Reader question: Renting in Vancouver

Ali posted this question in the comment section of a recent post.  She has given permission for me to repost it.  There are some very intelligent readers who may want to add their wisdom.

“I live in Vancouver and I’ve been offered $378,000 for my apartment (private sale) by an investor that already owns one suite in my building. I can rent back for $1400 a month in a 5 year lease that I can get out of with a 60 day written notice. I think the market here is most likely going down and I think I should take the deal, but I’m at a loss as to what to do with the $378,000 (i bought 10 years ago and have clear title).”

Additional info:  The condo is owned outright.  She has first right of refusal in the event that the condo be sold from under her.

Question 1:  Is it wise to take this offer?  The negotiation process is complete and this is the best deal she was offered.

More from Ali

“I’m super tempted to put all of the money into big Canadian dividend paying companies to generate an average yield of about 5%, that would more than cover my rent by the dividends alone…fingers crossed for capital appreciation. Would that be crazy? I can get 2.2% in a high interest savings account but half of that will go to the government, and I think bonds are a really bad bet right now. Any insight or suggestions would be greatly appreciated.”

Additional info:  She would like to buy back into the market at some point if prices normalize.  If that does not happen, she is fine renting.

She is in her mid 40s.  Obviously not a big fan of bonds.  May consider purchasing real estate in the US instead.

Question 2:  Given this information, what would you suggest she do with the 378K coming her way?

I’ve given her my advice which I’ll post after we get a few insightful suggestions from our readers.

Cheers,

Ben

Advertisements
This entry was posted in Real Estate and tagged , , , . Bookmark the permalink.

44 Responses to Reader question: Renting in Vancouver

  1. Etienne says:

    You can probably find private manager with that money (they usually start at $500k). They charge less fees and are usually very good.
    Personally, I’d have a chat with Garth Turner and see his fee schedule, then decide. But 5% on dividends is quite good.

  2. Marc says:

    I would take a certain portion, say 20-25% and buy some physical metal (gold mostly and a little bit of silver). I would also put a chunk (40-50%) into energy and other dividend paying stocks. As far as bond, I would avoid. I personally would invest in a small piece of land (with a cabin) a cheap one that’s out of the way. However, I work from home so I can live anywhere.

    The cabin will not depreciate as much when housing start tanking (especially if its in the middle of nowhere and not where prices have been bid up). This would give you a place to live, some long term non counter-party risk investment (gold and silver) and hedge that with some investments that pay dividends. I would also buy some other physical commodities that can be stored for a few months (like food and bathroom supplies). If there is a 1% chance of SHTF, its worth 2-3k to invest against it.

    That is what I would do.

  3. BBC says:

    We are also in Vanc. and sold our westside home last spring and are renting. We have kept our money liquid, diversified and making more than inflation. Where to put your money depends on how much risk you are willing to tolerate.

    Good for you to not look a gift horse in the face!

  4. Mango says:

    Give it to charity

  5. Terry says:

    Difficult without knowing what other assets and income she has. Assuming net worth is around $400K – which is not really much for someone in their mid 40s, I would:

    Sell for sure and look for something similar but somewhat cheaper to rent or she could move out of downtown a little.

    Here is what I recommend..
    25% Fixed income Preferred Shares
    25% Blue Chip Dividend Payers
    30% GIC – fix for 2yrs. Use as down payment later here or buy outright in USA.
    10% Stocks – pick those you feel will do well (utilise TFSA as much as possible).
    10% Bank it at 2% interest – Emergency Fund

    • Pat says:

      “Assuming net worth is around $400K – which is not really much for someone in their mid 40s”

      Hope you are enjoying your life in the clouds. The median 40-something Canadian isn’t anywhere near $400K in net worth.

  6. Ralph Powers says:

    I would keep some say 20% in cash. Even though rates are horrible if there is a big housing correction (which I believe there will be – esp. in Vancouver) You have access to cash for a healthy downpayment. The rest of the assets I would put into blue chip dividend payers, some precious metals, energy, and some preferred shares. Make sure the preferred shares are rate reset with a heftly premium when the reset. (for example most prefs re-set 5 years from issue but some will reset at 5 year canadian bond +3-4%. This way you’ll probably get your prefs redeemed and if not at least you’ll get compensated with a higher rate). When you do decide to buy a place you have your cash ready and if the markets are higher you could liquidate some of (or all) to buy a place. Or if the market is weak, you could hold off selling your investments continue to receive the income and wait for a more opportune time to sell.

