Buying vs renting a home

 

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Don’t roll your eyes just yet. This is not another debate as to whether renting is better than buying or conversely. I am actually not advocating for either option. I have been both a renter and a homeowner. In fact, I have rented more than I have owned.

I noticed there is a lot of calculators out there to help people determine which option would make the most sense financially.

Most of these calculators are flawed for various reasons; the biggest one being that they calculate based on gross income instead of net. They also don’t take into account non-financial factors, which could have a huge impact on your decision.

So, I have come up with my own analysis: non-financial factors and financial ones.

buying a home is a long-term project

Where do you see yourself in five years? As a rule of thumbs, five years is the minimum amount of time you need to stay in a property to break even or be ahead financially.

During the first five years, you pay more interests than principal on your mortgage. You also need to recoup the closing costs you paid.

Don’t get fooled by crazy real-estate markets like Toronto or Vancouver. It can be tempting to sell  after a year or two, but you would actually be losing money by doing so.

if you need to buy a car or two, keep renting

Transportation costs in Canada are very high. They can -and will- eat-up a huge chunk of your income.

if you have student loans or credit card debt, keep renting…

…at least for the time being. Pay-off your debt or significantly lower it before looking at buying. Debt repayments are a huge financial burden.

A lot of recent graduates seem to be obsessed with becoming homeowners as soon as they receive their degrees. It sounds a little bit crazy to me.

So, you have determined the above first point applies to you and the second and third don’t. Let’s do some basic math.

35% of your net income is the maximum for housing costs

Lenders always use gross income to qualify people for mortgages and other loans. The problem with that is your gross income is not what is deposited in your bank account.

Always use your net income and really avoid going over 35%.

compare apples with apples

Compare the cost of renting and buying based on similar properties in similar neighborhoods. Renting or buying a two bedroom apartment will cost more than a one bedroom or a bachelor. You can find rental info on Craigslist or Kijiji.

include very comprehensive costs

Buying costs do not stop at the mortgage payment. Unfortunately, too many people can’t seem to look past this.

If you are buying a condo or townhouse, include: mortgage, strata/condo fees, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of Hydro and monthly portion of maintenance.

If you are buying a single, detached home, include: mortgage, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of maintenance and monthly portion of all utilities: hydro, gas, water….

a word on maintenance costs

As a homeowner, the biggest difference from being a tenant is that you are responsible for repairs and maintenance. And yes, you will encounter these! The costs will be different if you own a condo or a single detached house.

In a condo building, most of the maintenance costs such as landscaping, snow removal, elevator etc…are usually included in your strata/condo fees. Big ticket items, such as the roof, are shared costs. You are only responsible for repairs inside your unit. Costs are overall lower. Take 0.5% to 1% of the proposed purchase price. That’s your yearly costs. Divide by 12.

For a single dwelling, you are 100% responsible for all the costs and they are usually higher. Use 1.5 % to 2% of the proposed purchase price.

You may not spend the amount in a given month or year, but it is best to err on the side of caution.

final word

If the number you end up with is lower than the renting cost AND does not exceed 35% of your net income, happy house-hunting! Otherwise, keep renting and invest the difference.

If home ownership is important to you, you owe it to yourself to do the above basic calculations.

There will always be opportunity costs whether you own or rent. The answer to this old age question is not so clear-cut anymore.

 

Suburban life ain’t cheaper

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Extraordinary real-estate costs in cities like Vancouver and Toronto are pushing people further and further away from said cities.

A single detached house in Vancouver costs close to 1.5 millions. A townhouse costs  about 500K and a condo 350K. No wonder people rush to the suburbs in hopes of snapping-up properties at a somewhat lower price.

The problem with this approach is two-fold: first, it drives prices up in the suburbs as well. Bidding wars and no-subject offers have become the norm there too. Second, it will cost you more if you have to buy a car or two.

A recent study compared the costs of housing in Langley with the costs of commuting Downtown Vancouver for 25 years. There are very few properties assessed at over a million  in Langley. However, the transportation costs would be close to 565K over the course of a quarter century. Staggering! On the other hand, someone living in Vancouver would spend “only” 298K in transportation costs, over the same period of time.

