Rob Carrick wrote about a Vancouver couple who sold their house recently with the idea that they would rent for a while and then buy back into the real estate market after the coming crash.
I know a couple who did this same move in Toronto. They might make out like bandits in the end, but the fact that they are on year seven of their plan makes me wonder.
After being a home owner for most of the last 12 years, I’ve gotten tired of it. I hate the costs and all the hassle that houses bring. However, I’m not planning to sell, since I’d probably find just as many things to complain about with a rental.
One thing I’m definitely not contemplating is trying to time the real estate market by selling my house now and buying again in the future at a lower price.
It’s easy to think that if you sell your house for high price and buy it back again at a discount, it’s a worthwhile thing to do. And it very well might be. But can you do it?
Let’s look at what kind of real estate drops would make this move worthwhile and then analyze some different outcomes to see what kind of benefit or loss a home owner might face if they try to time the market.
I’m going to assume a transactional cost of 10% of the selling house price. This could vary greatly, but I’m talking about all costs – real estate agent fees, moving costs, incidentals etc. If you don’t agree with this number, then just substitute your own.
I’m also going ignore a whole pile of other factors like money earned on house equity while renting as well as the fact that someone renting might rent the same house or they might downsize to save cash.
First off – I’m going to use a fictional house in downtown Toronto which is currently valued at $650,000. I’m going to pretend this is my house and I want to figure out what kind of market drop I need to make it worthwhile to sell and wait out the crash.
10% house price drop
Well considering I’ve said the transactional cost is 10%, clearly a 10% drop doesn’t do anything for me. I would end up buying back into the market for net gain of zero. That’s a small reward for moving twice.
15% house price drop
This results in a net gain of $32,500. Forget it – this isn’t close to making it wortwhile for me.
20% house price drop
Net gain of $65,000. Not bad, but still not enough to get me to do this.
25% house price drop
Net gain of $97,500. Ok, now I’m interested. Almost $100,000 of after-tax money is pretty appealing.
How’s your sense of timing?
One problem with my scenarios so far is that I’m assuming I sell my house at the exact peak of the market and then buy again at the exact bottom of the market. Obviously, this isn’t going to happen.
I suspect that to take advantage of a 25% house price drop, I would need the market to drop a lot more. 30% at a minimum and a 40% drop would be much better. That way I don’t have to time the market perfectly.
So in other words, I would need a house market drop of around 40% and be able to time things reasonably well in order to profit enough to make the whole exercise worthwhile.
Not a small order. Even if you think the market is going to fall, do you know the timing of the that fall? Will it drop enough to make it worthwhile for you? How long will the market drop take?
In my case, it’s very, very unlikely that the market will fall enough and my timing be good enough to do something like this.
Downside – What if you are wrong?
The big downside of this strategy is if you are wrong, you could end up with an insignificant profit which won’t compensate you for all the hassle involved. Or worse, you lose money. Maybe a lot of money.
Let’s look at some non-rosy scenarios:
You buy back in at a price that is 15% lower
In this case, I’ve packed up the house, rented for a certain amount of time and then decided to buy again. I’ll make about $32,000 which is not horrible, but not that great.
Housing market remains flat for a long time and you decide to get back in
In that case, the $650,000 house is still $650,000, but you have paid 10% in transaction/moving costs, so to buy the same house means you are $65,000 poorer and you’ve gone through the hassle of moving twice.
Market continues to climb and you (or your spouse) panic and want back in
If the market has gone up 15%, the $650,000 house is now $747,000, you’ve paid the transaction costs and are back in your old house and you’ve lost a total of $162,000 for your troubles.
Related: How to win a house bidding war
If you can forecast a big enough drop in house prices and you can time it well enough to benefit from most of the drop, selling and renting for a while could be quite profitable.
The way I look it, there is too much downside risk for most people. Yes, you could make a good chunk of change if things work out, but you can easily lose just as much money. If you want to play roulette – go to Vegas.
Real estate cycles can be incredibly long. Think of the timing – what if you had done this five years ago – how would you feel now? Would you still be married?