Renting, Buying, and Investing In Real Estate | E005
Full Transcript:
Jason Pereira: Hello and thank you for joining me for the Wisdom of Wealth, a show where I educate Canadians about fundamental financial literacy topics to help you make better and more informed decisions, and to know when and where to reach out for help. I'm Jason Pereira, and I have the privilege of being your host. Today on the Wisdom of Wealth we're going to talk about something that many Canadians seem obsessed with, real estate.
Jason Pereira: Real estate can both be a place to live and an investment if you want. Today we're going to talk about real estate from three different perspectives, renting, buying and investing.
Jason Pereira: Let's start with renting. The myth I hear most often about renting is that it's like burning money. After all, aren't you just paying someone else's mortgage? Well, not really, it's not that simple. Your expenses as a renter are obviously rent, insurance and in some cases utilities. All of those expenses, once spent, leave you with nothing to show for it other than the roof over your head, so sure it seems like you're burning money, but this belief is not true.
Jason Pereira: If we define burning money as expenses that you don't get anything back for, compare that to the cost of ownership. When you own a property, you have several expenses including mortgage interest, taxes, utilities, condo fees of you own a condo, and maintenance on the property. Most of those you never see anything back for as well. In fact, it's estimated that maintaining your home costs on average one percent of the value per year. Sure you could simply choose not to renovate and upkeep your home, but if you do, in the long run, your property value will suffer.
Jason Pereira: When you compare the amounts you are burning as an owner versus a renter, in many cases renting can actually make more sense than buying. Renting also frees up your savings to invest that money that you haven't put into real estate.
Jason Pereira: Buying your home is often the biggest financial decision most people make in their lives. Unfortunately, it can also be the biggest mistake they make if they're not careful and consider all the costs. The first set of costs you have to deal with are acquisition costs. These are costs associated with buying a home. They include land transfer tax, legal fees, closing costs to reimburse the previous owner for any pre-paid taxes or utilities, Canada Mortgage and Housing Corporation insurance if you have a high ratio mortgage, and if you are selling the home for the first time, your real estate agent is going to take fees as well. Add it all up and you're looking at, on the low end, between one and two percent, but it can get upwards to eight to nine percent on the high end. It's pretty expensive, so my first piece of advice is move as little as possible because buying and selling homes frequently can burn a lot of money.
Jason Pereira: The second set of costs are ongoing, and include mortgage payments, property taxes, insurance, condo fees if you own a condo, utilities, and maintenance as previously discussed. People often make the mistake of only considering the cost of the mortgage when considering how much they should spend to buy a home, but the other factors add up really fast.
Jason Pereira: Another mistake people make is thinking that the available mortgage determines your budget. I often get people saying to me, "Well the bank tells me I can spend a million dollars on a house." Let me make this very clear, the bank is not your friend. They make money by you staying in debt, so it's in their best interest to give you as much as you can handle, especially when secured by an asset. You should spend what you can reasonably afford without making yourself house poor. This is where a good financial planner can help you by putting together a financial plan to ensure that your decision is the right one.
Jason Pereira: What's the better option, renting or buying? The answer as always is, it depends. There are several factors to consider, including the amount one has saved for a down payment, the cost of renting versus buying, and the expected amount of time that you would own that home. Unfortunately, most Canadians make the biggest financial decision of their lives without so much as picking up a calculator. Needless to say, this is not a good idea. There are many free resources available online, including rent versus buy calculators that will help guide your decision making, and as always, consult with a qualified financial planner for advice.
Jason Pereira: Now let's talk about something that everybody seems to think is a great idea, investing in real estate. When you invest in real estate, you earn return in two was, rental income and capital gains on the property. It's no secret that rents in cities like Toronto and Vancouver are relatively high, and often times these high rates attract investors, but it can be deceptive. It's important to remember that you don't get to keep the full rent. You still have to pay all the expenses we discussed previously regarding home ownership, plus one new one, taxes.
Jason Pereira: When you factor all this in, it might surprise you to know that current rents in some of these cities are returning very, very low yields. In fact, some recent analyst reports estimate that many recently purchased investment properties are actually negative cash flow. That is to say that the rent does not cover all the expenses associated with the mortgage payment and everything else.
