This pandemic has really done a number on the real estate market. Busy metropolitan areas like New York, London and Madrid, which were previously scorching hot, became radioactive when the pandemic closed downtown cores. The closure of facilities such as cafes, restaurants and gyms and the move to remote working have thousands of people looking around and asking, “Why am I paying so much to live here?”
And it’s not just the pandemic that is messing things up. Here in Toronto, condo prices have historically been made artificially high by property speculators / investors who snapped dozens of units at once and then converted them into short-term rentals. Entire buildings known as “ghost hotels” are majority owned by these people and are rented out on AirBnb for hundreds of dollars a night. Those sky-high daily prices would justify the ridiculous unit prices, and residents would resent being priced out of the market while those speculators grin and rake the dough out of their highly indebted investments.
That also comes to an end when the city councils declare war on AirBnbs. They finally decided to get serious this year and curb this practice as Toronto banned short-term leases. You can still rent a room in your primary residence with AirBnb and rent units long-term monthly, but the practice of running an unlicensed hotel and charging a hundred dollars a day comes to an end.
This forced a flurry of these short-term rentals onto the long-term rental market, which has been predictably driving down rents like crazy. Toronto is projecting a 23% year-on-year drop in rents, something that has never happened in vivid memories in this city.
Toronto rents continue to fall as one-bedroom hits its lowest price in 4 years
And just to add insult to injury, Toronto added a vacancy tax late last year. Too Much Competition? Can’t rent the device? Pity! We’re gonna bleed you to death anyway!
After a year, these real estate investors come to a bad conclusion: their entire business model of tracking down condominiums and clearing them out through AirBnb no longer works. Now they are stomping towards the exit.
More than two-thirds of Toronto’s condo investors are planning to sell because of the new vacancy tax
The funny thing is that the item was sent to us by FIRECracker’s parents who made us buy real estate since we started working. When FIRECracker first told them she was a millionaire, her mother replied, “Who cares? You don’t even have a house. “So you are map-bearing zealots for the cult of real estate.
And here they are sending us this article with the message “Don’t touch these condos!”
It’s not just them. The article is on a website in Chinese, so the comments are in Mandarin as well. In case you can’t read them, here are some things they will say.
CONDO OND.了 ， 这 是 必然 OND CONDO 的 价格 和 半 独立 差不多 时 ， DD 买 CONDO
Translation: CONDOs will fall. If the price isn’t that different between a CONDO and a semi-detached house, who would buy a CONDO?
Condominium -3 现 是 每月 往 往 -3 2000-3000 加 币 币 明年 明年
Translation: Condominium investments throw 2000-3000 in the water every month, and even more next year.
Yikes The Chinese have on occasion been accused of behaving like swarms of real estate devouring locusts, and these allegations are not entirely out of left box. Our culture is so obsessed with real estate that we will be pouring generations of wealth into a single purchase. That is what makes this reaction so unusual. When it comes to real estate and you’ve lost the Chinese, you’re in big trouble.
What got us thinking: is it time to buy a condo?
Zigzag when everyone is zigzagging
I know, I know, we are dedicated renters who got known for yelling at home boners. But that’s because we realized that this crazy herd mentality that many people had about the housing market led people to make irrational, financially disastrous decisions. When everyone else was buying real estate, we purposely did the opposite and rented because that’s where the value was.
This attitude served us well in this pandemic. As people fled downtown Toronto to keep the suburbs safe, each time we skipped downtown apartment to apartment, negotiating with the landlord to bring the rent down. As a result, our spending in 2020 was an impressively low $ 34,000 out of our $ 40,000 budget. If everyone else is walking in one direction, we are walking in the opposite direction.
As Warren Buffett says, be fearful when others are greedy and greedy when others are afraid.
And right now, condo investors are scared. So is it time for us to get greedy?
The buildings can become flophouses
We got the idea from JL “The Godfather of FI” Collins a few months ago, and after he stopped laughing, he went through point by point why this is a terrible idea.
