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Rent vs. Buy? Putting the numbers to the Victoria Marketplace


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#1 mcmusty

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Posted 01 August 2013 - 05:37 PM

A Cost-Benefit Analysis (CBA) of Rent vs. Buy using Victoria averages, using a 5.14% interest rate on a 25 year mortgage.

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#2 VicHockeyFan

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Posted 01 August 2013 - 06:01 PM

Huh? Mortgage interest on your principal residence is not tax deductible in Canada.

Why is the investment income only 3%, yet the first mortgage interest on the other side is 5.14%? What if as a renter you invested in low-ratio first mortgages, and earned 5%?
<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#3 wisevictoria

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Posted 01 August 2013 - 06:02 PM

Why is the interest on mortgage payments for your personal residence tax deductible? Please elaborate.

#4 Matt R.

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Posted 01 August 2013 - 06:05 PM

Strange video. In the next part he should compare owning vs renting over a 40 year period.

Matt.

#5 LJ

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Posted 01 August 2013 - 06:41 PM

^^^ ^^ Like this.

http://www.integrate...tible-part-one/
Life's a journey......so roll down the window and enjoy the breeze.

#6 wisevictoria

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Posted 01 August 2013 - 06:49 PM

LJ - that tax deductibility is dependant on either having, or accumulating a substantial non-registered investment portfolio. The video explicitly states that mortgage interest is a tax deductible expense against employment income in Canada. This is patently wrong. It is a disservice for a real estate professional to be offering such clearly inaccurate information.

I would hate to think how a client would feel if they actually followed this advise, then had a very unpleasant letter from CRA.

#7 mcmusty

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Posted 01 August 2013 - 07:10 PM

Thanks for pointing out the error fellow readers. I'm relatively new to the BC Real Estate scene, and I hope to use this as a learning opportunity for us all. My background is in Economics, and I'm using these videos as a way for me to dig deeper into the intricacies of the residential real estate market.

I've investigated a bit more and understand that you cannot tax deduct interest payments on your primary place of residence in Canada.

There does seem to be a loophole around this policy, that is worth reading into. It's called an asset swap.



So basically, you sell your investments to buy a house, then you borrow against your house to buy back your investments. You've swapped one asset for another and ended up right back where you started. Only now, you've given yourself a big tax break!

The Partial Asset Swap
This doesn't have to be an all or nothing strategy though. If you don't have a big enough investment nest egg to buy a house completely, you can do a partial asset swap which will make a portion of your mortgage interest tax-deductible instead of the whole thing. Here's an example:

You are buying a house worth $200,000.
You have $50,000 in investment assets.
You make a $50,000 down payment on the house using your investment assets, leaving you with $150,000 left to pay.
You take out a mortgage for the full value of your house, $200,000.
Using the $200,000 mortgage money, you pay the $150,000 you still owe for the house, leaving you with $50,000 cash.
You purchase $50,000 worth of investments.
So now you have a $200,000 mortgage to pay off, except now, 25% of your mortgage interest payment ( $50,000 / $200,000 = 0.25 ) is tax-deductible! At the end of each year your mortgage provider will send you a statement showing how much interest you've paid on your mortgage for the year. You'll take that amount and multiply it by 25% to figure out how much to claim on your taxes.

Other Considerations
Asset swapping is a bit of a gray area in the tax laws so there are some other things you might want to keep in mind. Here are a few:

If you incur a capital loss when you sell your investments, you can't claim that capital loss if you re-purchase the exact same investment within 30 days. So you'll want to wait 30 days before getting back into the same investment.

Regardless of whether you had a capital loss or not, some investment professionals recommend waiting 30 days before re-purchasing the exact same investments when asset swapping. This helps make it clear that you've done two separate actions: selling investments to buy a house, then borrowing against the house to invest.
There is also some debate about what types of investments are eligible for this type of tax-deduction. In Revenue Canada's income tax guide there is a line the reads "... if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid." Some people insist, however, that even if your investments don't pay interest or dividends, the interest can still be deducted. If you want to stay out of this gray area, buy an investment that pays a dividend or some interest income so you know you are in the clear.
As a result of some of these gray areas, you should make sure you keep good records of all the transactions involved in the asset swap. That way, if you are ever audited, you'll be able to show exactly what you did, and you'll have all the paper work to prove it.

#8 pherthyl

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Posted 01 August 2013 - 08:16 PM

Strange video. In the next part he should compare owning vs renting over a 40 year period.

Matt.


That would be a silly comparison. The people that are interested in buy vs rent are typically not facing a choice of buying or renting forever, just whether renting or buying is the right choice for the short term (year or couple years). Also the change in home prices and interest rates would be the biggest factor over the longer term.

I agree that it is a strange video though. Why doesn't a realtor know that mortgage interest isn't tax deductible (modulo some tricks that 99% won't do)?


