What would you do? Real estate or invest (canada)

[Karenph]

Hello,
My husband and I live in the ridiculously over-priced Toronto area and are struggling with the long-term financial (and emotional) decision of buying a home. We currently have $200k between RRSPs, TFSAs and a Mutual Fund account. Hoping you can help me determine the better decision to buy and use a good chunk of our savings for the downpayment or continue to rent.

Things to know:
- in our early 30s
- combined income is $125k gross
- two young kids in daycare (ouch! - approx $2k a month)
- current rent for a 3 bedroom townhouse is $1380 + utilities, will go up by about 2% each year we stay here
- to buy a townhouse in Toronto would be $500k
- we both work in the city and want to stay in the city

We want to buy for the emotional aspect of owning your own home and feeling like we have a permanent home for our kids. I also feel if we don't buy soon there is no way we will be able to as the housing prices here just keep climbing. However I'm wondering if leaving $200k to grow and continuing to rent (forever?) is a better strategy.

Thoughts? Thanks!

[marty998]

Interesting...always thought Sydney was ridiculous but you guys top this.

Buy a $500k property here and a landlord can expect to get about $20,000 a year in rental income.

Buy a $500k property in Toronto and a landlord can expect to get $16,500?

We want to buy for the emotional aspect of owning your own home and feeling like we have a permanent home for our kids. I also feel if we don't buy soon there is no way we will be able to as the housing prices here just keep climbing. However I'm wondering if leaving $200k to grow and continuing to rent (forever?) is a better strategy.

There's nothing wrong with that sentiment. You'll find most here form the view that it is better to rent. However if your location is such that you can expect reasonable capital appreciation from a home, and the proceeds on disposal are tax free, then it's reasonable to suggest that your home can double as an investment. 2/3 of Sydney does it. The other 1/3 would like to but can't afford it.

**waits for the inevitable pies to be thrown at face**

[KMMK]

That rent is so cheap comparatively. I'd just continue to rent. Here in Winnipeg rent is about the same as you but you can buy for 200,000 so it's about even, give or take the estimated factors. I would never buy at those prices.

[totoro]

Renting is cheaper than buying for you.   The only way that buying makes financial sense is if the long-term appreciation compensates for the additional costs of owning.  It might.  Of course, they might not and interest rates might rise. 

You can use a calculator to figure out the variables:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=0

You have to put 0 for your marginal tax rate.  In the US primary home mortgage interest is tax deductible - here it is not so it is not a factor.

I'm in Victoria, BC.  Our prices are not quite as high, but they are high.  We chose to buy a multi-family home and rent out two of the units.  It has ended up cheaper than renting.

[daverobev]

Rent and stay, or move somewhere else and buy.

Really, though, $500k isn't too bad if you're on $125k between you. Put $100k down, $400k mortgage isn't much over the 'traditionally affordable' 3x gross salary. Of course when your daycare costs go down things change massively, as well.

[Karenph]

Thanks very much everyone.

I think the basis for choosing to buy is really going to be the emotional aspect of owning our own place. I don't know if a townhouse would appreciate as much in the long-run but I don't think we want to rent forever so seems like we need to get in soon or else we will be completely priced out of the Toronto market.

[Blindsquirrel]

 I would not buy in Canada. The prices have shot up a ton in the last few years. Rent to price multiples are horrible.  Prices will most likely revert to the mean.

[Geldsnor]

Thanks very much everyone.

I think the basis for choosing to buy is really going to be the emotional aspect of owning our own place. I don't know if a townhouse would appreciate as much in the long-run but I don't think we want to rent forever so seems like we need to get in soon or else we will be completely priced out of the Toronto market.

It seems that you already made up your mind, and seeking for confirmation.
How did you end up at the conclusion of buying. If it really purely emotional, asking in this sub makes little sense (I am trying not to be blunt!).

[totoro]

In Victoria prices went up a dramatically until 2008.  In the past sevenish years prices have been flat as appreciation stalled.  Prices are rising again now in the spring market - even some bidding wars.  There never was a crash.

In a low interest rate environment this might be much more likely method of moderation than a price drop -  meaning that there might not be a better time to buy than now if you want to buy but you are not going to benefit from strong appreciation for a long time.

ROI on rental properties here is abysmal.  I doubt that will change.  I don't think prices will drop in Victoria, or that appreciation will do more than keep pace with inflation after the flat market we've had for many years. 

TO might be different. 

[OldPro]

There is no simple answer to this and I think anyone expressing an opinion who is not familiar with the Toronto real estate market is just guessing in terms of the money aspects.

