- November 6, 2023
- Posted by: legaleseblogger
- Category: Related News
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Buying a home or condo is a significant decision in life, and I find myself at a crossroad contemplating whether to invest my $500,000 in real estate. Many people consider homeownership as a crucial milestone, so I decided to analyze the financial aspects of this choice.
Currently, there are three options I am considering: renting and saving, investing while renting, or purchasing a property outright with cash. Let’s delve into the details of each scenario.
Renting and saving seems to be the least favorable option when it comes to financial gains. After factoring in my annual rent of $17,400, along with saving and other expenses, I would end up with a cash flow of $3,680 for the first year. However, this approach does not offer any future benefits like homeownership or appreciation.
On the other hand, investing my $500,000 while renting presents a more promising scenario. Assuming an 8% capital gain, I could potentially earn $40,000 in returns. After accounting for capital gains taxes and other expenses, my first-year cash flow reaches $16,930. Gradually, this figure would grow to $13,148 after the first year, outperforming owning property in terms of immediate financial gains.
Now, let’s consider the option of buying a property outright with cash. In the best-case scenario, with an estimated 8% capital gain and 5.5% property appreciation, owning a property would provide me with $9,148 in the first year. However, it is important to note that this figure is lower than the returns from investing while renting. Moreover, the initial costs associated with homeownership, such as closing costs, strata fees, and property taxes, make the first-year cash flow negative at -$5,852. This situation is even worse if we consider the lowest estimated property appreciation rate of 2%, resulting in a first-year cash flow of -$36,852.
So, based on these calculations, it appears that buying a home may not be the most financially advantageous option in the short term. However, it is important to consider other factors such as the power of compound interest and long-term property appreciation.
Here is where the AI Legalese Decoder can be of great help in making a more informed decision. By utilizing its advanced algorithms and analyzing vast amounts of legal and financial data, the AI Legalese Decoder can provide valuable insights into the real estate market trends, property appreciation rates, and even the impact of different investment options. Its ability to decode complex legal terms and provide clear explanations can also assist in understanding the implications of various legal documents and contracts involved in the home buying process.
In conclusion, while buying a home may not always lead to immediate financial gains, it is crucial to consider the long-term benefits and potential appreciation. With the assistance of the AI Legalese Decoder, one can make a more informed decision, taking into account not only the financial aspects but also the legal implications involved in homeownership.
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****** just grabbed a
I mean you are simplifying wayyy too many different variables.
Also where are you getting numbers such as 8% capital appreciation, 5.5% property appreciation, 0.4% yearly maintenance etc
– Your property appreciation rate estimate is high.
– You are ignoring the effect of compounding returns over many years in the investment account, which is probably above the likely rate of unleveraged property appreciation. In the long term and under the assumption the market continues to return more than housing appreciation, those compounding returns will dominate.
– You are ignoring that unrealized capital gain taxation is deferred and that you can stagger it or take it in low income years (but part of gains are taxable in current year too, yes).
– You forgot property insurance, which costs a lot more than rental insurance.
– But also rent, property tax, maintenance and insurance will go up over time.
That said, there is nothing wrong with this decision. If I were buying today I’d buy with no mortgage or a small mortgage if at all possible. It might not be the most advantageous long term financial decision, but risk-adjusted to my specific preference I’d take it over 6% interest and being leveraged.
As others have said the security and peace of mind of owning your own home is worth more than the financials aspect. There are variables that can make either potentially cheaper but thats not as important. Another benefit to a home is being able to get a HLOC or HELOC.
Senior here that owned for 30 plus years and sold and now rent. Loved the our own place story and yes made profit in the long term due to timing. Saying that there were years we would not have done so well. Also remember with your own place you are always paying to fix, upgrade, paint etc. and costs can really add up. No work to do renting either especially if a house, townhouse etc. House insurance is way more than renters too. Don’t forget taxes and condo fees don’t come back to you when you sell. That can be huge over many years. Probably many more things too but timing is very important as far as hoping to win on selling. Personally I am enjoying the rental at my senior stage of life but timing was right to sell.
Ya that is not even close to a realistic comparison. You are missing so so much. Check out the “5% rule” by Ben Felix on YouTube for a more realistic comparison of renting vs owning. Also jack down that property appreciation to 2 or 3% max (historical average). And take into account the time value of money of the 500k sunk into the property. So many things.