Jason Pereira: Now this is not all of them, but across the board, low rental yields are pretty common in these cities, so why would people still invest if they're not going to make money off it from the rent? Well one, they don't do the math, and the second point is that they expect the prices to increase to make up for the low yields.
Jason Pereira: Given that in the last 20 years, Canadians on average have seen housing prices rise well over 200%, factoring in inflation, it's no wonder people think that housing is a great investment, but this is not normal. Just look at this chart going back to the late 1800s. It plots out the average growth rate in real estate prices after subtracting out inflation. As you can see, with the exception of the prolonged drop during both world wars, housing prices in Canada have largely gone sideways, until about 20 years ago, when they took off like a rocket. What caused this? Many factors, some of them include easy access to credit and lower interest rates. What I'm trying to show you here is that what we've seen in the last 20 years is not the norm, so buying a rental property expecting history to repeat itself is not likely a wise bet.
Jason Pereira: Now I'm not saying that you shouldn't invest in real estate. Every case is different, but what I am saying is don't be one of those people who makes decisions this big without even pulling out a calculator, let alone making sure you get the right advice. Every investment should be judged on its realistic prospects and merits. There is no sure thing. There's no never lose investment in this world, so always use caution.
Jason Pereira: Now that we've covered the financial basics that should be considered when buying or renting, let's talk about what else you should consider, and to do so I've asked my friend, realtor, and one of the stars of HGTV's Hot Market, David Cinelli to join me in studio today.
Jason Pereira: In studio today we have David Cinelli of Royal LePage. David, thank you for joining us.
David Cinelli: Oh, you're welcome.Thanks for having me.
Jason Pereira: My pleasure. Tell us a little bit about what it is you do.
David Cinelli: Where do I start?
Jason Pereira: Wherever you want.
David Cinelli: Yeah, well you know I'm a realtor, so I don't know how far back you want to go, but I've been a realtor about four and a half, and this May I've actually been trading for about five years. In that time, I got the top two percent nationally with Royal LePage the last couple of years. Last few years have been about one percent, the top one percent in the [inaudible 00:07:41] real estate board, but much like yourselves too, I do have a financial background, but I've owned rental properties for, I guess, almost 14 years now.
Jason Pereira: In the family far longer than that.
David Cinelli: Oh well, absolutely. My dad started when he was 20. When his dad passed away, so back in those days it just made more sense for them to purchase real estate and earn a lot of wealth that way. Going to the banks and being able to figure how to leverage it, and grew a nice little portfolio for himself, and then ...
Jason Pereira: It's safe to say, your family ... You've been in this space for a very long time in this capacity.
David Cinelli: Very long, yeah.
Jason Pereira: Okay, so let's talk about some of the factors, other than the financial ones we just talked about when it comes to renting. What should renters consider before they sign a contract?
David Cinelli: You're saying a contract for renting an actual ...
Jason Pereira: For renting, yeah.
David Cinelli: Okay. Well obviously, you want to look to make sure that you can afford the property. As landlords, we also check ... I'm a landlord as well, as we mentioned before, we make sure you can afford it, and you also have to look at some of the costs, so is it all inclusive, are you paying, do you have to pay utilities? Are you able to afford that? What about ... You've got to remember things like groceries and parking, and Uber and those kinds of things that go into it, so you probably, some rule of thumb that I've heard before is you're only supposed to spend maybe one-third of your monthly income on rental properties, if you are renting. There are a lot of costs that people don't necessarily think about.
Jason Pereira: Yeah, they look at the rent and they think, "That's it," but that factor is like how much more I'm going to have to pay to get to and from work, depending on if I live downtown, I mean I should be more economical than living than living somewhere in the suburbs and paying less rent, if you factor in if you have to drive, right? If you have to drive, then parking and gas could really eat up a lot of money.
David Cinelli: Absolutely, you also have to live.
Jason Pereira: Exactly.
David Cinelli: I don't know about you, but I enjoy, not so much now that we have the family and the kids, but if you are a younger person, and you want to go down to ... You want to enjoy ...
Jason Pereira: I wish I still lived downtown, I'll just say that much.
David Cinelli: Yeah, exactly. You want to go have a couple of drinks and relax, and be able to do that.
Jason Pereira: Exactly.
David Cinelli: You do have to factor that in.
Jason Pereira: Lifestyle.
