Buying a piece of property is one of largest expenses people face in their lives. Being a home-owner is still a dream for many.
What puzzles me, however, is that many people see their house as being a “great investment”. I don’t agree with this statement. Let’s look at the numbers.
Closing costs. When you buy or sell, you have to pay legal fees, realtor’s commission, home inspection, land transfer tax, etc….These are straight expenses to you.
Interests on mortgage. Unless you can pay cash for your home, you will need to borrow money, a.k.a. mortgage. Lenders are not charities and they will charge you interest. Over the course of my own mortgage, I will pay $ 56 000 in interests, provided rates remain the same….very unlikely. Right now, 50% of my payments go towards said interests.
On-going costs. As a condo-owner, I pay strata fees, property taxes and insurance. If I stay in my home until my mortgage is paid off, I will fork an additional $113 400 on these, provided the amounts remain unchanged. Again, very unlikely.
Repairs and renovations. Items will need to be repaired and replaced over the years. Unless you want a “retro house”, you will probably need to do some updating. Repairs are usually estimated at 3% of the value of the property each year. In my case, it would mean a total of $ 116 250. For simplicity, the value of my condo remains the same, again unlikely…which brings me to the next point.
Housing market. It is almost as unpredictable as the stock-market. A lot of people won’t believe this, but you can’t really predict how the market will go. Unless you live in a red-hot area, your house will not appreciate as much as you think. There may be years it won’t appreciate at all.
Inflation. An acquaintance of mine was thrilled when a realtor told him the house his parents bought in the 70’s for less than $ 100 000, was now worth over a million. Most of this “gain” is the result of inflation, just like a loaf of bread costs more now than in 1970. When factoring all the above points, they are not going to make a profit of $ 900 000.
Unless you are a landlord, a home is not an investment.
A home is a place to live, nothing more, nothing less. Usage is the best asset here. This is exactly how I see my condo.