A new study out of Toronto estimates that up to three in 10 homes in that city are being bought up by property investors and speculators.
Below is a simple, two-question test to find out whether you are an housing investor or a speculator.
A house for sale in Toronto's inner city. A new study estimates three in 10 Toronto homes are being bought by investors and speculators. (Photo: The Canadian Press)
But first, here's why it matters.
If you a property investor, you are an important part of the economy. Real estate investors are also called "landlords" and they provide housing to people who cannot afford to (or choose not to) buy a home of their own.
If you are a property speculator, you don't care whether your place rents out or not. You are not an essential part of the economy; instead, you are creating "artificial" demand in the housing market, forcing prices up and helping to create the affordability crises seen in Toronto and Vancouver today.
Also, as a speculator, you are making the housing market more vulnerable to a downturn. When house prices (inevitably) take a breather, many speculators will sell out of the market, increasing supply just as things are cooling off. By speculating in real estate, you are making a housing bust more likely.
So here's the quiz to find out if you're an investor (good) or a speculator (bad).
QUESTION 1: When you buy a property you won’t live in, you expect to make money by
a) Renting it out, and turning a profit on the rent.
b) Selling it for more money later.
QUESTION 2: After paying all the costs of carrying your investment property(ies) (i.e. condo fees, property taxes, any utilities you cover), your property
a) Makes money every month.
b) Loses money every month.
IF YOU ANSWERED A TO BOTH QUESTIONS: You are a successful property investor. You invest like the pros do: You make money by generating income from real estate, and your positive cash flow means you bought the right place(s).
IF YOU ANSWERED A TO QUESTION 1, AND B TO QUESTION 2: You are a property investor, but not a particularly successful one. You aim to make money by generating income from real estate, but the economics of the market aren’t working for you and you are losing money every month.
IF YOU ANSWERED B TO BOTH QUESTIONS: You are a housing speculator. You bought on the expectation that you will be able to sell for more later, and you don’t care that your investment is losing money today. Your only hope of coming out on top is to sell to a “greater fool” before price growth cools down. According to a note from BMO, you have 24 months before that happens.
IF YOU ANSWERED B TO QUESTION 1 AND A TO QUESTION 2: You think like a speculator but you are an accidental investor. You don’t care that real estate generates income, you just care that you’ll sell for more later. Despite this, you are turning a profit on your properties. Congratulations!
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