Before considering the dive into homeownership, I created a list of rules for Moose fans. Don't ask your local real estate seller or mortgage guy about them. These rules are bad for their business. (But good for your financial well-being.)
The Quick Rule Recap
Rule 1: Meet retirement savings goals before and after purchase
Rule 2: Have a 20% downpayment and 3 month emergency fund
Rule 3: All other debts must be paid off
Rule 4: Be prepared to stay for the long haul
Rule 5: It better be smarter than renting from a financial perspective
Evaluating the Financial Side
The rental side of the equation is super easy because it's a risk-free simple expense. You sign a contract, fork over a small damage deposit, and pay a specified amount each month. If you don't like the place, you can move at a low cost. If the economy turns and you lose your job, you pack up and move to where there's work. If your landlord jacks you, you move. It's easy!
If you are a good tenant, your landlord will likely treat you very nicely. Many people live in the same place for years without a rent increase because they are good tenants. Plus the laws work very much in your favour. A few years back I was bored and read my rich-person friendly and pro-business province's Tenancy Act—I'd rather be a tenant than a landlord.
Buying a house, on the other hand, subjects you to a lot of risk and expenses which start the second you sign on the line. Purchase costs, return on equity loss, property tax, home insurance, maintenance and depreciation costs, interest expenses, selling costs, upgrading costs, and on and on and on. Since anyone reading this blog would follow my Home Buying Rule 4, I'm going to focus on the ongoing expenses not the transaction costs.
The Easy Monthly Expenses
Mortgage payments, property taxes, and home insurance are the easy costs. Mortgage interest alone will cost you about $200 a month per $100,000 loaned at today's super-low interest rates. The average property tax bill in Canada is over $3000 a year, so add $250 a month there. Homeowner insurance costs at least $50 a month more than renter's insurance.
*For calculations you will want to use an interest rate of 4 or 5% to better reflect the real expected cost of your mortgage over the next 25 years*
Return on Equity Loss
Often overlooked is the return on equity loss for your 20% downpayment. A $500,000 house requires a $100,000 downpayment. If you invest that $100,000 in a Growth Portfolio averaging 6% annual returns, you would make $500 a month on your downpayment alone. That loss of investment return is a very real cost of homeownership.
This one is tricky and depends on your handyman skills and house size. Ramona King did a fantastic article for Moneysense magazine a few years back. I think her DIY numbers are a tad high at $930 a year in annual strict maintenance costs. I would say $750 is more reasonable for a skilled person. For your skinny-jeaned Millennial who has never got a callous and needs to hire the pros, this could easily run $2,000 a year.
For the bigger stuff: roof, furnace, foundations and drainage, windows, bathrooms, kitchens, floor coverings, etc. that need to be redone or reworked every 20 years or longer, her numbers are quite good. Having owned a home before, I think it's very realistic to set aside at least $5,000 a year for a 2000 sq.ft. place to make sure your house stays in good shape. You need to put away a lot more if you want upgrades with every replacement!
The Math Calculation
Here is my personal calculation on comparing renting and buying. I look at cash flow and costs today as well as 25 years from now when the mortgage is paid off.
If you run the numbers in your area, I think you will shocked to find it's frequently much smarter to rent and put your downpayment to work than it is to buy.
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