David Cinelli: Lifestyle is a big part of it, so I would 100%, and now you're seeing some of the rents in downtown cores getting pretty crazy, I would say. That's why a lot of times my clients will come to me and will say, "Well I'm spending this amount of money." We pull back, we do pull out a calculator, we figure out, "Okay, if you were not to be in the downtown core, if we can get you somewhere along the subway line, you might be only 15, 20 minutes away, now you're on the subway line, but your lifestyle doesn't change that much."
Jason Pereira: Yeah.
David Cinelli: That might make more sense, now you're actually cash more in your pocket if you're not renting the downtown core. Those are kinds of things we would talk about. Obviously as a landlord, I love having renters, so I'm never going to say everyone stop renting. That's just not my thing, right?
Jason Pereira: Yeah, it's not for everybody also, right? Whether it be the amount of time they're going to live in a city before they want to move to another neighborhood, or just financial constraints, so okay, that's the rental side. Let's talk about, what is it you should consider before buying.
David Cinelli: This is one of the reasons why I became a realtor. I had dealt with a number of realtors beforehand, buying, selling, and the one thing that added a lot of stress, tons of amounts of stress was not knowing the whole cost what happened, the whole process, just lack of information from the realtors that I was using before. It was pretty bad, to be honest with you.
Jason Pereira: Well in all honesty, most people's experience is probably like that. It's simply, they get it down to the least amount of work, which is essentially, "Okay, let's go make an offer," end of story, and then they don't get into the land transfer taxes and other things like that.
David Cinelli: Which I find is unbelievably like wrong. I do a lot of first time home buyer seminars, and we actually have, and before you even jump in a car with me and go look at properties, I sit you down. I tell you all the costs. I show you how to budget for those costs. I want to make sure you've talked with a mortgage broker beforehand. We can figure how much you can afford, not necessarily how much you're top ended for, but in order to live your lifestyle, what can you afford to purchase? Yeah, you said before, the bank can give you a million dollars.
Jason Pereira: Doesn't mean you should spend a million dollars.
David Cinelli: I would 100% say that. We'd run the numbers with them, like "Okay, how much does it cost per month? What's your budget like here? What are your budgets now? If you're able to spend this, yes, does this make sense?"
Jason Pereira: The bank doesn't care if you can afford to go on a vacation or not, right?
David Cinelli: Absolutely not.
Jason Pereira: You do, right?
David Cinelli: Of course, and listen the bank keeps giving me more, I do buy a lot of rental properties and like you said, the more you're in debt and you're able to cover those debts, they will love to give you more money. They just love you.
Jason Pereira: They love to give you more money, yeah.
David Cinelli: Honestly, they don't care, right?
Jason Pereira: Exactly.
David Cinelli: At the end of the day, yeah, there's one thing I made sure what we do, we sit down, we run the costs. Again, that was something that I never had, so when I give, and you get to go home with a pamphlet. You get to see what an agreement and purchase of sale actually looks like, and there's plain language below it, so you're not signing anything that ...
Jason Pereira: It's all in legal ease.
David Cinelli: Yeah, and it's also, we also have a buyer representation agreement which ensures ... Again, you're not ... I always tell people never, ever sign something you haven't read. I put it ...
Jason Pereira: For the record, that's just a good rule for life.
David Cinelli: Of course.
Jason Pereira: Most people don't do that. That takes some level of trust, yeah.
David Cinelli: I bought two or three properties, I didn't even know I signed a buy rep agreement, a representation agreement.
Jason Pereira: Yeah, well it's buried in like six other documents, right?
David Cinelli: Well exactly. My point is that I always try to be open communication. I only work with people that want to work with me. That's the other thing, so if I'm showing you all this information, I'm gathering, I want to make sure that A, you're comfortable with me, that I'm honest with you, but the second thing is by giving you all this information and getting through all the stress, which let's be honest, the budgeting, the unknowns, when, for example when a deposit is due, which is in 24 hours, can cause a lot of stress.
Jason Pereira: Absolutely.
David Cinelli: If you don't know those kinds of things, it's going to be very stressful, and my real estate coach actually says, he goes, "Buying real estate," and he actually has a study, he says, "It's on the top 10 most exciting things."
Jason Pereira: Stressful, yeah.
