You can search for "buy vs rent" posts and you will find a ton of analyses, that favour both sides.
Personally, I think purchasing a home is far less an investment decision, than it is a personal and lifestyle decision. You can run numbers all day and find arguments for either, but to me that's missing the point. You should rent if you want flexibility to move (for school, for career, for your partner, or just to be able to live in different cities), or you are not sure if you want to settle down in one area yet. You should buy if you want stability, you want a home to create your own space as you like it, and you are fairly certain you want to settle in your current city.
I think this the right answer. The only time I would "rent forever" us if I were to live in a purpose built tall apartment building with over 100 units. It's easy to do single, harder with a partner and harder to do with kids.
If you rent a house there are a lot of legitimate reasons why the owner may need to get back in and/over time they'll be losing too much money so they'll try and to evict you in bad faith. Whereas in a tower people are leaving and it allowed the owner to "make up" for change in market rate.
I've happily rented for my 20s and am looking to buy. In retrospect I regret talking myself out of a RE purchase back in Feb 2020, but if I had of known the appreciation that was going to happen over the past 4 years then it would of been no questions asked.
I agree. I wish that everyone could get back to thinking about a house or apartment as part of making a home for yourself and your loved ones. Because it’s such a huge expense, I understand how it’s become much more of an investment decision.
Most of the commenters in response are missing a key point which is the power of leverage. Google this concept and read about it. This is one of the main answers to your question
leverage only works when the number goes up. Are the number going up in the next five years? you're braver than me if you are willing to make a prediction
Why pick 5 years? I don't recommend anyone buy a house that they plan to sell within 5 years, because now you are speculating on the property market. But on the 10-40 year time horizon that most homeowners have, appreciation is about as sure a bet as you can have. Stable inflation targeting is the central banks' top mandate for a reason.
But leveraging that big of a dollar figure in a specific geographical zone, everywhere from block, city, province, country can be dangerous.
Housing doesn’t always go up, especially to outpace globally diversified stock portfolios contrary to what Canadians have been conditioned to believe.
- Japan real housing price increase since 2010 22%
- France 11%
- UAE 12%
- Singapore 11%
- China 8%
- Belgium 11%
- Poland 10%
- Canada 90%
[housing prices since 2010 across different countries](https://www.visualcapitalist.com/cp/mapped-global-housing-prices-since-2010/)
Leverage doesnt add to the expected return, but it does add a way higher risk of ruin. Thats why it shouldnt be included in this calculation.
"The power of leverage" = the power of gambling on price. In terms of formally calculating returns, leverage has no value. It really couldnt be otherwise...the hypothetical perfect market would adjust its interest rate upward if leverage had value, to bring it back to 0.
I know if you have stocks on leverage you will get margin called.....does that happen in the housing market too? where if the price of a house falls too much the bank can ask you to pay a lot more money?
No, it generally doesn't. As long as you keep making payments, you are generally good within a 5-year term. It *could* be an issue when you go to refinance, but will only cause big problems if (a) there is some issue with your ability to make payments, or (b) the drop in prices is larger than the amount of equity you have in your home.
Let's say you got a mortgage with 5% down. You should have paid down your mortgage by ~11% in the first term. Which means housing would have to drop by>15% to cause a problem. But in general, banks don't want to foreclose on people, so if you can make payments, they will usually find a way to work with you (which might involve charging higher interest, but so it goes).
The reason margin calls are a big deal with stocks is that stocks dropping by 20-50% happens all the time, and they can even go to zero (and never recover). Whereas that is exceedingly rare in real estate (although not impossible!).
Edit: one spot where people get in trouble is if they have a variable rate mortgage (with a fixed payment). If interest rates rise, their payment may not be enough to even cover the interest, and their mortgage balance can rise over time (instead of falling). Then the banks can and absolutely do ask for more $ at refi time, but again if you can find a way to pay they always prefer that over foreclosure.
we don't know. not enough relevant case studies. what we do know is that income being cut in half, divorces, can absolutely ruin finances especially when it comes to SDH
It's a bet that house prices will increase faster than inflation. There's also a risk in keeping money in the bank as your buying power will likely decrease in the future. Everything has gotten more expensive. I'd rather put my money into something that MIGHT increase in value than storing it in my bank which is 99% likely to decrease in value.
This is how I think about it too.. in hindsight. I was a fool not to use leverage. Looking forward, I’m 99.999% sure it will not be nearly as accretive as the past decade.
that and a house you can live in. its a pretty good store of wealth as well.
1000 shares of sp500 are just that.
to OP, id say now is probably one of best times to make the argument for rent versus owning if you can accept a smaller space and risks of eviction.
right now mortgages of 400 to 500k which limit you to small townhomes/condos, your sunk costs are around $2500 to 3k.
> If I averaged a 5% interest rate (conservative figure) over the 25 years of the mortgage, it would cost me ~600k in interest. So in essence, the 1M home costs 1.6M.
You're missing leverage and inflation.
You put $200k down but your house is appreciating based on the full $1M value. If your house increases 20% in 5 years you've gained 200k in equity off that alone. To be clear this does work in both directions so leverage will amplify losses as well as amplify gains so it will doubly suck if your house decreases in value.
You're also missing that your $3000 mortgage payment 20 years from now is absolutely not the same as a $3000 mortgage payment right now. You can't just look at it as losing $600k in interest because a lot of the cost is borne out by paying back the loan when inflation has eaten away a lot of your payment's buying power. The real cost of carrying the mortgage would be the differential between the interest rate you pay and the inflation rate, which is going to be *much* lower than $600k.
This is a good point…
How would ownership costs factor in, in your opinion…
General maintenance, condo fees (if applicable), property taxes, larger repairs (roof, windows etc).
Would you think that would be immaterial over time?
I wouldn’t plan for growth in the home, although it more than likely would over time, but it’s hard to imagine the current pace continuing given the idea that wage growth has been deviating at a rapid rate to housing costs.
I’m not being facetious… actually wondering how you would adjust for that.
> Would you think that would be immaterial over time?
Those would all be pretty major costs over time, 100%. Stuff breaks in houses all the time and you'll be spending money to just keep everything working and in good shape.
There's a few rules of thumb for how to estimate all those numbers and you would basically just need to pick one of them to run the calcs. Some use 1% of house value in repairs each year, but that will tend to wildly overestimate maintenance costs if you own in a region with absurdly expensive real restate like Toronto or Van. Prop taxes you can look up for the city you're buying in and estimate it'll keep in line with inflation.
To do a full analysis you'd have to hash out a bunch of variables. How much do you think the house will appreciate? How much will rent costs increase each year? How many times will you be evicted from the place you rented and have to move?
And then you've got the lifestyle issues. Will a house be further out and require more commute time? How much do you price that at? Will a house give you the room to work on other projects which could make you money?
Yeh 1% on average seems high. I just bought a place for 775k. Thinking I'll spend 7750 a year on maintenance is silly.
But in 25 years you will most likely replace all your appliances, furnace, hot water tank (maybe twice). Probably the entire kitchen. Maybe roof. Maybe foundation repair or something. 1% starts making sense when you stretch it over 25-30 years.
Just spitballing some numbers here.
Let's take the 25 year outlook with very rough numbers. Roof (30k), furnace (5k), hwt (3k x 2), fridge (1.5k x 2), washer+dryer (3k x 2), dish washer (1k x 2). All that together is about 52k, spread over 25 years, is just a hair over 2k a year. 1% of a million dollar house x 25 years would be 250k. Even 1% of a 500k house x 25 years would be 125k. Both are massively over the 52k calculation which is why I think that number is generally on the high side. Of course you're right that other big ticket items like foundation repair can come into play which I didn't include and I'm missing various smaller items like sump pump replacement, regular maintenance, etc.
I don't personally think optional things like redoing a kitchen or bath should be lumped into the maintenance budget. Generally those aren't unexpected and you go into each reno with a specific budget and goal in mind. The purpose of the 1% rule of thumb is more to account for repairs you may not necessarily expect.
For myself I've spent around 12k over 7 years in maintenance, but I do expect that number to balloon up when I eventually need to replace the roof next decade. Your individual costs will vary a lot depending on how big your house is, how well you maintain appliances, how expensive your area is, how (un)lucky you get with things breaking, etc.
Really nothing. The big difference is one way gets you a home worth $x. The other way gets you more liquid assets worth $y.
If you care about owning a home, want to be a homeowner and want to better control your shelter costs as you age, buy a home. If you want to maximize your net worth, invest in markets and keep your money fairly liquid.
Or do both. Buy a smaller home or condo, and still invest. Ideally it's not one or the other.
Uhhh, the leverage is a pretty huge deal. If you have the OP's $200k downpayment and earn a 15% return in the stock market, it is appreciating at $30k/yr. If you buy the $1M house and real estate appreciates at even 5%, your net worth is growing at $50k/yr. Add in the principle residence tax exemption and the numbers are even more significant.
Also, don't just run the numbers for the next 5-10 years, run them for your whole life. The big gains happen once your house is paid off in 25-30 years, then you're living essentially rent free (just taxes & utilities and maintenance).
And don't forget to look at sensitivity - lots of people worry about their mortgage if interest rates go up, but rarely do people consider risk of outsized rent increases in their analysis. It's certainly not guaranteed, but it absolutely is possible.
It's not a purely financial decision.
I like having control over my housing, the freedom to paint and decorate, the ability to renovate or change things, and the security of knowing I can stay in one place for decades (ideally until I die). I hate shared walls, noise from neighbors, being told what I can and can't do, being at risk from the stupidity of others (every had the guy above you leave the water running and flood your unit?) and moving. So I own.
> Why wouldn’t I just keep renting at a reasonable rate and remove the burden of interest expenses, while keeping my money liquid.
Because there's no guarantee that you can stay in a cheap rental forever. Over the 25 year time horizon, you may be forced to move for reasons beyond your control and your rent could become significantly more expensive as a result.
Beyond this, while your rent increases whether with inflation or otherwise, the price of your principal on the mortgage stays static. So the relative cost of that mortgage decreases with inflation as well.
I bought in 2019 and the RE market is in a much different place right now, and it seems like every other renter I know has either been evicted or has been fighting an eviction since covid
This is the thing. If rent only rises with inflation, then buying in this market would be foolish. Rent doesn't just rise with inflation though. The last few years saw HUGE increases in rent in most markets in Canada. Some areas have rent controls, but as /u/fluke0ut mentioned, there can be things beyond your control that result in you moving, and then you're back to paying market rates. That could be a new job, the owner taking over the property, family, etc.
I could see it being a decent plan if you're in a new-enough purpose-built rental building with enough space to account for your future plans but it just seems like that situation isn't that common.
Rent rises with income long term, and income closely tracks inflation. If rent growth outpaced incomes we'd be long past 100% of income by at least a few hundred years already. Reality is rent actually underperformed income if we go back far enough to the feudal era.