    Just my quick 2 cents.

    • ali says:

      nice advice about the preferred shares rate reset!
      and I totally agree with your advice regarding U.S dividend paying stocks, I think the U.S market is probably going to outperform the Canadian market this year, and although I’ll mostly invest here for the dividend tax credit, I do plan on putting a bit of money there.
      I’m betting on Citigroup and Bank of America in my TFSA right now.

  7. Ralph Powers says:

    Forgot to add to my last post – look to add some US dividend payers. Everyone hates the US market right now, but it won’t hurt to have some diversification there either.

  8. Kevin says:

    My advice would be to sell, take the $378 K, and do the following:

    $75 K in physical gold
    $20 K in physical silver
    $283 K in cash (high interest savings account at 2.2%)

    In my opinion, right now is a horrible time to be investing in equities. The dividend yield at 5% might be tempting, but considering current equity valuations, I don’t think you are being adequately compensated for the risk to your capital.

    The bursting of the credit bubble in Canada will be a deflationary event. By keeping the majority of your assets as liquid as possible (in cash) right now, you will be in a great position to get into equities or back into the housing market in the future.

    At 2.2% on $283 K taxed at 35%, you still return ~ $4050/yr with no risk to your capital. You would then be paying out of pocket ~$12.75 K/year to rent, which is only 3.3% of the lump sum of $378 K.

    I think the 3.3% hit to your lump sum over the next year will be partially offset by an appreciation of the gold/silver. Even if it is not, given current valuations of equities, I think you are far better off remaining primarily in cash while sitting on the sidelines.

    • ali says:

      Thanks Kevin for your reply. I’m a bit scared of gold and silver right now.
      I also hate the fact that I have to pay income tax on 100% of the 2.2% i make in a high interest savings account…but you certainly make some good points

  9. mac says:

    What an interesting position to find yourself in, Ali. But let’s start out by calling it what it is… and that’s market timing. From what I understand, you would be cashing out of the real estate market, and investing your money, with the hopes of buying back into the market at a lower price.

    Market timing gets called a lot of things: risky, hard-to-do, impossible, foolish, and brilliant among others. It comes with risk and costs. It’s a heck of a lot of fun if you get it right. But you need to be able to survive emotionally, if you get it wrong.

    I think to do this, you need to be honest with yourself about how you’ll feel if the market doesn’t turn out the way you expect. If the rate of return on your “invested” money is less than the rate of increase of Van RE and it doesn’t bother you, then you are a good candidate to sell, rent and see what happens. But if it goes the other way and you find yourself anxiously watching real estate increase while your money does little to keep up, don’t do it. Or if you’re susceptible to feeling bereft without “owning your own place”, or if negative comments by friends and relatives keep you up at night, don’t do it.

    As to what to buy with your cash, I’ve bought a few credit products, even very recently, from Onex that pay a “return of capital” that is 7% or so. That’s even better than dividends from my tax perspective. Unfortunately, you tend to need a trusted advisor to find you these little gems. You could add a credit product or two like these to all the usual candidates being mentioned by other posters, preferreds, stocks, commodities, ETFs etc., and hope to add up to a pretty decent return for 2011.

    You’ll also have to become an “investor” now that you are taking your money out of one, large, illiquid asset. You’ll have to diversify, make decisions about your money, live with the good and the bad, etc. because that’s what you do with 400K. Don’t look for another big asset to leave it in for 15 years. So, ask yourself if you’re ready for that?

    I’d like to say, ‘you have nothing to lose,’ but that’s not true. However, you do have a lot to gain, like the fun of taking a risk and the absolute bliss of being proven right when everyone else is wrong. But don’t get addicted to wanting and waiting for that or you’ll end up like all the other bears.

