Study Shows Location and Discipline Key

A study by the Sauder School of Business at the University of British Columbia concludes that on average, Canadians who own their homes become wealthier over time than renters.

“It’s not that renters cannot build wealth similar to that of owners,” says Tsur Somerville, lead author of the study. “But it requires a level of discipline and sophistication in investing that most North American households have shown themselves unable to achieve.”

The study, Are Renters Being Left Behind? Homeownership and Wealth Accumulation in Canadian Cities, compares the wealth that homeowners achieve by paying down a mortgage, with what a renter could amass by investing an amount equal to a home down payment, and the difference between ongoing owner and renter costs. Researchers looked at nine Canadian cities and created several scenarios, to allow for variations between owner and rental costs, type of renter investment, and types of mortgages. The analysis covers the period from 1979 to 2006.

“The results of this research show that only renters who are highly disciplined, savvy investors are able to match the wealth that owners can accumulate simply by making their mortgage payments,” says the study. “If they meet these criteria, in the best scenario for renters, they can accumulate over 24 per cent more wealth than owners in Edmonton, Halifax, Montreal and Regina, and they can accumulate at least as much wealth as owners in Ottawa, Vancouver and Winnipeg. In Calgary and Toronto, renters cannot on average over our study period match the wealth achievable through home ownership.”

The study says that in the cities where matching owner wealth is possible, renters would have to save between 60 and 100 per cent of the difference between annual owner and renter costs. “The average of 80 per cent is analogous to a savings rate of nine per cent,” says the study. “In contrast, the most recent Canadian savings rate was negative 0.4 per cent.”

In addition to avoiding spending money on automobiles and other consumer goods, renters would also have to invest in high yield assets with very low fees, the study says. “Yet, most mutual funds charge high fees and return less than the Toronto Stock Exchange’s total return,” says the study. “The challenge for renters to accumulate the same wealth as owners, while surmountable, does not seem to be realistic for the vast majority of renters who even have the income and wealth to buy.”

The study says that renters are also at a disadvantage because of the tax advantages of owning a principal residence. Although mortgage interest is not tax deductible as it is in the United States, Canadians enjoy a capital gains tax exemption when they sell their principal residence.

“In one scenario, 60 per cent of the difference between the gross and after tax and fee wealth ratios between renters and owners, is because of taxes that affect investment gains but not the returns from the primary residence,” says the study. “The social benefits of homeownership may well justify this subsidy. Still, it is striking how much tax policy contributes to the gap in wealth between what renters and owners can amass.”

In Toronto, the study finds that renters could not catch up with homeowner wealth because of fast-rising house prices. In Calgary, renters were faced with higher rents, which mean they had less money to invest.

In Vancouver, the country’s most expensive housing market, the study’s “best-case scenario” required renters to invest 100 per cent of the difference between owner and renter payments in the Toronto Stock Exchange, and pay very low investment management fees. That would have enabled them to match owner wealth.

The study received funding from the Real Estate Institute of British Columbia and the Real Estate Foundation of B.C., through contributions to the UBC Centre for Urban Economics and Real Estate.

Somerville says that homeownership provides a unique opportunity for people to accumulate wealth. “The significant benefit of home ownership for individuals is that a mortgage effectively forces them to save and build equity through mortgage payments,” he says.

By Jim Adair, Realty Times
February 22, 2007 
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Also read: The Condo Solution: To Rent or Buy?

Landlord/ Tenant Frequently Asked Questions

Renting is a part of my job like any other real estate professional. Renting is even more popular in the condo market, where almost 50 percent or more properties are owned by investors. There are many ways that landlords can find tenants, internet sites like Craigslist, Kijiji etc. have become very popular. Local newspaper ads is another way to find tenants. However easy it may sound, finding qualified tenants is a daunting task. Finding good tenants require a lot of time, effort, knowledge and experience. Real estate professionals can help reduce your risk and weed out bad lemons. With an ever growing list of new and existing clientele, I frequently answer some common questions raised everyday by my landlord investors and tenants. In order to make it simpler, and not to answer them each and every time, I thought of putting them on my condo blog. Some of the basic Q&A are as follows. For detailed landlord/ tenant rules, you may visit Landlord Tenant Board site.

What are your renting fees?

The renting fee charged by the listing brokerage on one year lease is standard one month rent plus tax. The tenant pays to the listing brokerage first and last month's rent in advance. After deducting the one month rent and taxes, the balance is paid to the landlord. Listing brokerage will also request tenants on behalf of landlords to provide post dated cheques for the balance term of lease. The listing brokerage lists your property on Realtor.ca (if you choose to) and other websites. This is an all inclusive; no frills fee, that includes marketing the property, arranging showings, pre-qualifying tenants, making an offer to lease, paying tenant brokerage's commission and arranging landlord/ tenant interview, if need be.

How do you pre-qualify tenants?

There are a lot of due diligence steps undertaken to shortlist tenants. These steps include: tenant filling out a rental application form, checking on tenant's credit history, verifying his/ her job, referrals etc. For newcomers or new immigrants, with no job or credit history, the tenants are requested to provide proof of funds available that can convince landlords of regular rental payments. Newcomers are also requested to bring along a good reference letter from their previous bank from the last country of residence. Further, tenants may be asked to provide a guarantor in Canada who has a good credit and job.

