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This pandemic has really done a number on the housing market. Busy metropolitan cities like New York, London, and Madrid that were previously red-hot became radioactive as the pandemic shut downtown cores down. The closing of amenities like cafes, restaurants, and gyms and the shift to remote work made thousands of people look around and ask “Why am I paying so much to live here?”
And it’s not just the pandemic messing things up. Here in Toronto, condo prices have historically been made artificially expensive by real estate speculator/investors who would snap up dozens of units at a time and then turn them into short term rentals. Entire buildings known as “ghost hotels” would be majority owned by these people and rented out on AirBnb for hundreds of dollars a night. These sky-high daily prices would justify the ridiculous unit prices and local residents would rage about being priced out of the market while these speculators would smirk and rake in the dough from their highly leveraged investments.
That’s also coming to an end as city councils declare war on AirBnbs. They finally decided to get serious this year and clamp down on this practice, with Toronto banning short-term leases. You can still AirBnb out a room in your primary residence, and you can still rent out units on a long term, month-by-month basis, but the practice of running an unlicensed hotel and charging a hundred bucks a day is coming to an end.
This forced a flood of these short-term lets onto the long-term rental market, which has predictably dropped rents like crazy. Toronto is looking at a 23% year-over-year drop in rents, something which has never happened in this city in living memory.
Toronto Rents Continue to Plummet as One-Bedrooms Reach Lowest Price in 4 YearsBlogto.com
And just to add insult to injury, Toronto then added in a vacant home tax at the end of last year. Too much competition? Can’t rent out the unit? Too bad! We’re going to bleed you dry anyway!
So after a year of this, these real estate investors are coming to a dire realization: Their entire business model of snarfing up condo units and AirBnb-ing them out doesn’t work anymore. So now they’re stampeding for the exit.
More Than Two Thirds of Condo Investors in Toronto Plan to Sell Due to new Vacant Home Tax51.ca
The funny thing is that article was sent to us by FIRECracker’s parents, who have been hounding us to buy real estate pretty much ever since we started working. When FIRECracker first told them she was a millionaire, her mom’s response “Who cares? You don’t even have a house.” So they are card-carrying zealots of the real estate cult.
And here they are sending us this article with the message “Don’t touch these condos!”
It’s not just them. The article is on a Chinese language site, so the comments are also in Mandarin. In case you can’t read them, here are a few things they’re saying.
Translation: CONDOs will drop. If the price between CONDO and a semi-detached is not that different, who would buy a CONDO?
Translation: Investing in condos is throwing 2000-3000 into the water every month, next year even more.
Yikes. The Chinese have, on occasion, been accused of behaving like swarms of real estate devouring locusts, and those accusations aren’t completely out of left field. Our culture is so obsessed with real estate that we will throw multiple generations of wealth into a single purchase. Which makes this reaction so unusual. When it comes to real estate, if you’ve lost the Chinese, you’re in big trouble.
Which got us thinking: Is it time to buy a condo?
Zig When Everyone Zags
I know, I know, we’re committed renters who gained notoriety for yelling at Home Boners. But that’s because we recognized that this insane herd mentality that many people had towards the housing market was causing people to make irrational, financial disastrous decisions. When everyone else was buying real estate, we deliberately did the opposite and rented because that’s where the value was.
That attitude has served us well this pandemic. As people fled the downtown core of Toronto for the safety of the surburbs, we’ve been hopping from downtown apartment to apartment, each time negotiating with the landlord to lower the rent. As a result, our spending in 2020 came in at an impressively low $34k out of our $40k budget. When everyone else is running one direction, we head in the opposite.
As Warren Buffett says, be fearful when others are greedy, and greedy when others are fearful.
And right now, condo investors are fearful. So is it time for us to get greedy?
The Buildings May Become Flophouses
We pitched the idea to J.L. “The Godfather of FI” Collins a few months ago and after he stopped laughing, he went through a point-by-point breakdown of why that’s a terrible idea.
Nowadays, J.L. Collins is known as the patron saint of index investing, but he reminded us that he only settled at index investing after trying every other possible option. He’s bought and sold individual stocks, he’s owned houses and apartment units, he’s tried his hand at landlording. You name it, he’s done it. So when he gives you advice, you know it’s coming from experience.
One of the more interesting points he raised is that if a significant amount of condo units in a building all sell, it would drop prices by a lot. This would cause other owners to go underwater on their mortgages, which may force them to sell as well. The downward cycle would continue until a bottom is hit, at which point most of the people at the building would have either lost money or been forced to leave.
If that happens, the building would likely fall into disrepair. Bankrupt condo boards don’t take good care of their facilities. So even if we managed to time that dip perfectly and get in at a really good price, the cost of maintaining the building (and repairing the damage of the inevitable neglect) would fall on fewer and fewer owners.
So, he argued, even if we got a unit at a super cheap price, our condo fees would likely skyrocket.
Honestly, I never would have thought of that, and is one of the reasons we enjoy talking to J.L. Collins. We always learn something from that guy. He ain’t The Godfather for nothing!
Do We Want To Stop Travelling?
Another factor weighing on us is that if we were to buy a condo in downtown Toronto, we actually have to live there. It’s not like we can buy it as an investment and rent it out on AirBnb. That’s the business model that no longer works.
So if we were to buy a condo (or, really, any real estate), that means we would have to essentially stop travelling.
I’m not sure we’re quite ready to do that yet. Right now our wings are clipped because of all the pandemic-related travel restrictions in place, but sometime this year once we get vaccinated, these travel restrictions should go away. And I don’t know about you, but a year spent not travelling has only made us realize how much we miss it.
If there’s anything the past 5 years has taught us, is that getting the “travel bug” out of our system didn’t work. Travel is part of our identity now. The world is calling to us, and once it opens up again we can’t wait to throw all our stuff into our two carry-on bags and hit the wide open road again.
So I’m not sure we’re quite ready to hang up our backpacks yet.
But Maybe At the Right Price…
Everybody has a price.
Usually that’s a line some mobster says before he buys off some corrupt police officer, and the context is “how high a price would it take to compromise your values?”
For us, it’s the opposite. How low would the price of a condo need to be to tempt us to jump on it?
There’s a few ways of calculating this price. One is the 150 rule, which we wrote about in our book. Basically, we take the monthly rent of an equivalent property and divide it by 1.5. That’s the monthly mortgage payment we’d comfortable paying, and by using a mortgage calculator with that number, we can figure out the equivalent purchase price.
So right now, our rent in downtown Toronto is $1700 a month all inclusive. By applying rule of 150, we’d be looking at a monthly mortgage payment of $1133, so that means a condo would need to be priced $330k or below to interest us. And since the average price of a condo is still sitting above $500k, it needs to crash a whole lot more to pique our interest.
But besides that, giving up travel is a much more difficult decision. How good of a deal does it need to be to entice us to hang up our backpack? How do you put a price on travel? How do you put a price on freedom?
What Would You Do?
And here’s where I’d love to hear from you! What would you do if you were our situation? If you were a lifelong renter who loves living nomadically, is there a price where you’d be tempted to trade it all in and become a home owner?
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