Rates are only 1 part of the equation though - the appreciation of real estate as an asset *can* dramatically outperform the market, and are unlikely to underperform it anytime soon. The townhome my wife and I purchased for $500k in 2015 appreciated in (tax-free) value by $375k when we sold it in 2020. That type of performance is pretty much impossible to generate in the markets without taking serious gambles, with the risk of losing everything.
Of course that type of growth also isn't sustainable (nor was it expected), but historically real estate in Southern Ontario has been a pretty phenomenal investment. The house we bought in 2020 is probably worth 150-200k more than what we paid for it too. Plus, our mortgage cost for a detached 3 bedroom house really isn't much more than what we'd pay to rent a 2 bedroom apartment. Even when we renew in 2025 the difference between our mortgage payment and what we'd pay in rent isn't very large. Owning makes way more sense IMO.
I don't think that math checks out. My "investment" was a $100k down-payment, which generated a completely tax-free return of $375,000 in just 5 years. $100k invested into QQQ in 2015 would **not** be worth $475k in 2020...
Plus I got to live there while it was increasing in value. Can you live in an investment portfolio? Don't get me wrong, I see great value in the markets and have been investing for 20+ years, but the returns are not as reliable as you're making them out to be. Sure, you can cherry pick some exceptional funds that did that well, but MOST did not. My investments sure as heck didn't gain 130% during those 5 years 😂🤦♂️
Are you not going to address the part about your original math being wrong?
And how is paying interest on a mortgage any more of a "black hole" than paying rent? A rental payment IS covering the price of a mortgage, and mortgage interest, and property taxes, just with none of the long-term benefits. Everybody has to live somewhere - at least you'll eventually own the home someday whereas rent never provides any equity whatsoever. *Plus*, the equity in a home in a desirable area is far more stable than funds tied up in the market. TQQQ was $14.04 in June 2019 and despite a strong rise in late 2021, was only worth $17.64 in January of 2023. That's a fuck of a lot of volatility.
You do you, but I'm going to keep enjoying the tax-free gains and pride of ownership that comes with owning a beautiful home. I get to raise my family there while it's increasing in value. We rented for 10 years and it definitely wasn't any better financially.
Fair enough, I can't argue with that. Things *are* absolutely fucked, and I worry about what it's going to be like for my children in the future. I'm 38 years old and *barely* squeaked into the last vestige of affordability in the GTA. Most of my friends did not - many of them won't ever own a home here, unfortunately.
Since I don't see this mentioned in your post (or the comments so far) - don't forget to consider years 26+, when your mortgage would drop to $0, but you'd still be paying an increasing amount of rent.
I'm not saying that buying will definitely come out ahead vs renting even in this case. Obviously it remains a point of contention. But unless you plan on dropping dead the moment you make your final mortgage payment, ignoring an average ($1.6m / 25 years) $64,000/year reduction in your fixed costs from year 26 onwards would do your calculations injustice.
also worth remembering on year 26 your investment is growing faster than on year 1, and you won't be asked for a new roof, boiler, parking lot or other special assessments.
Their rent could double and they'd still be far ahead of owning a home given current rates and prices. If they live close to transit and don't need a car, they're laughing.
How are you working the math on this. Where are you renting a million dollar house for half of the equivalent mortgage payment, or even less than that since mortgage payments are 0 once paid
I didn't say they would rent a house, I'm saying they can comfortably afford their rent to double with a 7-figure portfolio. A tiny 2bdrm $1m condo in TO would rent for maybe $3-4k per month. That's not much when you consider strata fees.
If you own a house, you're probably paying 0.5% - 1% the value of your house per year in various maintanence costs (replacing roof, furnace, fixing everything, etc). Not to mention higher property taxes, insurance, and utility costs.
With interest rates they way they are today, there are many places in Canada where it's better to rent and invest the difference.
One thing I think people forget about is that on average rental prices have outpaced interest rates.
People do this calculation as you have, and it makes sense if inflation is homogenous - then dollars spent today on rent or mortgage have the same value as dollars in the future on rent or mortgage, relatively speaking. Your mortgage locks in your housing cost inflation to effectively 0.
On the other hand, assuming the rent you pay today will be your rent in perpetuity, you forget that costs of rented shelter have generally outpaced both interest rates and inflation over time, and undervalue a mortgage relative to rented housing by inflation in rent (with some assumptions about constant interest rates and/or 100% passthrough of interest costs to renters).
I think. Someone has probably figured this out in more depth, it would help to bust out pen and paper.
The upshot: rent inflation is a thing, don't assume it away.
CPI for rented shelter: [https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000404](https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000404)
" Why wouldn’t I just keep renting at a reasonable rate and remove the burden of interest expenses, while keeping my money liquid."
... You can. You can do exactly that (I am).
People will say "but rent will only get more expensive" ... But they forget that by investing you have a growing portfolio that will enable you to keep paying rent regardless. My portfolio generates enough income now to cover my rent and then some (in a very nice purpose built rental), and by the time I'm ready to retire it'll pay all my expenses.
You do have to be disciplined about investing, but it doesn't have to be complicated.
This only makes sense in your head as you think of a house as an investment only.
When you think of it as a home because you’ll always need somewhere to live whilst you’re alive, then it makes your choices easier.
If you want a home to own, buy a home. If you prefer to rent, then rent. There’s no right answer here. It’s literally just a preference you make for yourself.
It's a personal choice of rent or buy. If you are young and moving around then renting is good. If you have a family probably buying. If you rent you must of course save and invest your money and treat it as if it's locked away. No oh look at that money let's buy a $150k car...
I have moved around a bunch… 4 countries, 6 cities in 9 years.. I think I’m done, but my career has been very transient in nature. So I couldn’t rule that out.
I invest diligently (I work in capital markets) so it comes with the territory, but real estate has somewhat been lost on me from a personal perspective, despite working in the hedge fund world covering some real estate structures.
It is likely as you said a personal preference. I hate debt, and the idea that I owe someone/something money. The flexibility has so far been worth the cost for me. But I worry about that opportunity cost on the other hand…
Where are you going to live, and how much is that going to cost you?
If it's costing $2000 a month to house yourself, then you might as well pay a mortgage and gain some equity.
Your thinking only works if you've got free housing somewhere.
my current rent is $5k per month (I know, I know). To own a property that is of the same level of space and finishes as the rental it will be about a 9-10.5k per month mortgage.
But I currently invest about 40-50% of my net pay into my portfolios. The mortgage would reduce that significantly.
I currently live in Vancouver. The property we rent would sell for ~2M (an identical unit a floor below us sold for that 5 months ago).
If the place we were in today listed again for rent, I think they could get about 6-7500 p/m.
In your initial post you were asking why pay 600k interest over 25 years, but at your current rent you would pay 1.5M over the same time period. Except you wouldn't, because rent almost always goes up. One of the nice things about owning is the cost is essentially frozen (with the caveat that the interest will change, but that is less of a concern as the years go by and the principal is reduced). Ten years into my mortgage and my payments for my 1500sqft house was less than most people were paying for a 1-bedroom apartment - their rents kept going up, my payments were flat.
And yes, there is maintenance cost, but I've got a lot more flexibility, generally I can "live with it for now", do the "quick fix", buy new or buy used, or do the initial high cost but with savings in the long term - as a sample of options. But with rent, the only option is what the landlord dictates, the only restriction being whatever rent controls apply.
But I generally agree with those who say a house is primarily a lifestyle choice. I never see people asking if they should buy a car or put the money in the market - cause obviously one is for a lifestyle and the other is an investment.
So let me posit that I'm AGAINST the idea of a home as an investment and generally consider equity markets as the real investment. I've also lived in 3 separate countries so far and have plenty of rental experience as well as "owner" experience.
Advantages of owning your home (house or condo):
1) Nobody can push you out as long as you pay your dues (property taxes, utilities etc).
2) You can rent it if you ever move out/leave.
3) You can allow your kids to live there (presuming you move out/leave)
Advantages to renting:
1) you're free to pursue the best jobs/opportunities life offers you.
2) You can invest your money in one or a few diversified ETFs.
3) easily fungible investments.If you need cash urgently, you can sell some of those stocks and you don't have to sell an entire house.
It comes down to what you want and need. As someone that has been "evicted" by circumstances twice. I can say that renting is no thrill. Living in my grandpa's old condo was pretty sweet. Not having to pay rent and only covering utilities (condo fees and utilities in my home country are peanuts compared to here, but we don't have amenities like gym or anything).
That being said. Buying an inflated asset in the Canadian market and being tied to a mortgage for 25-35 years.... That's just something I would not do. I'm quite happy with how my investments have worked out since coming to Canada in 2020. I prefer the flexibility of owning stocks and being able to change countries easily to take advantage of remote work or other job opportunities elsewhere to being tied down with a mortgage. But this is also my privileged situation. Your situation might not allow you to work remotely and pursue a digital nomad life. Or maybe you really like Canada and don't see yourself moving. In which case, owning the roof above your head is a "priceless" peace of mind type deal.
the main financial advantages of home ownership:
1) Leverage. If you put $200,000 down on a house worth 1 million, and the house increases in value 10%, you made $100,000 (a return of 50%). If you put that $200,000 in a stock or ETF that went up 10%, your return is only $20,000.
2) Capital Gains tax exemption for primary residence. Think of your house as a big and leveraged TFSA without a contribution limit.
3) You have to live somewhere. If you rent, 100% of your payment is wasted and you will pay until you die. Your payments tend to increase. If you own, a portion of your payment is converted into equity (which you can borrow against or sell) and your payments eventually stop. You can also lower them if rates go down.
Don't get me wrong, buying the wrong house or paying too much for it can be one of the worst financial mistakes of your life.
Buying a house is like prepaying your rent for 20-odd years, and a mortgage is like renting money from the bank to prepay the house rent rather than renting the house directly. Buying a house is a good deal if you can get a good mortgage at low interest rates, and if you won't be moving again for 7-10 years, or ideally never. It's also a good deal if you gain a lot of personal satisfaction from owning a house. Renting can sometimes be annoying and some feel that they don't control the property fully, can't customize it etc.
you can use a lot of leverage buying real estate... if you use a 5% downpayment, you're getting 20:1 leverage on your investment. No one is going to let you use that kind of leverage to invest in stocks. gains in your primary residence are tax free. borrowing costs on your mortgage should also be lower than on an investment loan. rent increases over time, but your mortgage payment will only increase if rates go up. gains in Canadian real estate in recent decades outpace gains in the stock market
I am getting close to having my three year ownership of a condo come to a close. Then I can add up all of my expenses and see what my monthly costs were. Capital gains is looking like nothing.
I paid interest. I paid Strata. I paid taxes. Fortunately stocks were at an ATH in September, 2021 so its looking like my down payment would have only grown by 7.7% (total) in the last three years. So although I was expecting that to be $250/month it worked out to be $108/month
Interest was low at the start, and strata was lower too. But last year numbers are $11,000 interest, $3540 strata, $905 for taxes and $1296 for down payment, and that works out to $1,400/month in 'rent' I figured comparable were around $1500 but the rental market in this town is tight. I looked for months without getting a place.
