TD Canada Trust Condo Poll Results – Owners Confuse Fees with Rent

TD Canada Trust’s annual Condo Poll results have been released for 2012, and there are some interesting findings in the four releases they have published:

• Canadians don’t mind paying for the perks of condo living (link)
• Maintenance-free living but can Calgarians really relax in their condos? (link)
• Torontonians worry about affording their mortgage – but many don’t mind paying for the perks of condo living (link)
• More affordable than a house: Condos seen as an attractive option in Vancouver’s expensive real estate market (link)

The interesting point for me

More than one-quarter (28%) of Vancouver condo dwellers say that their monthly strata fees make it feel like they are still paying rent, so they are saving up to buy a home without set monthly maintenance fees.

Condo, Strata, and HOA fees are not rent, but the monthly payments required to maintain the property that you have purchased. There is no concept of profit with monthly condominium fees unlike rent. The collection of monthly condominium fees is based off of a budget that is designed to be as close to actual cost as can be forecasted.

There is another focus about paying maintenance vs. paying rent. With rent – you have an owner that looks to maximize revenue and that usually includes significant controls on expenditure. Every penny provided to update or maintain the property is an out of pocket cost for a landlord.

With condominiums, you are paying (usually, unless the board is unusual) for proactive and ongoing maintenance and work designed to maintain the common property and the corporation. While owners may not like paying fees (35% of poll respondents want fees $200/month or less, 44% are ok with fees up to $400/month, and 17% with fees up to $800/month), they should realize that instead of lining the pockets of a landlord they are lining their own pockets by maintaining the condominium corporation.

I hope that helps understanding the difference between rent and condominium fees.

Toronto and Singapore Experience the Shoebox Condo

Some trends cover the world, but the underlying reasons may be different. For example, Singapore and Toronto both are experiencing a surge in shoebox condos (500 sqf or less) but for significantly different reasons.

With Singapore, prices on condominiums are averaging $1185USD/sqf – putting the price of anything lager than shoebox well outside the financial means of most local residents.

In Toronto, price is not nearly as sensitive (running about $630USD/sqf), but tax legislation is pushing units to list at $390k or less or suffer, and one bedroom condominiums now make up almost 60% of new construction. This forces smaller shoebox units to be built in order help create consumer choice in a market that prefers one bedroom condominiums.

In both cases though – Singapore and Toronto are both seeing massive preconstruction sales to investors and foreign buyers. This is likely a strong incentive to build shoebox condominiums, as they become more “affordable investments” and require smaller capital down. If that’s the case, shoebox condominiums are creating a new form of downtown transient population – encouraging renters to populate the cores of each city.

I live in an 1150 sqf 2 bedroom condo – with wife and 2 cats. At 500 sqf, one of those would have to go! (I love you hunny!)

Mortgages Are Not a Right

There’s a growing trend to complain at the stricter requirements financial institutions are requiring for new mortgages. USA Today has a whole article filled with people who feel that getting a mortgage is too hard, too long, and too difficult. Everybody claims their mortgage risk would be non-existent.

It seems so long ago, but even qualified loans (those to individuals that should be completely safe) had delinquency rates (at the extreme) of 40% in 2007 for people who put down 5% on the mortgage. The delinquency rates for people who put down 30% or more was still a staggering 2.4% that year.

Just to clarify, even qualified loans where the new owners were putting down a third of the mortgage themselves resulted in 1 in 42 loans being delinquent. That’s huge. For those putting down 10% that number jumps to one in 4.2 being delinquent loans.

Because of failed loans, banks are still looking to repossess 800,000 homes in 2011.

No mortgage is without risk to the lender, and they have all the right they need to run you through a grinder of forms and checks to ensure you’re a good risk. As it is possible to get loans in the US with as little as 3.5% down, it might be time for that minimum to be raised. All numbers show that the less a purchaser puts down, the higher the rate of delinquency. Hence, if you’re putting very little down, the tougher the fiscal review.

If you are really wanting to finance a home, it is substantially easier to get a mortgage the more you put down on the property. Saving more before purchase, or buying a cheaper residence, will both go a long way in securing a loan with less hassle.

Storage Facilities as Condominium Developments

Building storage spaces as condominiums allows for a whole different approach to long term storage. In particular, a condominium approach allows for large scale storage.

