Can Renting Forever Make Financial Sense?

[TravelTeach]

I've got a bit of a math/financial puzzle on my hands and hoping I could get some feedback.

 

I work and live overseas 11 months a year and have no property in Canada. I want to retire in 20 years in Montreal but I don't think buying a home there makes sense. I'd rather invest money in ETFs until 2037, then rent a home with the profits. I'd rent it in perpetuity since I'd only be withdrawing 4% from my saved income. Buying a home in Montreal now and paying it off would, according to my figures, be dramatically less profitable. Here's my logic:

 

Supposing I have 100k and use that now in 2017 as a down payment on an average Montreal condo, valued at 400,000. I get a mortgage at the average of 2.65%. So I owe the bank 300k plus interest.

 

Every year I also owe 250 a month in condo fees and 1.7% in property tax, or $6800. Combined that's $9800.

 

Supposing that somehow I got renters in there for all 20 years at 800 a month. I'd make $9600 (all of this not adjusted for inflation yet) so only have to pay $200 a year.

 

However, the interest on the mortgage remains to be paid. A mortgage calculator calculates this as a little under $88,000 over the 20 years. But I also have to pay off the principal, which if I divide by twenty is $15,000 a year. If I divide the $88,000 up into monthly payments and divide up the principal into monthly payments it's not mathematically accurate but I believe close. Please correct me if it's wildly wrong. I get 88,000/20/12= $367 and $15,000/2=$1,250. That totals $1617.

 

OR

 

I take the 100,000, put it in ETFs, and make monthly deposits of $1617. Assuming the rate of return is the historical market average of 7% and increasing deposits at inflation of 3.5%, my ETFs will accrue to 1.5 million in 20 years.

 

The condo, originally purchased at 400k will hopefully have increased in value at the rate of inflation (3.5%) to 800k.

 

This assumes I somehow got tenants every month for 20 years, I didn't pay tax on the rent, condo fees didn't change, the property tax didn't change, and absolutely nothing went wrong (repairs) with the condo. I'd also have to assume I didn't need a property management company because somehow everything took care of itself. Then, 20 years from now, I would still need to continue to pay those condo fees and property tax. AND I have no savings.

 

In the ETF scenario, I draw 4% a year from my 1.5 million, which is enough to cover rent in Montreal, food, and everything else within reason in perpetuity along with yearly escapes for 5 months to Thailand or wherever (I've already calculated all this based on projected inflation).

 

So...is there something I'm not thinking of. I am sure there are flaws in my math, but generally I can't see how buying a property makes any sense in my situation.

[topt]

Any reason why have you posted this in a Thailand forum?

 

If you work in Thailand then maybe post in the Home Country forum or even Banking but I would suggest you really need posters with specific experience of the Montreal housing market if you want your numbers validated/rebutted.

[11223344]

I agree with your math... the low return is simply because everyone can manage to buy a property. Banks offer leverage and it's not highly liquid (and volatile) as shares

[trogers]

Should you be doing your calculations 10 years ago and went with betting it all in the financial markets...all those straight lines would not be straight...?

[Bikeman93]

Who lives forever?

[Peterw42]

You dont appear to be comparing apples with apples, The condo scenario mentions 100k investment, and the EFT senario mentions 100k investment "and" ongoing monthly deposits of $1,617.

 

Condo senerio over 20 years is 100k investment.

 

EFT senario over 20 years is 100k plus (1617 x 240 months) = 488 k

 

Of course the results will be different, the amounts invested are different !

Edited May 22, 2017 by Peterw42

[TravelTeach]

9 hours ago, topt said:

Any reason why have you posted this in a Thailand forum?

 

If you work in Thailand then maybe post in the Home Country forum or even Banking but I would suggest you really need posters with specific experience of the Montreal housing market if you want your numbers validated/rebutted.

 

Fair enough. Yes I do work in Thailand, but I see your point.

[TravelTeach]

16 minutes ago, Peterw42 said:

You dont appear to be comparing apples with apples, The condo scenario mentions 100k investment, and the EFT senario mentions 100k investment "and" ongoing monthly deposits of $1,617.

 

Condo senerio over 20 years is 100k investment.

 

EFT senario over 20 years is 100k plus (1617 x 240 months) = 488 k

 

Of course the results will be different, the amounts invested are different !

 

I would be investing $1617 monthly in both scenarios. In the first I'd be transferring it monthly to the bank. In the second I'd be transferring it monthly to the ETFs. 

[1FinickyOne]

What part of Isaan is Montreal? 

 

Well, nice to see someone thinking ahead and maybe if tvf gets more questions like this, it will become a great investment forum. Renting can have great costs in aggravation alone. Good luck. 

[davidst01]

Option 3: Put your 100k in fbook stock(nasdaq) this year prior to the stock split which will probably occur next year. Triple your money in a 2 to 3 yrs when the stock rises even further. Ive nearly doubled my money in 2 yrs (currently 86% gain). EFT's are a safe bet but 7% is extremely low. 

