Buying Apartment

[SumAznGuy]

Originally Posted by jackmeister

By the end of the year I should be able to have around 20% saved for a down payment.

This is confusing. So do you plan on buying at the end of the year, or are you firm on the penthouse that mentioned in a later post?

Why are you asking on RS when the first thing you should be doing is going to your banks and asking them to see how much money you are qualified to borrow up to and then deciding based off of that how much you can afford with your $80K a year job.

Another thing to consider is that your $80K includes bonus which isn't guarenteed so the bank will look at gross without the bonus, whatever that number is. As well, have you been at your current job for more than 3 years? If not, then you might not have enough history/credit to apply for a loan without a co-signer. But all this is speculation until you actually go to your bank to see what they offer you.

[SumAznGuy]

Originally Posted by underscore

^ nowhere did he say he borrowed it, he said it's his savings. that said, probably not the best idea to spend everything you've got on the down payment, you'll need to furnish the place, plus probably a good idea to have a few months mortgage and whatnot in reserve

Yes he did, here.

Originally Posted by jackmeister

I was planning to put in enough downpayment so that i only pay around 2k a month towards the mortgage. most likely i'll pay bi-weekly or semi-monthly. The downpayment will come out of my savings and loans from my dad and mom, interest free.

[underscore]

^ nevermind then. sounds like the OP needs to lower his expectations and go talk to his banks and financial advisors

[hud 91gt]

Personally, making 80k, and 23 years old. I don't know how you would qualify for a 500k loan.

[unit]

if i only made 80k, a 500-600k mortgage would scare me shitless.

i just punched it in the cmhc mortgage qualifier and it said:
gross income: 6666/mo (80k)
down: 100k
amort: 25y
int: 5%

max mortgage: 285k
max house price: 385k

so yeah sorry to say you'd only qualify for an almost 400k house even with 100k down.

[jackmeister]

mortgage 350k (i was quickly told it would be a good range to be at)
the rest will come out of my account, but i might just borrow from parents for the time being. interest free loans anyday!

fyi, the rate is slightly lower right now.

yea if it doesnt work out i'll just find a smaller place for now then buy a house down the road.

[Chuck Norris]

I can't stress enough that people should not base their mortgage on the best case scenario.

Countless times I would see people ask how much they qualify for. The bank would say something like "Based on the current variable rate of 2.5% you qualify for $500,000. The person would run out and try and find something for $500,000 and even look at things for $525,000 expecting a negotiated price near $500,000.

This is the single biggest problem that faced the US a few years ago. Have we not learned what happens yet?

Simply put, we are at historical lows for interest rates. It is likely to stick around with us for a while but the only likely direction for interest rates to move is up. If you're on the limit at 2.5%, what happens when the interest rates go up to 5%?

If someone is on the edge at 2.5% and purchased a $500,000 home, their mortgage (assuming the statistically incorrect assumption it is a 20% down payment) is $400,000. A monthly payment of $1577 on a 30 year term.

In a few years, it would not be unrealistic to consider rates to be at 5% which means this mortgage would now be $2134 or an extra $560 a month.

Some of you might say that $2134 is still easy to pay off, but for someone that was on the limit at $1577, $2134 is not possible. Sooner or later, no matter how much money you make or have, you will reach a limit. This is why I also suggest someone play it safe.

Too many people want to be the big baller and king only to wind up going bankrupt or having the bank take away their home, car, and furniture.

The only reason people were getting away with it the last while is because the capital appreciation of homes were so rapid, it was justifiable. Prices, at best, are likely to be stagnant. My money is on the fact there will be some sort of a pullback or correction over the next few years. Real estate does not run at double digit returns for a long time without some kind of pullback.

No market does and right now, you'd be buying near the, if not already, the end of that party.

I use myself as an example although I stress, I am a bit on the weird side. I am happy to live in a $150,000 condo in Surrey even though I could live in a big home in Vancouver West. I don't have a family, I'm never home anyway. Why stress out about a mortgage or a home that makes me have face so I can think some random people will be impressed.

