Thoughts on Buying Real Estate?

Been on this board for years without posting, and I keep coming back because there's some seriously good insight (and some serious bullshittery) on this board that I'd like to tap into. I'm in the market for a condo and wanted to get everyone's insight, thoughts, and insults on buying real estate with all the crazy shit happening in the world today.

Bit of background:
I'm a 3rd year associate at a MM firm that invests globally and I'm currently based in Canada. I've been interested in buying a condo in a city that many have been calling a real estate bubble for years - Toronto. First and foremost the goal is to find a comfortable place to live while I grind away, but ultimately I want it to be a rental property producing some cashflow. I'm fine from a budgetary perspective and am pre-approved for the bite size I want, I'm not over-levering myself (looking to buy at 50% - 60% of my theoretical max pre-approved mortgage amount) and I am painfully aware of the "hidden" costs of purchasing real estate in Canada. I've got no debt and a healthy investing acct balance to put towards a down payment with a fair bit of change to leave in equities.. but every time I find myself convinced I'm ready to buy, there's some new "what if" that I come up with that keeps me apprehensive. I've had a long term goal of owning several properties since I entered the industry and brushed shoulders with seniors who own property.

I know folks in both Toronto and Vancouver on both sides of this equation - those who purchased and saw their equity value re-rate 100% in 10 years, and those who stayed on the sidelines and are salty as fuck.

My macro thesis is basically that rates wont be this low for long (I'm quoted in the mid 1%'s for 5 year fixed on a 25-yr amort). The economy will turn back on and immigration will continue driving Canadian real estate higher in the long term. I think real asset inflation is unlikely to go away post-COVID, and BoC will want to keep the RE markets buoyant since the Canadian economy would be shit without them. Things are definitely softening - I've been dabbling in it for the last 4-5 months and have seen numerous price decreases and units sitting for weeks when they would have historically sold 20% over asking in a day. COVID-19 second wave lockdowns are fast approaching and the market sputtered pretty significantly in March, but that was fear of unknown unknowns and I don't think we'll see quite the same sharp, short term correction here.

My realtor is a guy who's only ever known the bull market and doesn't have great insight other than to say buying is the right call (probably cause it pays their bills).

I am not looking to flip, but my underwriting downside case is that shit hits the fan, I'm out of a job, and I have to sell <3 yrs from now. I think that my income level is above average for my role in Canadian finance and while I don't think I'd have any issues replacing a large portion of my income I still stress about the downside.

Questions for the group:
How many of you have been in my shoes and bought real estate? What do you wish you knew going in? Any regrets? Any resources that helped you make your decision? 

Am I crazy for wanting to enter the market at a time of such uncertainty, at the end of an unprecedented bull market that has priced out the majority of young folks looking to buy a place? Should I stay liquid, wait for that sweet stimulus, and ride the equity bull market?

Even if you don't have any experience in buying or owning a condo/real estate, or your experience/insight only applies to other markets, I would still appreciate any and all thoughts. I want as much perspective as possible.

I realize I've written a novel here, so if you've gotten this far, cheers. 

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Comments (15)

Oct 13, 2020 - 5:53pm

Just bought my first piece of RE, probably same age as you. I think you are only likely to regret it if there is a reasonable shot you will sell within 5 years or less, almost impossible not to lose money selling that quickly with all various fees and the way mortgages are set up. Don't buy anything that leaves you with less than 12 months living expenses left over in CASH. 

Keep an eye on HOA and trends on the specific building, this is another potential trap door so just do some basic blocking and tackling. If you find a place you like and comps have it at a near or under market price, go for it. At the end of the day you will be happier in a place you enjoy and own, that can't be captured in a spreadsheet. 

Oct 14, 2020 - 9:57am

Thanks for the response. Agreed re: time horizon, I'm not keen to eat selling expenses anytime soon. Once upon a time I worked in a related field so I'm familiar with the strata/condo costs and what drives them.

A few follow-up questions for you, again just looking for as much perspective as possible here so any insight is appreciated.

Is this a future rental / investment property? Anything surprise you over the course of closing? What were your evaluation criteria and how long were you in the market? 

Oct 13, 2020 - 9:10pm

I bought a SFR in the suburbs for rental income. One thing that's helped a lot was help from my dad, who used to be a contractor. I wish I learned more from him, but he's been a great help with fixing/working on things around the house that I have much less experience with.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

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Oct 15, 2020 - 5:21pm

Yeah that's correct. The SFR is in the market where my parents live, and it helps having my dad there so we did a lot of the work ourselves (except for HVAC, new roof, things that are much more complicated). Not unlike our president, I got a small loan of not $1M for the down payment, but I am paying my parents back as well as the mortgage so I don't net all that much. They earn a bit. This was a little less than a year after I graduated.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

Oct 13, 2020 - 9:25pm

I think it depends on opportunities you have available to place capital elsewhere and the IRR it can net you...

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Oct 14, 2020 - 10:19am

Thanks for the response - This is probably the single biggest hang-up I have here. 

Shorter term, the ~$200k - ~$250k for down payment & taxes, although in puny Canadian dollars, could be better used in equities or in a new local fund I have an in to that's been shooting the lights out. That is high-risk. Longer term, I absolutely want to be a property owner in both the Toronto and Vancouver markets and ultimately have a tenant pay for my mortgage and retire off the equity in 25 years. I think this is low risk (provided I hold for term).