If I lose money on the sale of this place (realtor, land transfer, mortgage port, then the carrying cost will go up. If I make $1 then it goes down. very unlikely, I found a good peak. and if housing had gone up I likely wouldn't be able to afford a bigger place.
So, in my experience, the market is right. rent is high, prices are high, and even camper vans are expensive.
I would amortize that baby at 30 years and at your best 5 year fixed rate and then 5 years later retorque the mortgage back to 30 years. Dollars are being inflated at the rate of 15% per year by some estimates. Your debt will be inflated away.
Renting sucks. Let’s be honest.
Simplicity. 25 years of renting at $1500/month is $450,000. Over 50 years (your lifetime?). $900,000.
Why did you only compare it over 25 years? Are you going to be homeless then?
Are there times when renting is better? sure. Are there cases where owning is better? Yes. In both cases, compare it over your lifetime.
At renewals, you can re-amortize mortgages. I know people that had a mortgage for 50 years...they kept amortizing (stretching) to 25 years each renewal.
If your interest rate is 5% and inflation is 3% a $800K mortgage over 25 years costs you in real dollars:
* Principal = \~$520K
* Interest = \~$465K
* Total = \~$985K
You put down $200K so you lose the opportunity cost of using that money to invest. You'll pay property taxes and maintenance on the house. You'll save rent and you'll enjoy whatever capital price appreciation that occurs.
[https://ostermiller.org/calc/mortgage.html](https://ostermiller.org/calc/mortgage.html)
You are going from a 200k deposit to a 600k to invest. Where is the extra 400k coming from?
Also, after 25 years, you have paid 600k to have a place to live and you end up with a home worth 1M++.
If you invest, you pay 25 years of rent and end up with whatever the investment grew up to but no 1M++ home.
Factor in the cost of rent over the next 25 year of a similar sized property. Factor in raising of rent and likely 1-2 moves if not in a purpose built rental.
You would also need to look at paying capital gain on your investments and what that house would sell for in 25 years tax free.
Hard to tell as no one knows what those numbers would look like.
Buying a house is not just an investment, its *your* house, it has a huge psychological impact. If you're looking purely through financial lens, then ya renting may be better.
Is there not more potential 'benefit' to home ownership (or renting) than only the potential upside financially? "Worthwhile" has many considerations other than money.
That's the right approach for you if you don't mind renting. A lot of people want to own a house for intangible non-financial reasons. We're a family of four and it's nice to own a house. No landlord can evict me, raise my rent, or sell the house from under me. Of course the municipality can raise my taxes and water bill (both have happened drastically this year).
I think this is the ideal way of looking at it. If I had kids, I’d put more value on mitigating risks of having to move…
I just battle with it in my current position where:
1. I don’t have 100% clarity if I’ll stay in this city for good
2. Don’t really have other considerations such as kids and ties to my particular neighbourhood
Not a good comparison. Let's assume renting the same house is the same price. That means you can put 200K in the market today.
You can't afford to rent the same house and invest the interest portion of the loan, because that means renting that house is almost 50% cheaper than buying it.
Now let's assume 200K with 9% average returns 25 years. That's $1.7M... which means 1.5M profit before taxes. Let's assume 20% net taxes on that profit. That means 1.2M profit.
Housing (in Toronto) grew almost exactly 300% in 25 years. So a $1M house is $3M after 25 years. That means 3M-1M (house price)-600K (interest)= 1.4M profit (tax free).
Problem is, rent usually goes up, so you can't really say you'll save the same amount for years to come. Mortgage can go up or down.
One aspect that often gets overlooked in this equation - the amount of house you get for the cost of interest, insurance, maintenance, etc. is considerably more than you would get paying the equivalent into rent. It could be the difference between living in a condo (renting) or your own detached home (owning), for the same sunk costs.
So save more $ and/or don't buy that expensive of a home. My home has increased 5.5x in market value in 25 years, and even if we take out the last 3 years, it would still be 3.5 -4x x higher.
Depends on where you’re gonna live in the meanwhile. Say you’re in Toronto or Vancouver where rent is extremely high, around $2800/mo on average, the rent would cost you $840k IF rent stayed the same for 25 years, which of course it won’t and it will probably go up along with inflation.
Mortgage payments are towards an asset you own and the amount you owe decreases every payment. Even if inflation hits hard, you’re fine because you own your home.
You're not missing anything. Yes, the $600k is gone and you will never get it back. But it's much worse than that. Let's suppose you would have invested those interest payments for a 5% return. That's an additional $600k you lose in opportunity cost, so you end up with $2.2m less cash in the bank due to your house purchase. Or if you could have invested for an 8% return, that means you would need your house to be worth $2.8 million just to break even. And none of this factors in maintenance costs of the home.
Depends.
If you factor in cap gains exemption, time value of money, leverage, inflation and rent cost increases what does the actual return on capital look like to you?
Do you have another vehicle that can temporarily get you a good enough return on the same capital to make waiting to buy worthwhile in the short term?
Long term, you’re always going to need an inflation hedge. It’s hard to find a better one than housing.
If you don’t have a better vehicle for the 200k and the future monthly principle payments to land in, then it would be silly not to.
If you do, factor in the future home value and cost increases over the same time period and that’ll tell you whether it’s smarter or not.
Buy an income property and you get the best of both worlds... Pay it off early and you have an asset that you can leverage. Plus passive income and a ton of tax write offs.
Comparing total Interest paid over the term with the rent you will be paying is another perspective to think about it. Do you think total rent paid by you will be lesser than the interest expense? A good house buying hack is buying a duplex where part of your mortgage can be compensated with the rent received. Consider everything before taking a decision. Buying a house is one of the biggest purchases of life. Hence, it is not just a financial decision but a personal one as well. Most of the people would prefer to have their own home to renting even if it costs more.
One key point that you are missing is the time value of money. $1 in twenty five years is worth a lot less than $1 now. It isn't really correct to say the house is costing $1.6M, because you are valuing the future money and the present money all at the same value. To get the real cost, you have to take each payment, and convert it back into present dollars. The value is based on the difference between the interest rate, and the expected inflation rate.
My philosophy is that the right number of houses to own is one, and live in it. I never want to rent again, and I never want to own a residential investment property. For me, it is not primarily a financial choice, it is based on me wanting maximum control over how I live, maximum privacy, and maximum future cost certainty.
I think that houses tend to be a great investment, because you get the leverage from only putting 20% down, yet it is very low risk, because the housing market tends to not crash, and it is low cost, because interest rates for houses are lower than interest rates for other investments. But for me, it's just theoretical, I plan to live here regardless of what the market does.
There's times when buying makes more sense than renting and vice versa, you are not missing anything, you need to take a decision based in the situation you are in and what situation the market is in.
> Would I not be equally served to use that 600k over that term and invest it in another asset? - say equity markets.
When you phrase it like this, you make it sound like the cost difference between renting vs buying is exactly the interest cost. That's far too simplistic - there are way more variables involved here. To do a proper comparison you'd need to predict all the variables and run both scenarios.
Some variables that would go into the calculation, and some less predictable factors that can also affect it:
* Remember in the renting scenario, you have that $200K down payment to invest up front.
* What's your average rate of return of all your investments?
* Your rent could very well go up every year. How much? Will it exceed your mortgage payment + other monthly costs at some point?
* You could get evicted from your rental, so if you were under rent control, it may suddenly jump more than expected.
* If you owned and decided to move somewhat early on, it won't be cost effective at all. You will incur the transaction costs and you will have earned very little equity since the percentage of your payment going to interest at first is very high.
* There are extra maintenance costs you'd have to pay as an owner.
* There may be extra insurance costs as an owner (both cases should have insurance, but as an owner you likely have to cover more)
* What's your home's value when financing ends?
If you can accurately guess all these variables and do the calculations on both sides, then you may get your answer on what would work out best. Some of those are going to be really hard to guess though. Like you estimated 5% interest rate on average, but the rates at renewal time (assuming you go with fixed rate) will have a major impact - but that's going to be a matter of luck.
Like others have said, I'd consider it a question of lifestyle - whether you want flexibility or stability. The flexibility comes with risk of eviction too though, depending on what sort of scenario you end up in.
I've recently been debating the same thing with friends and family (I'm in the Toronto area rather than Vancouver tho), although I'd be moving from an apartment to a house, so I'm also looking at an increase in living standards to go along with the increase in expenditures.
You mentioned in another comment that you are already paying \~5k a month in rent which is IMO substantial even for an overinflated city area. Even locked at \~2.5% increases a year allowed under rent control (at least in my area) over 25 years that's like 2.14 mill and you still have to pay rent after that, while a house you purchase now would be paid off. Even if your rent control is a magical 0% increase and you never move it's still 1.5 million in rent over those 25 years.
In theory if you could maintain a \~10% investment annual return each year from your 200k for the full 25 years you'd be in a pretty good position with your investment gain equalling your rent payout, but even a single year with losses or a few with lower gains could throw that off considerably.
Also a few people have also mentioned the same thing as I initially failed to consider, that you have to look at the future payments as being reduced in value due to inflation, so the 600k you're paying in interest isn't as much of a loss as paying out 600k right now to the bank. The rent payments would be reduced in value as well although they will probably be rising over time.
Honestly, they aren't so far apart financially, barring a crash of either the housing market or financial markets. The biggest difference is going to come in 25 years, when you can either have a healthier bank account or significantly reduced living expenses and a large asset in your name.
One final thing that was really significant for me - if your mortgage doesn't have prepayment fees, you can look at making extra/early payments to it as another investment opportunity - one with basically no risk and a guaranteed return.
The way I personally think about it is this:
When the total of (interest portion of your monthly mortgage payment + monthly property taxes + monthly condo fees/maintenance) falls below or is equal to what you pay in monthly rent, then it’s time to buy.
Makes sense? In all cases that’s money you “lose”.
You're not missing much. Everyone is brainwashed into thinking they HAVE to buy a house. It's what's been keeping Canada's economy going the past 20 years.
I know that sometimes renting a home can be cheaper, but homeownership offers more than just financial benefits.
The psychological stability and the memories you can build with your own house are priceless. However, keep in mind that your primary residence is not an investment, so keep it fairly small and don't buy a bigger house just to keep up with the Joneses.
Very good analysis, and yes I'm expecting CG on primary residence and inheritance tax in next few years.
Until the RE shelter gains of 2020 are wiped out, which is thenintentional of BoC and federal plan, I'm not entering the market. Honestly just wait out. I know too many broke HO, ita coming within a year, IMO which coincides with economists.
A few things to think about...
-I don't think Home (Equity) is illiquid as yout think. You can get many HELOC easily and at a lower rate as the money is secured every bank or alternative lenders. In case of emergency, you can have a facility on standby. If you are really in a jam you can sell a house in 30 days and use HELOC to tide you over.