Something I learned, most average people are anything but impressed when you have something better than them. At my age, they'd probably think my parents paid for it and even if they knew it was mine, they'd probably still think I'm a reject and talk shit about me as they drive by my house. Face is such a fucking joke and was created so companies could sell a bunch of shit to people who are too insecure and stupid to know any better.

Besides, how much face do you have when the repo men are raping your girl and taking the furniture out of your house while a realtor is walking prospective buyers through your recently foreclosed home?

[SumAznGuy]

Originally Posted by Chuck Norris

they'd probably think my parents paid for it and even if they knew it was mine, they'd probably still think I'm a reject and talk shit about me as they drive by my house. Face is such a fucking joke and was created so companies could sell a bunch of shit to people who are too insecure and stupid to know any better.

I got a good laugh out of this part.

But going back on track, I completely agree with everything you said and just want to add one little bit. Whatever interest rate you sign now, is only good for whatever the term in on the contract, whether it is 3 years, 4 years or 5 years. After that, you will have to negotiate a new contract and pay whatever the interest rate is then.

Also, if you do take the full 25 years to pay off the mortgage, you will have paid out in interest the same if not more $$$ than the principle borrowed, ie borrow $350k and you will pay out over $700K over the 25 years.

[johny]

Originally Posted by SumAznGuy

Also, if you do take the full 25 years to pay off the mortgage, you will have paid out in interest the same if not more $$$ than the principle borrowed, ie borrow $350k and you will pay out over $700K over the 25 years.

it depends on the rate. at the current ~4% or so it's less then double. but not by a whole lot. 5 or 6% is probably double but I'm too lazy to figure it out.

[jackmeister]

Hey man I completely agree with most of the things you said because I do also think that its nearing the peak of the prices for the next while. But there are two reasons why I am moving out and I completely forgot to mention:

1) somewhat of a sticky situation at home. without going into further details, an argument resulted in me being asked to move out.
2) currently working in family business and will be taking over soon. unless some major shit happens, i should be able to pay off this house within the next 5 years.

Yea i dont really care about what a lot of other people think whether Im powered by dad and mom because i am and theres nothing to be ashamed about it. They're the failsafe if anything goes haywire.

Some people have told me to rent first and then figure it out later. But at the same time, when I look at places to rent I just can't justify paying that kind of money for someone else's mortgage.

[dubzz24]

Originally Posted by jackmeister

Some people have told me to rent first and then figure it out later. But at the same time, when I look at places to rent I just can't justify paying that kind of money for someone else's mortgage.

And at your age and current income you shouldn't be justifying buying a rediculously overpriced home that you don't need. Buy a smaller place on a lower floor, throw the extra money you would have ben paying straight into the principal, and you're set. Like Chuck, I know. I just did the same thing. When my broker pre-qualified me I was told $300k. I bought a place for practically half that and my total montly expenses are in the $800 range including utilities, strata, property tax, and mortgage. Every year I'll just dump all the money I saved up right into it and I'll be mortgage free in no time. And just incase the shit hits the fan I'll still be able to sleep at night knowing that I'm paying less to own a place than other people pay for rent on lesser homes.

[Chuck Norris]

Originally Posted by jackmeister

Hey man I completely agree with most of the things you said because I do also think that its nearing the peak of the prices for the next while. But there are two reasons why I am moving out and I completely forgot to mention:

1) somewhat of a sticky situation at home. without going into further details, an argument resulted in me being asked to move out.
2) currently working in family business and will be taking over soon. unless some major shit happens, i should be able to pay off this house within the next 5 years.

Yea i dont really care about what a lot of other people think whether Im powered by dad and mom because i am and theres nothing to be ashamed about it. They're the failsafe if anything goes haywire.

Some people have told me to rent first and then figure it out later. But at the same time, when I look at places to rent I just can't justify paying that kind of money for someone else's mortgage.