This is hard to follow. What exactly is the comparison here?
Why does your property appreciate 5.5%?
Looks like what you want is to compare similar investments. $500k in market etf Vs house
ThatÔÇÖs $40k cap gains taxed at $20k x marginal rate. Say $8k tax. $32k net on the $500k invested
Minus rent at $17400 is say $15k positive for ease of math
Owning you have $4800 strata. $1500 tax. $1500 maintenance. What about furnishings, appliances, utilities? Unclear what is included in that rent figure. Forget the one time costs for the moment.
Using your questionable assumptions above plus a 5.5% gain on the property (again, why?)
You come out with
$7800 costs of ownership (not including the list of things you didnÔÇÖt address)
$27,500 gain
Total profit of $19,700
So optimistically $5k better. Which is immediately destroyed on your first special assessment or you include more of my list. Strata fees only go up too.
Personally, I don’t care about a few thousand here or there. Nothing beats the security of owning your home.
Short term (a few years of living in one place), renting is usually better than owning unless you are lucky and buy at the right time (like if you bought in 2018/19). Longer term (five + years of living in one place), owning is going to be better than renting. And you have the massive benefit of never being at risk of being renovicted or whatever.
You’re just comparing investment returns of stocks to investment returns of real estate. The numbers you’re using are just guesses. You could input different numbers to make buying a house look like a bad idea. Nobody knows the future.
You can look up historical investment returns of each category to paint a better picture. Again, those don’t predict the future, so you’re rolling the dice.
There’s lots of info out there to show that investment returns have generally beat real estate. Buying land in toronto 100 years ago would have likely beat stocks. Buying land in Saskatchewan 100 years ago, maybe not so much.
>Buying a house is superior to all alternatives
Only if you have the best crystal ball.
It depends on the area you’re in, what the rent vs owner is costs are.
Where I am, you can buy a house for a million, or rent the same house for $40k/year (there are literally houses here that are for sale or rent right now at these numbers).
So if I have a million, I could buy it with no mortgage, and save myself the rent. But I’ll have to pay property taxes, house insurance, and 3-5%/year in long term R&M.
Or I could invest the million in long term GICs or bonds at 6%, get $60k income, or a maybe $40k after taxes. It would cover the rent, but the rent would go up every year.
This is a pretty balanced market, where either option is about the same. You can to do something similar for your own market.
Just buy a place and leave us alone.
If youre going to live in it then dont need to worry about cap gains tax.
5% spent on maintenance is actually a number that is suggested, ie you need to replace things how water heaters, furnace, window, roof, gutters etc over time.
Bro you can lock your money in a HISA and get 5% so ~$25000 year with that much capital. Why not rent something for less than that? Then rent is free with zero liability and still turning a profit
ItÔÇÖs hard to say, without knowing how the market goes.
Yes, your cash flow is better, but if the market drops 10% you are worse off.
Now, in terms of peace of mind, I would buy every time.
IÔÇÖm more curious as to how you got 500,000 In liquid money.
This is not a typical situation when one decides to buy a house. Normally the person has $25,000 to $100,000 and that represents 5% of the purchase price. They buy it as a home to live in long term, so the risk is small.
The benefit is less financial more life stability, not dealing with a landlord, fixed costs and more space/freedom.
YouÔÇÖve used a positive 5% appreciation for real estate but I think you should run the numbers using -2% for the long term average.
Or not. IÔÇÖm not the boss of you.
Without even looking at your numbers, I can tell you:
1. The tax system dramatically subsidizes owning a home because of the principal residence exemption
2. The mortgage/primary residence system is by far the most forgiving way of leveraging to invest in the financial system
Given those two major tailwinds to the economics, under a wide range of reasonable assumptions you will find that buying a home is going to be the most financially beneficial in the long run. The downside is that you will be highly leveraged in an undiversified, illiquid asset to you carry the risk of getting burned in a situation where mortgage rates rise quickly (just ask anyone that invested in a rental property in 2020 assuming they would have a 2% mortgage rate forever).
Strata fees, rent, property tax, utilities and insurance only go up.
Moving out of that small home into a larger one will cost you 10% off the top which is statistically likely after 5 years.
$1500 of recurring annual maintenance is woefully inadequate.
