So here we are, 2.5 years after the last time this dragon has posted anything to do with choosing castles. What has that eon brought us? Well, more money (Yay career progression!), more annoying adult dragon problems, and more of the same questions:
“What do you think about the housing market?”
“Do you rent?”
“Isn’t the cost of living in this town just horrible? Rent is so expensive!”
“The prices have been going up for years, don’t you think you’re missing out?”
Honestly, I’m beginning to think it boils down to one thing: FOMO. For you ancient grey wyrms that can’t remember all the new hatchling slang, this stands for “Fear of Missing Out”. It colours every part of our dragonish society. For how can you possibly accumulate a sufficient hoard for your dragonish retirement if you don’t buy a castle?!
The real answer to this is savings. You know. Not spending all the stuff you bring in. But Canadians seem perfectly happy to sit in an empty nest with nothing but the occasional copper penny stuck in the edges – the household savings rate is a measly 1.1%. And why do they do this? Well, because the hardy, snow-tolerant dragonkind of the Great White North are far too busy throwing their hoard into one thing: Castles.
The problem is, unlike the housing stock available to dragonkind of the 1900s, these castles are selling at incredibly inflated prices pushed by insanely low interest rates, absurd levels of demand (see: FOMO), and a lack of supply as populations rush away from the country and into the city. And those are just some of the suggested factors by economists worldwide.
But I really have only one question: “WHY?” (I want you to imagine me stomping around, flapping my wings, and breathing fire, seriously).
Back in February 2017, I wrote a blog post that talked about how to compare the true cost of renting and buying. Despite my best efforts, I have still encountered an absurd amount of juvenile dragons (or even full-grown ones) who look only at the mortgage payment, compare it to the rent, and happily skip off to buy a castle instead of renting one, because it is “cheaper” (spoiler: it’s not).
So here’s a reprise. It’s been nearly three years. I myself am a slightly more accomplished full-grown dragon. I’ve got a CPA designation, better salary, 8 years of post-secondary business and tax education, and a job I love. All in all, life is good. Now, I live in a bigger rental apartment in the same building as the one I lived in in 2017. Top floor, 1 bed + den, 700 sq ft. Oh, but look! Across the street is a very similar apartment, but with one shinier, sparklier, dazzling difference: I could own it.
But should I???
INGREDIENTS FOR AN INFORMED FINANCIAL DECISION
Do you remember this heading? I hope you do, because if you’re thinking about renting or owning, this is the recipe for your financial success. And here’s the flashback to the ingredients you need:
- Two COMPARABLE properties, one for rent, and one for sale. If you’re living in a small apartment and are thinking of buying a house/bigger condo, the property you are considering buying should be compared to a rental property as similar to it as possible, not the rental property you’re currently living in. After all, there’s nothing wrong with upgrading into a larger rental if it’s truly better than buying a comparable property.
- Information on the rental property:
- The monthly rent
- The annual rent increase percentage allowed in your province/state
- Cost of parking/laundry if any
- Cost of tenant insurance
- Information on the property for sale:
- The list price
- The annual property tax
- Strata fees
- Cost of parking/laundry if any
- Cost of home insurance
- Financial information:
- The dollar amount you have available for a down payment
- The mortgage calculator of the bank of your choice
DIRECTIONS FOR AN INFORMED FINANCIAL DECISION
- Calculate the average cost per month of renting over the next five years (most people move every 5, though feel free to change it up if you’re positive you’re staying wherever you are shorter/longer)
- Calculate the average cost per month of owning over the next five years
- Compare financial factors
- Consider qualitative factors
And now, 2.5 years later, let’s try it again with…
AN EXAMPLE (ABOUT ME, AGAIN)
So here we go. I will yet again throw my personal situation into the interwebs in the faint hope that someone, anyone will take a second and think before they throw their financial future onto a black arrow fired by a Bard.
I currently live in a 700 square foot one-bedroom apartment with den, top floor and corner unit. It is perfectly located to my work, central, has a billion windows for my coveted hoard of plants, and I adore it.
And like I said, across the street, there is a very similar apartment. So let’s compare these castles.
|My Rental Apartment||Apartment for Sale|
|Size||700 square feet||631 square feet|
|Age||Built 2016||Built 2009|
|Location||Half a block to my work||Next door to my work|
|Type||Low-rise apartment building||Low-rise apartment building|
|Pets||No pets permitted||2 cats or one cat and one small dog|
|Appliances||Fridge, Stove, Dishwasher, Laundry Hookups||Fridge, Stove, Dishwasher, Laundry Machines in Suite|
|Heat/Cool||Two Gree In-Wall Units||Two Gree In-Wall Units|
|Parking||Heated Underground Parking||Parkade|
|Storage||One 6-foot closet, one 3-foot closet, one 4-foot closet, laundry closet||One 4-foot closet, one 10-foot closet, laundry closet|
|Layout||See photo comparison below
Den can be used as 2nd bedroom, split floorplan, corner unit
|See photo comparison below
Odd den placement, bedroom barn doors encroach on wall space
|Other||Rentable garden boxes available||Rentals allowed|
|Financials||Monthly Rent: $1,450.00Parking Fee: $ 40.00
(Rent includes hot water)
|List Price: $299,900.00Strata Fee: $ 181.00
(Strata fee incl. water and parking)
Now with all that lovely documentation managed, let’s “MATH SHIT UP”, as my favourite blog writer FireCracker would say.