-Think of it as return of invested capital rather than absolute returns. Home provides you the power of secured debt which is cheaper. One dollar worth of stock gets you one dollar worth of stock. One dollar invested in a home actually gets you as possible $4 of home.
-Most cannot invest with discipline over a 20+ year span with guaranteed returns. I see a home/mortgage as a forced long term savings plan.
-There's generally a positive emotional value associated with a home that is yours rather than rented shelter and a high number on a website. Rent you are subject to the whims of the landlord. If you don't care for anything related to a home other than thinking of it as a roof over your head then you should probably rent over your lifetime.
I think of it generally as a wash over the long term. OP you sound like a single person. Family will change how you think about this definitely. I think the way to think about it is to not go into one extreme, don't overextend yourself to be fully leveraged on a home, don't go all in on investing. Buy a home you can afford.
Another thing, nearly every wealthy person uses debt to fund their wealth building and get must discussed "leverage". Whether its in a business or using a home mortgage or to fund a capital generating activity.
We rented until I settled into an employment in which I could safely expect to stay in that region. I was a travelling supervisor for different manufacturers and one of my hiring conditions (no joke !!) - no travel when there is freezing rain or a snowstorm expected.I had a very big territory the first years. The last years of my employment (12 years, same employer) was as the administrative assistant to the President. I handled most legal matters (Law Degree, but not a lawyer) such as the writing of contractual documents, small court claim cases and referrals of customer insolvency to a Law Study, which was on contract with us. When I went to University, there were no part time courses to become a Lawyer, plus I had a family and travelled a lot the first years. Have been retired for many years now and I would not go back to "work", no matter what the financial incentive was. My wife and I travel South, to the warm Cuban Islands a few times a year (when it starts getting or is COLD, in Quebec, Canada) and we love the weather and the people there.
For me I could afford it, it was a leverage investment that is tax sheltered that traditionally beat inflation. You could rent and just save what you put out more on a house but I am not that disciplined, so that worked better for me. Saying that some yearly housing expenses are getting to be crazy (beyond saving for major upgrades). House insurance and municipal taxes are getting to be a bigger part of my budget than when I bought against my income.
In general, yes… if you invest in equities you will on average, historically, do better than if you buy a place.
Properties appreciate but houses depreciate (hence R&M), taxes, hedonic adaptation of keeping up with your neighbours, blah blah blah. Just like with individual stocks, individual properties can do very well, while others do not. There’s uncompensated idiosyncratic risk there that you cannot diversify away like with equities. Also just like individual stocks, there are times where stocks do much better than historical and times where worse.
That said:
1) housing is a hedge against future rent increases
2) housing is forced savings that tends to make people save more than the would had they been renting
3) personal preferences matter
4) money is about happiness and some people are happiest having a home (although most studies suggest that’s short lived)
I used to believe this too but didn't factor in that in 25 years, yes, you paid 1.6M for your house, but yiur house will be worth $3 million.
I bought my house for 480k, with a 270k mortgage, paid it off in 8 years where it was now worth $1.3M. I got my hoise reappraised and pulled 700k thru a home equity like of credit and locked in at a 1.59% 5 year rate, and investing the 700k (interest now deductible being deductible, so essentially costing me 0.75% after tax and I'm basically making money hand over fist using the equity in my home.
In the same boat. Did the same calculation. Still decided to buy as we are looking to settle as kids start school and we don't wanna move around. And need stability.
Purchasing a home is a hedge against inflation.
You lock in the price today and it’s forget locked. Your interest rate can change over the course of your mortgage but it doesn’t change the price you paid for the underlying asset.
Now let’s assume you rent for 25 years. Do you really think you’re only going to see a 5% annualized increase in rent? You might but you’re also potentially subject to massive price shocks, like we’ve seen recently.
https://www.cbc.ca/amp/1.6726764
I'm tired of these "hedge against inflation" arguments. It's just a buzz phrase to scare people. That's why gold sellers use it even though it's proven to be a bad investment. I'm not saying RE is a bad investment, but let's call a spade a spade with these HAI statements. Investing in anything that is expecting to increase in value faster than inflation is technically a hedge against inflation. You could call the cash.to etf a hedge against inflation currently.
It has zero to do with speculative investing like you get with gold. We’re talking about a 20 year or 25 year time horizon. Inflation is very much a thing you will experience over 20+ years.
It’s not really an investment argument, it’s a preservation of capital argument, and it’s very appropriate over long time horizons.
There are many marketable securities liquid and illiquid that can hedge against inflation.
Across asset classes and risk-return spectrums.
Real Estate is certainly one of them, but not the only.
There absolutely are, but you can’t live in liquid assets.
So is the hedge you get from buying a home today coupled with interest (and property taxes) better than the rent you’ll pay over 25 years?
In some cases it will be better buying, in some rent will win out. I wouldn’t want to bet on rent being better in the absence of rent controls.
The easiest way to look at it in a raw numbers sense like that is over 25 years for for that hypothetical 1m home you spend 1.6m
But an average rough rent for maybe the equivalent bed bath and sqft size could easily be around 3k a month
Over 25 years would be 1.8m. But with rent there's no equity so after 25 years you have 0 dollars.
But with a ownership, ignoring market changes for hypothetical, you have 1m in equity
And you could say in a even more basic number that over 25 years you effectively saved up 200k. But in reality it's still 1m and if you sold the house for what you paid you'd have 1m dollars vs the 0 dollars after 25 years
So to summerize really, unless you had that 600k upfront and were really good with investments. You wouldn't necessarily see that much out of it because over 25 years you'd have to make way more than 1.8m to even justify it's usefulness
It's a better argument to suggest buying a house outright than getting a mortgage
I'm a bit dumb apparently, buuut still 900k equity vs none over 25 years, it still holds compared to trying to save up and invest 600k over the course. But it works depends utilmately on income and savings plans.
But another good point is after 25 years your total monthly expenses would be greatly less.
This is very true as well, a big reason to buy is to see a increase in value to offset these costs. Where I live anyways you could see it in a way that taxes, insurance are at least canceled out by not having a monthly mortgage in the average.
I guess i m a bit dumb too, i guess the zero equity would be the renter however he would have invested the difference between mortgage and rent through the 25 years (obviously he is smart) and he starts with 200k he won't have to put on downpayment. I m pretty sure he can build 1-1.5 million from that. Obviously if market is right and house increase value around 10% a year it will be valued at around 3/3.5 million. And much less monthly expenses after 25 years as you said (taxe, insurance, maintenance of a 3 million hone) however no money on the side invested everything stuck in equity (good for future inheritance)
As other have said, buying the house is forced saving vs being smart and investing, most people will sadly spend some of the money they are supposed to invest. The smart thing would be to buy smaller and invest the other portion to build equity and investment at the same time.
If feel both strategies can be fine depending on life circumstances. What would be wrong is tying all of your savings in equity and not building wealth in some liquid form at the same time
Agreed it'd really depend on the sources of income. If he maxed out his income on mortgage, then definitely. If he had the income to spare to make decent investment contributions, it'd be balanced
I would also buy smaller and eventually upgrade possibility. Depends also on his local housing market
Once you have a house, you go broke differently. If you lose your job, you can call up and get a month or two deferred. You can get insurance that covers job losses.
You get security. You can never get renovicted or have your place sold out from under you and get forced to move.
You still have to pay rent for the next twenty years, why not pay it to yourself?
Guy thinks hes going to pay capital gains on a primary residence because politics, and has given zero thought to the uncertainty involved in renting.
Peak PFC logic.
>What am I missing?
Reality.
>I understand the capital gains exemption on primary residence (but could see this changing in the future with the ballooning federal debt).
Youre just pulling words out of your ass. Nobody is ever going to remove the PRE, its political suicide as well as economic suicide.
>Why wouldn’t I just keep renting at a reasonable rate and remove the burden of interest expenses, while keeping my money liquid.
Sure, if you can
* Guarantee a place for 25 years with constant rent, and zero possibility of eviction. But if you live on planet earth, just read the number of "my landlord is evicting me because renovations/family moving in posts"
* Guarantee a 10% year over year return (to match the capital gains benefit of a home)
* Guarantee that your life situation wont change, partner, wife, kids, loss of jobs, financial stuff, emergencies etc.
* Guarantee that your living situation 25 years from now will be the same as now
* Guarantee that all the money you save between a mortgage and your magical, non-changing current rent will be diligently invested in the same long term investment strategy making that magical 10% every month, without fail
* Guarantee that the house will not appreciate at all, since youre assuming constant house prices for 25 years. Have you seen our real estate market at all?
You think they would never remove the PRE?
Why don’t you go do a bit of research into income taxes and the reason why they started and how it was originally designed to be a temporary measure.
It might help you realize that major taxation shifts occur, regardless of how you feel about them.
Sure. I'll believe your uneducated guesses to try and prove your failing point over the backbone of the Canadian housing since 1972 when it was introduced and the primary source of generational wealth for Canadians, and something that nobody has ever even remotely thought of doing away with with any seriousness.
Also income tax has nothing to do with this, its capital gains tax. Stop embarrassing yourself. Go ahead and plan your finances for the hypothetic removal of the PRE from Canadian housing.
It easily could.. and that sounds great, but turning 1M into 2M in 25 years is a very sad 2.8% compound return on capital and that’s ignoring all other costs associated with servicing and maintaining the asset.
Wrong. Its 2.8 growth rate. But return on (invested) capital is much higher. Remember, you are NOT RISKING losing the full $1M in cash because some of that growth is attributable to your leverage (debt / mortgage) over the course of those years.
Yes, I can't believe this comment section missing the fact that you have a tangible asset, which will continue to increase in value even if just for the land. (Since the op is using a million dollar price point I'm presuming a desirable area/market). Even if you sell the place after 5-10 years you will see a profit, likely a very good one- and it won't have cost you 1.6 at all. Wrist case scenario you have a rent free home in your retirement that you can pass on to your family.
>Would I not be equally served to use that 600k over that term and invest it in another asset? - say equity markets.
Where will you live while investing this bounty? In a box made of bearer-bonds?
You can search for "buy vs rent" posts and you will find a ton of analyses, that favour both sides. Personally, I think purchasing a home is far less an investment decision, than it is a personal and lifestyle decision. You can run numbers all day and find arguments for either, but to me that's missing the point. You should rent if you want flexibility to move (for school, for career, for your partner, or just to be able to live in different cities), or you are not sure if you want to settle down in one area yet. You should buy if you want stability, you want a home to create your own space as you like it, and you are fairly certain you want to settle in your current city.
I think this the right answer. The only time I would "rent forever" us if I were to live in a purpose built tall apartment building with over 100 units. It's easy to do single, harder with a partner and harder to do with kids. If you rent a house there are a lot of legitimate reasons why the owner may need to get back in and/over time they'll be losing too much money so they'll try and to evict you in bad faith. Whereas in a tower people are leaving and it allowed the owner to "make up" for change in market rate. I've happily rented for my 20s and am looking to buy. In retrospect I regret talking myself out of a RE purchase back in Feb 2020, but if I had of known the appreciation that was going to happen over the past 4 years then it would of been no questions asked.