[SOUTHERNSTAR]

There is no right and wrong answer here. You must make up your mind on which risk factors you are willing to live with. These are some of the risk factors to take into account.

 

1. The housing market is at all time highs at present in Montreal and buying now could be expensive and you could over paying. If you wait for a market correction you could save 25% plus. The lie we are living now that all assets only appreciate in value and never under go a correction will soon enough burst.

2. EFT's may not perform the same in future as they did historically. They may under or over perform. Many EFT's are based on the stock market and most markets are at all time highs. The biggest problem for you will be to time your exit from these EFT's. When you need to extract your money the EFT's maybe at very low levels. It will thus be important to actively manage these investments and not to see it as a passive investment.

3. By investing all your savings into 1 type of investment (EFT) you are increasing your risk profile. Look at investments that can protect you against a major stock exchange downturn.

4. You are also increasing your risk by investing into 1 country and one currency. Look at a diverse country/currency portfolio.

 

Good luck

 

 

[bazza73]

If you are planning 20 years ahead, property is the way to go. Every young person should make acquiring property their main financial goal. It will always increase in value in the long term.

On the other hand, when you are in your seventies like me, you don't want money tied up in an illiquid asset. Much better to rent and generate an income offset via readily disposable assets such as term deposits, share dividends and peer-to-peer lending..

The OP's calculations don't appear to take into account the effect of taxation. You don't pay taxes on repayments of loans to a bank. You do pay taxes on the income generated by ETF's.

[timendres]

20 hours ago, TravelTeach said:

Assuming the rate of return is the historical market average of 7%

Here, I believe, is the flaw in your calculations.

Assuming 7% returns over the next 10 years would be, in my opinion, a critical error.

Due to demographics, the current state of government balance sheets, and other factors, I do not think 7% returns are in the cards.

[funandsuninbangkok]

Property prices increase and decrease just as another investment. I prefer the stock market. Much easier to control your investment and no unblocking toilets for your tenants 

 

http://observationsandnotes.blogspot.com/2011/06/us-housing-prices-since-1900.html?m=1

 

 

[IAMHERE]

Good idea, but, just in case the Canadian property market goes tits up like the USA in 2008-9, be prepared to change your plan and buy a house.

[bazza73]

29 minutes ago, IAMHERE said:

Good idea, but, just in case the Canadian property market goes tits up like the USA in 2008-9, be prepared to change your plan and buy a house.

The housing market in the USA went tits up because of utterly absurd extension of finance to people who were totally unable to repay the housing loans. The effect snowballed as more and more people simply walked away their properties. Lots of supply, next to no demand.

While housing in most other countries took a pause, banks in other countries limited their risk exposure and did not have the mass abandonment which occurred in America. Although the Australian market in capital cities is looking quite overheated.

[whaleboneman]

9 hours ago, SOUTHERNSTAR said:

There is no right and wrong answer here. You must make up your mind on which risk factors you are willing to live with. These are some of the risk factors to take into account.

 

1. The housing market is at all time highs at present in Montreal and buying now could be expensive and you could over paying. If you wait for a market correction you could save 25% plus. The lie we are living now that all assets only appreciate in value and never under go a correction will soon enough burst.

2. EFT's may not perform the same in future as they did historically. They may under or over perform. Many EFT's are based on the stock market and most markets are at all time highs. The biggest problem for you will be to time your exit from these EFT's. When you need to extract your money the EFT's maybe at very low levels. It will thus be important to actively manage these investments and not to see it as a passive investment.

3. By investing all your savings into 1 type of investment (EFT) you are increasing your risk profile. Look at investments that can protect you against a major stock exchange downturn.

4. You are also increasing your risk by investing into 1 country and one currency. Look at a diverse country/currency portfolio.

 

Good luck

 

 

I believe he was referring to ETF's which I am invested in. ETF's do not have to be invested in one country or one currency. There are ETF's that invest in worldwide stock and bond markets. Some invest in real estate. In Canada, we even have an ETF that is invested in the marijuana market. Diversification with ETF's is easy and relatively safe and with an average MER of 0.4%, they are one of the most cost effective investments.

As far as real estate goes, in the long term it always appreciates. Of course there will always be corrections, but for the person who rides these corrections out, they will profit. Purchasing real estate to live in makes sense. Purchasing to rent, in my opinion, is foolish in the overheated Canadian market. Also, the OP should understand that rental income is taxable and capital gains taxes also apply on the property.

[Altalake]

Rent is good - if you are getting it.......

 

Not so good if you are paying it.

[Bikeman93]

If you are planning on residing in the premises for at least 2 boom cycles (I have yet to see 1 in 12 years in Thailand) in your country of origin I would say no. If any of these conditions are not met I would say keep your options open by renting while searching for cheaper rents until you get an idea of the true rental yield, true purchase price, fees and taxes and associated with buying/selling (especially if you are a foreigner) and see how the market moves, if at all (or do some historical google searches to see what the prices were 10 years ago).