You can certainly rent space from a commercial storage provider, but the space tends to be small – 50 sq feet or less. You can get larger space by actually leasing in a commercial park, but rental costs tend to be higher because the facility allows for businesses to operate, thereby requiring additional costs to maintain.

With a condominium based storage solution you can build only for storage, and build large. South of Sioux Falls they are trying out units large enough to hold touring busses, with a few units as large as 25×50 feet.

The development – Ultimate Space – indicates that the primary purchasers have been businesses to store inventory, but give a story of “the guy with too many cars” needing more space to tinker.

By buying the storage unit, you have a sense of predictable costs, control, the ability to upgrade or modify (within the limits of the bylaws) and a capital investment that may increase in value over time. As storage only units – the monthly condominium contribution should be relatively low as well.

Sounds like a great use of building under condominium governance and maximizing value to the purchasers.

How Much Can I Rent My Condo For

The easy answer is “whatever a tenant is willing to pay.” That answer though makes it difficult as an owner to predict the average rent that can be charged over a period of 5 or 10 years, and thereby determine if it is economically feasible to rent their unit, or if they should simply sell.

It’s an important decision – because margins on rentals can be very thin if the unit is highly mortgaged.

Certainly part of the process is to check what similar units are renting for, near where your unit exists. Maybe it also includes looking at some historical rental data. But good planning usually involves a bit of a formula.

There are two formulas – one on average income, and one on the unit price.

Average Income

As an owner, look at the average income your tenant may have. When we rented our unit – a two bedroom – we assumed a young single male with either a female or male roommate. In Canada for 2009 A non-elderly male (average) and a non-elderly female (average) make 40,600 and 35,800 respectively. Combined they would have 76,400 in income (both before tax).

The maximum a person should effectively pay in rent (including utilities) is 30% pre-tax. Because our condominium includes water, waste and electricity in the condominium fee, we don’t have to factor those into the 30%. So from an average income perspective, we should be able to charge about 1910/month. This turned out to be well over what the local market turned out to be – probably because other units don’t include electric, and maybe we are thinking that one or both might be students, which might reduce the (average to non-earner) income. If we change the female to non-earner, her income goes to 18,100 – or now a total income of 58700. 30% of that number is $1467.50/month, and if you subtract utilities (to be competitive with the market) then you get about $1387.50/month expected rent.

Unit Price

There is a rule of thumb that indicates if the cost of the unit is 15x or less the rental cost (yearly basis), then people will migrate from renting to buying. If the unit is 16x or more the rental cost people will continue renting. The smaller the percentage of the unit they pay per year, the better the odds of renting the unit. The sweet spot seems to be 16x or higher cost:rental makes better economic sense.

Assuming that we want to charge the highest rent, but still have it make worthwhile sense to a renter, we want to charge a rent that is 1/16 the cost of the unit. If we were desperate to rent the unit, we might charge 1/17 or even 1/21 of the cost – both being much more attractive to a renter. The city of Calgary places our Fair Market Value at $248,000. So our maximized rent would be 248,000 / 12 (months) / 16 (our ratio) = $1291. If we subtract utilities, we would be renting at $1211/month.

Which Formula Works

We are successfully renting our unit at $1200/month. It’s in line with the other local rents, and is competitive for both the city and the rental market (which changes as rental occupancy goes up and down). From a personal perspective, the Unit Price approach seems to be easy and very close to the actual rental amount. We should be aware though that if the rental market softens, we could expect to see rental rates at lower then 1/16 – if it was at 1/19, then the market would likely only support $1007 rent (or 17% cheaper), something we should be aware of.

The income ratio tells us the type of people we are likely going to be interviewing – with a pre-tax income of rent X 12 / .3 or in our case (at $1200) about $48,000 before tax.

Seniors Could Migrate To Small Towns and Bring Them To Life

I am excited about bringing the community aspects of seniors condominium living to small towns. Create a net migration of seniors fleeing the large urban communities to nest in smaller municipalities, and with that, lower the cost of their housing and make a comfortable retirement accessible.

With housing and health care costs rising significantly for seniors as the demand swells – literally as the baby boom bump hits this care phase and more people compete for limited living assisted care or seniors only living – we need new solutions.