To be fair I was in a similar situation. I HAD to move out ASAP due to some serious family issues and made the choice of buying when in fact renting made more sense. I just don't want to see anyone get in too deep. I spend a lot of time in the US and I've witnessed some ugly situations where families are torn apart due to overloaded debt. As for mom and dad helping out, some people will always hate it because they never had that opportunity. Jealousy is a huge thing with people.

I myself have never had any help from my parents HOWEVER knowing they are rich has allowed me to take on far more risk. For me, it worked out but would I have taken on that risk if I didn't have that background? Hard to say.

[4444]

back on topic - $80K is nice and all, but is it fair value $80K? he works for family business, so with just a degree, most ppl can't make $80K at 23 - therefore i'm concerned for future income increases
with that said, $500K on $80K p.a. is WAY too much

also, food for thought - mortgage rates WILL increase in the coming year/years, this will kill your monthly payment (will shoot right up - even if you're locked in for 5 years, in 5 years will you be making LOADS more than $80K to take this hit) - equally, with interest rate increases, affordability decreases, therefore housing prices will have to come down

is now a good time to buy for an average person? i'd say no

therefore, at 23, i'd consider staying at home, tide this wave of stupidity (known as low interest rates), wait until the norm has be reached, and buy then with a much bigger downpayment

also, with $80K income, i think you'd come out with less than $60K - i know i'm losing well over 35% of my paycheck thanks to taxes, EI, CPP, etc and i make this kind of cash

[freakshow]

I hope not to thread-jack at all.. but thanks for everyones input on this thread. I'm still trying to educate myself on real estate.

Since it seems that due to the potentially rising interest rates and over priced Vancouver market, buying an apartment is not recommended, how would this change if one were to buy an apartment for the sake of renting it out as opposed to living in it? Would it still be a bad time?

[Chuck Norris]

Originally Posted by freakshow

I hope not to thread-jack at all.. but thanks for everyones input on this thread. I'm still trying to educate myself on real estate.

Since it seems that due to the potentially rising interest rates and over priced Vancouver market, buying an apartment is not recommended, how would this change if one were to buy an apartment for the sake of renting it out as opposed to living in it? Would it still be a bad time?

That makes even less sense right now.

So no.

[4444]

Originally Posted by Chuck Norris

That makes even less sense right now.

So no.

agreed - don't get into something you don't understand, that you'll be paying for over the next 25 years of your life

[freakshow]

Originally Posted by Chuck Norris

That makes even less sense right now.

So no.

Would you mind elaborating on why it makes even less sense? I would like to learn a little bit more, if you're willing.

My uneducated mind would think that it's not as bad if you plan to rent it out because at least you're recouping some of the costs. This, of course, assumes that you can live with your parents in the process.

[jackmeister]

I think what he means is that if you're looking to rent it out (as investment purpose) then you're really not gonna get any deal from this market.. as prices are supposedly a peak?

but then, if you're living in it, like what i was planning to do, then its a slightly different story.

[Chuck Norris]

Why not rent it out?

You rent something out for two reasons. One, you rent it out so it will cover itself and/or generate a monthly or yearly profit.

You rent something out for a loss each month with the expectation that the price will increase at a greater rate than your monthly loss (speculation of price).

Right now, the main reason there is a problem with prices is due to price/rent multiples. For example:

Down the street from my dad's, there is a home that would sell for about $6 million or so. You mortgage would be $26,000 per month plus taxes insurance and if something goes wrong, you're on the hook for it. You can rent the home out for $12,000 which is less than half the price it would sell for.

The only reason someone would buy it is because they are either retarded and don't know what they are doing or they have an expectation that prices will go up.

Here is where things get a little interesting. Are rents going to go up or are prices going to come down? The house example is a bit different but condos are VERY reliant on investors as rental condos are often rented out in greater numbers than houses.

Right now, you can rent a nice place in Vancouver for about $1400 a month. You can mortgage the same place for about $1800 a month plus strata (usually $150 -$250) and then taxes (usually about $100 per month) so a total of $2000 a month.

Now, if prices are going up, renting is a poor choice but when the gap between rents and ownership divide too much, renting is a better alternative. Comparatively, the owners renting out the units want better returns.