STEP ONE: CALCULATE AVERAGE MONTHLY RENTAL COST
In BC, landlords are allowed to raise rent by 2.5% in 2019. As always, we must remove inflation in order to truly compare numbers. In Canada, the inflation rate in July 2019 was 2.0%, so:
Real Annual Rent Increase = 2.5% – 2.0% = 0.5% (Not a hell of a lot, what does that say about our economy?)
If we assume that my landlord (which is a corporation) will increase rent at the absolute max every year (seems like a corporate thing to do), then my rent is as follows:
2019: $1,450.00 | 2020: $1,457.25 | 2021: $1,464.54 | 2022: $1,471.86 | 2023: $1,479.22
Or, on average: $1,464.57
Now, I’m not going to bother increasing the $40 parking fee, or the $38.19 I pay for tenant insurance , as there are no real strict rules with which to calculate and it would likely be at most an inflation increase, so what this means is that over the next five years, my rental apartment would cost:
|$ 1,464.57$ 40.00
And as I’ve said before, the calculation should be completed not including utilities: remember, we’re comparing two comparable properties. If they’re truly comparable, the utilities cost should be the same.
STEP TWO: CALCULATE AVERAGE MONTHLY OWNERSHIP COST
- Probable Closing Costs: The Pihl Law Corporation Okanagan Home Purchase Cost Estimator tells me that I should expect about $900 in legal fees and $400 in third-party transaction costs, but nothing for property transfer tax, because the First Time Home Buyer’s Program eliminates property tax for me.
- My Down Payment: My net worth has improved over the past few years so I could do a large down payment, but with interest rates what they are, I probably wouldn’t do more than 10% down. There is a government program right now called “Equity Sharing” that can help with a downpayment at the cost of giving the government title to your house and a share of any profit you make. I wouldn’t touch this with a ten-foot pole, so we’ll ignore that for now.
- Interest Rate: TD, my usual bank, if offering a 5-year fixed at 2.87%.
With that done, let’s talk about the real price. This condo has been on the market for 106 days, maybe even longer, if the realtor has delisted and relisted it to reset the clock. At that length of time on market, this seller probably hasn’t gotten a lot of offers. It’s also listed above its property tax assessment value of $293k. My personal opinion is that this is probably overvalued given the glut of new builds in the Kelowna core. For arguments sake, we’ll assume that I could buy the apartment across the street for $280k.
Now to look at the mortgage. I could technically avoid CMHC insurance by putting down a 20% downpayment, but that’s a lot of cash tied up in one asset, so I’ll stick with 10%.
At $28k down, I’ve got a 10% down payment, which means 90% leverage. According to the Canadian Mortgage & Housing Corporation, that means a 3.10% insurance premium.
($280k – $28k)*(1+3.10%) = $260,000
Using TD’s interest rate and calculator , that gives us a monthly mortgage payment of $1,213.16.
But as I’ve said many times, the mortgage is not the only cost of owning property. We also have to consider:
- Property Tax,
- Strata Fees (if applicable),
- Home Insurance, and
Now, same as I did with the tenant insurance and parking fees for my rental apartment, I’m not going to increase these costs year over year. The assumption is that they will rise at the rate of inflation, and therefore will be the same cost next year as this year, in today’s dollars.
Calculating property tax can be tricky, since not all property listings will include them. However, if you’re lucky, your province/state will have an online assessment database, like E-Value BC, where I was able to find out that the apartment I’m looking at was assessed at a $293,000 value in July 2018. Punching this value into the City of Kelowna Property Tax Estimator leads to a $1,493.73 property tax levy for 2019, or $124.48 a month.
Home insurance was easier, as finding an online calculator is pretty straightforward. This particular calculator tells me I’ll spend $98 a month on insurance at the same level of content coverage as my current tenant insurance.
Maintenance tends to be a subjective topic when it comes to home ownership. The cost can vary depending on the age of the building, how well it was built, how good its previous owner treated it, how big it is, etcetera, etcetera. However, many experts suggest budgeting 1% of purchase price for maintenance, or budgeting $1 per square foot. This creates a heck of a spread of results for the apartment I’m looking at:
- 1% of purchase price = $2,800 per year
- $1 per square foot = $631 per year
That’s a bit of a range, so we’ll compromise and average it to $1,715.50, or $142.96 per month. If you’ve got more knowledge about maintenance costs, go with your expertise and not a random rule, because, as you can see, math really only goes so far.
And in conclusion:
Strata Fee (see the big table above)
And that brings us to the next step.
