes, yes I’ve heard of monopoly, you’re very funny!

What I envision would involve analyzing properties, determining the cash flow, and dealing with unexpected changes in market conditions and interest rates and whatnot. Probably it’d work better as a single player game, or if it was a multi-player game it would be fairly non-competitive.

Robert T Kiyosaki has a game, “Cash Flow” which is a step towards this idea (and he even made it with the idea of using it to help teach people about money), however its pretty lame (and I’d find it frightening if anyone actually felt better prepared to manage their finances after playing it).

Probably the game I’d imagine would in some way involve people balancing their time and money. They’d find and manage properties (with more potential problems as they got more properties), decide when to keep properties or when to sell them. Potentially it could work off of the computer as a game with cards or something (but there’d be a lot of book keeping tracking mortgages and whatnot). If it was on a computer, I’d make it as much of a simulation (instead of a game) as possible, and hopefully get it to mimic the real world as much as possible.

I’d ideally love it if it illustrated the idea of exponential gains, that things start of slow, and really pick up speed once compounding kicks in (which I don’t think is a very intuitive concept for many of us, we usually have a very linear perspective on life).

Nothing at all like what I’m describing, but I came across a silly, fun real estate game: Mansion Impossible. You should be able to figure out within 20 or 30 seconds what the strategy is then follow it until you win.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
See Part 4 – What to Buy

Friends who have recently survived the house hunting experience have faced and lost bidding wars and have even come across “bully bids”. Bully bids are offers submitted early (instead of on the pre-arranged date) and way above the asking price. Thus, the search may not be an easy one and may take a while.

Part of our house search strategy involves educating ourselves about the factors which determine a house’s value. For that reason, we are also looking at properties outside our budget to look at how much more $50,000 or $100,000 buys. This exercise is also useful in considering our willingness to take on a fixer upper in a hot area. We are also considering taking on a tenant to be able to increase our budget.

So what does roughly half a million dollars buy you in Toronto? The answer is not much from what we have seen.

Open houses provide a fantastic opportunity to compare different neighbourhoods or to just scope out renovation ideas. With this in mind, we made open houses a regular part of our routine for a while. What was disconcerting is that open houses in the more popular areas tend to be very busy and attended by couples fitting our demographic. We are essentially competing with others just like us in terms of age and income – not a surprise perhaps, but a sobering realization of how many people we are up against.

Recognizing that our money would stretch farther if we left the downtown core a bit, my husband and I considered houses along Yonge Street between Eglinton and Lawrence, areas outside our dream locations but still along the subway line. In these “cheaper” areas relative to the Annex, our budget still only allows us to afford a semi-detached.

A semi at Yonge and Eglinton was well-priced at $549K, however proved tiny in its overall size and room proportions. Despite its uninteresting curb appeal, a semi at Eglinton and Mt. Pleasant listed at $619K was very intriguing with beautifully spacious rooms, 4 bathrooms and even a sauna. Its flat roof (potentially expensive and a worry with our winters) and steep staircases (rebuilding a staircase could involve costly structural alterations in the tens of thousands) ruled it out.

An elegant detached century home at Yonge and Eglinton seemed to offer good value with 3,000 square feet of living space and an asking price of $899,900. With well maintained original floors and stately wood detailing, it was still a fixer-upper with outdated kitchens and bathrooms, oil tank heating and some knob and tube wiring. It remained on the MLS for only a couple of weeks.

Some of the other listings that our agent sent were close to Avenue Road and the 401, a beautiful area, but too much of a hike from transit for non-drivers like us.

Downtown, at first glance, a detached house with its dramatically renovated interior looked promising at $649K. However, the lot size and rooms seemed small. Also, its location close to Alexandra Park, a tough public housing area was not ideal. I also couldn’t help thinking that it might be considered a better house in a less desirable area and was worried about its resale appreciation potential. Nonetheless, the house sold for $60,000 over asking after only 12 days.

An updated Annex townhouse had spacious rooms, but had only two bedrooms for a $749,000 asking price. Inexpensive tiles and finishes too traditional for our taste were also off-putting.

Thus far, I am still optimistic, but recognize that either our neighbourhoods or budget may have to change. I have been diligently checking the MLS each day, and am hoping to look at houses each weekend and during the week as they become available.

The search continues…

Read the next post in this series “Week One With an Agent” .