I have owned homes in Toronto and never lost money as a result of owning them.  However, it is always possible for someone to buy at a high in the market and then need to sell in a low which would incur a loss.  There is no way to predict that.  having said that though I take the long view when it comes to buying what will be your home.  It is highly unlikely that over time you will not make a substaintial financial gain by owning a home in the Toronto area.

But you cannot just look at a home in the same way you would any other investment.  There are a whole host of benefits that are not about the money.  For example, owning your own home provides a stability that renting never will.  Being able to renovate a kitchen to just the way you want it may provide a great deal of happiness and you could never do that in a rental.  Trying to put a 'dollar value' on those intangibles is extremely difficult if not impossible.  Life on the way to FIREing is also to be enjoyed, not just reduced to dollars and cents.

On a practical note, I would ask what you mean by 'in the city'.  The City of Toronto, the GTA, how far from city centre?  It may make some sense to question your criteria in that regard and look a bit farther out.  If for example you found a very good deal (not all house prices are equal, there are always some better deals to be found if you hunt for them, within any given area) somewhere, it might compensate for a GO train commute.  Sometimes people tend to carve their criteria in stone and as a result miss out on an opportunity. 

When you buy a home with an eye to your future plans, it is always a good idea to look for a home where you can 'add value'.  Too many people insist on 'move in ready', not realizing that that often means there is no room for you to add value to the property.  A good bones fixer upper can often be a far wiser buy than a newer home. 

Do some research to educate yourself in what to look for in a home in terms of what matters.  https://www.google.ca/#q=what+to+look+for+when+buying+a+home

Here are some things that do NOT matter.  The colour the walls are painted.  Whether the kitchen counters are granite and the appliances are stainless steel.  Or anything else that you can easily change.  It's funny that a Google search for 'what not to look for when buying a home' doesn't even turn up one relevant hit.

When you watch those TV home buying shows you always see the young couple ooohing and aaahing over the stainless applicances and granite counters.  You never see them asking, 'how old is the furnace' or 'when was the roof last re-shingled'. 

[scottish]

Toronto?    You should try Garth Turners blog.   He has lots of opinions about real estate.    He also has amusing pictures, so even if you don't like his opinions you may get a chuckle.
www.greaterfool.ca

I'd be pretty cautious about buying real estate because 1.  it's cheaper to rent and 2. when interest rates revert to the mean a lot of people won't be able to pay so much money for a house.

[OldPro]

Well good golly miss molly let's look at a typical Toronto homeowner's story. (It's not my own story but a true story nevertheless)

Young single guy buys a condo at Toronto's Harbourfront when he is around 35.  Buys it new out of the box at one of those 'line up, walk through, buy a unit or walk out the back door of the trailer parked on the lot' sales they used to have.  Yup, people lined up, walked through a trailer and walked out the back door having plunked down their cheque for a deposit on a unit in a building that they wouldn't even be able to move in to for 2 years. 

So 2 years later he moves in to his 560 sq. foot or so 1 bedroom condo that he paid $100k for.  Then time moves on.  He stays single, keeps working but doesn't intend to do so forever.  So at after 15 years or so he looks at his condo and says, you know, the washing machine, refrigerator and air-con units are all getting on in age.  Starting to show signs of threatening to quit working.  My condo fees have gone up a lot since I bought this place too.  Add to that I've just FIRED a couple of years ago at the same time as I paid off that mortgage and no longer need to live in the city to be near my work.  Then there's the fact that nightlife and bright lights no longer excite me either.  I think it's time to move to a small town where I can get more bang for my real estate buck and release some of my tied up capital at the same time. 

So he puts his Harbourfront condo on the market on a Monday morning.  On Wednesday he is out of town visiting a friend in a small town in Southwestern Ontario and looking around at property prices which are the lowest in all of Ontario.  He finds he can buy a detached house of around double the size of his condo that while not new is pretty close to move in ready.  It has a new roof and new furnace, the bones are good.  It's even had every room just repainted in colours he likes. 

So he calls his Real Estate Agent back in Toronto to ask how long she thinks it might take for his place to sell.  He's thinking of putting a deposit on this nice little house he's seen.  His agent says, 'hey, I'm glad you called, I've been trying to call you all morning.  I showed your condo yesterday afternoon and I've got an offer for you at full asking price.  I'd suggest you accept it.' 

Three days, Toronto condo sold and new home found.  How did the money work out?  Well that little condo in Toronto sold for 3 times the price of the house in small town southwestern Ontario.  So he buys the house cash and banks the other 2/3s of his capital.  He'll figure out what to invest it in on Thursday.

