Another Should i buy thread! Yaaaaaaaa!

[camerondawson51]

Greetings everyone!

I am a long time lurker on this forum and love the advice provided here, I am looking to buy a 2 bedroom Condo in Downtown Toronto and rent out a room/live in the other. I know this topic has been beaten to death but I would appreciate it if you could humor me and take a look over my story.

Current situation:
I am a 28 year old accountant who recently moved from Winnipeg to Toronto in March of this year.
I have never been super open about my sexuality but I am a gay man, it was very hard for me living in Winnipeg I felt very depressed, alone, and isolated. My family has always been amazing but dating was extremely difficult and the LGBT community was limited. Since moving to Toronto my life has improved 10 fold, there is an amazing community here and I can’t see myself living anywhere else.

With that in mind, I am currently renting but have started looking more closely at potentially buying since I see myself living here for the next 10 + years.

Gross Salary: $75 000 per year
Bonus: 10% of Salary ($7500), this fluctuates based on the performance of the company
Defined Contribution: 6% match
Free GoodLife gym membership
Net: With our crazy Canadian deductions my net pay per month is $ 4200, Bonus is paid yearly in May

Expenses (per month)
Rent: 800$
Utilities/laundromat: 100$
Phone: $60
Groceries: $250
Sport league $50
Eating out/Entertainment: $350
Cloths/misc.: 50$
Travel 250$
Total: $1910
Savings: $2290 (55%)

Assets:
RRSP $50 000
TFSA $55 000
Cash $35 000 (recently sold my car so I have more cash than usual)
Total: $140 000

Allocations RRSP/TFSA are invested 100% in EFT’S and Canadian divined stocks, Cash is sitting in a high interest savings accounts

Liabilities:

None

Question: I would like to buy a 2 bedroom condo in Downtown Toronto and rent out 1 bedroom and live in the other.
Looking for someone to poke some holes in my plan.

I was pre-approved for a mortgage 5 year fixed at 2.19%

I would use my Cash, TFSA and 25 000 from my RRSP (Home buyers plan) to finance the purchase and closing costs.

Item    Dollar impact
Purchase price    $500,000.00
Down payment    $100,000.00
Net mortgage    $400,000.00
   
Mortgage payment    $1,788.00
 
Closing Costs (Estimated net):

Closing costs    amount
Home inspection fee    $500.00
Legal fees    $500.00
Title insurance    $300.00
Insurance ( fire)    $500.00
Bill Adjustments    $1,000.00
land transfer tax    $12,200.00
Total    $15,000.00
Refund ( first time home buyer)   -$5,725.00
net    $9,275.00
 
I likely wont purchase for 3- 6 months so this should allow me to build up more cash for a cushion, I also will be getting a large tax return in March (7500$).

Why do I want to buy over rent?
See below sample calculations based on recent properties I have looked at, rent in DT Toronto is quite high so I should be able to easily find a tenant for 1000$ per month ( if not more). Note: I am not including the principal payment as a cost since it is another form of savings

Item    Dollar impact
Interest portion of mortgage    $730.00
Condo fees    $437.00
Property taxes    $233.00
Hydro/electirc/internet    $200.00
Total costs    $1,600.00
   
Rent from 2nd room    $1,000.00
My monthly costs    $600.00
 
Based on these calculations I am slightly ahead monthly buying vs renting

Investment loss on 100k down payment VS appreciation: Due to the leverage nature of mortgage debt and using some conservative examples. I believe I will be further ahead Buying a Condo (see sample below). Toronto Condos have averaged 5% appreciation over the last 20 years, the below is using a conservative 2%.

Item   Amount   Total
Assume 7% return    $100,000.00     $7,000.00
Assume 2% return    $500,000.00     $10,000.00
 
Smith maneuver: I am also planning to implement the smith maneuver after 1 year once my condo has appreciated and built up additional equity. For those non Canadians this allows me to access my home equity through a HELOC and write-off the interest expense against the investments. This will allow me to continue to diversify and not become over exposed to the Toronto real estate market.

I appreciate any thoughts or insights you can provide!

[KMMK]

I think the home buyers tax credit will only get you $750 federally. Is there a credit for Ontario as well?

Also why would someone pay you $1000 for a shared apartment when regular rent is only $800? Or are you sharing a place now? Also a decent roommate is not guaranteed.

I'm not familiar with the TO market (I know Winnipeg and Edmonton which are very different) but it seems insane to pay that much for an apartment. What if you need to sell and the prices are down. I'd just keep renting, and saving lots of money unless you have a really strong reason to own - more lifestyle considerations. A rented apartment isn't much different from a condo apartment except you pay a lot more and can upgrade the interior.

[Fodder]

I am not super familiar with the Toronto rental market, but is it realistic to expect someone to pay $1k/month to rent a room?  My brother pays $1500/month for a 1 bed + den condo in Etobicoke and previously paid $800/month for a basement apartment in Mississauga.

I wouldn't want to pay 1k/month for a room in a condo that my roommate owned - I wouldn't really feel at home.  It's a bit different if it's a jointly-rented apartment and it belongs to neither of you, but living with the owner for $1k a month would not appeal to me.

You definitely seem to have your financial schmidt together and that's awesome, but I don't know if I would buy a Toronto condo.  It seems like such a saturated market and if you have trouble finding or keeping a roommate, you could expose yourself to a lot of financial costs.

Regarding your plans for HELOC, just a word of advice, you can only access up to 80% of value with the SAME institution where your mortgage is held - this works fine if your mortgage is with a bank.  But if it's with an institution that *doesn't* offer HELOCs, then you can only access up to 65% of the value.

[camerondawson51]

Ontario has specific rebates for the land transfer taxes, the Home buyers tax credit federally would be in addition tot he numbers listed.