Millionaire Mommy Next Door recently posted a series on renting vs buying which was quite interesting. She takes the view that renting can be much more financially rewarding than home ownership and gives her own situation as the example. While I don’t disagree that she has improved her lifestyle by renting, she makes it sound like home owners can’t participate in equity markets which is a bit ridiculous. On the other hand some of the commenters take the opposite tack and say that the only way to win at real estate (or to save) is to own a house.

There is no difference between renting and buying

I would argue that theoretically there doesn’t have to be any economic difference between renting and buying. Ideally both renters and home owners should be invested in equities and real estate and will benefit if either investment class does well.

Renters could include more REITs (such as VNQ) or investment properties in their asset allocation so they have some real estate exposure to make up for the fact that they don’t own a house. Another strategy that a renter can follow if they want to keep up with their house-owning friends is to use leverage to buy equities so that they can have a large monthly payment as well. If your best friend buys a house and has a $250k mortgage then you (a renter) can go out and borrow $150k and buy equities. The renter can expect a higher rate of return from equities and therefore doesn’t need to borrow as much as the home owner. This way you can still remain best friends and commiserate together about not having enough money.

Don’t overspend on the house

The reality is that when we rent, we tend be fairly moderate in our demands since we know that all of the rent payment is a cost and nothing is going towards our equity. When buying a house, a lot of us buy as big as possible and ignore the huge interest costs, focusing instead on the small (in the beginning at least) amount of equity we are building. A comment such as “At least I’m building equity instead of throwing my money away on rent” would only be true if the amount of interest on the mortgage plus maintenance and property tax was equal to the amount of rent being paid which it usually isn’t.

What to do if you are a homeowner?

• Only buy as much house as you can afford and still be able to save money so you can invest in equity markets.
• Pay down your mortgage at a reasonable rate – 20 years maximum. In case your house value goes down the more equity you have (had) the better off you will be. If your house value goes up then you are still better off with less mortgage.

What to do if you are a renter?

• Save as much as you can (more than the home owner) and increase your asset allocation in real estate investments such as REITs. You could also buy rental properties although that’s another ball game altogether.
• If you really want to emulate the home owner experience without actually buying a home then consider using leverage to buy equities since that’s the reason home owners have done so well in the rising real estate market. Extreme caution should be used with leverage.
• Don’t feel like you are being left behind. I honestly believe that a renter has more financial options than a home owner. The trick is to make sure you take advantage of those opportunities.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
See Part 3 – Choosing a realtor.

Prioritizing a wish list

Be realistic about what you want or need in a home. There are so many permutations of features in houses and condos out there that you have to think about what you absolutely cannot live without and then be clear in explaining your needs list to your realtor.

Creating a wish list is a process of evaluating what is realistic balanced against the market and is a good starting point for your realtor. A condo or a house? A fixer-upper versus a newly built home? How many bedrooms and bathrooms do you require. Do you need parking? Close to the night life or a quiet subdivision? Are you willing to commute? Do you wish to rent out part of the home? Are you a gardener or do you hate the idea of outside maintenance?

What we are looking for

My ideal home is downtown, has at least four bedrooms with as many bathrooms, and has an open, Hotel W aesthetic with immense closets. The dream is achievable, but not in Toronto and not on my budget.

With a $500-600,000 budget, the home that I am seeking is walking distance to the subway in central or north Toronto. While my budget seems generous, the buying power of our money is greatly reduced by the location. My husband and I require three bedrooms and would like to have at least two bathrooms. Within our budget, a detached home is unlikely. Our hope is to find a house that is structurally up-to-date in terms of wiring, plumbing and the roof, such that only cosmetic updating would be needed.

However, we are trying to remain open-minded and are also considering fixer-uppers which our agent feels may be available in the $400,000 range. Within our budget constraints, a fixer-upper would potentially allow us to stay downtown and may give us added space. In terms of future resale potential, it may also be wiser to fix up a solid home in a developing hot central neighbourhood than to buy a starter home in an established one. Some of the smaller renovated homes that we have seen in the Annex were not renovated to our standards or tastes and did not seem to justify the $700,000+ price tag.
Home buying is all about timing, so we shall wait and see what is available in the months ahead.

Location

By far the biggest factor in the cost of a home is location. The neighbourhood that you choose will have a great impact not only on your lifestyle, but on the cost of a home and the type of home that is available.

For my husband and I, location is our top requirement. We wish to be close to the Annex or the Yonge Street corridor, and walking distance to the subway. We are true urbanites who like to be a short walk to everything from grocery stores to restaurants and jobs.

If you are new to a city, check with friends and colleagues about different neighbourhoods. Form your own opinions by visiting open houses, talking to neighbours and looking around the area. If you have children, check into the reputation of the schools nearby.