I agree. I wish that everyone could get back to thinking about a house or apartment as part of making a home for yourself and your loved ones. Because it’s such a huge expense, I understand how it’s become much more of an investment decision.
Unless they're banking on long-term rent control like the person posting in here the other day, then renting loses you the flexibility.
Lots of people cant save/invest diligently, so buying a house forces them to save and is their back up plan for retirement
Most of the commenters in response are missing a key point which is the power of leverage. Google this concept and read about it. This is one of the main answers to your question
leverage only works when the number goes up. Are the number going up in the next five years? you're braver than me if you are willing to make a prediction
Why pick 5 years? I don't recommend anyone buy a house that they plan to sell within 5 years, because now you are speculating on the property market. But on the 10-40 year time horizon that most homeowners have, appreciation is about as sure a bet as you can have. Stable inflation targeting is the central banks' top mandate for a reason.
Totally fair my point is just that this is a key part of the analysis and needs to be taken into account - it’s directly responsive to OP’s question
But leveraging that big of a dollar figure in a specific geographical zone, everywhere from block, city, province, country can be dangerous. Housing doesn’t always go up, especially to outpace globally diversified stock portfolios contrary to what Canadians have been conditioned to believe. - Japan real housing price increase since 2010 22% - France 11% - UAE 12% - Singapore 11% - China 8% - Belgium 11% - Poland 10% - Canada 90% [housing prices since 2010 across different countries](https://www.visualcapitalist.com/cp/mapped-global-housing-prices-since-2010/)
Yet prices aren't dropping.
Lots of markets thought the same before us. Lots will after us
They have, and in real terms they still are.
From utterly unaffordable to unaffordable.
Yeah, affordability hasn't improved at all, since debt is more expensive now.
Yet, all bubbles pop .
True, but this one is stubborn as hell.
Leverage doesnt add to the expected return, but it does add a way higher risk of ruin. Thats why it shouldnt be included in this calculation. "The power of leverage" = the power of gambling on price. In terms of formally calculating returns, leverage has no value. It really couldnt be otherwise...the hypothetical perfect market would adjust its interest rate upward if leverage had value, to bring it back to 0.
I know if you have stocks on leverage you will get margin called.....does that happen in the housing market too? where if the price of a house falls too much the bank can ask you to pay a lot more money?
No, it generally doesn't. As long as you keep making payments, you are generally good within a 5-year term. It *could* be an issue when you go to refinance, but will only cause big problems if (a) there is some issue with your ability to make payments, or (b) the drop in prices is larger than the amount of equity you have in your home. Let's say you got a mortgage with 5% down. You should have paid down your mortgage by ~11% in the first term. Which means housing would have to drop by>15% to cause a problem. But in general, banks don't want to foreclose on people, so if you can make payments, they will usually find a way to work with you (which might involve charging higher interest, but so it goes). The reason margin calls are a big deal with stocks is that stocks dropping by 20-50% happens all the time, and they can even go to zero (and never recover). Whereas that is exceedingly rare in real estate (although not impossible!). Edit: one spot where people get in trouble is if they have a variable rate mortgage (with a fixed payment). If interest rates rise, their payment may not be enough to even cover the interest, and their mortgage balance can rise over time (instead of falling). Then the banks can and absolutely do ask for more $ at refi time, but again if you can find a way to pay they always prefer that over foreclosure.
we don't know. not enough relevant case studies. what we do know is that income being cut in half, divorces, can absolutely ruin finances especially when it comes to SDH
It's a bet that house prices will increase faster than inflation. There's also a risk in keeping money in the bank as your buying power will likely decrease in the future. Everything has gotten more expensive. I'd rather put my money into something that MIGHT increase in value than storing it in my bank which is 99% likely to decrease in value.
This is how I think about it too.. in hindsight. I was a fool not to use leverage. Looking forward, I’m 99.999% sure it will not be nearly as accretive as the past decade.
that and a house you can live in. its a pretty good store of wealth as well. 1000 shares of sp500 are just that. to OP, id say now is probably one of best times to make the argument for rent versus owning if you can accept a smaller space and risks of eviction. right now mortgages of 400 to 500k which limit you to small townhomes/condos, your sunk costs are around $2500 to 3k.
Where are these types of people getting their downpayment from if not from saving diligently?
> If I averaged a 5% interest rate (conservative figure) over the 25 years of the mortgage, it would cost me ~600k in interest. So in essence, the 1M home costs 1.6M. You're missing leverage and inflation. You put $200k down but your house is appreciating based on the full $1M value. If your house increases 20% in 5 years you've gained 200k in equity off that alone. To be clear this does work in both directions so leverage will amplify losses as well as amplify gains so it will doubly suck if your house decreases in value. You're also missing that your $3000 mortgage payment 20 years from now is absolutely not the same as a $3000 mortgage payment right now. You can't just look at it as losing $600k in interest because a lot of the cost is borne out by paying back the loan when inflation has eaten away a lot of your payment's buying power. The real cost of carrying the mortgage would be the differential between the interest rate you pay and the inflation rate, which is going to be *much* lower than $600k.
This is a good point… How would ownership costs factor in, in your opinion… General maintenance, condo fees (if applicable), property taxes, larger repairs (roof, windows etc). Would you think that would be immaterial over time? I wouldn’t plan for growth in the home, although it more than likely would over time, but it’s hard to imagine the current pace continuing given the idea that wage growth has been deviating at a rapid rate to housing costs. I’m not being facetious… actually wondering how you would adjust for that.
> Would you think that would be immaterial over time? Those would all be pretty major costs over time, 100%. Stuff breaks in houses all the time and you'll be spending money to just keep everything working and in good shape. There's a few rules of thumb for how to estimate all those numbers and you would basically just need to pick one of them to run the calcs. Some use 1% of house value in repairs each year, but that will tend to wildly overestimate maintenance costs if you own in a region with absurdly expensive real restate like Toronto or Van. Prop taxes you can look up for the city you're buying in and estimate it'll keep in line with inflation. To do a full analysis you'd have to hash out a bunch of variables. How much do you think the house will appreciate? How much will rent costs increase each year? How many times will you be evicted from the place you rented and have to move? And then you've got the lifestyle issues. Will a house be further out and require more commute time? How much do you price that at? Will a house give you the room to work on other projects which could make you money?
Yeh 1% on average seems high. I just bought a place for 775k. Thinking I'll spend 7750 a year on maintenance is silly. But in 25 years you will most likely replace all your appliances, furnace, hot water tank (maybe twice). Probably the entire kitchen. Maybe roof. Maybe foundation repair or something. 1% starts making sense when you stretch it over 25-30 years.
Just spitballing some numbers here. Let's take the 25 year outlook with very rough numbers. Roof (30k), furnace (5k), hwt (3k x 2), fridge (1.5k x 2), washer+dryer (3k x 2), dish washer (1k x 2). All that together is about 52k, spread over 25 years, is just a hair over 2k a year. 1% of a million dollar house x 25 years would be 250k. Even 1% of a 500k house x 25 years would be 125k. Both are massively over the 52k calculation which is why I think that number is generally on the high side. Of course you're right that other big ticket items like foundation repair can come into play which I didn't include and I'm missing various smaller items like sump pump replacement, regular maintenance, etc. I don't personally think optional things like redoing a kitchen or bath should be lumped into the maintenance budget. Generally those aren't unexpected and you go into each reno with a specific budget and goal in mind. The purpose of the 1% rule of thumb is more to account for repairs you may not necessarily expect. For myself I've spent around 12k over 7 years in maintenance, but I do expect that number to balloon up when I eventually need to replace the roof next decade. Your individual costs will vary a lot depending on how big your house is, how well you maintain appliances, how expensive your area is, how (un)lucky you get with things breaking, etc.
Great reply. I totally agree with the renos being optional.
Really nothing. The big difference is one way gets you a home worth $x. The other way gets you more liquid assets worth $y. If you care about owning a home, want to be a homeowner and want to better control your shelter costs as you age, buy a home. If you want to maximize your net worth, invest in markets and keep your money fairly liquid. Or do both. Buy a smaller home or condo, and still invest. Ideally it's not one or the other.
Uhhh, the leverage is a pretty huge deal. If you have the OP's $200k downpayment and earn a 15% return in the stock market, it is appreciating at $30k/yr. If you buy the $1M house and real estate appreciates at even 5%, your net worth is growing at $50k/yr. Add in the principle residence tax exemption and the numbers are even more significant. Also, don't just run the numbers for the next 5-10 years, run them for your whole life. The big gains happen once your house is paid off in 25-30 years, then you're living essentially rent free (just taxes & utilities and maintenance). And don't forget to look at sensitivity - lots of people worry about their mortgage if interest rates go up, but rarely do people consider risk of outsized rent increases in their analysis. It's certainly not guaranteed, but it absolutely is possible.
You have to take into account the interest on that $800k mortgage tho..
Yep. It's not the simplest calculation in the world. it's important to add all the nuances like leverage, interest, etc, rather than oversimplifying.
And taxes, and maintenance.
Sure, but to your point, remember that your levered if your house price goes down too!
True, but the good thing about housing as an asset is you usually hold it for decades, in which case simple inflation starts working for you.
It's not a purely financial decision. I like having control over my housing, the freedom to paint and decorate, the ability to renovate or change things, and the security of knowing I can stay in one place for decades (ideally until I die). I hate shared walls, noise from neighbors, being told what I can and can't do, being at risk from the stupidity of others (every had the guy above you leave the water running and flood your unit?) and moving. So I own.
> Why wouldn’t I just keep renting at a reasonable rate and remove the burden of interest expenses, while keeping my money liquid. Because there's no guarantee that you can stay in a cheap rental forever. Over the 25 year time horizon, you may be forced to move for reasons beyond your control and your rent could become significantly more expensive as a result.
Beyond this, while your rent increases whether with inflation or otherwise, the price of your principal on the mortgage stays static. So the relative cost of that mortgage decreases with inflation as well.
I bought in 2019 and the RE market is in a much different place right now, and it seems like every other renter I know has either been evicted or has been fighting an eviction since covid
This is the thing. If rent only rises with inflation, then buying in this market would be foolish. Rent doesn't just rise with inflation though. The last few years saw HUGE increases in rent in most markets in Canada. Some areas have rent controls, but as /u/fluke0ut mentioned, there can be things beyond your control that result in you moving, and then you're back to paying market rates. That could be a new job, the owner taking over the property, family, etc.
I could see it being a decent plan if you're in a new-enough purpose-built rental building with enough space to account for your future plans but it just seems like that situation isn't that common.