Today, JL Collins is known as the patron saint of index investing, but he reminded us that he was only satisfied with index investing after trying every other possible option. He bought and sold individual shares, owned houses and apartments, and tried renting out. You name it, he did it. So if he gives you advice, you know that it comes from experience.
One of the more interesting points he made is that having a significant number of condos in a building would cut prices many times over. This would cause other owners to submerge their mortgages, potentially forcing them to sell too. The down cycle would continue until a bottom is reached. At that point, most of the people in the building would either have lost money or would have been forced to leave the building.
If so, the building would likely fall into disrepair. Bankrupt apartment boards don’t take good care of their facilities. Even if we managed to perfectly plan this break-in and get in at a really good price, the cost of maintaining the building (and repairing the damage of inevitable neglect) would be falling on fewer and fewer owners.
Even if we got a unit at a super cheap price, our condo fees would likely skyrocket.
In all honesty, I would never have thought of it and is one of the reasons we love talking to JL Collins. We always learn from this guy. He’s not the godfather for nothing!
Do we want to stop traveling?
Another factor that weighs on us is that if we want to buy a condo in downtown Toronto, we actually have to live there. It’s not that we can buy it as an investment and rent it out on AirBnb. That is the business model that no longer works.
So if we were to buy a condo (or really a property), we would essentially have to stop traveling.
I’m not sure we’re ready for this. Right now our wings are cut off because of all the pandemic-related travel restrictions, but sometime this year when we get vaccinated, those travel restrictions should be lifted. And I don’t know about you, but a year without travel just made us realize how much we miss it.
If there is anything that the last 5 years have taught us, it has not worked to get the “travel bug” out of our system. Travel is now part of our identity. The world is calling for us and as soon as it opens up again, we can hardly wait to throw all our things in our two hand luggage bags and go back out into the open.
So I’m not sure we’re ready to hang our backpacks.
But maybe at the right price …
Everyone has a price.
Usually that’s a line a gangster says before buying a corrupt cop, and the context is, “What would the price be to compromise your values?”
For us it’s the opposite. How low would the price of a condominium have to be to trick us into jumping on it?
There are several ways to calculate this price. One of them is the 150 rule that we wrote about in our book. Basically, we take the monthly rent of an equivalent property and divide it by 1.5. That’s the monthly mortgage payment we’d like to pay. With a mortgage calculator with this number, we can determine the corresponding purchase price.
Right now, our rental in downtown Toronto is $ 1700 per month, all inclusive. Applying rule 150, we would consider a monthly mortgage payment of $ 1,133, which means a condo would have to be priced at $ 330,000 or less to interest us. And since the average price of a condo is still over $ 500,000, it has to crash a lot more to get our interest.
Aside from that, however, it’s a lot harder to give up traveling. How good does it have to be to tempt us to hang up our rucksack? How do you set a price for travel? How do you set a price for freedom?
What would you do?
And here I would like to hear from you! What would you do if you were our situation? If you were a lifelong renter who loves to live nomadically, is there a price you would be tempted to trade in and become a homeowner at?
Hi. Thanks for stopping by. We use affiliate links to keep this website free. So if you believe in what we are trying to do here, please click to help! Many Thanks ;)
Create a portfolio like ours: Check Out Our FREE Investment Workshop!
Earn a daily interest rate of 1.5% *. No daily bank fees .: Open an EQ Bank Savings Plus account! (Canada only, excluding Quebec)
Are you American looking for a high yield savings account? See what’s on sale on SaveBetter.com!
LIMITED OFFER: Earn up to 4% Cashback (Canada): With Tangerines Money-Back-Mastercard!
To travel around the world: With AirBnb, we’re saving $ 18,000 a year. Click Here To Get $ 40 Off Your First Booking!
Don’t Pay FX Fees: We used the Scotiabank Passport Visa Infinite card to eliminate foreign exchange fees around the world! In addition, we received 35,000 points in the first year and also free access to the airport lounge! Click here to login!
* Interest is calculated daily on the total final balance and paid monthly. The prices are per year and can be changed without prior notice.