Some good neighbourhood references are the real estate guide on the Toronto Life website, www.torontothegood.com and a book called, what else, Your Guide to Toronto Neighbourhoods by David Dunkelman. These sources each give an overview of the type of houses in different areas, and, in the case of Toronto Life, fairly recent housing prices. Keep in mind though that the descriptions do not give a complete picture in terms of area safety, noise levels and the type of current residents, factors which you should evaluate in person. Regardless of lifestyle, your real estate agent is a valuable resource for providing up-to-date advice in this regard.

If like myself, neighbourhood “walkability” and nearby amenities are important, www.walkscore.com is a wonderful tool. Just type in an address or postal code, and up pops a list of everything from coffee shops to parks and their proximity. A walk score rating out of 100 is also listed. Also helpful for pinpointing location is the mapping program on www.google.com.

Finally, on Fridays, the Globe and Mail has a real estate section with helpful profiles on recently sold homes and their asking and selling prices.

Read the next post in this series “The Search“.

Thicken My Wallet asked me a while ago to post more about the multi-use building that I was involved in purchasing as a silent partner, and my experience doing that sort of deal. Just to be clear, what I mean by silent partner is someone who puts money into an investment, but isn’t involved in the day-to-day management of it.

Some time ago a buddy of mine, who has been holding my hand while I learn about real estate, contacted me with info about a building he’d found in a small Ontario town he lives near. He sent me the general building info, and it seemed pretty good ($400K, bar and retail store on the main floor and rooming house upstairs).

My friend likes to be pretty aggressive with real estate, so he never has enough cash to buy everything he’d like to. He also likes to mortgage to the hilt so that he has as much possible cash for the next purchase as possible. Given this, he’s quite open to partnering with people (and has done so successfully in the past with his sister’s boyfriend).

I told him it looked interesting, asked for an income statement (which seemed too good to be true, but we verified it). We put in an offer conditional on a property inspection (and my buddy negotiated a vendor-take-back mortgage).

After the inspection was completed (and we managed to get $25K knocked off the purchase price due to some potential problems turned up by the report), we set up a corporation (my buddy took care of all this), and recently completed the purchase.

Originally my friend was planning to live there himself, so he was going to manage it in exchange for living rent free, but in the end he changed his mind, and what we decided would be fair would be that we’d pay him 10% of the gross rent to manage it (and treat this the same as any other property expense), then we’d split everything else 50/50. I live in Toronto so wouldn’t have been able to do any of the management duties.

I went to tour the building, but for the most part deferred to my friend’s experience. This isn’t necessarily a course I’d recommend to everyone, but I’ve known this guy for about a decade (we met at university) and I was in his wedding party, so I’m willing to trust is judgement.

There’s a fine line to walk between doing business with someone you’re close enough to trust, but not doing business with someone you’re so close to that it might jeopardize the friendship. Some people trust more easily than I do, and some people are more able to do business and keep the friendship out of it than I can. For me there’s a pretty narrow range where business and friendship intersects (and I’m always nervous when I’m in that territory).

As an example, I could see my brother suggesting him and I buy property together (with him as the silent partner). I’d be very uncomfortable doing this, as if anything went wrong with the deal, I could see it causing problem with the relationship (and I don’t want to lose my brother over money). On the other extreme, whenever you go to “real estate networking” events, you’ll find TONS of people who are very excited to partner with you on deals. I’d say if you’re that sick of your money, just send it to me instead of losing it to them.

We’re still in the early stages of managing the property, so I’ll post more details in the future once figures start rolling in (and mention if we run into any problems).

I’m writing this late at night the night before posting, so I may have left out important details. Please let me know if there’s any holes in the story and I’ll be happy to fill them in! 🙂

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
See Part 2 – Down Payments and Financing

Going it alone or choosing a realtor

With the availability of information online on MLS (Multiple Listing Service), how necessary is an agent? After all, agents work on commission and are paid a percentage of the value of a home. The fee is paid through the seller, but a buyer indirectly pays through the negotiated selling price.

For myself, the decision came down to the practicality of having an expert do the initial culling through the listings. Because our top priority is to stay along the subway line, my husband and I are dealing with the “hot” neighbourhoods where houses can sell within a week of being listed. As home buying novices, we wanted the advice of an expert in finding the right home and not overpaying for it. Real estate professionals have access to MLS properties before the public and can fine-tune searches. Agents are also experienced in negotiating offers, have access to a plethora of specialists such as home inspectors, lawyers, and mortgage brokers, and can lead one through the intricacies of closing costs and legal requirements.

