Getting a Grip on Housing Affordability
Victoria, British Columbia
Taylor McMullen | McMullenHomes.ca
Hey everybody, Taylor McMullen here with McMullen Homes team, coming at you with the transcribed version of Episode 4 of the McMullen Homes News/Stats & Tips Report.
I will be covering the topic of housing affordability. I’ll put most of my emphasis in Victoria but this sort of affects all of BC in general because of the rapid increase in housing prices we’ve been experiencing recently.
Affordability has become a major issue for a lot of younger people. Actually not just younger people, first time homebuyers too. Everyone is sort of affected by this, anyone that is wanting to purchase a home. What my goal is to hopefully get you guys thinking differently – thinking outside of the box – when it comes to purchasing a home in an expensive marketplace.
I’ll quickly cover some data points that compares what the market and income was like in the 1970s versus what it’s like present day.
Essence of the Issue
So I’ll get right into it, to the essence of the issue, as to why the housing market has done its thing and made itself quite unaffordable for the average person.
The major contributors are the low incomes – incomes haven’t been rising in unison with the cost of living and the cost of housing. And then of course the steep drastic price increases that we’ve just experienced.
Income-to-housing cost ratio
So I did some digging. Paul Kershaw is a university professor over at UBC in Vancouver, and he did an analysis and took the average home price in 1976, which was $213,000, with the median full-time earnings at $54,000. That was a 4 to 1 ratio, so you can see the spread there wasn’t as drastic as present day. The average home price in Victoria is around $850,000 and the average income for BC came in around $70,000, a 12 to 1 ratio. So there’s quite a big difference there. Back then, 25% of your income made up part of the full purchase price of a home, now its 1/12 of that. That’s significant, and makes it that much more challenging for first time homebuyers and younger people for getting into the marketplace. This forces us to think a bit more creatively, a bit more outside of the box, when it comes to property in BC or in Victoria.
Purchasing in an expensive marketplace
3 thoughts when saving for a down payment:
1.Ask a parent, family member, or friend if they would like to co-purchase a property together
So there’s the traditional route, some people may feel sheepish by doing this, but realistically, if you approach it as an investment between two parties, it doesn’t become about your parents loaning you money anymore, it becomes about you guys going into an investment together, because that’s realistically what it is. So ask a parent, ask a family member, or a friend if they’d like to co-purchase a property together. This will make is significantly easier for you to get into the marketplace. And once you are in the marketplace, you won’t have to partner again, unless you plan on doing multiple investments. But definitely consider a family member or a parent or a friend, you know there’s lots of people out there that either wanna get into the market, get a place of their own, or invest. I know that’s what I did when I was looking to purchase, I visited all three of those sources before I was able to successfully purchase my first home.
2. Downsizing your lifestyle
In order to really afford that down payment, we need to be focussed and disciplined when it comes to downsizing our expenses, and we’re going to be downsizing some of those luxury material objects that we tend to blow a lot of our money on. You know, big expenses that I’ll get into later in the presentation, like your car, your phone, eating out, entertainment, there’s lots of things you can do to really dumb it down. Just for a short period of time, doesn’t have to be long term, just to help you get to that down payment faster.
3. Set a goal and remain disciplined throughout the saving process
And then, as I said, set a goal and remain disciplined throughout the saving process. You have to be consistent, that’s what counts. $10 may not seem like a lot, but when saved constantly, it adds up to be a significant amount over time.
Tips for downsizing your lifestyle
I will be going over a list of expenses to help you with downsizing your lifestyle.
- Focus on the large expenses first, your car, rent, phone, entertainment, as I said. Prioritize down payment savings.
- Car payments alone will save you anywhere from $4000 to $10,000 yearly, factoring in monthly payments, gas and insurance. It’s crazy expensive when you think about it, so see if you can downsize that vehicle. Get the property before the Porsche, as they say. And also look for alternative affordable transportation solutions. Especially if you’re living in Victoria or Vancouver, you’ve got quite a few methods. If you don’t need a car, it might be best to hold off on that until you get the property.
Downsizing your Lifestyle (Continued)
So, here’s some thoughts and ideas around downsizing your lifestyle and some things that I’ve heard other people doing that help take on this challenge.
● Rent out your car to vacationers for additional cash
I’ve actually met people that rent out their car to vacationers for additional cash. If you actually combine this in unison with the Airbnb, for instance, if you were to purchase a property and you were to then Airbnb it out, you could also Airbnb your car at the same time to those same people for additional cash. You can take that extra bedroom in that room your renting – make sure you confirm this with your landlord – rent it out and also at the same time rent out your car. You’ll have your rent covered for that month which allows for you to save, and you’ll be earning some extra income. So that’s a thought. May be bending the rules a bit by renting and Airbnb-ing at the same time, but you’ve got to ask. You’ve got to start thinking outside of the box here when it comes to saving money, and earning an income and purchasing a property. You have to get creative in an expensive marketplace.