David Cinelli: Top 10 most exciting things you can do in your life, but it's also the top ...
Jason Pereira: 10 most stressful things.
David Cinelli: Most stressful, but my job is to make sure you get out of the stress, and the reason why people get stressed is that they don't know.
Jason Pereira: They're not educated.
David Cinelli: They're not educated.
Jason Pereira: Yeah, good. Excellent, so all those considerations, basically what your real message is, is get organized, similar to mine, get the right advice, and that means not just the proper realtor. It could mean your financial advisor, it could mean a mortgage broker. It does mean the bank, but never the less, those are ... That team is going to prevent you from making big mistakes.
Jason Pereira: Let's talk about the tipping point between renting and buying, so at what point or what factors should be considered when people are going to jump from one to the other?
David Cinelli: Well, we talked like cost of rent.
Jason Pereira: Absolutely.
David Cinelli: Right, and when you do have, and we talked a little about leases for example, in place.
Jason Pereira: Yes.
David Cinelli: You are legally allowed to increase rent after your one year lease is up. Now if your property is built, and I think now they made this stipulation, after 2018 I believe it was ...
Jason Pereira: 2018.
David Cinelli: They can increase your rent wherever they want. If it's built, if your building's built after 2018.
Jason Pereira: Yeah.
David Cinelli: If you going from rent from $2000, all the sudden they jump to $4000 ...
Jason Pereira: That's legal, sadly.
David Cinelli: Yeah, that's legal, unfortunately. That might be something to push you. The other thing is that we talked about what are your budget? If you are close to the end of your budget, and you are renting, and you're saying, "Yeah," and it's been three, four years, and you're like ... Now you're spending $3000, $4000, and we can get you into a property which now you can actually pay down your mortgage, even with the expenses and it makes sense, yeah you might be outside the downtown core, that's the tipping point I would say.
Jason Pereira: That's the key consideration, right, because it's not the rent you're paying downtown versus the cost of buying out in, say Georgetown for example, that's not, you're not comparing the same thing. That rent may be completely reasonable and a very low rate of return for the landlord who owns it, but the property price drop to move out to Georgetown could be enough to basically make up the difference for you, and actually make it realistic.
David Cinelli: Right, absolutely. Same thing you said, it all depends on what your goals are. I have a client now, they might be moving. They're looking to purchase it, but they have a plan in place. We're looking for something for them, just for five years. After the five years, it has to be rentable, so we're looking for a duplex. They're going to live in one unit. They're going to rent out, which helps over their mortgage because the rent, and they're going to live in the property which is not going to yield as much. They don't mind living in that one because the upper unit is going to be nicer, and it's going to carry a big portion of their mortgage.
David Cinelli: Now they have a plan, in the five years they're going to move out of town, and rent both of them out. At that point they already have a closed mortgage. Their five year mortgage is going to be less, so their cash flow is going to be a little bit better, but they do want to live somewhere. They currently have a condo downtown, which right now, that's another factor, the reason why they're selling. There's going to be a special assessment on this property. There's going to be a lot of factors, which even if they kept this one as a rental, it's not going to make economic sense for them to keep it. They're actually going to be in a cash flow deficit position.
Jason Pereira: There we go.
David Cinelli: That is the reason why they're going to sell this property and put the equity into this one, but they do have a plan. We've discussed this plan. It's not like they just came to me and said, "I don't know what to do." I'm like, "We're going to do this." I'm like, "No, it doesn't work that way."
Jason Pereira: Yeah.
David Cinelli: If you don't have a plan, I always get somebody like yourself, I don't know, the viewers probably don't know, but me and you talk ...
Jason Pereira: Quite frequently.
David Cinelli: A lot.
Jason Pereira: Yep.
David Cinelli: We bounce ideas a lot off each other.
Jason Pereira: Yeah.
David Cinelli: I'll send you clients and I'll say, "What do you think about this," and vice versa, and the reason why is because we work together. We're not against each other in any sense.
Jason Pereira: No.
David Cinelli: We do have a lot of conversations. As a landlord, we've had a number of conversations like, "I think you should buy. I think you should rent," but it all depends, again whether the tipping point is.
Jason Pereira: Exactly, for that person.