Choosing a real estate agent

Choosing the appropriate person to work with was therefore not a decision that we made lightly. Start with the recommendations of friends and people you trust. Look at an agent’s online profile and their recent listings to evaluate if they work in the neighbourhoods you are targeting and at your budget. How long has the person been in the business? Although I was confident about a friend’s referral, I still met with the agent to interview her and to determine if she was someone with whom I would be comfortable working. I was impressed with her frank advice and that we could sign a buyers’ representation agreement for as short a term as two weeks. My husband and I decided to begin with a one-month contract instead of a longer commitment to see how it goes.

Dual Agency or Buyer’s Agency Agreements

Several of my friends were fortunate enough to find their homes without an agent and then worked with the listing agent to negotiate the buying price and finalize the offer. Such a situation, whereby the seller and buyer use the same agent, is referred to as a dual agency. The seller must also agree to this arrangement. From the agent’s perspective, dual agency is advantageous as s/he would earn a double commission. However, the worry is whether the agent has your best interests in mind, especially in terms of price.

Engaging in a buyer’s agency agreement is a contract to use the services of a particular agent or company for a specified length of time. The advantage of such a contract is that the realtor has agreed to work for you and is obliged to disclose all available information.

Realtors also have a network of other experts they can connect you with such as home inspectors, mortgage brokers and lawyers. A real estate agent’s job is to make things easier for you, so do not be afraid to make use of their network if you don’t already have access to such professionals.

Read the next post in this series “What to Buy?”.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.

See Part 1 – First Steps and Pre-Approved Mortgages.

Mortgage Down Payments

Remember that a mortgage is a fancy term for a loan; however, it is a loan that is secured against the value of your home itself. The original amount that is borrowed is referred to as the principal.

A conventional mortgage requires a downpayment of at least 20% the purchase price of a home.

First time home buyers can take advantage of the federal government HBP (Home Buyers’ Plan) whereby an individual is allowed to withdraw up to $20,000.00 from his/her RRSPs. Minimum repayments of 1/15^th of the loan are required each year, with the full amount to be repaid within 15 years. You are essentially loaning yourself the money for a home purchase. The downside is that the withdrawn money would be not be appreciating in your RRSP.

If you do not have 20% down, what are your options?

When a mortgage is taken out on more than 80% of a house’s cost, then it is known as a high-ratio mortgage and lenders require mortgage insurance to protect themselves in case of default. The insurance is required on the full mortgage and is either paid upfront or added to the mortgage itself.

Mortgage insurance is charged on the full principal mortgage. The calculation is based on the percentage of the mortgage compared to the total purchase price.

CHMC (Canadian Mortgage and Housing Corporation) and Genworth Financial Canada are the two institutions which provide mortgage insurance in Canada. Mortgage insurance premiums are available here.

Table of CMHC Mortgage Loan Insurance Premiums
Loan Size (% of Lending Value)	Single Advance Premium (% of Loan)
Up to and including 65%	0.50%
Up to and including 75%	0.65%
Up to and including 80%	1.00%
Up to and including 85%	1.75%
Up to and including 90%	2.00%
Up to and including 95% Traditional Down Payment Flex Down	2.75% 2.90%
Up to and including 100%	3.10%
Note: See your lender for premium surcharges and other terms and conditions that apply.

Thus, with a house purchase price of $400,000 and a $50,000 down payment, the CMHC premium to insure a high ratio mortgage would be:

$350,000 mortgage x 2% (the rate for a loan 87.5% of the house value) = $7,000.

My husband and I decided to avoid taking out a high ratio mortgage and will be using a line of credit to top up our downpayment to reach 20%. We were leery of the compounding interest on a higher mortgage. As good savers, we are confident of paying off a line of credit quickly, so the borrowing cost will actually decrease as the loan is paid off.

Different Types of Mortgages

The lowest lending rate is only one of the considerations for a mortgage. These other variables will be discussed below and vary by bank or lending institution.

Fixed or Variable Rate — A fixed rate is a set lending rate for a specified period of time with fixed payments. A variable rate changes on a monthly basis against the prime rate. Therefore, while your payments remain the same, the amount that goes towards the principal loan versus interest changes.

Although historically, variable rates have saved money, it is a guess which direction rates will go in the next few years. Therefore, which route you go depends on your comfort level in terms of risk.

