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What I learned

? By Guest Blogger Sinan Terzioglu


Fifteen years ago I was a New Yorker. Just 28 at the time, it was exciting. An adventure. I was single, no dependents and didn’t own real estate, so it was an easy move. For the first three months the bank I worked for put me up in a furnished apartment in the heart of the city. All I had to do was pack my suitcases and suddenly I was a resident of the Big Apple.?If only life were always this easy!

Before the New York gig I’d been thinking about buying a condo in downtown Toronto. ?Early on in my career I heard many people say renting was throwing money away – so in moving to one of the most expensive residential markets in the world and putting my purchasing plans on hold I feared I was falling behind.

As those three months of paid-for comfortable living came to an end, I had to find a place to live. The bank set me up with a rental agent to take me around the city. I was shocked. ?I knew New York was extremely expensive but on top of that the standards were definitely not what I had become used to. The price range I initially set would easily pay for a nice apartment in Toronto but in New York it basically got a closet. Everywhere I went I discovered something else I couldn’t believe.

Like Toronto today, New York’s vacancy rate is extremely low and rents steadily rise most years. Most available units are gone in 24 hours. There were multiple agents showing dozens of people a single unit. Even if you decided to take a unit after seeing it there was a good chance someone who had just seen it was already in the process of filling out the paperwork. It happened to me several times and needless to say it was frustrating.

Like many people in Toronto and Vancouver today I felt owning would give me security so I started to consider buying an apartment. After the initial sticker shock wore off, I crunched the numbers and had a really tough time making sense of the valuations. Like in Toronto, it was cheaper to rent but my decision to stick to renting had a lot more to do with liquidity, flexibility and freedom. Everyone’s goals and circumstances are different and being single I had to worry about only myself. After going over all the numbers I couldn’t justify the large transaction costs. Unless I owned the property for at least 5 years (as a resident or landlord) it didn’t make sense to buy, since at least 5% would go to transaction costs. I was young and had no clue what lay ahead in the following few years with my career and personal life. I decided that based on my circumstances having flexibility was what I valued most.? So I happily became a renter and took advantage of the defined contribution plan of my employer as well as the US equivalent of our TFSA.? I still had the desire to own real estate but realized it was much more important to build the financial foundation of my life early on, so I didn’t have to worry about it later.

A few years into my days on Wall Street the financial crisis hit. Investment bank Lehman Brothers crumbled and Bear Sterns had to be rescued for pennies on the dollar. In a matter of months some of the largest investment banks and financial institutions in the world had turned to ashes. I couldn’t believe what I saw. Working on an institutional trading desk in those days was intense. All of a sudden industry colleagues lost their jobs. Some had expensive homes with big mortgages. Severance packages helped buy them time but their big lifestyles quickly ate away at the remaining cash until reality hit.?Many had a mountain of mortgage debt and savings were raided to cover costs.? I was fortunate to still be employed, with the flexibility of liquid financial assets and no huge mortgage. I, too, could have been out on the street at any point. Sure my investment account was feeling the pressure but I took comfort in knowing I had a balanced and diversified portfolio of quality productive assets.

Toronto increasingly smells like New York to me. Lots of exciting growth especially in the technology sector but there’s no such thing as job security anymore. Just like my days in New York I think it is extremely important for everyone to ensure they build a strong financial foundation for themselves and households. The 2008 crisis proved anything can happen so risk management can never be taken lightly. I’ve worked with several people who never got back to their pre-crisis earnings and regret not saving and investing more. There are plenty of stories around the US of people getting greedy with real estate and eventually being wiped out. We know most don’t have pension plans nor save enough, so whether you are 30, 40, 50, 60+ you must always ensure you’re prioritizing the building of financial assets. If you need $60,000 net a year to live today, then in 10 years you will need the equivalent of $80,000 because of the consistent force of inflation. It’s the silent killer of purchasing power and you must have a strong plan to stay ahead of it.

I was recently asked by a 50-year-old if he should liquidate his entire portfolio and purchase a condo because he feared he would not be able to afford a place to live in Toronto one day. ?It was emotional, as he’d recently divorced with no dependents. His portfolio was worth approximately $500,000 spread out across a RRSP, TFSA and non-registered account. No pension plan and income of about $90,000 a year.?He wants to retire in a decade with $5,000 a month in net income – close to what he earns now.? If he is able to invest an additional $15,000 a year for the next 10 years and earn an average annual return of 6% his portfolio will be worth ~$1,100,000 by the time he’s 60. This would generate ~$65,000 gross a year in dividends, interest and growth.? Add to that CPP and he will have a good chance of meeting his objective so long as he stays invested. But if he liquidates his portfolio and buys a condo he runs the risk of not meeting his retirement goals.