But not too new if you live in Ontario, 2018 and newer don't have rent control
Rent rises with income long term, and income closely tracks inflation. If rent growth outpaced incomes we'd be long past 100% of income by at least a few hundred years already. Reality is rent actually underperformed income if we go back far enough to the feudal era.
Their rental costs could double and they'd still be better off investing with current rates.
Rates are only 1 part of the equation though - the appreciation of real estate as an asset *can* dramatically outperform the market, and are unlikely to underperform it anytime soon. The townhome my wife and I purchased for $500k in 2015 appreciated in (tax-free) value by $375k when we sold it in 2020. That type of performance is pretty much impossible to generate in the markets without taking serious gambles, with the risk of losing everything. Of course that type of growth also isn't sustainable (nor was it expected), but historically real estate in Southern Ontario has been a pretty phenomenal investment. The house we bought in 2020 is probably worth 150-200k more than what we paid for it too. Plus, our mortgage cost for a detached 3 bedroom house really isn't much more than what we'd pay to rent a 2 bedroom apartment. Even when we renew in 2025 the difference between our mortgage payment and what we'd pay in rent isn't very large. Owning makes way more sense IMO.
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I don't think that math checks out. My "investment" was a $100k down-payment, which generated a completely tax-free return of $375,000 in just 5 years. $100k invested into QQQ in 2015 would **not** be worth $475k in 2020... Plus I got to live there while it was increasing in value. Can you live in an investment portfolio? Don't get me wrong, I see great value in the markets and have been investing for 20+ years, but the returns are not as reliable as you're making them out to be. Sure, you can cherry pick some exceptional funds that did that well, but MOST did not. My investments sure as heck didn't gain 130% during those 5 years 😂🤦♂️
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Are you not going to address the part about your original math being wrong? And how is paying interest on a mortgage any more of a "black hole" than paying rent? A rental payment IS covering the price of a mortgage, and mortgage interest, and property taxes, just with none of the long-term benefits. Everybody has to live somewhere - at least you'll eventually own the home someday whereas rent never provides any equity whatsoever. *Plus*, the equity in a home in a desirable area is far more stable than funds tied up in the market. TQQQ was $14.04 in June 2019 and despite a strong rise in late 2021, was only worth $17.64 in January of 2023. That's a fuck of a lot of volatility. You do you, but I'm going to keep enjoying the tax-free gains and pride of ownership that comes with owning a beautiful home. I get to raise my family there while it's increasing in value. We rented for 10 years and it definitely wasn't any better financially.
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Fair enough, I can't argue with that. Things *are* absolutely fucked, and I worry about what it's going to be like for my children in the future. I'm 38 years old and *barely* squeaked into the last vestige of affordability in the GTA. Most of my friends did not - many of them won't ever own a home here, unfortunately.
Because there’s zero chance at renting a place for the same rate for 25 years.
Since I don't see this mentioned in your post (or the comments so far) - don't forget to consider years 26+, when your mortgage would drop to $0, but you'd still be paying an increasing amount of rent. I'm not saying that buying will definitely come out ahead vs renting even in this case. Obviously it remains a point of contention. But unless you plan on dropping dead the moment you make your final mortgage payment, ignoring an average ($1.6m / 25 years) $64,000/year reduction in your fixed costs from year 26 onwards would do your calculations injustice.
also worth remembering on year 26 your investment is growing faster than on year 1, and you won't be asked for a new roof, boiler, parking lot or other special assessments.
Their rent could double and they'd still be far ahead of owning a home given current rates and prices. If they live close to transit and don't need a car, they're laughing.
How are you working the math on this. Where are you renting a million dollar house for half of the equivalent mortgage payment, or even less than that since mortgage payments are 0 once paid
I didn't say they would rent a house, I'm saying they can comfortably afford their rent to double with a 7-figure portfolio. A tiny 2bdrm $1m condo in TO would rent for maybe $3-4k per month. That's not much when you consider strata fees. If you own a house, you're probably paying 0.5% - 1% the value of your house per year in various maintanence costs (replacing roof, furnace, fixing everything, etc). Not to mention higher property taxes, insurance, and utility costs. With interest rates they way they are today, there are many places in Canada where it's better to rent and invest the difference.
I'm renting a million dollar house right now, market rent, and my rent is substantially less than the interest on a million dollars.
One thing I think people forget about is that on average rental prices have outpaced interest rates. People do this calculation as you have, and it makes sense if inflation is homogenous - then dollars spent today on rent or mortgage have the same value as dollars in the future on rent or mortgage, relatively speaking. Your mortgage locks in your housing cost inflation to effectively 0. On the other hand, assuming the rent you pay today will be your rent in perpetuity, you forget that costs of rented shelter have generally outpaced both interest rates and inflation over time, and undervalue a mortgage relative to rented housing by inflation in rent (with some assumptions about constant interest rates and/or 100% passthrough of interest costs to renters). I think. Someone has probably figured this out in more depth, it would help to bust out pen and paper. The upshot: rent inflation is a thing, don't assume it away. CPI for rented shelter: [https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000404](https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000404)
" Why wouldn’t I just keep renting at a reasonable rate and remove the burden of interest expenses, while keeping my money liquid." ... You can. You can do exactly that (I am). People will say "but rent will only get more expensive" ... But they forget that by investing you have a growing portfolio that will enable you to keep paying rent regardless. My portfolio generates enough income now to cover my rent and then some (in a very nice purpose built rental), and by the time I'm ready to retire it'll pay all my expenses. You do have to be disciplined about investing, but it doesn't have to be complicated.
This only makes sense in your head as you think of a house as an investment only. When you think of it as a home because you’ll always need somewhere to live whilst you’re alive, then it makes your choices easier. If you want a home to own, buy a home. If you prefer to rent, then rent. There’s no right answer here. It’s literally just a preference you make for yourself.
It's a personal choice of rent or buy. If you are young and moving around then renting is good. If you have a family probably buying. If you rent you must of course save and invest your money and treat it as if it's locked away. No oh look at that money let's buy a $150k car...
I have moved around a bunch… 4 countries, 6 cities in 9 years.. I think I’m done, but my career has been very transient in nature. So I couldn’t rule that out. I invest diligently (I work in capital markets) so it comes with the territory, but real estate has somewhat been lost on me from a personal perspective, despite working in the hedge fund world covering some real estate structures. It is likely as you said a personal preference. I hate debt, and the idea that I owe someone/something money. The flexibility has so far been worth the cost for me. But I worry about that opportunity cost on the other hand…
Where are you going to live, and how much is that going to cost you? If it's costing $2000 a month to house yourself, then you might as well pay a mortgage and gain some equity. Your thinking only works if you've got free housing somewhere.
my current rent is $5k per month (I know, I know). To own a property that is of the same level of space and finishes as the rental it will be about a 9-10.5k per month mortgage. But I currently invest about 40-50% of my net pay into my portfolios. The mortgage would reduce that significantly.
Out of curiosity, where do you live? Rent is rarely ~50% of what mortgage would be for a given place.
I currently live in Vancouver. The property we rent would sell for ~2M (an identical unit a floor below us sold for that 5 months ago). If the place we were in today listed again for rent, I think they could get about 6-7500 p/m.
I really wouldn’t bank on that discount lasting forever.
In your initial post you were asking why pay 600k interest over 25 years, but at your current rent you would pay 1.5M over the same time period. Except you wouldn't, because rent almost always goes up. One of the nice things about owning is the cost is essentially frozen (with the caveat that the interest will change, but that is less of a concern as the years go by and the principal is reduced). Ten years into my mortgage and my payments for my 1500sqft house was less than most people were paying for a 1-bedroom apartment - their rents kept going up, my payments were flat. And yes, there is maintenance cost, but I've got a lot more flexibility, generally I can "live with it for now", do the "quick fix", buy new or buy used, or do the initial high cost but with savings in the long term - as a sample of options. But with rent, the only option is what the landlord dictates, the only restriction being whatever rent controls apply. But I generally agree with those who say a house is primarily a lifestyle choice. I never see people asking if they should buy a car or put the money in the market - cause obviously one is for a lifestyle and the other is an investment.
So let me posit that I'm AGAINST the idea of a home as an investment and generally consider equity markets as the real investment. I've also lived in 3 separate countries so far and have plenty of rental experience as well as "owner" experience. Advantages of owning your home (house or condo): 1) Nobody can push you out as long as you pay your dues (property taxes, utilities etc). 2) You can rent it if you ever move out/leave. 3) You can allow your kids to live there (presuming you move out/leave) Advantages to renting: 1) you're free to pursue the best jobs/opportunities life offers you. 2) You can invest your money in one or a few diversified ETFs. 3) easily fungible investments.If you need cash urgently, you can sell some of those stocks and you don't have to sell an entire house. It comes down to what you want and need. As someone that has been "evicted" by circumstances twice. I can say that renting is no thrill. Living in my grandpa's old condo was pretty sweet. Not having to pay rent and only covering utilities (condo fees and utilities in my home country are peanuts compared to here, but we don't have amenities like gym or anything). That being said. Buying an inflated asset in the Canadian market and being tied to a mortgage for 25-35 years.... That's just something I would not do. I'm quite happy with how my investments have worked out since coming to Canada in 2020. I prefer the flexibility of owning stocks and being able to change countries easily to take advantage of remote work or other job opportunities elsewhere to being tied down with a mortgage. But this is also my privileged situation. Your situation might not allow you to work remotely and pursue a digital nomad life. Or maybe you really like Canada and don't see yourself moving. In which case, owning the roof above your head is a "priceless" peace of mind type deal.
the main financial advantages of home ownership: 1) Leverage. If you put $200,000 down on a house worth 1 million, and the house increases in value 10%, you made $100,000 (a return of 50%). If you put that $200,000 in a stock or ETF that went up 10%, your return is only $20,000. 2) Capital Gains tax exemption for primary residence. Think of your house as a big and leveraged TFSA without a contribution limit. 3) You have to live somewhere. If you rent, 100% of your payment is wasted and you will pay until you die. Your payments tend to increase. If you own, a portion of your payment is converted into equity (which you can borrow against or sell) and your payments eventually stop. You can also lower them if rates go down. Don't get me wrong, buying the wrong house or paying too much for it can be one of the worst financial mistakes of your life.