  10. ali says:

    hey Mac, super interesting place I’m in!
    You’re right, I am trying to time the market, and I know that’s risky and possibly crazy, but my gut is telling me to do it. Of course I’ll feel a little stupid and upset if real estate goes up and my other investments don’t, but i won’t be completely devastated. I think I’m leaning towards dividend stocks because at least if the price of the stocks go down I will still be pulling in about $1600 a month in dividends. I would of course choose companies that had an impeccable record of paying dividends every month, as well as raising them on occasion.
    My friends and family are not a concern, I’ve owned at least a small piece of real estate since I was 19, I’m actually looking forward to the feeling of not owning anything for a change.
    I definitely like the idea of being an “investor”, I watch the market (both real estate and stocks) like a hawk, I love it, and I’ve been fortunate with my timing on both so far….fingers crossed.
    Thanks for taking the time to give me your opinion, I appreciate it!
    Right now I’m trying to get as many opinions as possible from some savvy peeps:)

    • Mango says:

      Amazing, this whole website is geared toward telling everyone that real estate is going to crash because people don’t have money to pay…You are the seller and thinking about what do with your cash EXACTLY what this website doesn’t want. They want people like you to panic, sell and cause a crash..before the BIG SHAKEDOWN….so they can get in on the cheap…

      Now here you are here looking for investment advice on your solid gains…

      Who is your buyer? Didn’t they read Ben’s outcomes of the shakedown…

      They must also be in strong financial shape I assume. Would you tell your buyer about this website???? Do you think they would cancel your deal???

      I am very happy that you come to a real estate crash website and showed people how much money you made…you probably are giving the best advice and you don’t know it…rather then taking the arm chair financial advice from these newly minted FA’s…

      Ali, take your 378k and do the following.

      1. Don’t buy anything in USD
      2.Don’t buy GOLD or SILVER
      3. Don’t Metals, Steel etc
      4. Go to Manulife Bank and buy a 5 year GIC at 3.5% and take no risk. You are aiming for five, but are taking risk. You should be happy to take a little less and sleep at night.

      • ali says:

        the purchasers are in a completely different ball game than I’m in. They are looking at buying rental properties in good solid buildings and holding on to them for a very long time, this property is just one of many that they own. They probably won’t care at all if the market goes down 10-20% in the next few years, but a 10-20% haircut for me would mean that I could possibly upgrade to a two bedroom apartment in Vancouver.
        Maybe they think the Vancouver real estate market is going to be higher in two years, and they might be right…..who knows, I certainly don’t.

      • Mango says:

        You are making it easy for them, you are both saving out on fee’s a via private deal, you are then going to make sure the home doesn’t stay vacant a single day with your lease back from them. I say they are making a wise choice towards the future. I don’t think a 378k flat is going to be cut in half anytime soon, but in the mean time, you keep paying them that rent, they free up your capital and replace it. Money always finds a home where it is treated the best.

  11. tw says:

    Why do anything with the money right away? Why not take the time to educate yourself on the various options and spend time interviewing financial advisors until you find one that: has a record of performance through up and down markets, and can meet your needs in terms of information and advice.

    The biggest mistake most people make with their money is not taking adequate responsibility for the direction and outcome of the decisions made. You would not buy a condo or car without educating yourself and making an informed decision. I highly recommend that you apply the same process here.

    Your money does not have to “work for you” all the time. That is just bank speak for “give me your money so I can bleed you dry with poor performance and (in reference to a recent ally commercial) egg management fees….

    • ali says:

      you’re right, and I’m definitely not going to rush into anything, I haven’t even signed the real estate contract ….yet.
      The closing date isn’t till the end of Feb and I will absolutely take my sweet time deciding what to do when the money lands in my bank.
      I thought it might be fun to throw the scenario out there to see what others would do, but I will give all of this a LOT of thought.
      thx

  12. @ Ali
    ”the purchasers are in a completely different ball game than I’m in. They are looking at buying rental properties in good solid buildings and holding on to them for a very long time this property is just one of many that they own”

    Ali, they’re looking at an investment that costs them $400 a month. This baby is cash flow negative. These purchasers are classic speculators looking for cap gains only. This is exactly the sort of buyer who acts equally rationally selling their property as they do buying it.

    ”They probably won’t care at all if the market goes down 10-20% in the next few years”

    I think you’re wrong on that one. The only hope they have of making any sort of a respectable return is to get appreciation from the units. They’re banking on continued appreciation. If they lose that hope, you may find them looking to unload just as eagerly as they have aquired these properties. Desperate speculators are the grease that lubricate the slide down!

  13. mac says:

    Mango,

    This site can’t cause a market crash. Get real. Who cares who her buyer is? It’s not an air-tight universe. Every day on the stock market there are bids and asks, buyers and sellers. Every day 50% of those people are wrong or right. The world doesn’t end.