As Garth says, stop worrying about a roof over your head because you can always rent one but you cannot rent cash flow. If you can afford real estate after you contribute to your financial portfolio, go ahead and buy but, but don’t make the mistake of thinking real estate is the only strategy you need.? If you want to retire at 60 you need to plan to grow financial assets that will take care of you for at least 30 years.

You have no idea what’s coming. So be ready. I was.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.???

Shared stupidity

The GTA is a huge place. Six million captives. There are hundreds of thousands of rental units in Canada’s biggest hunk of urbanity. Currently 99% of them are unavailable if you happen to be looking for digs. That vacancy rate of just over 1% is bad, but last year it was 0.3%.

Fewer rentals means higher rents, despite rules designed to keep costs down. And although tens of thousands of new units are in plans or in construction, condo prices have jumped four times faster than single homes.

Why is it so hard to find a rental in such a big place? Why do they cost so much to rent ($2,400 for the average one-bedder)? And why have condo prices escalated when single family homes have been in a torpor?

One word: Airbnb.

Almost four in ten condos in the GTA are owned by investors. About half of all new sales go to people with no intention of living there. Some of those are rented out to long-term tenants. A load are not. They get Airbnb’d. Currently more than 21,000 units are listed on the company’s site for Toronto.

Do the math. It’s a helluva lot more lucrative to rent out a downtown condo for $200 a night than get $2,500 a month from a tenant. Plus tenants have rights. They’re needy. They can refuse to move out. They can haul your LL butt before a tribunal. They can wear-&-tear your place with abandon. They can stop paying you, and still stay. Even an expiring lease is useless in getting rid of a melonhead. In contrast, Airbnb guests are quickie cash. They come. They go. They pay big. Badda-boom.

Of course, short-term rentals are a social scourge. They put hotel employees out of business. They seriously damage the hospitality business. They take tens of thousands of rental units off the market. They skew the economics of property values, as residences are turned into businesses. In big cities they crash the vacancy rate and raise rents. In small towns they suck off rare rental accommodation and leave streets dark in the off-season. They’re antipathetic to local economies – grocery and hardware stores, dry cleaners and bank branches – that rely on a stable year-round population. And they help lift real estate out of reach for locals.

Yes, Airbnb lets homeowners collect cash they would not otherwise get and, yeah, it’s cheaper to rent a condo in downtown Toronto for three nights than to stay at a hotel. But the societal costs are staggering. So what just happened in T.O. is a good thing.

It’s been a two-year fight. Landlords and the booking site have resisted every step of the way, and refused to voluntarily comply with municipal regs. For more than 20 months the issue has been before a tribunal, and now the decision’s been made. City, 1. Airbnb, 0.

All those units bought to rent out by the night (usually against condo board rules) are now illegal. Short-term rentals will be allowed only inside a landlord’s principal residence, and for no more than 180 nights s year. Homeowners can rent a max of three bedrooms, and not for more than 28 days at a time. No rentals will be allowed in basement or secondary suites. Landlords need to register and pay a fee plus a 4% accommodation (hotel) tax on revenues.

Of course by registering, landlords also join a database which is shared with the CRA – so anyone not declaring Airbnb (or VRBO) income is probably asking for an audit.

The expected result – about 5,000 units will be returned to the long-term rental pool, which is good. Says the lobby group out to geld the short-term landlords: “Commercial hosts are real estate investors who commodify our residential housing stock. They operate anywhere from two to many dozens of so-called entire homes, be these houses, apartments or condo units. They use residential housing stock as hotel inventory in buildings that were not planned, zoned, approved and built as hotels, but as residential buildings.”

Toronto joins Vancouver in trying to reign in the Airbnb beast. In YVR landlords have to secure a business license and can only operate out of a principal residence. Owners also have to pony up provincial sales and tourism taxes, which are collected and remitted by Airbnb. The city says over 70% of the 4,700 short-term rentals listed are legal, but suspicions remain a lot of other landlord are operating under the radar.

Meanwhile Airbnb continues to accumulate bruises for allowing ‘party house’ rentals to be listed and turning a blind eye to the incredible neighbourhood problems which short-term rentals cause – from North York to Venice.

Okay, kids, I know this is all part of the sharing economy. Like Uber. Or Rover. We’re all supposed to be collaborative now. Owners get cash for the bedrooms. Guests get a deal. Hilton gets zip. It feels good in an iconoclastic, screw-da-man kind of way.

But it’s not really sharing. More like stealing. From yourself.