Open or Closed – Open mortgages allow you to repay the entire mortgage or make extra payments without penalty fees. Some closed mortgages charge a fee for extra payments, while other closed mortgages require that you wait until the end of the term. The degree of “openness” on a mortgage varies between institutions. If you wish to pay down a mortgage faster and will have extra funds for payments, you may not want to choose a completely closed mortgage.

Term – The length of a mortgage agreement can last from 6 months to 10 years. Short-term mortgages run for two years or less and are advantageous for borrowers who think that rates will be decreasing in the next few years. After the end of a term, a new mortgage can be negotiated with a different lender.

Amortization period – A period of 15 to 40 years can be chosen. The length of time that you choose to pay back your mortgage will affect the size of your payments and the amount of interest that you will eventually pay.

Payment Schedule – The frequency of payments (monthly, weekly, bi-weekly, etc.) against your mortgage will vary between financial institutions. Because interest is compounded monthly, making weekly payments will more quickly reduce your principal mortgage than paying on a monthly basis, even if the overall size of the monthly payment is the same.

Pre-payment Options – Essentially extra payments against the mortgage free of penalty fees, the terms and amount vary between lenders. As with a more frequent payment schedule, pre-payments help reduce the principal and the overall interest borrowing cost.

Read the next post in this series “Choosing a Realtor“.

Are you the type of person who has to have everything updated in their new house? Do you shudder at the thought of having laminate counters in your kitchen and not stone? Do you throw out perfectly good cabinets and replace them with expensive new “modern” cabinets? Do you toss out modern white appliances and replace them with stainless steel ones?

If so, then this post is for you! I’ll discuss two reasons why you shouldn’t be replacing parts of your house that are still functional – one is the environment and the other is your pocket book.

Most renovations are not good for the environment

Environmental effects of renovations are pretty major. Lots of energy gets used to make new materials like drywall sheets, kitchen counters, tiles etc. so if you are throwing out perfectly functional kitchen counters then you are not doing the environment any favours. Another problem is that the disposal of demolition material takes up a lot of space in landfills. It’s one thing to replace an item that is broken or in a state of disrepair but to redo a bathroom because you don’t like the colour of the tiles is a bit of a waste.

Renovations don’t always add to house value

At this point if you are thinking that you would be willing to fork out some money for a Prius but you are not going to give up your dream kitchen for the environment then let’s take a look at the effect of renovations on your house value. A lot of people assume that any money they put into a house automatically gets added to the value of their house. So if they buy a house for $400k and spend $30k on a new kitchen then the house must be worth $430k right? This assumption is a bit of a stretch, however let’s say for the sake of argument that it’s accurate. If that assumption is true, then the opposite must also be true – if you remove anything of value from the house then the value of the house must go down as well. Typically when you buy a house that is in half decent condition then you are paying for all the various parts of the house. If the kitchen is in reasonably good condition or even if it’s not that great but still functional then you paid some $$ for that kitchen when you bought the house. If you were to remove the kitchen and then put in a new one then you have to subtract a value for the removed kitchen.

Let’s look at a hypothetical example:

Let’s say you buy a house for $400,000, the kitchen was remodeled about 20 years ago and is in fairly good shape but it looks a bit dated in your opinion. The new kitchen you want will cost $25,000. Let’s assume the value of the existing kitchen is $10,000. We’ll also make the assumption that your house value goes up or down with any money invested in renovations or demolition (removal of value).

In this case the added value of the new $25,000 kitchen will be:

$25,000 – $10,000 = $15,000. Considering you paid $25,000 and went through a lot of hassle for the new kitchen you didn’t get a very good return on your investment.

So how do you help save the environment, get your money’s worth from renovations and still have your dream kitchen?

I suggest two different alternatives:

1. Try to buy a house with a kitchen that is in the poorest condition possible. The more rundown the kitchen is, then the less value it has and the negative effect of removing it will be minimized.
2. Lower your standards a bit. Consider repainting the cabinets instead of replacing them. The repainted cabinets might not be quite as nice as the new ones but for less than 5% of the cost you might have a much better value. If the appliances aren’t too old then hang on to them and decorate the kitchen in such a way that they fit in. Bottom line is to try to only replace items that need replacing and just fix up/paint everything else.

Summary

Whether you are thinking of the environment or your pocket book – try not to remove items of value when you are doing renovations. Use as much as you can of the existing room.

If you have to gut a kitchen/house then buy one that is about to fall down, that way you aren’t throwing out anything of value.

And remember – it doesn’t matter how much you spend on your new kitchen – the food will still taste the same!