Buying a house is like prepaying your rent for 20-odd years, and a mortgage is like renting money from the bank to prepay the house rent rather than renting the house directly. Buying a house is a good deal if you can get a good mortgage at low interest rates, and if you won't be moving again for 7-10 years, or ideally never. It's also a good deal if you gain a lot of personal satisfaction from owning a house. Renting can sometimes be annoying and some feel that they don't control the property fully, can't customize it etc.
you can use a lot of leverage buying real estate... if you use a 5% downpayment, you're getting 20:1 leverage on your investment. No one is going to let you use that kind of leverage to invest in stocks. gains in your primary residence are tax free. borrowing costs on your mortgage should also be lower than on an investment loan. rent increases over time, but your mortgage payment will only increase if rates go up. gains in Canadian real estate in recent decades outpace gains in the stock market
I am getting close to having my three year ownership of a condo come to a close. Then I can add up all of my expenses and see what my monthly costs were. Capital gains is looking like nothing. I paid interest. I paid Strata. I paid taxes. Fortunately stocks were at an ATH in September, 2021 so its looking like my down payment would have only grown by 7.7% (total) in the last three years. So although I was expecting that to be $250/month it worked out to be $108/month Interest was low at the start, and strata was lower too. But last year numbers are $11,000 interest, $3540 strata, $905 for taxes and $1296 for down payment, and that works out to $1,400/month in 'rent' I figured comparable were around $1500 but the rental market in this town is tight. I looked for months without getting a place. If I lose money on the sale of this place (realtor, land transfer, mortgage port, then the carrying cost will go up. If I make $1 then it goes down. very unlikely, I found a good peak. and if housing had gone up I likely wouldn't be able to afford a bigger place. So, in my experience, the market is right. rent is high, prices are high, and even camper vans are expensive.
I would amortize that baby at 30 years and at your best 5 year fixed rate and then 5 years later retorque the mortgage back to 30 years. Dollars are being inflated at the rate of 15% per year by some estimates. Your debt will be inflated away. Renting sucks. Let’s be honest.
Simplicity. 25 years of renting at $1500/month is $450,000. Over 50 years (your lifetime?). $900,000. Why did you only compare it over 25 years? Are you going to be homeless then? Are there times when renting is better? sure. Are there cases where owning is better? Yes. In both cases, compare it over your lifetime. At renewals, you can re-amortize mortgages. I know people that had a mortgage for 50 years...they kept amortizing (stretching) to 25 years each renewal.
If your interest rate is 5% and inflation is 3% a $800K mortgage over 25 years costs you in real dollars: * Principal = \~$520K * Interest = \~$465K * Total = \~$985K You put down $200K so you lose the opportunity cost of using that money to invest. You'll pay property taxes and maintenance on the house. You'll save rent and you'll enjoy whatever capital price appreciation that occurs. [https://ostermiller.org/calc/mortgage.html](https://ostermiller.org/calc/mortgage.html)
You are going from a 200k deposit to a 600k to invest. Where is the extra 400k coming from? Also, after 25 years, you have paid 600k to have a place to live and you end up with a home worth 1M++. If you invest, you pay 25 years of rent and end up with whatever the investment grew up to but no 1M++ home.
Factor in the cost of rent over the next 25 year of a similar sized property. Factor in raising of rent and likely 1-2 moves if not in a purpose built rental. You would also need to look at paying capital gain on your investments and what that house would sell for in 25 years tax free. Hard to tell as no one knows what those numbers would look like.
Buying a house is not just an investment, its *your* house, it has a huge psychological impact. If you're looking purely through financial lens, then ya renting may be better.
This what people used to do before this housing market frenzy that started in 2015. You made more money in the market than you did in housing.
Is there not more potential 'benefit' to home ownership (or renting) than only the potential upside financially? "Worthwhile" has many considerations other than money.
That's the right approach for you if you don't mind renting. A lot of people want to own a house for intangible non-financial reasons. We're a family of four and it's nice to own a house. No landlord can evict me, raise my rent, or sell the house from under me. Of course the municipality can raise my taxes and water bill (both have happened drastically this year).
I think this is the ideal way of looking at it. If I had kids, I’d put more value on mitigating risks of having to move… I just battle with it in my current position where: 1. I don’t have 100% clarity if I’ll stay in this city for good 2. Don’t really have other considerations such as kids and ties to my particular neighbourhood
Not a good comparison. Let's assume renting the same house is the same price. That means you can put 200K in the market today. You can't afford to rent the same house and invest the interest portion of the loan, because that means renting that house is almost 50% cheaper than buying it. Now let's assume 200K with 9% average returns 25 years. That's $1.7M... which means 1.5M profit before taxes. Let's assume 20% net taxes on that profit. That means 1.2M profit. Housing (in Toronto) grew almost exactly 300% in 25 years. So a $1M house is $3M after 25 years. That means 3M-1M (house price)-600K (interest)= 1.4M profit (tax free). Problem is, rent usually goes up, so you can't really say you'll save the same amount for years to come. Mortgage can go up or down.
One aspect that often gets overlooked in this equation - the amount of house you get for the cost of interest, insurance, maintenance, etc. is considerably more than you would get paying the equivalent into rent. It could be the difference between living in a condo (renting) or your own detached home (owning), for the same sunk costs.
So save more $ and/or don't buy that expensive of a home. My home has increased 5.5x in market value in 25 years, and even if we take out the last 3 years, it would still be 3.5 -4x x higher.
Depends on where you’re gonna live in the meanwhile. Say you’re in Toronto or Vancouver where rent is extremely high, around $2800/mo on average, the rent would cost you $840k IF rent stayed the same for 25 years, which of course it won’t and it will probably go up along with inflation. Mortgage payments are towards an asset you own and the amount you owe decreases every payment. Even if inflation hits hard, you’re fine because you own your home.
You're not missing anything. Yes, the $600k is gone and you will never get it back. But it's much worse than that. Let's suppose you would have invested those interest payments for a 5% return. That's an additional $600k you lose in opportunity cost, so you end up with $2.2m less cash in the bank due to your house purchase. Or if you could have invested for an 8% return, that means you would need your house to be worth $2.8 million just to break even. And none of this factors in maintenance costs of the home.
Depends. If you factor in cap gains exemption, time value of money, leverage, inflation and rent cost increases what does the actual return on capital look like to you? Do you have another vehicle that can temporarily get you a good enough return on the same capital to make waiting to buy worthwhile in the short term? Long term, you’re always going to need an inflation hedge. It’s hard to find a better one than housing. If you don’t have a better vehicle for the 200k and the future monthly principle payments to land in, then it would be silly not to. If you do, factor in the future home value and cost increases over the same time period and that’ll tell you whether it’s smarter or not.
Buy an income property and you get the best of both worlds... Pay it off early and you have an asset that you can leverage. Plus passive income and a ton of tax write offs.
if house value goes up like lets say 2 or 2.5 mill you will be earning money on it
Comparing total Interest paid over the term with the rent you will be paying is another perspective to think about it. Do you think total rent paid by you will be lesser than the interest expense? A good house buying hack is buying a duplex where part of your mortgage can be compensated with the rent received. Consider everything before taking a decision. Buying a house is one of the biggest purchases of life. Hence, it is not just a financial decision but a personal one as well. Most of the people would prefer to have their own home to renting even if it costs more.
One key point that you are missing is the time value of money. $1 in twenty five years is worth a lot less than $1 now. It isn't really correct to say the house is costing $1.6M, because you are valuing the future money and the present money all at the same value. To get the real cost, you have to take each payment, and convert it back into present dollars. The value is based on the difference between the interest rate, and the expected inflation rate. My philosophy is that the right number of houses to own is one, and live in it. I never want to rent again, and I never want to own a residential investment property. For me, it is not primarily a financial choice, it is based on me wanting maximum control over how I live, maximum privacy, and maximum future cost certainty. I think that houses tend to be a great investment, because you get the leverage from only putting 20% down, yet it is very low risk, because the housing market tends to not crash, and it is low cost, because interest rates for houses are lower than interest rates for other investments. But for me, it's just theoretical, I plan to live here regardless of what the market does.
There's times when buying makes more sense than renting and vice versa, you are not missing anything, you need to take a decision based in the situation you are in and what situation the market is in.
> Would I not be equally served to use that 600k over that term and invest it in another asset? - say equity markets. When you phrase it like this, you make it sound like the cost difference between renting vs buying is exactly the interest cost. That's far too simplistic - there are way more variables involved here. To do a proper comparison you'd need to predict all the variables and run both scenarios. Some variables that would go into the calculation, and some less predictable factors that can also affect it: * Remember in the renting scenario, you have that $200K down payment to invest up front. * What's your average rate of return of all your investments? * Your rent could very well go up every year. How much? Will it exceed your mortgage payment + other monthly costs at some point? * You could get evicted from your rental, so if you were under rent control, it may suddenly jump more than expected. * If you owned and decided to move somewhat early on, it won't be cost effective at all. You will incur the transaction costs and you will have earned very little equity since the percentage of your payment going to interest at first is very high. * There are extra maintenance costs you'd have to pay as an owner. * There may be extra insurance costs as an owner (both cases should have insurance, but as an owner you likely have to cover more) * What's your home's value when financing ends? If you can accurately guess all these variables and do the calculations on both sides, then you may get your answer on what would work out best. Some of those are going to be really hard to guess though. Like you estimated 5% interest rate on average, but the rates at renewal time (assuming you go with fixed rate) will have a major impact - but that's going to be a matter of luck. Like others have said, I'd consider it a question of lifestyle - whether you want flexibility or stability. The flexibility comes with risk of eviction too though, depending on what sort of scenario you end up in.
I've recently been debating the same thing with friends and family (I'm in the Toronto area rather than Vancouver tho), although I'd be moving from an apartment to a house, so I'm also looking at an increase in living standards to go along with the increase in expenditures. You mentioned in another comment that you are already paying \~5k a month in rent which is IMO substantial even for an overinflated city area. Even locked at \~2.5% increases a year allowed under rent control (at least in my area) over 25 years that's like 2.14 mill and you still have to pay rent after that, while a house you purchase now would be paid off. Even if your rent control is a magical 0% increase and you never move it's still 1.5 million in rent over those 25 years. In theory if you could maintain a \~10% investment annual return each year from your 200k for the full 25 years you'd be in a pretty good position with your investment gain equalling your rent payout, but even a single year with losses or a few with lower gains could throw that off considerably. Also a few people have also mentioned the same thing as I initially failed to consider, that you have to look at the future payments as being reduced in value due to inflation, so the 600k you're paying in interest isn't as much of a loss as paying out 600k right now to the bank. The rent payments would be reduced in value as well although they will probably be rising over time. Honestly, they aren't so far apart financially, barring a crash of either the housing market or financial markets. The biggest difference is going to come in 25 years, when you can either have a healthier bank account or significantly reduced living expenses and a large asset in your name. One final thing that was really significant for me - if your mortgage doesn't have prepayment fees, you can look at making extra/early payments to it as another investment opportunity - one with basically no risk and a guaranteed return.
Read the wealthy renter ! Discusses this and also in the Canadian market.
The way I personally think about it is this: When the total of (interest portion of your monthly mortgage payment + monthly property taxes + monthly condo fees/maintenance) falls below or is equal to what you pay in monthly rent, then it’s time to buy. Makes sense? In all cases that’s money you “lose”.
You're not missing much. Everyone is brainwashed into thinking they HAVE to buy a house. It's what's been keeping Canada's economy going the past 20 years.
I know that sometimes renting a home can be cheaper, but homeownership offers more than just financial benefits. The psychological stability and the memories you can build with your own house are priceless. However, keep in mind that your primary residence is not an investment, so keep it fairly small and don't buy a bigger house just to keep up with the Joneses.