David Cinelli: It all depends where you are in your life. Now exactly, if you're coming from a divorce situation, we've had before, and I had one client, he just wanted to buy right away. He had enough equity, he goes, "I don't want, I'm in no particular ..." He had no appetite ...
Jason Pereira: See those are dangerous situations.
David Cinelli: Right.
Jason Pereira: More often than not the people who are getting divorced don't want that event in their lives setting them back in any way, right?
David Cinelli: Right.
Jason Pereira: They often times go out and will want the same lifestyle they had before, want the house, the want whatever else, and unfortunately when you look at it, divorce is one of the number one leading causes of bankruptcy, so more often than not ... I mean part of your job and mine is hoping to try to pair back some of that emotion, and try to counter that with reason, which it's at a very sensitive moment, but it can happen.
David Cinelli: Yeah, I had the same ... I had one of my clients, she got a divorce. She's actually separated. Her good friend, was same thing, they had a realtor, they were going to use me. I said, "Why are you looking to sell this property?" Now at that point they weren't getting enough. I'm like, "If your husband buys you out," and we looked at her financial situation, I'm like, "You should not be buying. You're going to be bankrupt so fast."
Jason Pereira: It happens. It happens all the time. They want to keep the family home, but that home was supported by two people.
David Cinelli: Right.
Jason Pereira: One income is often not enough to support that.
David Cinelli: That's what I tell them, "You need to rent."
Jason Pereira: Yeah.
David Cinelli: Not to mention, now you're moving from, where do you want, do you want to be in this neighborhood? Do you want to be close, and they were just purchasing somewhere just to be somewhere close. They didn't care about the neighborhood. I'm like, "That's dangerous."
Jason Pereira: Yeah.
David Cinelli: You haven't done your research. You don't know. You're just getting into something. You figure you think you have to buy. No, those ... Sometimes I say to them, "No, let's rent for a bit and make sure you like that area."
Jason Pereira: Make a decision, yeah exactly, why don't you test it out before you get into it. You brought up an interesting case earlier, the one where they're planning on owning it for five years and then moving out of the city. Clearly these people have equity, and you've gone through it with them to make sure that this makes sense, but a lot of times people will get into these types of situations and they want to own a house for say five years, and then move somewhere else. Well I have to tell you, that's a very risky proposition, right, because in general, like we said, last 20 years, market was spectacular, but there's even been massive dips over short periods of time.
Jason Pereira: I mean recently we still haven't reached previous peaks, I believe, and that was four years ago, so there was a big ...
David Cinelli: No, two years.
Jason Pereira: Two years ago.
David Cinelli: Actually three, yeah that was in 2017.
Jason Pereira: If you bought three years ago, you could still actually be worth less than you are right now.
David Cinelli: Yeah.
Jason Pereira: These things happen, despite the fact that most people want to believe they don't, and I get why you don't think that way. You maybe sell a house every 10 years, right? The odds of it being down over 10 years are pretty slim historically, so if you're going to own for less than five to 10 years, you are taking a fair degree of risk with a highly leveraged property. The thing about the bank, in leverage, is that when you buy with the house, and you sell at a loss, the bank never loses money. They always get paid first, right? It's you who takes the hit, so it's very important to contemplate that.
David Cinelli: Yeah, two points on that. What I tell clients, when you're purchasing a property, it should always be the long term.
Jason Pereira: Absolutely.
David Cinelli: Yes, so I don't, if you're speculating ... Say like obviously I help clients ...
Jason Pereira: You're three years rent, you know.
David Cinelli: Yeah, so I'm like, "This has to be long term." When we're saying long term, at least, if you're looking less than five years, you're speculating, you are taking a huge risk.
Jason Pereira: Absolutely.
David Cinelli: Anybody who's purchasing, even these pre-construction condos, which we'll talk ...
Jason Pereira: We'll talk about those in a second.
David Cinelli: Yeah, that's a different story, but they're speculating and now the numbers are getting ridiculous, but if you are speculating, if you're less than five years, I'm like, "You might be in trouble."
Jason Pereira: Absolutely.
David Cinelli: I say that, and regardless, and then if you look in the long term plan, okay you will help yourself. Historically in the last 30 years we've had about a 6.6% return per annum.
Jason Pereira: Yeah.
David Cinelli: We've gone and run those numbers, but like you said, there's dips.
Jason Pereira: Historically it was actually closer to zero, when you subtract that inflation, right?