What is your role once the lease is signed and do you help with landlord/ tenant issues during the term of the lease?

Once the lease has been signed and the landlord and tenant have met each other, my job ends. I do not deal with landlord/ tenant issues and do not provide property management services at this time. The landlords and tenants deal directly and in case of dispute, should consult with the Landlord Tenant Board.

I can refer landlords to reputed property management companies that will manage their properties, collect rent and deal with legal issues for a fee. These companies can charge anywhere from 6-10% of gross rent.

What terms are included in rental contracts?

The lease contract is made to protect both the landlords and the tenants in accordance with the laws of Ontario. They include issue like who pays for utilities, who takes care of repairs and maintenance, tenants' compliance with bylaws of condominium buildings, insurance of unit and tenants' contents, smoking and pet policy, showing of property to prospective tenants/ buyers nearing end of lease term, rent increase as per rent increase guidelines of Ontario Province etc.

How can landlords evict a tenant?

Landlords can evict a tenant for non payment of rent at any time. Landlords can also evict tenants at the end of their lease term if the landlord wants sell the place, or want the place for their own or his/her immediate family or someone who will provide care services to the landlord or a member of the landlord's immediate family, if the person who will be receiving the care services lives in the same building or complex. Read more.

Feel free to contact me if you are a landlord or a tenant, looking to avail of my services. As tenants, you will not pay any fees, as the same are paid to my brokerage by the landlords.

If you are renting because you believe it’s cheaper than buying a home, it’s time to take a close look at your math. Current interest rates make mortgage payments equivalent to or lower than rents in many areas.

At the end of a tenancy, you have paid out thousands of dollars and have nothing to show for this expense. Yes, renting may get you into a house or condominium that you could not afford to own at this point, but it still leaves you with nothing but the illusion of security.

Answering the question, “Should I rent or buy?” starts your real estate adventure. Don’t rely on your own reaction to this question. A knowledgeable local real estate professional can take you through the process of evaluating possible answers to this question.

Decide to buy smart and you can gain enough financially on your first purchase to make a significant step up with your second buy. The equity, or accumulated value, increases in parallel with the marketplace and as the mortgage is paid down. Equity represents the potential down payment for your next property.

Buying a home is the largest single investment most of us will make. Buy the right property in the right location at the right time, and it will provide security, growth and a hedge against inflation. Your real estate professional can help you set realistic goals for building your real estate worth and can direct you in your “Step One” purchase.

Condominiums are a great place to start. Your first real estate purchase may need to be the most affordable unit rather than the largest unit you can squeeze into financially.

Marketing for many hi-rise condominium projects is geared toward making the units accessible and affordable to those who are currently renting, so there is plenty of support for your venture.

Step back from the marketing, sales and promotion to take a close look at the neighbourhood surrounding the proposed or existing building. Why would someone want to call this location home? Who are they? Where would they work, etc? What percentage of the units will be investor owned? Clarity about the resident mix in the building will help you determine what will appeal to the buyer you hope to sell to in the near future.

A small condominium unit in the best location and complex you can afford will usually appreciate in value more quickly than buying the best unit in a lesser building and location.

Within each complex, there are preferred floors and views. Put your money here rather than in trendy furnishings.

Check out projects that are in the planning stage. Aim to be ready to take advantage of an early purchase as soon as the sales office opens. Even a well-located smaller unit may increase in value over the selling period, so by move-in your unit may be worth more than you paid for it.

Consider a well-situated existing building which may have larger units or more design features, including fewer bulkheads and oddly-shaped rooms. You may be able to afford a parking space, too. Buy a “tired” unit you can makeover cosmetically and you may see solid returns. Your real estate professional can help with sales statistics to determine what elbow grease and clever interior design could net you. Before you buy, check with the condo committee, through your real estate professional, to ensure you’ll have permission to make the changes you plan.

Amenities are nice but they cost money each month. Monthly maintenance fees also affect purchasing power. This amount is factored into monthly expenses to determine the size of mortgage you can carry. It may sound great to have a pool and roof garden, but how often will you realistically use these features. In some cases, green roofs are not available for resident use.

Additional monthly expenses should also be weighed when considering affordability. Electric heating versus forced air gas can have a big impact on your wallet. What additional costs should be considered?

Most Ontario and British Columbia first-time purchases will be under Harmonized Sales Tax (HST) levels, so there many be post-July-1 benefits. Markets may stall when HST begins, especially if interest rates rise at the same time.

Negotiate for everything. Ask for deals, packages and discounts. If you don’t ask, you won’t get. Educate yourself by comparison shopping. Ask condominium owners about what they did and would do differently. Check with your real estate professional for more tips and cautions.

Shop around for a mortgage so you become familiar with terms and options beyond the interest rate. Explore the impact of interest rate increases with online calculators. Push for the longest possible commitment period when you are pre-approved for a mortgage. Committed rates usually hold to insulate you against increases.

Whether you decide to tackle this purchase alone or to take in a room mate or boarder to carry costs, remember that this is the first real estate step to that down-the-road dream home.

Is this the year you move from tenant to owner? The answer lies in your determination.

Written by PJ Wade
for my Realty Times newsletter