experts: real estate column Friday, March 07, 2003

Some advice for a world of ups and downs

Your questions answered on property, interest rates, taxes - and more

By Ozzie Jurock

This article appeared in The Vancouver Sun on March 1, 2003

Up or down on Whistler, up or down in condos, up or down in BC, up or down in interest rates ... those are the questions. Tons of them. And of course comments. In essence all questions are mostly about money and what to do with it. That's the real problem. What to do with my money. Of course, there is a secondary problem as in ‘I don't have any money’. If you don't have any money you have to get some. But after you've got some then that brings you right back to the primary problem of what to do with it.

If you think that inflation is coming back then you have to do something with the money you already have to make it grow or the effect of inflation will make it melt away like holding an ice cube in the palm of your hand. Not only do you want to preserve the purchasing power of your money but use the dynamics of inflation to make your money grow even faster.

However, you might be of the mind that inflation is permanently dead and will never come back or you might think we're going to have deflation. If that's the case you'll want to sell everything, buy the highest yielding, longest term government backed bonds you can find and then use the leverage available in that portfolio to open an account to short the Standard & Poors 500.

Question: Interest rates are rising. Should I lock in my mortgage now?

Answer: Yes, we are looking for rates to rise. We are also looking for more inflation. Meaning more increases in rates. But not pre-war. As an owner, I have today a 5.1% 5 year term. As an investor I can get a 6.15% 10 year term. Where else can you have your cost fixed and your income rising? Why on earth would I want to speculate on the rates. Rates have a nasty habit of coming down very slowly and going up when they do very fast.

Question: I now own my house with a basement suite that I rent out for $985.00 a month and I built a suite downstairs ($13,000.00 in 2000). Can I can still deduct this "reno" even though it's two years later?

Answer: Renos are not deductible. Any improvement or addition to a property is added to the ACB (adjusted cost base) of the property and "can be" depreciated - but you do not want to depreciate part of your family home because that makes the home subject to capital gains tax. Sometimes, it is hard to tell the difference between a "reno" and a repair. It is always a non-deductible "reno" or improvement if you did it before renting for the first time.Best to see your personal accountant.

Question: We plan to take a line of credit on our primary residence until we are able to sell it. The money will be used as a down payment for an upgraded house. Until we are able to sell the primary residence we plan to rent it. Will the rental income be tax deductible for the interest on the line of credit? If we deduct the interest from the tax, will we loose the capital gains exemption for the primary residence?

Answer: Because the money was borrowed to buy a house for you to live in, it is considered a personal expense and is NOT deductible.

Question ... eh ... not really a question: "Ozzie the prophet. You’re not managing a mutual fund Mr. Jurock. You don't get to take personal credit for the price of real estate going up just like you never took the blame (I'm sure) when somebody lost money on real estate over a two year period."

Answer: Uh ... not everybody likes me. Nope, do not and want not to manage a mutual fund. Do not and never did take personal credit for the rise or the fall of the real estate market. Did for 30 years tell people to invest in their own home, pointing however to ‘timing and trends’ ... as in real estate values fluctuate and do not go up in a straight line. I also wrote a book "Forget About Location, Location, Location" where I debunk the myth of location and explain the importance of timing and trends.

Question: In your article you talk about if one had bought 2 years ago how good it would have been. Agreed, but what you are not talking about in the article is where to go from here for those who did take your advice. I purchased in Yaletown ... and in paying down the mortgage quickly I have approximately $50,000 equity in a unit worth $220,000. I haven't seen you talk about the problem that is happening right now with more vacancies in the rental pool ... Should we be selling now and taking out the equity or hold for increases in the future (5-10 years) and risk declining rentals as we have reasonable rents but few takers?

Answer: In 800 or so words you can’t cover everything. But it is of importance to note that CMHC only uses ‘3 units and up buildings’ to arrive at their vacancy rates ... thus missing all the individual investors that bought condos. In Vancouver’s downtown that could be as many as one third of all sold units (some 2,500!). In Toronto it is far worse. We think some 14,000 high end units were sold to investors. Add to this that Toronto’s developers sold some 67,000 units since 1998 - 40,000 of which are not completed as yet and WILL - when completed hugely aggravate the rental market. So, be ‘nice to your tenants’ ... and while that always applies ... it particularly does so now. Whether you should sell now however, depends on "What are you going to do with your money?" If you just put it in the bank I would keep my unit ... you know what you own. If you do sell - buy something else.

Question: In the Lower Mainland we are clearly in a bubble? Values will crash mark my words.

Answer: How would you like me to mark them? Get set? Yes, I believe that there are bubbles TODAY in some real estate markets and some bubbles have already burst. In our view, many US markets and almost all major resorts are in ‘bubble territory’ including Whistler. Currently held up only by more and more money coming in, driving it higher. Yes, all bubbles reverse eventually.

No, I do not believe the Lower Mainland is in a bubble and that bubble has to pop. But I do believe that your personal deal has to supercede ‘the good market conditions’. I also believe there are a lot of lousy deals on the market today. Investing remains work.

Question: I am a dentist. Would it make sense to buy my own building?

Answer: If you are a professional - whenever possible buy your own building or pool one with other professionals. Actually, any business should buy its own building. Most buildings make sense at today’s low interest rates. Lock in the rates on all commercial buildings for at least 10 years.

(There is a section Q & A section on my website where 16 experts answer hundreds of questions take a look, perhaps yours is answered there as well.)

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