David Cinelli: Yes.
Jason Pereira: You subtract that inflation. If inflation was three, the growth was probably around three, right, with all these up and down dips. Yeah, we've had this unprecedented run up, so let's talk about pre- construction. What is the deal with pre-construction, and what was it like before, what is it like now?
David Cinelli: I used to love selling pre-construction and purchase pre-construction, and there is basically, there is three main sellers I had on it. One was that it was below market value, because you're buying things off of a plan.
Jason Pereira: Yeah, they don't exist, right? You're taking some degree of risk as to when it's going to get done.
David Cinelli: Correct.
Jason Pereira: When you're going to receive it, and we've seen these things always get pushed out several years.
David Cinelli: Correct, so usually second thing was the deposit. The deposit, sometimes you couldn't qualify for the mortgage, that's the third thing. You didn't have to qualify for the mortgage.
Jason Pereira: Yeah.
David Cinelli: First the deposit structure is, you don't have to pay 20% right off the bat, and even currently, most of them still do that.
Jason Pereira: Yeah.
David Cinelli: There are certain, there are a couple companies, and one big name company, they make you pay the deposit within 365 days, so they've got ... That no longer existed, but if it's spreading it over four years.
Jason Pereira: Yeah.
David Cinelli: Then now the mortgage ... Some of the companies are actually, now requesting you get a full mortgage approval within that 10 day cooling down period. A 10 day cooling down period on pre-construction, what it is, you go in, you pick your unit. You sign, you pay $5000 deposit. You take this document, you bring it to your lawyer. Your lawyer reviews it to make sure everything's kosher.
Jason Pereira: Yeah.
David Cinelli: Once you're okay with that, you can move forward with it, and then you have to pay the remainder of that 5% upon that.
Jason Pereira: Yeah, and that 10 day cooling period exists in all contracts in this province.
David Cinelli: Correct.
Jason Pereira: With the exception of auto dealers, which is an interesting topic.
David Cinelli: Which is interesting, yes.
Jason Pereira: Yeah, so 10 day cooling off period, then ...
David Cinelli: Yeah, so then in that time, so what happens, we used to do what we called a pre-approval beforehand.
Jason Pereira: Yes.
David Cinelli: The bank would give you a letter, it really didn't mean much, because we don't know what's going to happen in four years.
Jason Pereira: Exactly.
David Cinelli: These banks now, let's say now these builders are saying, "No, no. Now we need to ..." They're leveraging it. They're making you get a pre-approval, sorry a full approval.
Jason Pereira: Yeah.
David Cinelli: Those three things, those three factors, one it was below market value. Two, you have the deposit structure, which was longer, and three, you didn't need a firm approval. All those have all been diminished.
Jason Pereira: Last point, that last point goes back to my point about what's happening in the market, and a big reason why they moved to that a couple years ago was because when we had that dip in the market three years ago, all kinds of pre-construction deals went to close, and now everybody went back to the bank and said, "Okay, I need that mortgage now," and they're like, "What a sec, that house you bought on a pre- construction for a million dollars, you can't sell that for more than $800. We're not going to give you the money. You've got to come up with the extra $200,000.
David Cinelli: Yeah.
Jason Pereira: So many of these people ended up in situations where they lost their deposits because of it.
David Cinelli: Yeah.
Jason Pereira: It's no surprise that the builders are saying, "I don't want to deal with this if there's another correction, so go get a full approval. Forget this pre-approval stuff."
David Cinelli: Right. That only happened after that small dip, but what happened ...
Jason Pereira: It wasn't a small dip, because ... Yeah, fair enough.
David Cinelli: It was, it really was. There was a couple months of correction.
Jason Pereira: Yeah, but it was a big correction.
David Cinelli: If you bought before that, like it was like you're buying at a discount.
Jason Pereira: Yeah.
David Cinelli: If you bought pre 2017, on those numbers, the pre-construction wouldn't catch up to what the resale value.
Jason Pereira: Yeah.
David Cinelli: It buffered that. Now I'm getting worried, because we're looking at, and we've had this discussion before, people aren't pulling out the calculators and calculating, right?
Jason Pereira: No.
