Seasons

The tale of Tom yesterday had a moral: when you’re old, you need income. It trumps having a house. If you can have both, great. You win. If not, pick the cash flow.

Of course, this was lot on most commenters. Typical little beavers. Canadians now equate wealth exclusively with real estate. Especially the young, it seems. The cult of property has never had this tight a curl on our collective soul. Lost on most is the outsized cost of ownership, the debilitating effect a house can have on financing life and the capricious, volatile nature of the property market. Whatever. We don’t care. Real estate is the reasons to exist – which is why (along with our outdated tax code) – we’ve pushed the price of it beyond the capacity of average people to get an average home.

How many bloggers yesterday suggested Tom (a) rent a suite in his house, (b) lease out rooms, (c) get tenants for the home and move to an apartment or (d) take on a reverse mortgage? Way too many. People thinking with their pants, not their heads.

When a man has hundreds of thousands in debt, no liquid assets, an unaffordable house that needs work and no job – and his only wealth is locked inside real estate equity – how is this even a debate?

Let’s review the risks.

Renting. Landlords are now suckers. The ROI is abysmal, which is why most LLs actually subsidize their tenants. But it gets worse. Legislative ‘reforms’ in every part of the country have tilted the system in favour of the occupiers, not the owners. Many rents are legislated. Evictions are almost impossible. The regulator is little more than an advocacy agency for tenants.

Have you heard about cash for keys?

Covid changed things. Forever, it seems. Not only were evictions basically outlawed during the pandemic, but landlord-tenant boards suspended activities and piled up a years-long backlog of cases. So if your renter decides to stop paying, she cannot be tossed. You’re not allowed to change the locks. And your appeal for an eviction order (which can be contested or subjected to long delays) will not be heard for at least a year. Or more. During all that time, you have expenses and no revenue. And no rights.

Leverage is in the hands of renters, many of whom are now extorting large sums from landlords simply for moving out when they were supposed to. Payments as gross as $50,000 are being handed over so the deadbeat will exit. This is a world in which it is legal for a tenant to stop paying. It’s legal for them to demand payment to vacate. And the odds of collecting unpaid rent are zero.

As for the reverse mortgage, well, the outcome is probably worse. These loans provide cash flow (or a lump sum payment) based on age, property and equity. Then the debt increases daily. The rates are obscene – 10.3% for a variable, 9.2% for a short-term fixed loan and 7.3% on a five-year term – which can double the original debt in relatively short order. It’s a last, gasping, pathetic resort for those without options or too emotionally crippled to give up real estate they cannot support.

In this case, the 76-year-oold we discussed already has more than $230,000 in debt, taking 100% of his public pension income to support. There are no available funds. He will face renewal at a higher rate. The only wealth he possesses is locked away in that house, now bleeding him dry. It’s turned from an asset into a carnivore.

The only sane option is to sell, free up the capital and use it to finance a decent, less-stressed life with a higher income, no debt and lower overhead. The funds can be GIC’d, invested in a stable diversified basket of financial assets or stuck in an annuity. In the first two instances, the capital is retained for eventualities as he ages (immensely wise). In the latter, he has life-long income, but the pot diminishes and empties over time.

The least intelligent and most hormonal path is to hang on to the property. Remember that real estate is only an ‘investment’ when the wealth it creates is monetized. Otherwise, those funds are unusable, frozen, generating no income stream. Meanwhile the costs of entry, exit and ownership of property are massive. Without an assured capital gain, why play?

So Tom’s tale is not really about Tom. Just a reminder that real estate ain’t the goal of life. It’s useful to live in. It may yield profits. It can be a forced savings plan for those who cannot save. In good days it can throw off a tax-free gain. In bad days a loss is not deductible. It can be in demand or rapidly turn illiquid. Financing is easy but rates are a gamble. There’s always a banker around willing to give you 20x leverage to buy some. He’s insured against loss. You’re not.

Mostly, to every thing there is a season.

A time to buy (when you need it and can afford it).

A time to sell (when autumn comes and income goes).

A time to plant. A time to reap.

And a time to refrain from comments. I swear it’s not too late.

About the picture: “Mr. Rex came back from his 40 minute walk this morning in Hamilton, ON,” writes Rob, “where it is currently -20 Celsius with 35KM/HR winds. He was a trooper and got his exercise…but it seems to have wiped him out so he decided to crash on his bed in the middle of the day…something he never does at all. Getting ready for the mid-afternoon walk…..”

To be in touch or send a picture of your beast, email to ‘[email protected]’.