STEP THREE: COMPARE FINANCIAL FACTORS
The first part of this step is pretty straightforward:
BUYING WOULD COST ME $216.83 MORE A MONTH THAN RENTING.
In pure cash flow, this means that owning would set me back over renting on a monthly basis. That $217 could be better used for other things – three weeks of groceries, a shopping spree, a payment on a new car, a ziplining experience, and so on and so forth. In a year, that’s $2,600, which could pay for a vacation, or a kayak, or a Nintendo Switch.
But as always, it’s not just the monthly cash flow that matters. What about the lost opportunity on the down payment? I have that money invested making a consistent 6-7% from a balanced portfolio of ETFs. If I use that on a condo, I lose the investment return I was making. What about if the condo rises or falls in value, where does that factor in?
The true decision here isn’t “Should I rent or should I buy – which is cheaper?”, it’s really “Will renting or buying improve my net worth more?” So let’s do the math.
Scenario 1: I continue renting and invest that $216.83 a month in my stock portfolio.
Scenario 2: I buy, and I don’t get to invest that $216.83 but I pay off my mortgage and build equity that way.
If I continue renting, I don’t have to cash out the beginning balance in my marketable securities portfolio for the closing costs and downpayment, so that’s $28,000 that will continue earning money. We plug that, plus a $2,601.96 ($216.83*12 months) annual contribution into this handy calculator with a 7% return (my average, and also the stock market’s), a 5 year timeline, and 100% reinvestment, and we get:
Net Worth After Renting for 5 Years = $55,282
Note that I will probably be investing more than $217 per month, but anything I’d invest above that is the same I’d be investing if I bought, so there’s no point in including it in the calculation.
But what about net worth when owning property? Well, that’s a gamble. House prices are a local game, and it varies. Across Canada, prices are peaking or falling. In Kelowna, they appear to be falling. With a glut of new condo builds, condos are sitting unsold for longer, and price cuts are a usual thing to see in my daily realtor update emails. If anything, this castle is likely to experience a crumble in price, rather than an increase. But let’s be optimistic, and assume it’ll still be worth $280k in 5 years. If I were to sell it, this would probably incur real estate commissions of about 4.5%, so we’ll say the real worth of the condo at the end of five years is $268,000.
The equity is simply the original downpayment of $28,000 plus the amount of principal I managed to pay off over five years. For the less math-savvy, this is because if, in five years, I sell the apartment, my “earnings” is simply the difference between the list price and the remaining loan I have to pay back to the bank.
So let’s take a look, and head back to the mortgage calculator I used back in Step 2 to punch in the same data. If we toggle the amortization graph button, it tells us how much mortgage we have left each year. At the end of year 5, the amount owed is $221,273.61.
Net Worth After Owning for 5 Years = $268,000 – $221,273.61 = $46,726
And look at that, if I buy now and sell in five years, I can lose myself a casual $8,556. So sure, sure, go ahead and tell me that “castles are the best investment you’ll ever have”. And the thing is, it’ll probably be lower than this, because god knows interest rates have nowhere to go but up and we’re rather overdue for a recession. I’d bet a lot of money that the only place Kelowna condo prices are going is down.
Why on earth would I buy when there’s a huge likelihood that even if the prices stay the same, I could lose money. And not just some money, but enough money to fund a few trips to Europe, or half a car, or hell, a couple of really really nice watches, and a new designer suit thrown in to match.
So what’s the conclusion here?
- Per month, owning would cost me $216.83 more than renting,
- Over five years, even if housing prices stay stable, I would lose money.
And that brings us to step four.
STEP FOUR: CONSIDER QUALITATIVE FACTORS
Money isn’t everything, so it is important to consider qualitative factors. In my case, the only true qualitative factors that would maybe push me towards home ownership is this: pets. Renting with pets is a near impossibility, and I have never lived in a rental apartment that allows them. Someday, I would like to own a pet – I am putting off that day until the day I own.
But the qualitative factors for owning are still far too negative for my liking. The financial risk in the current housing market is high. Liquidity is poor, because house equity can’t be cashed out like a stock portfolio. Owning takes work – maintenance would be on me, and not the landlord, and as handy as I might be with my dad’s teaching and a bit of YouTube, maintenance is not this dragon’s cup of tea (or rum? What do dragons drink anyway?). Add in the lack of flexibility of being stuck in one apartment until you sell, and overall, there is nothing to owning that would outweigh a near nine thousand dollar minimum monetary loss.
This can be different for everyone, and qualitative factors can outweigh the quantitative. But this is my advice: Only ever buy if you can afford it, even if the qualitative feels important to you. Generally, this means 3-4 times your income. Try to stick in that range, or I can promise you that you will never accumulate the hoard you need for retirement.
STEP FIVE: DECIDE
The answer to the question “Should I rent or should I buy?” is: “It depends.” I’ve mathed the math yet again 2.5 years later, and my answer is No. What’s yours?
And more importantly, how different will this answer be in another 3 years?
Perhaps this millennial lizard might own a castle one day after all…
Dollar dragon out.