David Cinelli: They're looking right now, I'm like, "Oh okay," but they're looking what the pre-construction market is and what these builders are now doing is they're now, they're selling these pre-construction condos, and they're adding some inflation in there too.
Jason Pereira: Yeah.
David Cinelli: What these properties will be worth, they think in four years.
Jason Pereira: Yeah.
David Cinelli: There's a big problem with that. As you can imagine, we don't know where they market's going to be in four years.
Jason Pereira: Well now you're not getting a reward for taking the risk, right?
David Cinelli: No.
Jason Pereira: You're not going to get discount for taking the risk.
David Cinelli: 100%, and you don't even know what the condo looks like on the inside.
Jason Pereira: Yeah, that's true.
David Cinelli: You have to rely on me to explain like, "Okay, I can show you ..."
Jason Pereira: Maybe a cut back on materials, yeah.
David Cinelli: I literally have to walk people through. I pull out a measuring tape, I'm like, "This is where your bathroom is. This is the size of your closet." They're like, "Oh, that's a lot smaller than we thought."
Jason Pereira: Yeah.
David Cinelli: On paper it looks great, but until you actually pull out a calculator, and pull out a measuring tape ...
Jason Pereira: Unless you have a figure that' the scale, that you can put down there and see how big you are ...
David Cinelli: Right.
Jason Pereira: It's hard to tell.
David Cinelli: I was like, "This bedroom looks a good size." I'm like, "You'd be lucky to get a queen in that," and they're like, "Come on, it's so and so." I'm like, "Go measure your bedroom." They're just surprised. For example, you have to have ... A bedroom needs to have a window in it, and I've had to sell condo units ...Jason Pereira: Well, windows, yeah.
David Cinelli: This is hilarious that they put the bedroom in the middle of the floor, and they have to, and they have a window, which looks inside the kitchen, so your window, the light that did, the natural light that you're getting is from inside.
Jason Pereira: It's non-direct.
David Cinelli: That being said, I've purchased four pre-construction condos, and one this past year, right?
Jason Pereira: Yeah.
David Cinelli: I ran the numbers.
Jason Pereira: I'll tell you, we've had clients come to us and say, "I want to buy this pre-construction," and whether investment or to live in, and we look it up and we say, "That looks expensive." Then we look at comparables in the area, and we're like, "This makes no sense. You want this price for a condo that's not going to be done for four years, yet meanwhile this condo closed last year, and it's cheaper." You could literally, in some of these cases, buy something down the street, comparable size, comparable design, that is already existing for less.
Jason Pereira: We've talked about this before, I mean my belief is, frankly, that this is the lowest cost of speculation, so a lot of real estate speculators get in because of the timeline and the amount of time that they have to close these things, but unfortunately they've driven the price to the point where you're actually, you're behind the eight ball the day you sign that contract.
David Cinelli: Correct.
Jason Pereira: Yeah.
David Cinelli: They do add, now the funny thing is, like they say now, they're adding free assignments.
Jason Pereira: Oh, so then, so what they're doing ... Again, this is for the condo speculator, so essentially I can sell my pre-purchase condo to the next guy, who thinks the market's going to be even hotter, right?
David Cinelli: Correct.
Jason Pereira: Again, you're still behind the eight ball. When you signed, and you had a discount. Let's call it 15%, whatever it was, off of what it was going to sell for as of today, but four years down the road, there was money to be made there from day one. Whereas now, essentially you need the market to grow first and foremost, just to break even.
David Cinelli: Right.
Jason Pereira: This is what's known as the greater fool's theory. You keep on selling to someone else, who just hopes to sell to someone else at a higher and higher price.
David Cinelli: Right. Now if you look at, personally, like on my personal, my Instagram page or my Facebook and all that too, we have a pre-construction manager, and he manages those because there's a big market for it, obviously. He sends us, we get tons and tons, and tons of listings, of things or projects that are coming up. If you look at my Instagram, there's only a few that I actually ... I actually take it, run the numbers, and I'll endorse.
Jason Pereira: Yeah.
David Cinelli: The reason why is that, there's one that's coming up too, and it's like ... If it has a celebrity on it, you know it's just going to sell for more, and the price point is actual ... The price point wasn't too bad, so that's why I said I didn't mind that.
Jason Pereira: Celebrities are endorsing condos.
David Cinelli: Right.