People who are actually interested in this question should do the calculation themselves with this tool which is far superior: http://members.shaw....-or-buy-v6a.xls

#9 VicHockeyFan

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Posted 01 August 2013 - 08:32 PM

Thanks for pointing out the error fellow readers. I'm relatively new to the BC Real Estate scene, and I hope to use this as a learning opportunity for us all. My background is in Economics, and I'm using these videos as a way for me to dig deeper into the intricacies of the residential real estate market.

I've investigated a bit more and understand that you cannot tax deduct interest payments on your primary place of residence in Canada.


Somehow you received a real estate license for this province without knowing that?
<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#10 Bob Fugger

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Posted 01 August 2013 - 09:12 PM

Thanks for pointing out the error fellow readers. I'm relatively new to the BC Real Estate scene, and I hope to use this as a learning opportunity for us all. My background is in Economics, and I'm using these videos as a way for me to dig deeper into the intricacies of the residential real estate market.


Yes, but when you post a video stating a background in Economics, the inference is that you purport some level of expertise. Unfortunately, you betray yourself as an amateur by stating that rent is "wasted", which ignores the gained opportunity cost of the difference between down payment saving, mortgage interest payments, non-capital repairs and maintenance and property taxes (although to be honest, the last one is a bit of a wash, as you're the one who really plays your landlord's property taxes, when renting) versus investing your surplus income, after rent and expenses. Anyone who avers a background in economics would never make such a normative statement - I was going to say that normative statements are the enemy of the economist, but most (decent) economists don't give them anything more than short shrift, and rightfully so.

As well, you appear to be guilty of cherry-picking your statistics to fit your premise. 3% is such an arbitrary number - why did you chose it? Because realty good and mutual fund bad - so everyone only ever holds assets in GICs & ING savings accounts? With my admittedly limited background in economics and statistics, I would have chosen the historical 25 year average rate of return of the TSX, for example. That's kinda basic stuff. No need to touch mortgage deductability - you've been called on that, enough. After that, I just kinda turned the video off.

In re: asset swap - in Canada, that's called the Smith Maneuver (you're welcome) and if it is the panacea that it was purported to be, everyone would be doing it. While it has upsides, there are many risks; the largest being that you never pay down your debt, which only works if you base this on the assumption that it doesn't matter, because your equity will always increase so the debt size relative to the value of the asset decreases proportionally. I'd put a sawbuck on a three-legged nag before I'd assume that we'll see the kind of realty market asset growth that we saw in the '90s and early aughts.

Apologies if you feel that I'm picking on you - just on your arguments, really. One thing you should know about Victoria is that we have the highest level of citizenry per capita with graduate degrees in the country. That's not to say that everyone's a genius (or an arrogant prick, like myself), but you've got to get up pretty early in the morning to teach folk around here a lesson. Perhaps you might find success in humbly listening and learning, rather than claim expertise in a video series. What's that old saying, better to be silent and risk being thought a fool, than open your mouth and remove all doubt.

If you may indulge me editorializing, it's crap like this that feeds antipathy towards the real estate profession. Someone takes a course and are now licensed to sell a house, and suddenly they've discovered America, while the rest of us ignorant schmucks are left mucking for scraps. Indeed, the same can be said of economists - it's a fascinating and useful way of looking at the world, but boy, do you guys love the smell of your own farts, or what!?

Good luck out there and welcome to town. :teacher:

#11 pherthyl

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Posted 01 August 2013 - 09:28 PM

Yes, but when you post a video stating a background in Economics, the inference is that you purport some level of expertise. Unfortunately, you betray yourself as an amateur by stating that rent is "wasted", which ignores the gained opportunity cost of the difference between down payment saving, mortgage interest payments, non-capital repairs and maintenance and property taxes (although to be honest, the last one is a bit of a wash, as you're the one who really plays your landlord's property taxes, when renting) versus investing your surplus income, after rent and expenses. Anyone who avers a background in economics would never make such a normative statement - I was going to say that normative statements are the enemy of the economist, but most (decent) economists don't give them anything more than short shrift, and rightfully so.

As well, you appear to be guilty of cherry-picking your statistics to fit your premise. 3% is such an arbitrary number - why did you chose it? Because realty good and mutual fund bad - so everyone only ever holds assets in GICs & ING savings accounts? With my admittedly limited background in economics and statistics, I would have chosen the historical 25 year average rate of return of the TSX, for example. That's kinda basic stuff. No need to touch mortgage deductability - you've been called on that, enough. After that, I just kinda turned the video off.

In re: asset swap - in Canada, that's called the Smith Maneuver (you're welcome) and if it is the panacea that it was purported to be, everyone would be doing it. While it has upsides, there are many risks; the largest being that you never pay down your debt, which only works if you base this on the assumption that it doesn't matter, because your equity will always increase so the debt size relative to the value of the asset decreases proportionally. I'd put a sawbuck on a three-legged nag before I'd assume that we'll see the kind of realty market asset growth that we saw in the '90s and early aughts.

Apologies if you feel that I'm picking on you - just on your arguments, really. One thing you should know about Victoria is that we have the highest level of citizenry per capita with graduate degrees in the country. That's not to say that everyone's a genius (or an arrogant prick, like myself), but you've got to get up pretty early in the morning to teach folk around here a lesson. Perhaps you might find success in humbly listening and learning, rather than claim expertise in a video series. What's that old saying, better to be silent and risk being thought a fool, than open your mouth and remove all doubt.

