Case #2: Buy Or Rent?

TOWNHOUSES-FOR-Sale-in-Scarborough-810x430.jpg

Let’s face it. In most areas of Canada, at least the ones with jobs, real estate has reached epic high proportions when it comes to cost of ownership. The costs are so high that many young professional and families have been completely priced out of the market. But does that mean it still makes sense to rent?

Over the last 3 years, rents have increased at an exponential rate as well. What was once a good idea to rent may now have become a detriment. Why have rents increase?

  1. Increased interest rates. Amateur landlords thought that monthly mortgage payments would never go up, but boy were they wrong. The 1% increase by the Bank of Canada over the last 2 years from 2017 to 2018 caused many amateur landlords to renew mortgages at higher rates. Since real estate is all about making money, the increases were passed on to renters.
  2. Population growth. In many of the large Canadian metropolitan areas, population has expanded at a rapid rate. This can be due to many geopolitical factors, but also from the fact that Canada is seen as the best place to live on Earth. Canadians will continue to see more and more people come into the country and settle in large cities rather than rural ones.
  3. Renovictions. You’ve read about them a lot, but with some cities implementing strict rental increase guidelines through rent control, landlords need to find a way to pass costs down to the renter. Real estate is supposed to be a risk free investment and shouldn’t lose money. So the only recourse for amateur landlords is to evict tenants through legal means, one of them being renovations. By throwing on a layer of paint, redoing the kitchen cabinets or refurbing the bathroom, a landlord can relist rental properties without limits.

With the trend of rising rent, does it make sense anymore to continue renting in expensive cities like Toronto or Vancouver? Perhaps it makes more sense to buy like I’ve written before.

Young Families

For a young family that is just starting out, saving 10% for a down payment might be all one can afford. In this case study, we take a look at a family making the median household income of $85,000 in Toronto. This assumes we have two people working making $42,500 each.

Since two people are working and making similar salaries, the taxes are in your favour because of lower marginal rates. Two people working with lower salaries is better than one person making more. The take home pay for this couple would be $36,324 each or $72,648. That’s $6,054 monthly.

If this couple has two children between 6 and 17, they would be eligible for additional child benefits of $500.44 a month from the federal government. In total that is $6,554 a year.

The Rental

Today we look at townhouses. That’s because renting is not solely contained to single professionals. For families, something more than a single bed condo is required. So let’s take a look at a property in the outskirts of Toronto.

buy-townhouse

Rental costs are easy to determine. That’s because all that needs to be paid is the monthly rent. In this case $2,280. By renting the down payment can be saved and invested instead.

The only extra cost that is required by landlords is rental insurance. This usually runs around $50 a month for most families that might have less than $30,000 in possessions.

The total to rent is around $2,330 a month. For a couple living in Toronto that nets $6,554 monthly, this is highly doable.

Buy It

This property was listed pretty much next to the rental property above. The cost to buy the townhouse in this case is $615,000. buy-townhouse2

Fixed Costs

In addition to cost of the property there are some other fixed costs that have to be added.

  1. Lawyer fees will run around $1,000 to close the deal
  2. The total land transfer tax for this house is $17,550 but let’s assume these are first time buyers and get a rebate. The total with the rebate would be $9,075.
  3. Mortgage insurance for this couple is required because they only have a 10% down payment. This will amount to $17,159. Thankfully we can roll this into the mortgage.

Monthly Costs

When a house is bought, there are many monthly costs to consider:

  1. A maintenance fee of $374 exists for this townhouse as it is not freehold. This isn’t too bad considering the size of the home.
  2. Property taxes must be paid by the owner that costs $195.95 a month. The government gives no free ride for home owners.
  3. Home insurance for a home like a townhouse isn’t extremely high but generally runs higher than just standard tenant insurance. One can expect to pay around $125 a month for insurance on a house like this.

The Mortgage

Thankfully interest rates keep falling and we’re starting to see homes get more affordable because of it. In today’s market we can potentially lock into a 5 year fixed mortgage of only 2.7%.

In this case we assume the couple can make a 10% down payment on the home while also being able to cover the closing costs. That means $71,575 of cash is needed to buy the townhouse. The CMHC insurance costs will be rolled into the mortgage as most people do. The total mortgage amount is now $570,659.

At a current low rate of 2.7%, the monthly payment for this would be $2,613.55.

Total Monthly Payment

OK, this is simple math now.

$2,613.55 mortgage
$374 maintenance fee
$195.95 property taxes
$125 insurance
————————————
$3,308 monthly payment

The total monthly payments of buying this is $3,308. For a couple netting $6,554 it’s a bit of a stretch but would still not exceed 50% which, for a family in Toronto, is generally a requirement to own a place.

Total Monthly Cost

What someone pays for the house is not completely thrown away. That’s because part of the mortgage goes towards the principle of the house. A renter is just throwing all their money away down the drain.

Over the course of 5 years, the average amount put towards the principle on a monthly basis is $1,463.73. That means the total cost to own is really $1,844.27 per month.

What’s Better?

The renter is basically throwing away $2,330 every month to rent the same townhouse that one can buy by throwing away $1,844.27. Clearly the numbers favour buying.

The one question that remains the wildcard for most people is the amount of the down payment. The buyer needs to pay $71,575 up front to buy the house, whereas the renter can keep it and invest it.

For 99% of Canadians, that sum of money is usually thrown into a high interest savings or GIC yield at most 2.5% annually. When this is factored in, the extra cash from the interest on the down payment only yields $149 a m month. This decreases the cost of renting down to $2,181.

When looking at these raw numbers, $2,181 is still much higher than the $1,844.27 it would cost to own. A home owner would be putting $1,463 a month into equity while a renter would be getting nothing in return with their rent.

Over the long term, it makes absolutely no reason why a family should even consider renting because they would be throwing away more and more money each year. This doesn’t even take into consideration the possible rent increases of over 10% a year due to renovictions or landlords selling their properties.

Can You Buy It?

It’s quite obvious that buying is a lot better, but is it possible to buy a townhouse that is so high in price? Coming up with $71,575 might be particularly hard. Also, buying a house has a higher monthly payments of $3,308 versus $2,330 in renting.

This is why this blog stresses greatly that buying a home is something you have to commit to and want. In order to own this townhouse means forgoing a lot of things in life that you might enjoy. Vacations, going out to eat, driving nice cars or buying luxury items are all things that might need to be sacrificed.

These are all questions that can’t be answered by any blog post because they are all emotional decisions that only you can answer. When it comes down to the nitty gritty numbers that can be calculated on a spreadsheet its quite clear what becomes better.

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