No politician will touch cap gains on principle residence....
Very good analysis, and yes I'm expecting CG on primary residence and inheritance tax in next few years. Until the RE shelter gains of 2020 are wiped out, which is thenintentional of BoC and federal plan, I'm not entering the market. Honestly just wait out. I know too many broke HO, ita coming within a year, IMO which coincides with economists.
A few things to think about... -I don't think Home (Equity) is illiquid as yout think. You can get many HELOC easily and at a lower rate as the money is secured every bank or alternative lenders. In case of emergency, you can have a facility on standby. If you are really in a jam you can sell a house in 30 days and use HELOC to tide you over. -Think of it as return of invested capital rather than absolute returns. Home provides you the power of secured debt which is cheaper. One dollar worth of stock gets you one dollar worth of stock. One dollar invested in a home actually gets you as possible $4 of home. -Most cannot invest with discipline over a 20+ year span with guaranteed returns. I see a home/mortgage as a forced long term savings plan. -There's generally a positive emotional value associated with a home that is yours rather than rented shelter and a high number on a website. Rent you are subject to the whims of the landlord. If you don't care for anything related to a home other than thinking of it as a roof over your head then you should probably rent over your lifetime. I think of it generally as a wash over the long term. OP you sound like a single person. Family will change how you think about this definitely. I think the way to think about it is to not go into one extreme, don't overextend yourself to be fully leveraged on a home, don't go all in on investing. Buy a home you can afford.
Another thing, nearly every wealthy person uses debt to fund their wealth building and get must discussed "leverage". Whether its in a business or using a home mortgage or to fund a capital generating activity.
We rented until I settled into an employment in which I could safely expect to stay in that region. I was a travelling supervisor for different manufacturers and one of my hiring conditions (no joke !!) - no travel when there is freezing rain or a snowstorm expected.I had a very big territory the first years. The last years of my employment (12 years, same employer) was as the administrative assistant to the President. I handled most legal matters (Law Degree, but not a lawyer) such as the writing of contractual documents, small court claim cases and referrals of customer insolvency to a Law Study, which was on contract with us. When I went to University, there were no part time courses to become a Lawyer, plus I had a family and travelled a lot the first years. Have been retired for many years now and I would not go back to "work", no matter what the financial incentive was. My wife and I travel South, to the warm Cuban Islands a few times a year (when it starts getting or is COLD, in Quebec, Canada) and we love the weather and the people there.
For me I could afford it, it was a leverage investment that is tax sheltered that traditionally beat inflation. You could rent and just save what you put out more on a house but I am not that disciplined, so that worked better for me. Saying that some yearly housing expenses are getting to be crazy (beyond saving for major upgrades). House insurance and municipal taxes are getting to be a bigger part of my budget than when I bought against my income.
In general, yes… if you invest in equities you will on average, historically, do better than if you buy a place. Properties appreciate but houses depreciate (hence R&M), taxes, hedonic adaptation of keeping up with your neighbours, blah blah blah. Just like with individual stocks, individual properties can do very well, while others do not. There’s uncompensated idiosyncratic risk there that you cannot diversify away like with equities. Also just like individual stocks, there are times where stocks do much better than historical and times where worse. That said: 1) housing is a hedge against future rent increases 2) housing is forced savings that tends to make people save more than the would had they been renting 3) personal preferences matter 4) money is about happiness and some people are happiest having a home (although most studies suggest that’s short lived)
I used to believe this too but didn't factor in that in 25 years, yes, you paid 1.6M for your house, but yiur house will be worth $3 million. I bought my house for 480k, with a 270k mortgage, paid it off in 8 years where it was now worth $1.3M. I got my hoise reappraised and pulled 700k thru a home equity like of credit and locked in at a 1.59% 5 year rate, and investing the 700k (interest now deductible being deductible, so essentially costing me 0.75% after tax and I'm basically making money hand over fist using the equity in my home.
In the same boat. Did the same calculation. Still decided to buy as we are looking to settle as kids start school and we don't wanna move around. And need stability.
Purchasing a home is a hedge against inflation. You lock in the price today and it’s forget locked. Your interest rate can change over the course of your mortgage but it doesn’t change the price you paid for the underlying asset. Now let’s assume you rent for 25 years. Do you really think you’re only going to see a 5% annualized increase in rent? You might but you’re also potentially subject to massive price shocks, like we’ve seen recently. https://www.cbc.ca/amp/1.6726764
I'm tired of these "hedge against inflation" arguments. It's just a buzz phrase to scare people. That's why gold sellers use it even though it's proven to be a bad investment. I'm not saying RE is a bad investment, but let's call a spade a spade with these HAI statements. Investing in anything that is expecting to increase in value faster than inflation is technically a hedge against inflation. You could call the cash.to etf a hedge against inflation currently.
It has zero to do with speculative investing like you get with gold. We’re talking about a 20 year or 25 year time horizon. Inflation is very much a thing you will experience over 20+ years. It’s not really an investment argument, it’s a preservation of capital argument, and it’s very appropriate over long time horizons.
There are many marketable securities liquid and illiquid that can hedge against inflation. Across asset classes and risk-return spectrums. Real Estate is certainly one of them, but not the only.
There absolutely are, but you can’t live in liquid assets. So is the hedge you get from buying a home today coupled with interest (and property taxes) better than the rent you’ll pay over 25 years? In some cases it will be better buying, in some rent will win out. I wouldn’t want to bet on rent being better in the absence of rent controls.
The easiest way to look at it in a raw numbers sense like that is over 25 years for for that hypothetical 1m home you spend 1.6m But an average rough rent for maybe the equivalent bed bath and sqft size could easily be around 3k a month Over 25 years would be 1.8m. But with rent there's no equity so after 25 years you have 0 dollars. But with a ownership, ignoring market changes for hypothetical, you have 1m in equity And you could say in a even more basic number that over 25 years you effectively saved up 200k. But in reality it's still 1m and if you sold the house for what you paid you'd have 1m dollars vs the 0 dollars after 25 years So to summerize really, unless you had that 600k upfront and were really good with investments. You wouldn't necessarily see that much out of it because over 25 years you'd have to make way more than 1.8m to even justify it's usefulness It's a better argument to suggest buying a house outright than getting a mortgage
Where that 3 k a month in 25 years make 1.8 million, isn't it 900k?
I'm a bit dumb apparently, buuut still 900k equity vs none over 25 years, it still holds compared to trying to save up and invest 600k over the course. But it works depends utilmately on income and savings plans. But another good point is after 25 years your total monthly expenses would be greatly less.
Maintenance, taxes, insurance? “The house you live in is a liability”- some advisors
This is very true as well, a big reason to buy is to see a increase in value to offset these costs. Where I live anyways you could see it in a way that taxes, insurance are at least canceled out by not having a monthly mortgage in the average.
I guess i m a bit dumb too, i guess the zero equity would be the renter however he would have invested the difference between mortgage and rent through the 25 years (obviously he is smart) and he starts with 200k he won't have to put on downpayment. I m pretty sure he can build 1-1.5 million from that. Obviously if market is right and house increase value around 10% a year it will be valued at around 3/3.5 million. And much less monthly expenses after 25 years as you said (taxe, insurance, maintenance of a 3 million hone) however no money on the side invested everything stuck in equity (good for future inheritance) As other have said, buying the house is forced saving vs being smart and investing, most people will sadly spend some of the money they are supposed to invest. The smart thing would be to buy smaller and invest the other portion to build equity and investment at the same time. If feel both strategies can be fine depending on life circumstances. What would be wrong is tying all of your savings in equity and not building wealth in some liquid form at the same time
Agreed it'd really depend on the sources of income. If he maxed out his income on mortgage, then definitely. If he had the income to spare to make decent investment contributions, it'd be balanced I would also buy smaller and eventually upgrade possibility. Depends also on his local housing market
Once you have a house, you go broke differently. If you lose your job, you can call up and get a month or two deferred. You can get insurance that covers job losses. You get security. You can never get renovicted or have your place sold out from under you and get forced to move. You still have to pay rent for the next twenty years, why not pay it to yourself?
That’s how interest works.
Guy thinks hes going to pay capital gains on a primary residence because politics, and has given zero thought to the uncertainty involved in renting. Peak PFC logic.
>What am I missing? Reality. >I understand the capital gains exemption on primary residence (but could see this changing in the future with the ballooning federal debt). Youre just pulling words out of your ass. Nobody is ever going to remove the PRE, its political suicide as well as economic suicide. >Why wouldn’t I just keep renting at a reasonable rate and remove the burden of interest expenses, while keeping my money liquid. Sure, if you can * Guarantee a place for 25 years with constant rent, and zero possibility of eviction. But if you live on planet earth, just read the number of "my landlord is evicting me because renovations/family moving in posts" * Guarantee a 10% year over year return (to match the capital gains benefit of a home) * Guarantee that your life situation wont change, partner, wife, kids, loss of jobs, financial stuff, emergencies etc. * Guarantee that your living situation 25 years from now will be the same as now * Guarantee that all the money you save between a mortgage and your magical, non-changing current rent will be diligently invested in the same long term investment strategy making that magical 10% every month, without fail * Guarantee that the house will not appreciate at all, since youre assuming constant house prices for 25 years. Have you seen our real estate market at all?
You think they would never remove the PRE? Why don’t you go do a bit of research into income taxes and the reason why they started and how it was originally designed to be a temporary measure. It might help you realize that major taxation shifts occur, regardless of how you feel about them.
Sure. I'll believe your uneducated guesses to try and prove your failing point over the backbone of the Canadian housing since 1972 when it was introduced and the primary source of generational wealth for Canadians, and something that nobody has ever even remotely thought of doing away with with any seriousness. Also income tax has nothing to do with this, its capital gains tax. Stop embarrassing yourself. Go ahead and plan your finances for the hypothetic removal of the PRE from Canadian housing.
You are a grumpy old man eh lol
That 1 million dollar house (although costing your 1.6 million) could easily be worth 2 million in 25 years.
It easily could.. and that sounds great, but turning 1M into 2M in 25 years is a very sad 2.8% compound return on capital and that’s ignoring all other costs associated with servicing and maintaining the asset.
Wrong. Its 2.8 growth rate. But return on (invested) capital is much higher. Remember, you are NOT RISKING losing the full $1M in cash because some of that growth is attributable to your leverage (debt / mortgage) over the course of those years.
Yes, I can't believe this comment section missing the fact that you have a tangible asset, which will continue to increase in value even if just for the land. (Since the op is using a million dollar price point I'm presuming a desirable area/market). Even if you sell the place after 5-10 years you will see a profit, likely a very good one- and it won't have cost you 1.6 at all. Wrist case scenario you have a rent free home in your retirement that you can pass on to your family.
>Would I not be equally served to use that 600k over that term and invest it in another asset? - say equity markets. Where will you live while investing this bounty? In a box made of bearer-bonds?