It is possible to bring housing into the mix when accumulating wealth Moose-style. However, there are rules to ensure sanity!
Moose Rules for Housing
- You first must be comfortably saving enough for retirement in real investment accounts (TFSA, RRSP, and Cash/Margin accounts). Follow Moose Math to estimate your number. If you are under 30, you should be saving a minimum of $562 per month. This money is for retirement only, not raiding later for your downpayment! It goes with saying that after your home purchase and those related expenses, you should still be comfortably saving your number every month.
- Always have your 20% downpayment plus closing costs plus an emergency account on hand. This significantly reduces your leverage ratios, saves you money on insurance costs, and decreases your chances of getting into a financial pinch. Your emergency account should be equal to 3 months expenses. This will shield you from unexpected expenses associated with owning a house: furnace breakdown, hot water tank replacement, flood in the basement, roofing disaster, etc. New house or older house, one episode of Holmes on Homes highlights the importance of this!
- Make sure all other consumer debt is paid off. No outstanding credit cards, lines of credit, student loans, etc. Never, ever, EVER borrow your downpayment, EVER! If you have outstanding debts, you are essentially borrowing your downpayment. This type of behaviour brings you into dangerous debt cycle loops where you are constantly relying on monthly payments for everything: a recipe for poverty.
- Stability... or stay-ability. Never buy a house if you are going to school, in an unstable job, in a career you can't see yourself in long-term, or planning to move somewhere else in the foreseeable future. Trading costs on housing are ridiculously expensive. Sales commissions, lawyer fees, mortgage fees, staging costs, survey costs, transfer taxes, etc. can easily run $20,000+ on a typical house in Canada. Much more in high priced markets. There's a reason why there are 40% more real estate floggers than medical doctors in this country; they make gobs of money selling houses in their price-fixing trading monopoly... If you buy a house, be sure to stay in that exact house for a long time. Buying, selling, flipping, upgrading, and downsizing is for chumps. Every time you change real estate you lose 4-5% of the house value off the top. Your real estate guy and mortgage gal will rub their hands together gleefully at your expense I guarantee you! I'm all for spreading wealth, but make sure you are actually wealthy before you give away thousands!
These first four rules are critical to home buying success and general long-term wealth. Without these prerequisites, you are gambling your long-term financial health on chipboard and vinyl. You survive when house prices go up, but you put your family at serious risk when prices stagnant or fall.
A survey in 2016 by Manulife found nearly 40% of homeowners couldn't make their monthly bills at least once in the previous year. Not surprising in the land where combined household debts are higher than the total value of the national economy, average non-mortgage debt is at $22k per person, high ratio home loans are approved daily, and where 1 million house lusters would crumble if interest rates increased just one measly percent.
The final rule is financial evaluation relative to rent. This is the most complicated step and it's NOT simply mortgage payment vs. rent fees.