● Tackle monthly rent
To help tackle monthly rent, find a roommate and share the monthly rental expense
I lived in a basement suit for a while with a of couple friends, and it definitely helped expedite the saving process by having them split the monthly cost. That’s a pretty obvious one, pretty logical, and I think a lot of people are doing that today, so good for you all who are taking part in that.
● Sublet living room to another student (if landlord agrees)
Again, this one is a bit outside of the box, but if a landlord agrees, you can sublet the living room to another student to further offset monthly rental costs. Typically suits come in two bedrooms. If you were able to cut-off that part of your living area, and convert the living room into an additional bedroom, and you and your landlord agreed on a rental agreement between you and this other individual, they would become your responsibility. I’m sure as long as you cut the landlord in, they’ll be willing allow for this to happen. That extra student could cover your monthly rent, which means you live relatively rent free, and you can use that money to help save for your property.
● Airbnb a spare room downstairs (if landlord agrees)
Another thing if the landlord agrees, you can Airbnb out a spare room downstairs – you never know until you ask – I’ve heard of people doing this. I can see coming into a lot of roadblocks with landlords when it comes to renting out their own property, but I’ve heard of people doing this, and it’s definitely an interesting scenario. Especially when looking to save, why not try and squeeze the opportunity out of every situation if you can.
● Offer to assist with yard work to help landlord reduce maintenance costs
Another option, I’ve actually had a friend offer this on my place which I thought was kind of cool and it kind of gave me the idea for other individuals. Offer to assist with yard work and any other regular maintenance tasks to help the landlord reduce maintenance costs. In turn, request a reduction in your rent. That’s certainly another option, another avenue.
● Credit score is important
And then the other thing to consider, is make sure your credit score is good. Work to improve this during the savings process. You’ll need a good credit score when qualifying for a mortgage, so that’s a very important thing to keep up to date with.
Time to Purchase
Now that we’ve downsized our lifestyle, we’ve come up with the down payment, now it’s time to purchase. Where do I look, and how do I purchase?
Buying your first property
So you’ll need at least 10%. I mean in some cases 5%, basically anything under 20%, you’ll be qualifying for mortgage insurance, but that’s a good target. Now, that could increase your expenses a little bit. But a good target I would say is 10%. 5% – I don’t really see that offer too much anymore. But 10%, the higher the better, lets just put it that way.
Get creative when it comes to purchasing.
Focus on Location
So you’re going to want to focus on Location. Of course, you’ve heard that term, that adage, location location location! It’s very true, it’s important. So when it comes to rental properties, or when it comes to purchasing your own property it’s important to put yourself in a location that’s desirable from a resale standpoint, from a market appreciation standpoint, from a rental standpoint. All those things factoring into it really make a huge difference. So we’ve got schools, hospitals, and amenities. The location will determine where the majority of your opportunity is.
You’ve got student bedrooms, and you’ve got the potentiality for a residential daycare.
You could rent the house out or suite to medical professionals, provide senior assisted living, provide disability assisted living.
Everyone needs to work so everyone needs a place to rent. Even your baristas at Starbucks, or your Tim Hortons employees, they need places to rent, so if you’re around big outlets, big malls, that’s typically another good spot to be for renting out bedrooms and suites.
And then of course we live in BC, so Airbnb is pretty much a pretty popular method of investing here as well, we live in a beautiful province, everyone wants to come here and travel, you’ll always have that place filled up if you are in a good spot.
Covering Your Mortgage
Getting creative around covering your mortgage!
● Purchase an investment property and continuing to rent elsewhere.
That was something that I’ve seen a lot of clients do. What they’ll do is, they’ll come and they’ll purchase an investment property, and they will continue to live where they’re at, continue to pay the rent. They’ll purchase the investment property, then they’ll pay down that equity monthly by having a tenant pay down that monthly mortgage. Hopefully it’s covering the expenses, but for the most part, having that tenant in there makes that investment basically cover itself. Build up the equity, you move into it at a later date, or you sell it and take that equity pile up and you bring it into a house. That’s one thought when looking to get into a house or a bigger house, consider staying where you are, consider renting and then purchase an investment property and have someone pay down that mortgage for you – a tenant.
● Live in your basement and rent the upstairs OR live in the upstairs and rent the downstairs
If you do manage to purchase a house, the other option is live in the basement, and rent the upstairs, that’s a pretty obvious one. Or live in the upstairs and rent the downstairs. I did both of those, and that was very effective for me when it came to purchasing and affording my mortgage, having that income assistance was vital for sure.