I am currently sharing an apartment with 3 other guys, and its a bit worse for wear.....hence the reason i am getting it on the cheap side. I have no problem living with people i am pretty easy going.

Note i am looking to buy in the downtown core ( st lawernece/cabbagetown) - rents are significantly higher than the GTA. I enjoy the freedom to be able to walk everywhere/not have a car. ( using your example of Etobicoke & Mississauga those are about a 40 min commute to the downtown area where i currently work)

The Toronto Market is crazy compared to Winnipeg, its hard to understand it unless you actually live here. The communities are amazing and everyone i talk too really love and want to live here. I am looking at it from a longer term angle which i feel like puts buying ahead of renting from an investment standpoint.

I feel like the numbers i have listed help prove out the case, aside from the "yikes that's a lot of money gut reaction" is there anything else i could be missing?

[patchyfacialhair]

http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/

Not exactly answering your question, but some good material from last year's MMM blog roll.

[camerondawson51]

Thanks  patchyfacialhair! i did read that post and it made some good points.

However it looked more at buying a house in the GTA and commuting rather than buying a condo downtown vs renting.

For example: the 2300$ he listed for rent, would almost completely cover the Mortgage + condo fees + property tax if you were to buy a similar property.

[TrMama]

I think it sounds like a great plan. Your case study was also the most thorough, best written one I've ever seen. RE in Toronto is probably a great buy right now with all the foreign buyer tax shenanigans going on in Vancouver. I bet anyone looking to buy RE in a big Canadian city will now be looking more closely at Toronto rather than Vancouver.

The only caveats I have are minor:

- get a real quote from a lawyer for the transaction. Lawyer fees for basic RE transactions in BC are now in the $1200-1500 range. Your quote seems low. Condos are sometimes a bigger PITA wrt to the transaction because of all the strata paperwork.

- Can you file a T1213 to have less income tax witheld from your paycheck? That should really boost your paycheck since you've probably already paid most of the tax you owe for this year.

[mozar]

What's your commute now and what would it be if you moved? Do you think you'll stay at the same job for years? If you were to get a new job would it be likely to be in the same area? One thing I failed to consider when I was buying is even if I am pre-approved, that doesn't mean I will get the house. I was outbid so many times that I decided to move further out. I'm glad I did, as I really enjoy living in the suburbs and I was able to convince my boss to let me work out of the office near my house.

[camerondawson51]

Thanks for the tip on the T1213 - I am gonna look into it.

My current commute is about a 5 min walk to work, the places i am looking at are all within a 10 to 20 min walk.

I have been at this current position for 1 year, and plan to stay minimum 3 to 5 years.

My long term goal is to move into a controller type position, Accounting jobs tend to be more centered in the financial distract which i am buying close too. However the properties are also a 5 min walk from the subway line which puts lots of the city within a 20 min commute.

Yes the bidding issue is a concern for me, Any tips on navigating that?

I lived in the suburbs of Winnipeg most of my life its not really for me. I have enjoyed the city life way more.

[mozar]

Well Toronto is a little different because Toronto proper is huge. I would consider anything above Casa Loma to be suburban. I wasn't suggesting you move all the way back to Winnipeg.
 Like I said I moved to the suburbs and was able to get my job to follow me. I would connect with a realtor to see what's actually happening in the market so you're not surprised.
But it's a different situation than me because I couldn't rent for less than 2k near my office downtown. You are considering buying further away from work. If you're just tired of living with 2 people is there a tiny studio you could get?  You're easygoing now but that could change in a couple years. After 3 years I'm tired of having a roommate but the money is too good to give up.

[mozar]

Also can you buy a place with only 1.5 years of a job there?Where I live its 2 years minimum which they might not tell you unril the last minute.

[vivophoenix]

i see nothing wrong with the plan or the math, and loved the case study.

one question though, what about retirement savings? it seems like you would pretty much exhaust all of your savings to make this plan happen. are we just assuming that because you would come out ahead by buying, you would start investing again to make up for the $100K you just gave up?

[Eurotexan]

Good for you! It sounds like you've landed in your happy place (literally and figuratively!) which is a huge deal!

Being in Texas I have nothing to add to the discussion on the Toronto real estate market I just want you to watch out for condo fees. Make sure you do your homework on the state of the condo association's finances so you're not screwed later down the road. I have friends here who had bad experiences with HOAs/ condo associations. One of my rentals is in a small 4 unit HOA so I became President of the HOA so I could make sure it is being run correctly. Just an idea..

Good luck to you and welcome to the forum!

[camerondawson51]

Hi Mozar,

Thanks for the reply - Just to clarify i have no problem living with people. I quite enjoy it. I just think it would be more financially advantageous to own the property rather than rent it.

I would consider Midtown for a place - which might make things cheaper. When you mention suburbs i was thinking North York, Richmond or Markham :P

When it comes to the job requirements - its my understanding you just need 2 years of continuous employment history. This is my second accounting job, worked at another place for 3.5 years in Winnipeg and than was recruited to this position.

Thanks for the tip on the realtor - i have been asking around.

[TrMama]

Ditto the advice to join the strata council (aka the HOA association) of whatever place you buy, especially since you're an accountant by trade. It's a minimal time commitment and has a big payoff in terms of saving money on the monthly fees, keeping the strata funds stable for rainy days and making sure the correct maintenance is done at the correct time.

Another advantage of buying into a hot market is that you get stability. When prices get nuts (<cough> Vancouver <cough>) landlords either sell their properties (forcing you to find a more expensive rental in a tight market) or jack the rents way up to ensure they're still making a good return. The only way to beat them is to join them.

[okits]

I think this is a worthwhile read.