The choice of Langley is not random. Public transit is fairly limited in this city, making a car a necessity. Technically, one could go Downtown Vancouver from Langley with bus/skytrain but it would take them close to 2 hours. There are also fewer job opportunities.

Case in point with my own story: before buying my first condo in Surrey, I rented in North Vancouver and New Westminster. I worked mainly Downtown Vancouver and have been calling New West my workplace for close to 5 years. I never rented Downtown Vancouver, as I simply couldn’t afford it and didn’t want to. Rents are a waste of money in this part of the city!

With some previous salaries I made, I simply couldn’t afford a car, but I also didn’t need one. When I was in North Van and worked Downtown, I would simply take the Seabus. It took me 15 minutes to get to work. The best was when I moved to New West and also found a job there. I would walk to work.

If I needed a car, I was member of a couple of car-share organizations. It was way cheaper than owning one. I would also claim the monthly bus pass as a tax credit. Financially, it looked like an idyllic situation, when it was not necessarily the case.

The black point is that I was renting when it no longer made sense for me to do so, both financially and personally. I am not getting into the rent vs.buy debate here!

Back to my own story, I didn’t qualify for anything in Vancouver or closer suburbs, so I turned to further suburbs, namely Surrey and Langley. With public transit more limited, I had to buy a car, which added $ 800 to my monthly budget. Buying was cheaper than renting, but when I factored in that extra $ 800, I wasn’t so ahead anymore!

The yearly cost of a compact car in Canada is just under $ 10 000. If you have a bigger car or a truck, that amount will be higher. If you have 2 cars, it will be double.

Living in the suburbs used to be a no-brainer. It is definitely no longer the case. Nowadays, suburban vs. urban living is a trade-off between housing and transportation costs. Before deciding to move to the suburbs, whether as a renter or owner, take a look at your transportation costs and commute time.

As for me, I do not regret buying in the suburbs and getting a car, despite the extra expense. My car will be paid off next year and I anticipate my transportation costs to actually be lower for a few years after.

Most importantly, I enjoy my suburban life.

In favor of the “starter home” concept

I am glad June is over. Last month was definitely a whirlwind, hence the lack of activity on my blog.

Thanks to the Vancouver red hot real-estate market, my condo sold for over-asking and in less than a week!

It is definitely a sellers’ market at the moment. As a buyer, I felt the pinch. On several occasions, I wasn’t fast enough and the property was already sold. At other times, there was a bidding war I was not willing to enter.

I ended-up finding the right condo when I increased my budget by $ 10 000. Luckily, I did not find myself into a bidding war and was able to put subjects in my offer.

To ensure I could actually afford my new place, I used a couple of tools: Ratehub and the real life ratio by Rob Carrick.

I also contemplated going back to renting. I would also have been able to afford a nice place, but finally decided against it. After further number-crunching, it simply does not make sense for me financially.

During the whole process, I ensured I did not make any of these previous mistakes or these ones. I also had the right Realtor.

Which, somehow, brings me to the next point. I have gained a whole new appreciation and perspective on the concept of “starter home”.

I now see this as “trial and error”. Let me elaborate a bit.

As a first-time home buyer, I knew nothing about real-estate, mortgages and the whole process. It was a steep learning curve and I felt overwhelmed.

Money was also tighter. I pretty much put all my savings in the purchase and then some.

I also wasn’t sure of what I actually needed in a home, and living in Vancouver, I had to adjust my expectations big time.

My current condo’s layout is not that functional. It has 2 bathrooms and it is one too many for me. The walk-in closet in the master bedroom is also too small. First-world problems, I know!

Unfortunately, the Realtor I randomly chose back then was not really helpful and did not give me sound advice. I ended-up buying in my current building, in a neighborhood I wasn’t thrilled about.

For my second purchase, I did not go with bigger, but with smarter and better. I ditched the second bathroom in favor of a den, the layout is way more functional and both building and neighborhood are much better. I am not going to see any special levy anytime soon in my new home.

I am really exited about moving-in -and by extension moving-out of my current building-. I hope that it will be more of a “permanent” home for years to come.

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