    Her buyer believes in RE. She’s hoping there’s a correction. I come to this site and I think real estate is going sideways (condos) and up (SFH) in Vancouver. Ben thinks I’m an idiot. I don’t know why you’re going all snaky. It’s a mundane proposition. I sell. You buy. Then I buy something else someone else is selling. Repeat. The lady is entitled to her opinion. Ben didn’t lock her in a room and force feed her.

    • I don’t think you’re an idiot at all, Mac. I was actually just about to comment that your response above was fantastic.

      Maybe you’ve drank too much of the ‘rich asian’ cool aid (remember the ‘billions of billionaires in China’ comment?), but for the most part you’re a decent guy. Misguided, but decent.

      • Mango says:

        OOO ben loves mac, and mac loves Ben and they both hate Mango…you found each other….

        I love you both

    • Mango says:

      Read Ben above Mac

      I don’t believe this site would cause a crash, but it is telling people with fancy graphs and rental listings that the market is going to collapse. You don’t find it strange a seller who is basically benefited from real estate in a good cash position is also looking for a crash to get in on the cheap upgrade???? If everyone wants a crash, will it happen? I doubt it.

      Above Ali talks about the buyer and Ben responds, give it read fella.

      • tw says:

        Some time ago some old friends of mine talked about transportation. They had bought volvos and drove them until they literally quit, rotted or both. On this trip we were in their new minivan and they discussed their revelation. They said that transportation costs (at the time) $500 a month on average so how you get there, buy, loan or lease didn’t matter. In this case they found leasing worked well.

        Shelter is the same in many ways. It has a cost and that cost can be approached in a variety of ways, buy, lease, loan.

        It would appear that this person is exploring another approach to shelter. It is neither right or wrong. However, with literally a glut of condos here in the core, one would be wise to consider that sometimes selling is best done when you can, rather than when you have to. To paraphrase Jesse Livermore : the bottom eighth and the top eighth are the two most expensive eighths. Many fortunes have been lost pursuing the top and bottoms.

        In other words the meat in the middle is where you want to be, especially in a highly illiquid product subject to substantial extraordinary circumstances.

  14. ali says:

    hey Mango,

    not everyone wants the market to crash, and I certainly don’t think that my potential purchasers care that Little Old Me and a few other bloggers think the market might go down, I hardly think that would change their mind about buying my one bedroom pad.

  15. New says:

    I’m hopeful a few more readers with experience will share their opinions on Ali’s situation. I’m in a similar situation – I am waiting for a healthy RE correction (crash would be great for me) and want to compare the advice my investment advisor gave me to some of your opinions. Thanks in advance.

  16. HHV says:

    Don’t do anything. Rent free living (either not paying rent or being mortgage free) is the goal of real estate ownership. Congratulations, you’ve attained it. If you’ve got $1400 per month to pay rent to the people who buy your condo, if you’re not already doing so, save it. Put it in whatever you’re comfortable investing it in, preferably not all in the same basket. Sock it away, think of it long term, make sure your “fees” for saving are minimized as much as possible and stop worrying about it.

    Sounds like you’re happy in your current place if you’re willing to sign a 5 year lease. If you can see yourself being there long term, you’re laughing. Shelter has a cost. Right now, yours is minimized. Sure, when the bubble bursts it might be hard to watch your home’s value drop, perhaps even lower than what you originally paid for it. But at least you don’t owe on it today and you’ll be saving the difference while many people struggle to keep their roofs over their heads.

  17. mac says:

    Mango,

    Do I find it strange a seller who has benefited from real estate and has equity is also looking for a crash to get in on the cheap upgrade? No. Because we are talking about what people (buyers and sellers) believe. It’s a gamble. She thinks the roulette wheel will land on red, so she’s betting red. Her buyer thinks it will be black. It has nothing to do with where the ball falls.

    It’s a free market (sort of, if you don’t count all the government intervention) and the actors in the market–the buyers and sellers–continuously make buying and selling decisions. Those decisions are what makes up the market. 100% normal. If one of those two sides didn’t show up one day, there would be no market.

    Are you suggesting that Ali and other people who act like her could trigger a crash, especially if they acted in concert? I guess if you removed the seemingly evil motivation that I think you’re suggesting, I would agree with you. When people act in concert, they can move asset prices, big-time. But they can move them both up and down. Was it wrong that so many people bought real estate over the past 10 years? Some would say yes. But it’s just the free market. It will change and change again no matter what anyone does.