For me it wasn’t about the money. I lost money buying (and subsequently selling, after realtor/closing costs/etc) my home.
It was about not having to deal with awful slumlords that tried to illegally raise rent on me or try to blame me for damages caused by their own lack of maintenance.
I’m incredibly tired of that, and decided I’d rather pay more money to avoid it.
You’re also locking your money down into an illiquid asset and it will limit things like job opportunities for many people who aren’t lucky enough to work remotely or even things like romantic opportunities.
Realistically comparing owning costs @ 20% deposit on a median home vs renting a median home and investing the deposit and then investing the cost savings you are miles ahead renting.
Median home $741k
Deposit @20% = $148,200
Mortgage per month = $4,400 @6% 30 yr term.
Maintenance, insurance, prop tax per month $708
Cost to own a month $5,108.
——-
Cost to rent $2,149 per month.
Renters insurance $90 per month
Total cost to rent $2,239 per month.
Saving/investing $2,869 per month. ($34,428 per year)
Money in savings already $148k
Maintenance seems too optimistic on a house. I think I read somewhere annual maintenance and property taxes would come to 3 to 5% of property value, which would negate most property appreciation?
Edit: I removed the link. Search for 5% rule in rent vs own.
>5.5 property appreciation (on average property in Greater Vancouver Area appreciated round 5.5 for the past 20 years.
I’ll focus my comment on this data point alone. You are cherry picking your data by looking only at the last 20 years. Why not look at the past 100 years?
Also, if housing is anything like stocks, past performance is not indicative of future returns. I would not expect 5.5% year after year, especially after the latest run-up. Check the *robustness of your math. What if housing returns only 0.5% annually? 1.5, 2.5, 3.5, 4.5? What rate of return gives you the inflection point where the market has better returns (holding everything else constant)?
If housing were truly a better investment vs the market, wouldn’t REITs and wall street / bay Street have already realized this and snatched up properties?
What are able to buy for 500 in greater vancouver area?
How are you getting $500-ish home insurance? Our home insurance is 20x the rental insurance we paid, and we have a newer home with excellent drainage next to a fire hydrant.
We Purchased our first house about 30 years ago in Calgary. We have moved five times and got very lucky with the market every time and bought and sold at the right time. Interest rates were around 5% and we made around $60,000/yr for our first 7 or 8 yrs. We didnÔÇÖt have money left over to invest at the beginning.
Even in those circumstances I think our current house value over the 30 yr period is about 8X what we purchased our first house for. Our first house we bought in Calgary is about 5X now than when we bought it. Net it will be less due to interest payments and maintenance, updating/minor RenoÔÇÖs, legal fees, closing costs, transfer taxes in BC etc.
We have been mortgage free for 6 or so years exclusively due to benefits of other investments that we eventually able to make. It was such a relief to be out from under the thumb of a bank.
Every house we have owned has been a bit of a fixer upper, with sweat equity poured in. They have all met our needs as we grew a family and now as empty nesters. We loved our communities and always had great neighbours.
We are now in a position to help adult children purchase housing, but I donÔÇÖt know any more if it financially makes sense.
Housing prices are probably too high. Some say the best time to buy is when you can afford it, regardless of price,
Assuming values will increase on your schedule and you have a bit of luck re. market timing.
The financial value of a house is only as good as when you sell it or you are going to borrow against it and use that money for other investments. Definitely an emotional investment and a generational belief that owing is the best.
Lots to consider either way. Good luck.
Owning a home these days mostly has value in security and peace of mine knowing that you have a place to live (especially when you don’t owe anything on the home)
That being said, financially it’s a bad idea in these interest rates you lock up that 500K into an asset that grows slower than most other asset types that will more than offset rent especially in the near term.
Properties are still stupid overvalued since everyone and their dog is factoring “appreciation” into their decisions, as well as “fomo”.
That 500K property only being worth ~18K in rent puts it’s IRR is giving you a measly 2.7% return that DOESN’T compound and only factors in the compound 2% increase in rent per year which is what Vancouver allows.
Meanwhile your savings or investments that gain 5% in a year, have their following year earnings increased by 5% as well due to compounding.
All that being said, the security and peace of mind is arguably more important than maximizing every possible dollar.