I do struggle to form a definitive base case here. RE is a massive component of the Canadian economy and the powers that be want growth to continue. Immigration, post-COVID, is going to be substantial as the world continues its trend towards becoming an unlivable shithole. Rates are as low as they will ever comprehensibly be (knock on wood), and COVID-19 lockdowns are keeping a lid on prices. The fine print here is that Canadian real estate has appreciated at breakneck pace over the last 20 years and the majority of folks are now priced out - so who buys or rents down the road? More rich immigrants? How much further does this gravy train go? I've seen it firsthand amongst my friend group and while I'm incredibly fortunate to be in the position to buy today, I know that this shit is cyclical. Where's the down cycle? Am I about to sign up for 25yrs of debt at the absolute peak of the market? Are we Japan in 1989?

That's a long caffeine-fueled rambling way to say I'm suffering from analysis paralysis. I don't know that I even have a point to make here. I gotta nut up or shut up.

Oct 14, 2020 - 11:46am

Yeah, it is completely dependent on this question. I looked into some real estate in ~2012 or so and instead kept my money in equities and the returns I would have had on the real estate don't come close to what my equities portfolio did. Could have easily been the opposite, but looking at your options is the only way to reasonably assess this question.

Then again, I live in a state that has high taxes, has a tendency to screw landlords (if rental property) and has extremely expensive real estate. Between having to keep up with the property, the taxes, the headaches of tenants, the interest, I was just never really that into it. If this is a 30-year thing, the IRR is going to be really low. 

Oct 15, 2020 - 9:10am

Your state sounds like my province.. 

If you'd gone in on RE in Toronto in 2012 you'd be up 100%, which ordinarily would be a pretty decent gain but compared to US equities on that same time horizon you'd have lost out. 

I think its less about velocity of capital return and more about longer term portfolio construction for me. I know that I want to own real estate and I'd be leaving roughly 40% of my investible assets in equities and 10% in cash immediately following closing. I guess my free-floating anxiety is that this is the long-awaited top of the Canadian real estate market. 

I get the sense that a lot of younger (ie: more risk-tolerant) folks on this board would prefer to keep renting, stay liquid and in equities. I've also received this advice from a few colleagues & friends, but on the other hand I've been told to go big on real estate by other colleagues. Just want to get as many perspectives on this as possible before committing.

Dec 9, 2020 - 10:55pm

I'm curious to understand how people view real estate investments as well, specifically in bigger metropolitan areas like NYC/LA/SF.  Is it really worth the investment to buy vs. rent?  I tried doing the math and this is what i came up with based on the following assumptions:

  • Estimated Purchase Price: $850K
  • Down Payment: $170K (20%)
  • Loan: $680K
  • Interest Rate (30-year fixed): 3.5%
  • Annual Taxes = 1% of purchase price, grown at 2.5% annually
  • Monthly HOA = $450, grown at 5% annually
  • Monthly Insurance = $333, grown at 3% annually

Over the course of the first 3 years:

  • Interest, Taxes, HOA, and Insurance total $120,796 ($40,265/yr; $3,355.45/month)
  • If you include the principal payments needed, that would be an additional $44,132 ($14,712/yr).
  • That brings your average monthly cost to $4,581/month.  

If interest, taxes, HOA, and Insurance are essentially money lost (just like rent), would it be better off paying less tan $3K in rent and saving the rest and not having to worry about potential CapEx issues that may arise (which i didn't account for in the numbers above)?  I don't see how it makes sense to buy compared to renting.  Am I thinking about this incorrectly?  Even if you assume a 30% tax bracket, based on interest of $21,930 over 3 years, that's about $548/month.  That takes your all-in $4,581/month down to $4,033.23.    

Dec 10, 2020 - 11:00am

Your thinking is correct to me re buy vs. rent and the TRUE cost of buying (haven't checked your math at all). Capital gains, especially recently, potentially make the so called monthly "loss" worth it.

The ideal situation I think would be to buy in a high-demand area and have a quality tenant who pays a rent that eats most of these costs for you and allows you build equity in a fixed asset/inflation hedge at a relative discount to its true cost. This was my personal thesis on purchasing an apartment to live in for a few years, then rent out/own long term. In 20-30 years, I'd be living elsewhere and this city apartment would presumably have appreciated in value and I'd have built significant equity in it, which would form a portion of my retirement.

I was looking at buying and living in a unit in the $800 - $900k range earlier when I posted this (work has gotten crazy and so has COVID so I've stopped seriously looking). At the rates I was getting, "all-in" costs before CAPEX were circa $3,500 - $4,500 per month depending on building. Typical rent for these same buildings was $500 - $1,000 less, pre-COVID. Since I was going to be living in the building at first, my mortgage amount alone was $3,000, maybe $1,800 of that was going to actual equity and the rest to interest. So I was "losing" $1,700 - $2,700 per month.

There are several other exogenous factors affecting my decision to hold back from buying right now (work load, potentially moving for a new job, stress, etc.) but I am renting a 2br for $2,800 in a building where the unit would cost ~$850k and would run me about $3,800 before CAPEX. Mortgage was about $2800 of that amount, so it was basically my rent, but only $1,800 was principal out of that mortgage payment. So I was "losing" $2,000 a month before CAPEX. It's not terrible, especially compared to "losing" $2800 in rent, and if life was a bit easier right now I'd probably be more willing to eat that "loss" if it meant building equity in a highly desirable unit/building in a top market. 

All of the above ignores rent / home price inflation/appreciation. The people selling these $850k units bought them for $400k - $500k 5 years ago. Before any fees/taxes that could mean $5,000+ of capital gains per month. My rent pays the all-in cost of my landlords with margin, but it would barely cover the mortgage if I were to buy the property from them and rent it out at the same rate. The last decade or two have been apeshit bananas for real estate but accounting for capital gains on the property, helps explain why folks are so keen to "invest in real estate" IMO.

I watched a Youtube video by a guy named Benjamin Felix about something called the 5% rule - basically, the rule of thumb says if you can rent for an annual cost of

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