If you purchased a home to rent out at the beginning of this year rather than put that money in the market, your returns would be minute in comparison. Rents can't really go up much higher because incomes in this city do not support much higher rents. When I tried to rent out my condo in Coal Harbor it was next to impossible. Who can afford $3000 a month in rent?

So if investors want higher returns, rents have to go up. If rents can't go up, investors do not want to bother with buying real estate. If it is cheaper to rent, renters will just keep renting.

The only fuel has been low interest rates coupled with the uniqueness of really stupid people making as much or more money than smart people. This is a phenomenon in Vancouver I don't see often when I travel abroad. Prices can and will go down simply because they are too high. They are too high because people cannot afford to buy them.

So who is buying? People who are afraid of being priced out of real estate forever which is actually an impossibility because our society would fall apart. Young people that are 30 are taking out 35 year mortgages that 2 people will be chained to for the rest of their life.

Obviously I am bearish towards real estate but for good reason. Buy in the US or something if you HAVE to buy.

A lot of people in this city would argue with me, but then again, most of the people who have purchased would rather keep their head in the sand and hope rather than look at the obvious.

The US had a similar situation and please do not say subprime because that had almost nothing to do with it. It was a buzz word to make people feel smart. The average US person has no clue wtf subprime even means or what it's defined parameters were when it was blamed as the culprit.

I'm not saying this to be a dick. I'm genuinely trying to help so please do not take it the wrong way

[freakshow]

I certainly fall into the stupid category.. if only I could also fall into the make-as-much-as-smart people category.

That said, Chuck, I very much appreciate your lengthy detailed replys!
Now, excuse my ignorance, but here's how the hamster in my head spins the wheel:

You have a $500,000 place with a mortgage of 2000 (1800 + fees), but can rent it out for 1400. This means you have a net loss each month of 600 bucks; however, you also have someone else putting 1400 into your mortgage. If you don't plan to sell the place, and, in 5 years, it's still only worth 500,000, although you put in 36000 (600*12*5), someone else has also helped you put in 84000(1400*12*5). Wouldn't that have been considered a good move?
I know I guessed at a lot of factors, but overall, it seems that unless the market drops by a lot, you still have someone (the renter) who is essentially giving you a reasonable amount of money.

[johny]

Originally Posted by Chuck Norris

Why not rent it out?

You rent something out for two reasons. One, you rent it out so it will cover itself and/or generate a monthly or yearly profit.

You rent something out for a loss each month with the expectation that the price will increase at a greater rate than your monthly loss (speculation of price).

Right now, the main reason there is a problem with prices is due to price/rent multiples. For example:

Down the street from my dad's, there is a home that would sell for about $6 million or so. You mortgage would be $26,000 per month plus taxes insurance and if something goes wrong, you're on the hook for it. You can rent the home out for $12,000 which is less than half the price it would sell for.)

why is that stupid? as long as the rent is higher then the interest part of the morgarage the guy is making money in the long term.

who the hell is going to rent a place for the same price as a mortage?..

[Chuck Norris]

Originally Posted by johny

why is that stupid? as long as the rent is higher then the interest part of the morgarage the guy is making money in the long term.

who the hell is going to rent a place for the same price as a mortage?..

There are very few places that fall into this category. I understand that you're suggesting that if something is rented as least someone else is subsidizing the cost which is all fine and dandy if you're living at home with mom and dad footing the bill. If you're living on your own or during the time in which you own something, you have to live on your own, things could get ugly.

There are better places to put your money rather than rent out an overpriced condo. A perfect example is would you rather buy a condo in Vancouver at all time highs for $400k and collect $1400 rent or buy a $240,000 condo in California at all time lows and rent it out for $1600 a month?

Keep in mind that the odds of prices in real estate going down are far greater than up at this point although I wouldn't be surprised to see a little more upside between now and the winter games next year.

