Thursday, November 29, 2018

Buyer Beware

Over the space of the last 70 years (my entire life) I have owned 25-acres of vacant rural land, a small residential house in an old part of Town, a large residential house in a new part of Town, a condominium and parking space in a trendy urban centre and a heritage building with four units (two residential, two commercial). Though I've owned more real estate and had more headaches for doing so than most people I know, I am seldom if ever asked my opinion on the subject. If I were asked, my unadulterated thesis is this: rent; don't buy.

By trade I am a lawyer who primarily practiced residential real estate law for 40 years. I am still a member in good standing of the Law Society of Upper Canada though I am prohibited to opine on legal matters now that I am retired because I no longer pay Professional Errors and Omissions Insurance. Nonetheless I feel compelled to share my admittedly unpopular view that owning real estate is a misadventure, at least as a first choice for a private residence. Certainly Donald J. Trump and others like him will make a strong case otherwise but they're entirely in a different league and what they do has no bearing at all upon what I am saying. Nor does what I say have any moment for people who insist upon owning things just for the sake or pleasure of saying so. If you have the money and you don't care about losing it, do what you like. Where however the reasoning gets murky is when people confound owner-occupied residential real estate with sound investment. That's like trying to mix water and oil - they don't mix. And the concoction can turn out to be just as volatile.

The promotion of home ownership is so notorious that I needn't do anything to heighten its celebrity. So I'll get straight to the point. To start with, real estate ownership is not a way to save money (which is the most popular motivation surrounding the national myth about home ownership). In a nutshell, home ownership is a money pit, a relentless money pit. Certainly you'll have some money at the end of the day but it may well be less than you spent to get it, hardly a formula for investment. It's just turning over dollar bills, not a retirement plan (which by the way should be the primary - and possibly the only focus of money making). While the theory is that home ownership is a "forced savings", that is a two-fold deceit. First, borrowing cheap money to buy a house is the narcotic by which the chartered banks keep themselves in business. When you sign a 25-year mortgage, you're indenturing yourself like a hobbled horse in harness to the banks for a lifetime. Besides it makes "owning" or "renting" a house a distinction without a difference. Second, chances are very good that you'll end up spending more money than you should to "improve" your charming cottage; and unless you're far more brilliant than most others I've known (which is a statistical uncertainty), you'll never see the return of your so-called "investment" when you sell. Don't be fooled or tantalized by the lure of flipping. The non-taxable status of capital gain from the sale of a principal residence is no legislative accident where the majority will only plant the proceeds in the ground again for yet another home and thus perpetuate the foible. Home ownership is unmistakably good for the economy but that doesn't make it a wise acquisition.

Home ownership is a fiction, a legend based upon folklore and misrepresentation. There's a reason Architectural Digest and the hundreds of other glossy "Home and Garden" magazines on the market dwell upon Manhattan multi-million dollar properties and impossibly quaint and cozy country mansions. The magazine "Country Life" is best described as "real estate porn" and it depicts a passion which is equally ephemeral and as quickly exhausted. The industry has with good reason (at least for its own benefit) cultivated the glamour of home ownership. I invite you to recall the days of advertising associated with smoking cigarettes. Subterfuge is not without precedent! And popular thinking can be just as wrong. Renting at least puts a lid on monthly expenditure.

There is no need to argue that there are no desirable places to rent. Not long ago - and perhaps even to this day - the elite of New York City felt it was no indignity to live in a rented apartment on the Upper East Side. Anyone who knows Sherbrooke Street East in Montréal knows that there are many, many luxurious and astonishingly spacious apartments behind fortress-like stone walls. In even the smaller rural centres there is invariably a prudent landlord who has an inventory of fine premises to consider whether for individuals, couples or families. When exactly did the English boarding house become so unfashionable? The gentry who tired of wasting away on sprawling country estates never objected to renting a manageable townhouse. It is a distortion to imagine you capture an urban estate when you buy a box in a subdivision.

Ironically it is most often young people who pine to own their own home. This is especially unfortunate when it is these same people who have the possibility more so now than ever before to move about the globe for purposes of recreational travel or employment. Everything I know about modern economics and trends is towards borderless societies and international exchange. Yet attaching oneself irrevocably to real estate is a burden from which it is no easy task to unhinge. The costs of moving, storage, real estate commission and legal advice are only the beginning - and all that is assuming you find a buyer. Make no mistake it is not assured you'll find a buyer much less the so-called "willing buyer", or even if you do, that the buyer will bite when you want. Be prepared for a slow day for fly-fishing! And possibly standing in hip-waders in water up to your chest!

Buying real estate has as much promise as the yearning of a recovering alcoholic for another drink - it's an enterprise fraught with defeat from the outset. One must learn to govern one's appetites and to be guided instead by logic and reason. People are all too eager to capitulate enduring thought to leisurely expenditure and the unconsidered servitude that is real estate ownership. Any long-term examination of the project will quickly reveal the exposure to unmerciful and constant maintenance which - even if a confessed reality - is honoured more in the breach than the observance. The need for unending and frequent maintenance soon becomes lost in the sea of other unexpected ownership expenses many of which are wastefully cosmetic or decorative only. Renting entirely eliminates that competition for capital.

Naturally there must be some other plan afoot to fill the gap of mindless consumption which often accompanies burgeoning salaries and commercial promotion. For that purpose I recommend a fee-based financial advisor. And an aggressive savings plan to address the long-term objective. I am not qualified to go beyond that suggestion. But I know enough to say that the rental alternative will in the meantime inflict minimal injury or restraint. Most residential leases are year-to-year. Occasionally a commitment for 3 - 5 years is possible though in every instance the choice to sublet is available so one is never irrevocably tied to any legal arrangement. I believe flexibility is the paramount feature to be sought; and that by definition reduces one's exposure on every front.

As this elucidation is obviously designed to be controversial and thought provoking especially for young people, I can do no better than conclude by referring my reader to "The Art of Money Getting or Golden Rules for Making Money" by P. T. Barnum. It is a 28-page manuscript of invaluable insight in my opinion. It can be found on the internet free gratis:

"The Art of Money Getting" by P. T. Barnum

A much touted corollary of the Trump US Presidential election is an anticipated rise in interest rates. If this occurs it will of course increase the capital cost of real estate for most purchasers (who are normally borrowers). In turn housing prices will decline. Lest this gratuitous advice should offend those already invested in the real estate market whether directly or indirectly I note that real estate agents will nonetheless continue to turn over properties; buyers will continue to buy (though perhaps at reduced prices) and sellers will continue to sell (though they will be able to reinvest their capital at a higher rate of return).  I consider it an anomaly of real estate investment that, unlike investment in Canadian resource and production companies, it never generates more than it was initially. The house you buy today and sell in ten years is the identical house; and oddly it is expected that it will approximately double in value even though it produced nothing in the meantime.

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