    Now, if what you’re suggesting is that we all engage in group think so that the market goes in the direction the group wants it to, I’m afraid you’re dreaming. Markets turn, sometimes on a dime, and that’s the way it goes. What goes up eventually comes down. But no one knows when. That’s why it’s OK for me to make fun of Ben’s charts and graphs because he could be wrong for another 10-100* years. At least!

    * Mac likes hyperbole

  18. mac says:

    Oh and by the way, none of these gambling considerations were ever meant for real estate. Real estate was just supposed to be for living in and not for gambling. After 25 years of hard work you had a mortgage burning party. That’s what Archie Bunker did. Oh well. Those were the days.

  19. mac says:

    It’s not my fault. Rich Asian Kool-Aid is all they serve in the restaurants here.

  20. New says:

    Ali,
    Recommendation was for about 25-30% cash/equivalents, 55-60% fixed income securities (mix Canadian and foreign) and 15% equity/income trust. Return projected to be @5%. I’m risk adverse with this house money but not willing to go only in cash, for now.

    JM

    • UnagiDon says:

      Ali, I’m roughly in the same situation as you, so I’m very interested in this discussion too.

      I’m selling my house in Ontario and moving to Vancouver because I have several family members living there, and I have small kids who would benefit from having family around. I don’t like the maintenance, expenses and lack of liquidity of owning real estate, and I’m concerned about the downside risk in Vancouver. So I will probably rent.

      There are 3 possible scenarios, all of which I’m comfortable with:
      – If there’s a price drop in Vancouver, or I happen to come into a huge amount of money, great I might buy.
      – If there’s no price drop, but I’m still enjoying life in general, great I stay there, in my low-risk, low-hassle rental lifestyle.
      – If there’s no price drop, but I’m not enjoying life, I give up and move to Seattle. (Fortunately my career is such that emigrating to the US is easy.) Real estate prices are 2x to 3x less than Vancouver, salaries are higher, taxes are less, cost of living is less, and it’s only a 2.5 hours drive away.

  21. UnagiDon says:

    Oops, my previous post was not supposed to be a reply to “New”.

    I have one question, which may be relevant for Ali too:
    Is there an investment, say a REIT, that captures Vancouver Real Estate? So if one has some belief that Vancouver RE will go up, and you want to capture that upside without actually owning a house, is there an easy way to do that?

    • ali says:

      interesting way to hedge your bets I guess, I’m not sure if there is one that is specific to Vancouver though, but if it is it’s probably super expensive:)
      I’m sure you’ll love Vancouver. I’ve lived here all my life, but like you, I could make a move to the states if I wanted to, it kills me to see places in San Diego, San Fran, Santa Barbara, West Hollywood, all cheaper than here in Vancouver.
      I could live in California, wouldn’t need a lot of arm twisting.

  22. LightsOut says:

    Some thoughts on investing.

    Current markets should be traded, the situation is just too volatile for long term holding in commodities, bonds stocks or equities. Rule #1 is risk management, #2 is conservative return, #3 is spec return.

    The best tool I’ve found is short to medium term mean reversion. This works whatever the investing flavour of the month is and has worked forever.

    On this basis I’m currently in bonds as they are undervalued and too many people hate them. Don’t dis bonds even undervalued a good corporate bond is returning 7% at the moment, including capital gain/loss.

    This same method is keeping me out of equities, even dividend paying ones, although I expect to go back in later this year.

    It is also keeping me out of commodities, although again I expect to go back in later this year. Commodities will be great for the long term but again should be traded.

    Also don’t dis gold or be afraid of it. I have had a bullion holding since 2000, it pays a great 19% per year, but get the metal directly and store it in a safe deposit box, but be ready to sell when the time comes.

    Cheers.

  23. Norm says:

    If housing come down hard, say 20-30%, the stock market will most likely come down as much and maybe more. Also, the stock market will come down faster (a few months) than the housing (a few years).

    I think that the housing is too important for the economy in general to be long the stock market and short housing.

  24. Ray says:

    Scroll back up and read Marc’s reply. That’s all you need to do. And ignore all the rubbish from Mango.

  25. QH says:

    No bonds or debt securities of any type. They don’t keep up with inflation.

    Dividend paying ETFs or a discretionary manager. With both, focus on energy and commodities.

  26. New says:

    Ben,
    Wondering if you’re ready to reveal your recommendations for Ali?

  27. Ian says:

    We’re in the valley , I’m lurking on sites like this looking for ideas , I’ve spent a month reading info on how to invest. Too confused to make a decision.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s