“I want to buy a house but I really don’t want to stay in Calgary for more than another year,” said Rachel as we sipped coffee while discussing her housing situation.
Rachel, who is in the process of going through a divorce, had just sold her home. Facing the dilemma of whether to buy or rent, she contacted me for advice. Normally when faced with this kind of question, I would be a strong advocate of buying a home based on the low interest rates and the fact that over time, market fluctuations aside, a house is a sound investment. In Rachel’s case however, there was wrench thrown into that logic.
“My heart belongs in Kelowna,” she proclaimed. “I just can’t see myself being here more than another 18 months.”
It is one thing to advise someone to buy if they plan on owning for the long term, but to advise someone to buy short term in a market where fluctuations are anybodies guess is another story (by the way, anyone who seems certain that they know where the market will go short term is either ignorant, or biased). In Rachel’s case renting was an option she had to take seriously, by buying with the intent to move in 18 months she ran the risk of being in a negative equity position just from the Realtor fees and payout penalties on the future sale alone. If Rachel didn’t see substantial positive returns on the property within the first year, she would almost surely lose money on the venture.
However, Rachel seemed to be the type intent on buying no matter what. Someone had convinced her at some point in her life that paying rent was the fools play. Most likely that person was right long term, perhaps I was wrong to advise her that renting for the short term is the best strategy in this market when an uncertain future exists. That being said, and understanding that the strong desire to buy was present, the advice I gave her was as follows.
If you are going to buy, and you are uncertain as to whether you will be living in Calgary in the near future, buy as if you are buying to invest. Don’t necessarily buy for your tastes, or your lifestyle, buy with the intent to purchase a property that will be easy to rent, require little maintenance, is in a central location, and that will provide somewhat positive cash flow. By doing so, if you decide to leave in 18 months, you can easily rent out the property and hold onto it long term, ensuring that you don’t realize any losses as a result of short term market fluctuations.
In Rachel’s case she will probably end up buying, but as a result of our conversation she will do so with a little bit more caution and a whole lot more knowledge. Most importantly, if her heart does move her to Kelowna, she won’t have negative equity in her home holding her back.
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This is an interesting dilemma that I think a lot of people face. I know I do. I just started a master’s program, meaning another two years of education on top of the four I have already completed. The thought of renting for two years while I complete the program, isn’t exactly heartwarming but I also know I am probably not going to end up in this city which I have come just for school. What to do… what to do… Thanks for the advice–I think this could benefit a lot of people in the same type of situations.
Come on, the chances of negative equity in 18 months are probably close to 100%
An interesting dilemma she is in.
Few things to consider before you send me my ipod.
1. People need to be aware of the fact that you make money in real estate when you buy not necessarily when you sell.
2. That being said, this is the market of great deals. Unfortunately most think that a great deal is the fact that they got a house for $400,000 instead of the same house worth $500,000 in the high market. That is not a good deal, let alone a deal at all. A good deal in any market is minimum 20% less than CURRENT market value.
3. So, if she ends up buying and selling in 18 months. There will be a greater chance that she will not have a negative equity as the 20% below market value at the time of purchase will protect her during the sale.
4. This magical 18 month time frame: It seems like most people that go through a life changing event, like a divorce, seems to think they will be leaving where they are in approx. a year to start a brand new life somewhere else. The question she needs to ask is how realistic is this 18 months?
5. If the thought is to buy in calgary and then rent it out in 18 months and move to Kelowna, where the heart is. Will she have enough equity leverage to be able to buy where her heart is?
Nolan, where would you like me to send you my mailing address for my ipod?
..in light of the ‘anticipated’ property value increase combined with fantastic low rates etc, Rachel should definately consider buying now……
…in the event that her life does point in the Kelowna direction, she should then employ the services of a reputable rental agency to ensure peace of mind whilst watching her investment grow……
…in any case a lot can change in 18 months, who is to say what is round the corner for any of us…
….and hey!…..there are loads of eligible Calgarians out there….maybe her heart will stay in calgary after all!!!
Live for the present…I reckon!
Fred makes a very good point – if Rachel buys in Calgary she may be relegated to renting when she moves to Kelowna, in which case the question becomes where is the better place to buy, Calgary or Kelowna?
2 years ago I was in a similar situation to Rachel and had many conversations with friends about what to do. One conversation with a very knowledgable buddy of mine in regards to short term property ownership. We determined that the largest factor in this equation is going to be the Realtor Fees that will be paid on the sale of the property. Owning a property for the short term only makes sense when the value of the property is going to increase, and increase enough that you cover the realtor fees, interest and other closing costs associated with property ownership. In an 18 month period I would take a very good guess and say the increase in Calgary real estate is going to be very small and not enough to cover the costs of home ownership in her desired time frame.
This looks like a great time for Rachel to find a nice cozy place to rent in Calgary, and then bust into the Kelowna real estate market in 18 months.
Looking back at my options to Rent over Buy, I am 110% Satisfied with my decision to Rent. I have found 2 incredible properties to live in, both of which are in great locations and the rent has been less than the mortgage payments I could have been making. I will also add the properties I looked at purchasing, have decreased in value over the last 2 years with the economic downturn.
There is an option that has not been suggested. Racheal should consider buying in Kelowna now and renting her newly purchased Kelowna place till she is ready to move. This will give her motivation to actually move to Kelowna as well as build equity through both appreciation and mortgage pay down over the 18 months.
Additionally, everyone is talking about mortgage payout penatlies and fees to an agent.