>tl;dr, check my math, buying a home is no-brainer if cash deal?
No. Your numbers are a bit all over the place and opportunity cost is excluded. It *could* make sense but your numbers are not supporting your conclusion.
A massive advantage to buying is that you actually have something tangible. Dollar can fluctuate but an acre is always an acre.
Diversification across asset classes is essential to reduce downside risk.
A 6% GIC which is basically risk free would net you 30k annually before taxes
I’ve met financial guru types (usually the young upwardly mobile types who have statues of Warren Buffet in their house) who claim that renting is better and homes have all kinds of hidden operating costs and that money can be better invested. AND, since they are going to be investment gurus they’re going to fly past those paying mortgages because they did a 2 minute calculation on investing this “thrown away money” and how, over 40 years they will be multi-millionaires and buying homes with cash.
Not everybody is that confident in their “portfolio”.
Regular people get into the market (your purchase price doesn’t go up even if mortgage rates do) and rents will ALWAYS go up with increased housing costs as we’re seeing now.
Plus I don’t like sharing walls with nosey people, Karen the Complainer, people who make stinky food, children practicing saxophone poorly, or people cooking meth on their stovetops – or that couple who is going to spend every day (and night) fighting until one of them leaves. Or just guys who have a surround sound system to have full-scale explosion sounds when playing first person shooter games. Fun stuff.
I don’t miss any of that, and my four walls and ability to crank up my stereo is almost priceless.
go for the house.
5.5 percent appreciation means my 2M house will be worth 13M in 35 years.
So my kids need to make at least 3M/y to afford a house in Toronto????
I agree owning is far better than renting for more than financial reasons. That being said property taxes and maintenance are too low. A water heater replace would eat a years maint. I would double both at least. your making probably incorrect assumptions on the property appreciation the past is no guarantee of future results. Housing is just as likely to be flat or lose value. Homes have been investments in the past but they should not be considered investments. And the same can be said for your 8% invest that number should be 5% as you would want to use a risk free number as in guaranteed return of treasuries. just my opinion.
Senior here that owned for 30 plus years and sold and now rent. Loved the our own place story and yes made profit in the long term due to timing. Saying that there were years we would not have done so well. Also remember with your own place you are always paying to fix, upgrade, paint etc. and costs can really add up. No work to do renting either especially if a house, townhouse etc. House insurance is way more than renters too. Don’t forget taxes and condo fees don’t come back to you when you sell. That can be huge over many years. Probably many more things too but timing is very important as far as hoping to win on selling. Personally I am enjoying the rental at my senior stage of life but timing was right to sell.
A home is going to cost you $25,000 every 5 years. Furnace, shingles, windows on repeat. ThatÔÇÖs not factoring in renovations, upkeep, insurance etc.
>Buying a house is superior to all alternatives
What other alternatives? You only name vs renting.
This is a losing argument.
You are comparing a high return stock if itÔÇÖs in deed high return to a decently appreciable real estate property.
Imagine the market crashing you will lose everything in a stock yet u still open the brick of your house.
When SHTF real estate would still give you more leverage.
Renting = throw away $ not building equity
Mortgage = keep the $ building equity
Unless inflation skyrocket and makes your money devalues like crazy , no amount or renting > mortgage
You are correct. But careful, this sub is filled with financially illiterate people that hate buyers at all-costs. You will get people barking down your neck that you’re missing this-and-that expense, or you haven’t considered (insert anecdotal and incredibly unlikely story).
Renting is *usually* always a loser when you’re talking about a cash deal like you are.
You could factor in the deppreciation of money over time as well.
Where is the best place to buy a house in Canada at a reasonable price
How are you getting 16,500 for cap gains tax?
Cap gains tax only applies to 50% of cap gains. So 44k *0.5 = 22k taxable; if you are in the highest tax bracket then 22k *0.5 = 11k cap gains tax (absolute worst case scenario).
This is also assuming you are selling everything every year; in reality you defer this and would sell later in life at lower tax brackets; allowing unrealized gains to compound.
Get a Conservative federal government that cuts immigration and condo prices will flat-line or collapse.
Are you trying to convince yourself or others?
Simple math, why do people rent to others?
If it cost less to rent than to own, nobody would be renting to others.
So of course home ownership pays off long term unless you are buying a house that’s a bad investment.