Households as both renters and owners

Several friends of mine own a condominium unit but don’t live there.  Instead, they are renters when it comes to their family home (a larger condo, a townhouse, or the main floor of a small house).

Is this a uniquely Vancouver experience, or the start of a broader urban trend in North America?

Here’s how it has happened in Vancouver.  A young couple together buys a condo in the downtown area (Yaletown, Coal Harbour, etc.), maybe a 1 bedroom unit.   They love living and working in close proximity and in the walkable, amenity-rich milieu that higher density neighbourhoods can offer.

A few years later they decide to have a child or children, and quickly the 1 bedroom unit is too small.  Suburbia and long commutes offer no appeal and really nor does having that suburban house (with lawns to mow, gutters to clean and other time and money sinks).  They like being able to get to-and-from work quickly, allowing for more family time.  Plus, they have lots of friends with children downtown–this is their community.

But, if they want another, larger, downtown unit, the costs of selling the one bedroom and buying a larger condo or a townhouse is quite high (in part because of market lift since they first bought in).  By contrast, the cost of renting that larger condo or townhouse is much less, especially when offset by the rental income they can achieve from leasing their owned 1 bedroom unit.  (For example, rent out the well-located 1 bedroom for $1700 and then rent a larger place for $2200/month; by contrast buying the larger place might cost $3200/month–or more–in mortgage and condo fees; if they moved to a slightly less expensive neighbourhood still near downtown, they might be able to rent a large 2 bedroom place for the $1700).

They keep owning the 1 bedroom unit, as an investment.  The rent covers most of the mortgage and carrying costs initially, and over time as they pay down more of the principle, the rent fully–or more than–compensates for the carrying costs.

This scenario allows the family the benefits of old fashioned home ownership where they have a nest-egg at the end of 25 years, or equity should circumstances change and they wish to buy a different home.  It also allows them the flexibility of renting in terms of being able to move should employment needs change or if they need to relocate for children’s schooling.

Owning the 1 bedroom is also an investment in the city, to which they are also contributing as citizens who work and play there.

So what do you think? Is this a bizarre Vancouver anomaly? A once-in-a-market-cycle phenomenon? Or something that is happening or could happen in many other cities going forward?

(P.S. I’m now on Twitter)

4 comments

  1. Daniel says:

    This is an interesting arrangement. I know a couple of people in similar situations: owned a home, moved and decided to rent the next place instead of buying again. They still own their last home and rent it to another household. In both of the cases I can think of, this strategy was done out of necessity. Because of the market, they would have had to sell at a major loss, and they are holding in hopes that the values will go up. They also knew their move would be temporary.

    The downside to this is the extra headache of having to be a landlord of just one place, and the risk always involved in not knowing the tenants. And one of primary benefits of homeownership is lost, the daily care of the living environment. Fixing the leaks right away, flowers in the window, etc. Not that many renters do not do these things, but they are more likely when you are financially invested in the place where you live.

  2. Global Urbanist says:

    Definitely not just a Vancouver thing. Usually this circumstance comes about when one spouse owns a small property before they get married.
    I’d have to say it is a market cycle phenomenon.
    The numbers show there is a 45% monthly premium to owning an equivalent property versus renting in Vancouver, probably because financing to own is so cheap right now with 5% downpayments and 3% interest rates. I can see the urge to keep the real estate. For every 4% rise in housing prices there is a 12% return on a 25% downpayment. Of course that is a 12% loss should housing prices go the other way.

    -If you think interest rates will rise then the small condo should be sold, wait for prices to drop and then buy another investment property at a lower price that it can pay for itself when rented.
    -If you think the cost of financing will be unchanged and housing demand will keep rising then sell the small property and buy the maximum house you can finance.
    -If not sure of the housing markets direction then for sure only rent and invest the money from the sold condo in a market that is more familiar.

    Conclusion is it doesn’t make sense to own a second property that is not paying for itself while you are still renting.

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  4. we are doing that right now…we own a home in MI and rent in NC

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