Don't forget to take into account maintenance fees, real estate fees and keeping your purchase modernized (kitchen/bathroom) so as to reflect the market. What is a new house now will be in need of renovation in 20 years time to reflect the market prices i.e. depreciation. 

Edited May 22, 2017 by Bikeman93
Addition

[steven100]

you are better off buying a bar in Chaing Mai  ... 

[Suradit69]

On 5/21/2017 at 9:12 PM, TravelTeach said:

I work and live overseas 11 months a year and have no property in Canada.

If you mean you're thinking of buying a house now, would it sit empty 11 months each year or be rented out? If you were lucky enough to find a long-term renter who didn't trash the house, it might almost pay for itself.

 

Both real estate and the stock market depend to a certain extent on inflation to grow in value. Obviously both are also impacted by other factors. Maybe by the time you're ready to retire you could sell the house at a nice profit. Maybe by the time you retire rents in Montreal will have doubled and you'd be spending more of your ETF investment income for housing than you had planned on.

 

There was a time when buying a home was a good investment because it seemed a quality house in the right neighborhood would only appreciate in value ... during some time periods outpacing the stock market and other investments. About 10 years ago a lot of people found out that real estate prices can go down (dramatically) as well as up.

 

On the other hand, many people are predicting that we're likely to be heading into a decade of stock market returns far below what we've become used to. And stock prices can fall dramatically too, although over a 20 year period you'd likely do reasonably well ... unless some major market melt down happened just as you were retiring. I had a comfortable investment portfolio as well as a pension tied to stocks and bonds when I retired in 2007 ... just as the stock market cratered.

 

One important consideration is that you can easily shift around investments in ETFs and stocks if the investing environment takes some unexpected twists and turns. If you buy a residential property and things fall apart, you can either sit on a big loss in value that you have to keep making payments on or try to get out and take a major financial hit.

 

There really is no certain answer to your question. An investment in ETFs, stocks and fixed income at least allows a degree of flexibility, but nothing is risk-free or guaranteed.

 

 

[jerojero]

No. Because after forever you have absolutely nothing. Renting is not that much cheaper than mortgage payments. After owning, at the end you at least have some equity value. Yes, in the short run there is ownership risk of property devaluation, but you asked about forever timeline long term. Answer overwhelmingly is thus no.

 

 

[lkn]

Scenario 1: You invest 100,000 at a 7% annual return and you increase your investment by 12×1,617 per year.

 

After 20 years, your investment should have a value of 1,182,445.

 

If we decrease expected return to 4.5% per year then the value will be 849,902.

 

Scenario 2: You buy a condo for 400,000. The 100,000 you already have and the 300,000 you borrow at a cost of 2.65% per year.

 

You repay your loan with 12×1,617 per year (which is excess income, the same as invested above).

 

Expenses are 12×250 per year in condo fees, 1.7% of condo’s value per year in property tax, and mortgage interests (2.65%).

 

Income in this scenario is 4.85% of your condo’s value (based on https://www.numbeo.com/property-investment/in/Montreal).

 

Condo prices are expected to appreciate by 3.5% (your inflation number).

 

After 20 years the mortgage has been fully paid, the value of your condo is 795,916 and you have 318,395 in cash (profit from renting out your condo).

 

So your net worth in the second scenario is 1,114,311.

 

If we decrease appreciation to 1.5% and rental yield to 3% your net worth is down to 602,989.

 

Update: If in scenario 2 we invest rental profit in a ETF that gives us 7% then your net worth should be 1,386,268 or 661,127 (depending on whether you use the optimistic or pessimistic appreciation and rental yield percentages).

 

(for the above calculations, I did everything on a yearly basis to simplify things)

Edited May 23, 2017 by lkn

[lkn]

In the above post, I did not include tax. Do you pay tax on capital gains? Rental income? Or condo appreciation? That would change the final numbers.

 

I also did not comment on your numbers. For example condo appreciation of 3.5% is probably below the historic average for a condo with a good location. I personally bought a condo in 1995 which I sold in 2016, and that had appreciated by almost 11% per year, so this condo would have outperformed your ETF.

 

But as you only buy one condo, you can be lucky or unlucky, as opposed to buying a portfolio of condos, which should lower the risk and get you closer to historic averages regarding appreciation.

 

[trogers]

20 hours ago, lkn said:

In the above post, I did not include tax. Do you pay tax on capital gains? Rental income? Or condo appreciation? That would change the final numbers.

 

I also did not comment on your numbers. For example condo appreciation of 3.5% is probably below the historic average for a condo with a good location. I personally bought a condo in 1995 which I sold in 2016, and that had appreciated by almost 11% per year, so this condo would have outperformed your ETF.

 

But as you only buy one condo, you can be lucky or unlucky, as opposed to buying a portfolio of condos, which should lower the risk and get you closer to historic averages regarding appreciation.

 

More probability in being unlucky to buy near the peak of a property cycle.