I would suggest she look at a two year mortgage. You can get better rates and don’t have to pay any penalties for mortgage cancelation.
Additionally, most agents will give you a reduced commision if you plan on buying and then listing with them. By doing this you can significantly reduce your listing fees.
So if she did want to buy those are two handy tips to reduce all the costs that everyone is talking about.
My two cents.
MH
lots to consider here nolan matthias so please read the following jumble of sentences. the hassle of buying and selling is not worth it for such a short time frame. if she wants to buy, she also has to take into account how long its gonna take for her to find a place and close on it. when she gets to kelowna, is her house in calgary gonna be sold … Read Moreby then?
she can rent a cheap place for now, and invest some of the downpayment in some preferred shares which pay her a dividend. also less stress about having to sell her place when she is ready to leave. she is not tied down, that way she can leave in six months is she wants.
its not always about the money. 🙂
Interesting thoughts from everyone.
Nolan, Mark took the words out of my mouth…What are your thoughts on her renting in Calgary and buying in Kelowna where she ultimately would like to be. As he said, it solves both issues of getting into the market while interest and prices are low, and prtecting her assets from the future sale. Of course the rental market being saturated both in Calgary and Kelowna might mean she could find herself with both a mortgage and rent to pay…
As for the comment that Fred put out about the 18months being realistic, one would think that if she began making small movements towards her goal that would solidify her commtiment to follow through and follow her heart.
Nolan,
Interesting question, one I’ve been asked before by a friend. I will give you the same response now as I did a few years back. Basically, I told my friend that if he wanted to buy a home but was intent on moving out in a relatively short period of time, why doesn’t he buy a property in the city that he intends to move to and rent it out. My rationale to him then was he could game entry into the home market in which he was going to reside, earn rental income to cover the carrying costs etc. on that property, while continuing to pay for a rental property in the city he was taking a definite term contract in. This turned out to be a good move for him as he bought a home in the market were the value of the home appreciated with the market and was able to carry it for the lease payments he was getting. Turns out that had he waited, he would not have got the home he did if he waited to the time he actually moved. At least this idea worked for him.
In your case it may very well work and your client will still need a mortgage. Just a thought.
All the best.
lots to consider here nolan matthias so please read the following jumble of sentences. the hassle of buying and selling is not worth it for such a short time frame. if she wants to buy, she also has to take into account how long its gonna take for her to find a place and close on it. when she gets to kelowna, is her house in calgary gonna be sold … Read Moreby then?
she can rent a cheap place for now, and invest some of the downpayment in some preferred shares which pay her a dividend. also less stress about having to sell her place when she is ready to leave. she is not tied down, that way she can leave in six months is she wants.
its not always about the money. 🙂
There are a couple of things to consider with respect to the buying in Kelowna prior to moving idea.
The first is the cost of buying now vs. buying when Rachel actually moves to Kelowna. By buying now, Rachel would have to buy the property as a rental, which would mean that she would likely have to pay a slightly higher interest rate, and a substantially higher insurance premium than if she were to buy it as an owner occupied property a couple of years down the road. In fact, the higher insurance premium alone, would in my mind, be reason enough to deter her from taking this action as it would likely eat up almost the same amount of equity as buying a house in Calgary and having to sell it 18 months down the road.
Rachel would also be exposing herself to market fluctuations in a smaller market that may not be as stable, and is definitely much more seasonal than Calgary’s. If she changed her mind about moving this could cause her to be stuck with a property that is hard to rent, hard to sell, or has negative equity. It would be important for her to only make this decision if she was 100% sure she would make the move. Lots of things play into this type of decision, including job, family, peer groups, and other factors.
Furthermore, Rachel may not even qualify to buy in Kelowna because the bank would likely consider her monthly rent as a liability. While buying in Calgary may be a simple process, qualifying to buy a house with an extra $1500 in monthly obligations tacked on may be near impossible.
Rachel obviously has a lot to consider, and ultimately she will make the decision that is right for her. Her best bet is to weigh all her options, create a plan that minimizes her risk, and execute it to the best of her abilities. The rest will fall into place when and if the time is right.
If I were her, I would probably just rent. I too, have been brought up to ‘own my home’ and would be a bit apprehensive to rent. It’s the right choice though, especially if she is planning to move in the short term. Whether she chose to sell (taking into consideration possible payout penalties, real estate commissions and legal fees), or convert to a rental (which can be difficult to manage from afar), neither option offers enough incentive to proceed. With renting, she could easily find a nice place at a bargain basement price. She could then take the extra money she is saving and invest it elsewhere, or save it for additional funds to go towards her future downpayment.
Fred sarkari
5. If the thought is to buy in calgary and then rent it out in 18 months and move to Kelowna, where the heart is. Will she have enough equity leverage to be able to buy where her heart is?
How long would it take to gain enough equity leverage to own second home and rent out the first? How much of the home needs to be paid off in order to be considered for buying a second rental property? I ask because I have considered purchasing a home with the intent to move (after a few years) and rent out the original property.
Ian,
The amount of time to gain enough equity in ones personal residence in order to refinance and use the funds to purchase a second property is anyone’s guess. It all depends on the market and how fast home values are increasing.
That being said, saving a down payment for the second property is another option that can save you having to wait for the value of the first home to go up. Since you want to rent out the original property and not the new one, you would be able to purchase with as little as 5% down, and you wouldn’t have to pay the additional rental premiums because the new property would be owner occupied.