● Airbnb your bedrooms; your house; upstairs; downstairs
I’ve heard of people Airbnb-ing their bedrooms, or parts of the house. That can certainly bring on it’s own pros & cons. The benefit to an Airbnb is you can get more, you can treat yourself as a portable hotel or an individually listed hotel. What I like about the Airbnb model is that your tenants are, yes they are changing quite frequently, but you get quite a bit more and they are not committed to long-time term, & you are not committed to a long-term tenant. So, if you have problems with them, they’re out of there in a week anyways, and they do pay a fair bit of money. You can get the same amount of income per month by renting out your place for a week or two, as you could by just following the traditional route of just renting out your property to a tenant.
● Senior assisted living
Another thing that’s very popular these days is the senior assisted living. My own grandfather is having an issue getting into the retirement residences, so I know how challenging it is. Also, having senior clients as well moving into these things after we sell their property, or them talking about being on long wait lists. They’re very expensive, $5,000-$10,000 a month to live in these care facilities. Mind you, it does come with everything you need. It’s arguably worth what you are paying, but they have some huge expenses to pay. So, there’s a very big shortage of senior housing, and an even bigger shortage of affordable senior housing. There’s definitely some opportunities in it there. If you look at the wave – there is a huge wave of baby boomers coming – so there is going to be a huge demand for senior housing and affordable senior housing. I’m looking into models of residential senior assisted living where you have a couple of seniors living within the home with a full-time caretaker. Look into that further – can you fill that niche? That is an interesting niche, and I think there’s a lot of opportunity there for senior assisted living.
● Residential daycare
And again – Residential daycares – on the other end of the spectrum, helping out the younger kids and their parents. There’s a huge shortage of daycares, again there’s the issue of affordability for business owners as well. A lot of daycares are shutting down in BC, just because of the fact that they can’t cover the monthly expenses. It’s very expensive to run a daycare, and it just doesn’t make sense dollar-cents wise. So I think the new opportunity will be residential daycare. I’ve seen them in and around Gordon head where I live, different parts of Victoria, they come up here and there, and there definitely a really effective method. Having spoken to and talked to and even considered myself. Not me running the daycare, but having a friend whose licensed come to my property and potentially host the daycare, is a thought in my mind in the near future. And that can be a really great income source, that could provide you enough income to basically cover the house, housing costs and provide you a bit of cash flow.
And that’s really at the end of the day what we are after, I mean we want that equity paid down but if you can get some cash flow that’s one step closer to financial freedom, taking you out of that Rat Race, that 8-5 rat race that we all end up chasing at some point.
● Build a Garden Suite
If you already have the house of course you can build a Garden Suite in the backyard. I went over that last episode, so if you missed that go back and check out Episode 3. I went in depths in regards to Garden suites, and justifying it versus purchasing a condo as an investment. I do think Garden suites are an excellent opportunity. It’s a detached dwelling with it’s own metre set-up, so if you are renting that out, your responsible for utilities, and this is your room to rent.
That can bring a multitude of opportunities in itself. It’s a detached dwelling, so that’s where you can host your senior assisted living, or you could potentially make that large enough to turn it into a daycare in your backyard. There’s lots of things you can do, you just have to start thinking outside the box a bit and that’s how you learn to purchase in an expensive marketplace.
● Add liveable square footage under your deck
And then another thing I’ve seen -I’m considering doing this actually – is putting in some square footage under your deck – turning it into a big office, or as I said, that could be where the daycare is, or some extra bedrooms. Make sure you are going to the city and getting all this stuff permitted. I don’t want to be giving advice, then find out everyone is doing this stuff without getting your permits all in place!
Thanks For Reading!
That’s everything I wanted to talk about today. I’ve decided to split up my shows into Informational Content pieces and Market Statistics. So two weeks from now I’ll go over the August statistics, and then I’ll cover another topic two weeks after that. I just figured keeping it shorter was better for everyone, since we all have the attention span of fruit flies these days. I want to make sure I am bringing as much value to you guys as possible, while keeping you engaged.
This post has been transcribed into a blog format so you can use it as a reference or a checklist, or to help inspire some thought. You can view the original video that this blog post was transcribed from here: https://www.youtube.com/watch?v=v-J5H1P82Dg&feature=youtu.be
The list I showed was very minor, there’s a million things you could do with your property to help with affordability. These are just some things I thought of when it came to me purchasing my own property. These were things that I considered to help tackle affordability, and ultimately not end up house poor – that’s not the goal. You want to purchase that property and still be able to maintain your lifestyle comfortably, without having to give up too much. But, during the initial period of saving up for that property, you may to consider downsizing your life. And who knows, once you buy that property, you’ll probably be okay with living that way. I know I’ve certainly downsized, and have a lot less expectations for things, and that’s really helped me when it came to saving for a property.
I hope I was able to add value to this issue. If you have any questions or suggestions on future content, please refer to the comments below, or message us directly. I’m happy to hear from you, and happy to answer any questions related to the Real Estate market.
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