One would be to build such housing in rural towns. As stated below, we can realize a lower cost of residency for the seniors in smaller communities.

But better, if done right, the communities will be the ultimate benefactors – the focus being health care.

It’s a chicken/egg problem. Seniors don’t inhabit small towns due to a lack of easily accessible medical treatment. Small towns have problems growing because they lack a variety of services including, importantly, medical care.

We can break this chicken/egg problem by building assisted care communities. These communities hire trained and certified nursing and medical staffing. Done right, and working with the regional health care boards, these professionals could have split time jobs – part-time for the assisted care facility, and part-time for the health care region. Indeed, balanced correctly, this could be a way to subsidize the cost of nursing and trained medical receptionists for the always overworked, underappreciated, and often difficult to find rural general practitioner. We could work on using a seniors complex to incentivise doctors to practice in rural communities by sharing costs with the housing facility.

Perhaps the hosing facility has a medical clinic as part of the building, with an outside/separate entrance for the public use.

And if a small community can attract some accessible medical treatment, which is one of the most significant hurdles to overcome in growing the town, everybody wins.

Housing Should Be Only For Those That Can Afford It

There are common shared social moments in people’s lives that root their life experience within society.

Assassinations (the “I remember where I was when President Kennedy /Martin Luther King / John Lennon was shot”), Marvels (the “I remember Neil Armstrong’s first step on the moon”) and event experiences (the “I remember the entire scare over the year 2000 bug”) are all common shared social moments.

I must be a little out of phase, because my experience that roots my awareness in society is the great subprime mortgage collapse. The experience has made me a little jaded about the housing industry. Maybe a little more than a little.

The root of the issue is granting people credit that they cannot support.

The housing industry has done a great job in painting a picture that if only everybody had their own home, then financial security would be universal. There is a picture painted that home ownership is a safe, secure, and promising way for people to build equity and generate savings – all very important for that new family who is buying for the first time.

But in the US, we have seen the massive dislocation of people from homes they purchased in the last few years (and it’s still happening with an extended and renewed economic collapse as seen in the most recent job figures). People who never had the ability to properly service their loans were offered amazing housing deals. Low and behold, the mortgagees defaulted and the houses are standing empty.

The UK has recently offered their second new and non-wealthy new-home buying program called FirstBuy. In this process, the developer and the government both take a 10% equity stake (that’s important here) with interest. The new home buyer then needs to put down only 5% of the total cost of the house, and the bank will mortgage the remaining 75%. New home buyers can get a house with 5% down.

Given the history of the US, I am now prone to say that 5% down isn’t enough to show the ability to service the loans (see plural!). One is the bank loan of 75%, the second is the builder and government equity purchase that are really loans. They convert at the 6^th year to interest bearing loans (vs. interest free).  If the unit is sold before the equity loans are paid – the builder and the government get paid out first their share of the selling price.

So what we really have is a 95% mortgage that only people making £60,000 a year or less can apply for.

What does housing costs entail – capital repayment, interest, taxes, utilities, maintenance, and upkeep on the appliances – things indirectly covered in a rental situation with one monthly, predictable, contracted cheque. The problem with owning a house is costs are not predictable – especially maintenance and upkeep. Even in condominiums, we see special assessments which are non-scheduled sums owners are required to pay beyond their monthly contribution.

For low income families which have not proven their ability to service debt, documented through their inability to amass a respectable down payment, non-scheduled costs (like new roofs, etc.) will be beyond their payment ability at some time.

So, incentives like these do nothing to ensure home ownership is a safe, secure, and promising. They heap credit debt on the least able to afford it, offer a discounted rate for 5 years on the belief that life will always be better (ie. make more money to afford the full loan) down the line. It doesn’t always happen, especially for the poorer, where we know their marginal income doesn’t rise.

Until people can get a respectable down payment for the purchase of their house, rental provides an extremely stable, predictable method to secure housing. Further, unlike a mortgage, renting allows for easy mobility – either to lower cost housing, or to move unencumbered from a housing debt to pursue better employment.

PS. That 20% loan held by the government and developer for 5 years interest free, and then jumps, feels a lot like those US subprime financing schemes that people couldn’t afford.