If you may indulge me editorializing, it's crap like this that feeds antipathy towards the real estate profession. Someone takes a course and are now licensed to sell a house, and suddenly they've discovered America, while the rest of us ignorant schmucks are left mucking for scraps. Indeed, the same can be said of economists - it's a fascinating and useful way of looking at the world, but boy, do you guys love the smell of your own farts, or what!?

Good luck out there and welcome to town. :teacher:


Bang on.



#12 Szeven

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Posted 02 August 2013 - 11:02 AM

Marko is this person representing your office?

#13 VicHockeyFan

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Posted 02 August 2013 - 11:05 AM

Marko is this person representing your office?


Oh, come on. Every real estate office is full of independent contractors, nobody represents the brand, be it Re/Max, Century 21 or Fair.
<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#14 Szeven

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Posted 02 August 2013 - 11:15 AM

Oh, come on. Every real estate office is full of independent contractors, nobody represents the brand, be it Re/Max, Century 21 or Fair.


I thought it would be like insurance sales where your contractors sell insurance through a head broker, who is ultimately responsible.

#15 VicHockeyFan

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Posted 02 August 2013 - 11:19 AM

I thought it would be like insurance sales where your contractors sell insurance through a head broker, who is ultimately responsible.


Well, it sort of is, but who chooses a realtor by their brand?
<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#16 Szeven

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Posted 02 August 2013 - 11:24 AM

Well, it sort of is, but who chooses a realtor by their brand?


Lots of people! Image is everything! In particular to Fair Realty and other discount brokerages, I'm sure it would be a constant uphill battle to project an image of service, professionalism, and competence to the general public. I think in general people perceive cheap commissions as less service, less professional, less experience etc.

#17 mysage

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Posted 02 August 2013 - 11:54 AM

I agree. There are a number of real estate offices in town that I would never use because the supervison provided to their reators is, in my opinion sub par. No business is without its flaws but one should hedge ones bets as much as possible. Either know your realtor personally or know your brand.

#18 MarkoJ

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Posted 02 August 2013 - 12:58 PM

Lots of people! Image is everything! In particular to Fair Realty and other discount brokerages, I'm sure it would be a constant uphill battle to project an image of service, professionalism, and competence to the general public. I think in general people perceive cheap commissions as less service, less professional, less experience etc.


I've made a number of short educational videos on this exact topic ->





I don't have an ego and this is not intended to promote myself but I work at Fair Realty and I've been successful on selling anything but image. I wear jeans and drive a Honda Civic, but the content is there, and my clients gravitate towards that.

i/ Performance: easily in the top 1% (out of 1220 REALTORS® in Victoria) this year as far as sales transactions.
ii/ Education: masters degree from UBC, Broker's Couse from UBC (less than 10% of REALTORS® have the broker's course).
iii/ Experience: Lots of construction experience, strata treasurer for a large building downtown, plus much more relevant experience.

As I've mentioned and explained in one of my videos...when hiring a REALTOR® you have to hire the individual.

Fyi....Fair Realty is not a "discount brokerage." I happen to offer lower commissions and alternative business models but about 60% of REALTORS® at Fair Realty are full commission.

Marko Juras, REALTOR® & Associate Broker | Gold MLS® 2011-2018 | Fair Realty

www.MarkoJuras.com - MLS® from $899 and $1,000 cash back for buyers | www.834sales.com & www.promontoryforsale.com - Building(s) specialist 

Looking at Condo Pre-Sales in Victoria? Save Thousands!

 

 


#19 MarkoJ

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Posted 02 August 2013 - 01:10 PM

Marko is this person representing your office?


Dustin is a new REALTOR® at Fair Realty and every REALTOR® is an independent contractor.

Let's cut him some slack. I think this is an excellent learning opportunity for him. I have taken heat many times on HHV and various other websites for my comments and it has certainly helped me to learn and evolve.

I've had to deleted many of my videos over the years stemming from various complaints from different stakeholders including Garth Turner, VREB, colleagues, etc! It goes with the territory of social media I guess?

Marko Juras, REALTOR® & Associate Broker | Gold MLS® 2011-2018 | Fair Realty

www.MarkoJuras.com - MLS® from $899 and $1,000 cash back for buyers | www.834sales.com & www.promontoryforsale.com - Building(s) specialist 

Looking at Condo Pre-Sales in Victoria? Save Thousands!

 

 


#20 Bob Fugger

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Posted 02 August 2013 - 02:44 PM

Dustin is a new REALTOR® at Fair Realty and every REALTOR® is an independent contractor.

Let's cut him some slack.


I think you have to admit that coming onto VV to try to educate us and then blow such a basic, layperson fact about mortgage deductibility is beyond any slack that ought to be cut. I hope his clients have the good sense to ask him if his and FAIR's E&O policy premiums are paid up.

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