Renting in many places is more expensive than ownership. I am not suggesting this should be or will be the case in Vancouver. Rentals typically cater towards people who are unable to afford a home due to down payment, credit issues, or they are working and need a temporary place to stay etc.

For argument sake, if you can own for the same price as renting, why wouldn't you own? The same argument can be said right now. Why own when you can have a nicer place for half the price. If the market drops you have no downside whereas the owners will.

Another interesting thing is that mortgage rates are very low and it's a great time to get a mortgage or refinance. The bad news is for the first time or recent buyers who paid a premium price. When interest rates go up, look out. You will see homes worth less than the mortgage and owners that won't be able to pay down the mortgage.

Vancouverites are funny. They believe everything is just going along fine. When shit hits the fan everyone is dumbfounded!

[taylor192]

Originally Posted by Chuck Norris

Simply put, we are at historical lows for interest rates. It is likely to stick around with us for a while but the only likely direction for interest rates to move is up. If you're on the limit at 2.5%, what happens when the interest rates go up to 5%?

If someone is on the edge at 2.5% and purchased a $500,000 home, their mortgage (assuming the statistically incorrect assumption it is a 20% down payment) is $400,000. A monthly payment of $1577 on a 30 year term.

In a few years, it would not be unrealistic to consider rates to be at 5% which means this mortgage would now be $2134 or an extra $560 a month.

Some of you might say that $2134 is still easy to pay off, but for someone that was on the limit at $1577, $2134 is not possible. Sooner or later, no matter how much money you make or have, you will reach a limit.

Chuck gives great advice, I hope more young people listen rather than foolishly buy houses they can afford now, and cannot afford in 5 years...

Actually correct that, I hope a bunch of idiots do buy houses they cannot afford. I'm a renter, I want housing prices to crash and scoop up great deals from idiots having to dump their homes.

The limits Chuck mention are already defined:

35% GDS (gross debt service ratio)
42% TDS (total debt service ratio)

Lets take your example, lets say $1577 represents 35% of the buyer's income. Then $2134 represents 47% of the buyer's income. Guess what happens? Bank denies renewal, buyer forced to sell.

Sound familiar? This is what led to the US sub-prime meltdown. Brokers sold ARM (adjustable rate mortgages) that slowly increased the rate, yet people didn't understand how the rate would increase or expected to beable to refinance for better terms leveraging value built up in their house.

Do I need to review what happened? Hopefully not.

[taylor192]

Originally Posted by freakshow

You have a $500,000 place with a mortgage of 2000 (1800 + fees), but can rent it out for 1400. This means you have a net loss each month of 600 bucks; however, you also have someone else putting 1400 into your mortgage. If you don't plan to sell the place, and, in 5 years, it's still only worth 500,000, although you put in 36000 (600*12*5), someone else has also helped you put in 84000(1400*12*5). Wouldn't that have been considered a good move?

I know I guessed at a lot of factors, but overall, it seems that unless the market drops by a lot, you still have someone (the renter) who is essentially giving you a reasonable amount of money.

You're ignoring one important aspect: your mortgage payment is principal + interest: If your mortgage is $1800, only $500 is principal and $1300 is interest.

So you're gaining $500 equity in your house (principal being paid down), yet its costing you $600 to do it. If your house never increases in value, you're making -$100/mn.

Consider prices are still down from 2 years ago (they are close, yet still down from the peak) and all trends point to prices leveling out for a long time.

Therefore in the short term, you're making -$100/mn, plus if you have to sell you'd lose 5% of $500K ($25K) and lawyer fees ($1K) plus any associated maintenance with renting (paint, repairs, accounting, ...)

Plus we haven't even touched on the fact you have to pay income tax on the $500 principal, so the -$100/mn becomes more like -$300/mn.

Rental properties are not worth it unless one of these 2 things are true:
- housing prices are increasing dramatically
- you're making a cash-flow from renting

[freakshow]

Thanks taylor, that helped a lot!
I'm sure I'll have a few more questions for you and Chuck as I attempt to educate myself.

btw, i also spotted your coming down around westminster & 7/8 road a few weeks ago.