[scottish]

I take it he didn't buy in 1989?  IIRC that was around the peak, and things went downhill for about 10 years.   I wish I had a good anecdote as a counterpoint to your story!

The non-emotional way to do this is to get out your spreadsheet and look at the long term implications of your choices.  Work different scenarios, worst case real estate, worst case stock market, best case real estate, and so on so you can get a good understanding of the risk and rewards. 

[OldPro]

Well there probably is a counterpoint scottish of some guy who continued renting for less than the cost of my guy's mortgage and condo fees and then invested the difference wisely and ended up with a bigger pot of capital than my guy.  But the question is how likely is it and how easy would it have been to do?

We are talking about the Toronto real estate market here.  While prices may go up an down, the reality is that over the longer term they are only going to go one way, up.  So buying is really a pretty safe bet in the long run.  The alternative of investing in something else like the stock market and making more is not as safe a bet at all in my opinion and as I said, there are intangible benefits that the stock market can't give you that owning your own home can.  People always want to analyze things in terms of risk and reward as you say but you can't put everything on a spreadsheet when it comes to a HOME.

Sometimes the best decision is the one that just feels right.  Warren Buffet was once asked to explain why he bought a particular stock.  His response was, 'it just felt right.'  He also said, 'beware of Geeks bearing formulas.'

If the OP wants to buy a home which I think it is clear she does, then I don't think anyone should be discouraging her or suggesting she spreadsheet the decision. It is not an un-emotional decision and you cannot remove the emotion.  It is also not a high risk decision or unlikely to provide a good ROI over time. 

I think there is too much emphasis here sometimes on 'there must be a right answer that provides the highest return'.  The truth is it's all guesswork whatever you do.  Having a goal of achieving FIRE is a good goal to have but you also have to live and enjoy your life on the way there.

Buying vs. renting can be profitable either way and I do think you have to do either carefully and hopefullly wisely.  Like I wrote already, buy the right house at the right price if you are going to buy.  Don't buy because it has granite counters, buy because it is in a good location, etc.  But as far as the basic decision of buy or rent, I don't think you need to go beyond, 'it just feels right.'

[GuitarStv]

I bought in Toronto (Scarborough) several years ago.  This was after watching the market go up for eight years while people all proclaimed the end was nigh.  As they're still doing.  Rationally, it may have been a better decision to rent and invest.  On paper my house has drastically increased in value since purchasing.  We'll see what happens when interest rates rise and it all goes tits up.

We bought our house at about 380 and put down a little over half for down-payment.  Our minimum mortgage payments were very very low, much lower that the cost of renting anything comparable.

[scrubbyfish]

My thoughts:

1. Coming out ahead vs at a loss depends, as has been noted, on timing. I was one that lucked out with timing. Not everyone has been or will be.

2. I do know people who've gotten to renovate their rented home to what they want. They rented super cheap, renovated to their heart's content, and continue renting cheap. Landlord is happy because the place is improved, and is being well looked after. Tenants are happy because they have their dream space for cheap. Yes, landlord can end the tenancy with (limited) legal reasons, but so can factors end homeownership. In my case, horrible tenants, skyrocketing property insurance rates (with no claims), skyrocketing property tax rates, etc. In other people's cases, divorce, job loss, disability requiring different amenities, etc. Ownership is not much more guaranteed than renting. On the flip side, ownership can crunch a life, if we end up underwater on a mortgage or real estate stalls for years (my parents bought their dream house, filled it with kids, and then couldn't sell it for 10 years when they needed to).

3. Emotional reasons... I'm going to say this is not a simple factor. Emotions change. Life needs change. I bought my house for emotional reasons -I planned to fulfill my secular vocational dreams through it, then parent in it, then retire in it. I loved that house. Most of my life changed, and I let the house go. I'm happy I fulfilled that dream, happy that the timing made me money, and happy I was, logistically speaking, able to move on when life continued to morph.

It's a very, very narrow situation in which I would own in Canada again. (I rent very happily.)

[scottish]

Well my point was not that the OP shouldn't buy the house, but that she should do some risk assessment before making a huge leveraged investment.   We own our house, so it'd be kinda hypocritical to say "don't buy a house."!  I like owning my house, despite the property taxes, maintenance and repairs, yard work and swimming pool that I wouldn't have to worry about with a rental.   With gross income of $125K, $500K represents something like 5-6 years of net income for this couple.  I'd never recommend making a decision like that without considering the alternatives analytically as well as emotionally.