Jason Pereira: That's how ... That's [inaudible 00:26:29] the scam.
David Cinelli: That's not the one I purchased. The ones I purchase are actually close to my house and I know the area, and I know they're under-valued.
Jason Pereira: Yep.
David Cinelli: The current price, because I've actually seen the prices go up, so my wife ...
Jason Pereira: You've done the math.
David Cinelli: Oh 100%, and we looked at the current rents, what they're renting out now. What I say to my clients is, "We run numbers and stuff too," and I'm like, "Where are we at now?" If they're coming to me, and it's like most ... I'll be honest, most of the time, something like, "What do you think about pre- construction?" I'm like, "We run the numbers, we like, let's buy this condo." If you want to ... First of all, it's a totally different thing.
Jason Pereira: Absolutely, why wait four years.
David Cinelli: Why would you wait four years.
Jason Pereira: That could be six.
David Cinelli: What happened with a couple of ... I'm not going to say any names, what happened, there was a project which was north of the city, north of Toronto. I'm not saying where it is or the name. They had built two towers, which was fine, and they assumed that they can get another two towers, so they fully sold out of the towers. Now, with a pre-construction, what they usually do, and this was pretty, like the big booms were, the money, they didn't actually factor in a lot of inflation in this one. The problem with that was that they didn't hold any of their units back, so the smart builders, what they'll do is they'll sell a stack, and then they'll increase the price to sell another stack. Again, wherever it is, so ...
Jason Pereira: Yeah, so that they're participating in market up cycle sells.
David Cinelli: Exactly, so they are, these guys sold it all up front and they never got the approval for the city. They sold everything before the approval. Then they went to the city and said, "Okay good, we already approved ..." They assumed, it took them over a year, over a year to even get approved, which pushed back all of the construction date and during that time, they had that strike with the drywallers, which ...
Jason Pereira: Drove up the cost again.
David Cinelli: Drove up the cost, so it literally got to the point where this builder, if they actually built, were going to be in the red.
Jason Pereira: They just handed back everybody's money.
David Cinelli: Zero interest.
Jason Pereira: Yeah, that's it, and this is the risk you take with these things.
David Cinelli: Yeah.
Jason Pereira: Before we wrap up, let's talk about, give me three tips for what you think everyone needs to consider before buying any property.
David Cinelli: Before purchasing any property, a, obviously know the area you're going to be in.
Jason Pereira: Yes.
David Cinelli: 100% okay, b, know your finances, know what your costs are going to be whether going in, and that includes your land transfer tax. In Toronto, we have double end transfer tax.
Jason Pereira: Unfortunately, yeah.
David Cinelli: Lawyer fees, which I explained that, and the third and most important thing is have a good support team, that includes your realtor. That includes your financial planner, and that includes your mortgage broker, because without having them working together, a, you're not going to know that the market is or whether you're getting a good deal or not. B, you're not going to know if you can afford it, and then most ...
Jason Pereira: Yeah, the biggest purchase of your life can be the biggest mistake of your life.
David Cinelli: Exactly, and most important, are you going to be happy with the purchase.
Jason Pereira: Absolutely.
David Cinelli: Those three things have to work together.
Jason Pereira: Absolutely. Before we go, where can people find you, Dave?
David Cinelli: Well find me all over the Internet.
Jason Pereira: That is true.
David Cinelli: You can always call or text me, 416-876-9998, if you want to do that.
Jason Pereira: That's pretty brave.
David Cinelli: I know, I do get some ... I do answer, I do get some funny text messages, but obviously know if you do that, you're going to get blocked. If you show up on, and it comes up the number blocked, I don't answer it. You could always email me, dcinelliroyallepage.ca, but other than that, alternatively I'm on Instagram at David V. Cinelli Realtor. I'm on ...
Jason Pereira: Just Google you.
Jason Pereira: Everything from HGTV to every social media outlet.
David Cinelli: I'll be there, yeah.
Jason Pereira: Excellent.
David Cinelli: Yeah, I'll be around.
Jason Pereira: Well David, thank you so much for coming in today.
David Cinelli: You're welcome.
Jason Pereira: Thank you, and thank you again for joining us for the Wisdom of Wealth, where hopefully today we did a little bit more to increase your financial literacy, and help you make better decisions around your real estate purchases. Until next time, take care.