I often have conversations with clients about the resale value of their home purchase. It’s an important factor to consider when buying, especially if you don’t plan to stay in the home for long.
I’m regularly irked when I hear about how much home prices have been increasing in other parts of Canada. How I long for the days when I could meet with a prospective home seller and give them the good news that they can sell their house for more than they paid and walk away with a tidy profit!
Instead, my conversations with sellers for the past few years have mainly been not a question of whether they are losing money on their house, but how much. Being the bearer of bad news does get old!
However, everyone needs to live somewhere and that comes with a cost.
Here’s a scenario – you buy a house for $500,000 and live in it for five years. The market decreases slightly and you have $460,000 in your pocket when you sell it, after paying real estate and legal fees.
Let’s say a similar house would rent for $2,200 per month. This comes out to $132,000 in hard costs over the five years.
The house you purchase has hard costs too – money you never get back. Based on a 20% down payment and with interest rates as low as they are now, this would come out to about $600/month in mortgage interest and let’s say $100/month in home insurance and $250/month in property tax. This comes out to $57,000 over the five years.
(Please note I’m not factoring in utilities or telecom since in this example, the cost would be the same in both scenarios. This can change with condos since a homeowner has to pay the condo fees which may include utilities but a renter doesn’t.)
Let’s be realistic and say you also spent $10,000 on some flooring and paint upgrades over the five years.
With the $40,000 loss on the house (from $500k to $460k), the $10,000 in renovation expenses and the $57,000 in hard costs, you are out $107,000 total.
In comparison to the $132,000 in rental costs over the same period, you have saved $25,000.
Add to this the intangible benefits of home ownership – no stress about your lease coming due and having to move, the ability to make upgrades and changes as you desire without landlord approval and the pride that comes with home ownership.
Now let’s get optimistic and say the market (someday) starts to go up in Calgary! It sways the numbers strongly toward owning.
Some factors can sway the numbers toward renting, though: if you end up having to break your mortgage early and have a large payout penalty, if you end up with a big special assessment on a condo or a large unexpected expense on a house or if the market drops more substantially.
If you’d like me to run similar numbers for you on a different property type or price range, please let me know!
And stay tuned for Part 2: rental property!