Why my home is not an investment

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.

5 financial items to consider when home-buying

Summer is peak season for home-buying (and selling). Buying a property is the biggest financial decision one will ever make.

Before embarking on this exciting but somewhat stressful adventure, here are 5 things to consider:

  1. Use both a mortgage broker and a realtor. Unless you are a realtor yourself or work for a bank, it will probably be difficult to get the best mortgage or ensure all the required paperwork is filled-in correctly and on time. These two services are at no cost to the buyer.

 

  1. Get pre-approved for a mortgage. It will help you narrow down your search and present you as a serious buyer. Don’t waste your time –and your real-estate agent’s- by visiting properties you can’t afford.

 

  1. Plan for closing and moving costs. When finalizing an offer, you will most likely have to reimburse the seller for your share of the property tax and other municipal taxes. You will also have to pay for legal and administrative fees, land transfer tax, home inspection, land survey…etc. These costs can be significant. You also may not have relatives or friends who can help you move into your new home. Budget for the moving company as well.

 

  1. Think beyond the mortgage payments. You need to figure out how much it costs to live in your prospective home. Inquire about the property tax and utilities; obtain a quote for insurance. If you buy a condo, ask for the amount of strata fees and what is included in them. Also check what kind of significant repairs have been done. Crunch numbers and see if they fit with your income and current finances.

 

  1. Have a home inspection done. A qualified, reputable home inspector can save you thousands of dollars and massive headaches. They will check for items you probably didn’t think about.

 

Happy house-hunting!