Rent or buy? There seems to be an endless debate on whether it is good investment to buy your own home vs. renting and investing your money elsewhere. Unfortunately, this article won’t put that argument to rest and won’t provide definitive answers. What this article will do is look at some real word costs (mine to be exact) to see the potential of a property as an investment.
Rent or buy? I chose buy
In April 2012, I took the plunge and purchased a 1-bedroom condo, without a whole lot of cost/benefit analysis. My main line of thinking was “why pay someone else’s mortgage, in the form of rent, when I can just pay my own”. 5 years later and little bit more financial savvy, I still haven’t figured out whether or not it has been a good investment, but I have a better picture of whether or not it will be. But one thing is for sure, I didn’t take all factors into account when purchasing my first home. For the sake of the following argument, I’m going to assume that my mortgage and strata payments would roughly equal what I would be paying for rent.
Starting numbers
In February 2012, I had $13,000 saved up, and after talking to a mortgage broker and a realtor, decided I was going to get into the housing market. After looking at numerous places, I decided I wanted to purchase a 1-bedroom condo that, after some negotiating, ended up with a value of $183,000. In April I bought it, and signed a 5 year fixed mortgage at 3.19%. One thing I did not take into account when making my decision to purchase, was the CMHC Mortgage Loan Insurance that was necessary since I wasn’t putting 20% down (not even close). This insurance was based on a percentage of the value of my mortgage. A big lost cost, right up front:
| Condo value | $183,000 |
| CMHC Insurance | $5,015 |
| Total condo cost (Value + Insurance) | $188,015 |
| Down payment | $13,000 |
| Total mortgage amount | $175,015 |
So there I was, April 2012 and I had just invested $13,000 as a down payment, had $175,015 mortgage, and $7,985 in equity (value – mortgage), a loss of $5,015 right off the bat for my investment! But it’s not all doom and gloom.
And now it’s 2016
Over the years, I made my monthly mortgage payments no problem, and while much of those payments went to paying the interest on the mortgage, a portion of those payments was also going to paying down the principle.
As of December 2016, 4 ½ years later, this is what the mortgage situation looked like:
| Mortgage principle December 2016 | $157,433 |
| Equity if the condo value remained at $183,000 | $25,567 |
Whoa, did I just turn $13,000 into $25,567 in 4 ½ year!? Simple answer: NO. The additional costs of owning a home still needs to be taken into account. These are costs that would be avoided, had I rented an apartment for 4 ½ years instead.
| Property tax (5 years worth) | $2,804 |
| 2 special levy’s made by the Strata council | $1,095 |
| Appliance and floor renovations (my fridge decided to kick the bucket, and the carpets were as old as the building) | $2,900 |
| Total | $6,799 |
And unfortunately, that’s not all. As a buyer of a property, you don’t pay any commission fees for a realtor, but that is because the seller covers these costs. This eventual cost has to be taken into account as well. If going with a big realty firm in my province (BC) the standard realty fee is 7% on the first $100,000 and 3% on the remaining (and that fee is taxed by the government as well!). So we are looking at fees that are upwards of $10,600!
So where does that leave me with my 5 years of equity?
| Equity if the condo value remained at $183,000 | $25,567 |
| Home owner costs | $6,799 |
| Realty fees of selling my home | $10,600 |
| Total equity | $8,160 |
So that means after almost 5 years, my investment of $13,000 has a worth of $8,160 – a loss of $4,870!
That can’t be right!
The one thing that all of these calculations are missing is that $183,000 is not the value of my condo! Usually people invest in property because property values tend to go up, and this is why the debate of buying vs. renting will never end – you never know how much your property will sell for, and no one can tell you what this number will be (an appraiser can suggest, but in the end it’s only as valuable as what somebody is willing to pay).
I decided to look up my local real estate statistics (easily found online), and see what insight the numbers could give me. Between November 2011 and November 2016, the average price for a condo in my city went up 15%. My building is fairly well run, and I’ve made upkeep and renovations to my condo, so I estimate at the low end, if there was an increase in 10% value, my condo could very well be valued at $201,000.
At a sale of $201,000 and taking into account increased realtor fees, my equity would now sit at $25,768, an increase of $12,768 of value on my initial investment of $13,000! But when it comes down to it, there is no way to predict how much my condo will be valued at when it comes time to sell, it could be anywhere from $180,000 to $200,000, and that condo value alone will tell whether I invested that original $13,000 well.
How does that stack up to the alternatives?
Time to look at the alternatives. If I had invested that $13,000 down payment instead in a diversified index portfolio, what would that $13,000 be valued at? Here are the annual returns as calculated by the Canadian Couch Potato, if I put that $13,000 in a ‘Balanced’ TD e-Series portfolio:
5 year annualized compounding return would have been somewhere between 9% and 11%, so we’ll go with 10%
| Year | Investment value |
| 2012 | $13,000 |
| 2013 | $14,300 |
| 2014 | $15,730 |
| 2015 | $17,303 |
| 2016 | $19,033 |
That’s a $6,033 increase over 5 years.
So is it worth it?
Unfortunately, I won’t be able to tell for sure until the day I sell my condo, which I have no plans for in the near future. Here’s how that $13,000 could look like depending on the path that I took:
| Investment route | Investment value | Loss/Gain |
| $13,000 invested for 5 years | $19,033 | +$6,033 |
| $13,000 invested in a condo for 5 years (including costs) | $8,160 – $25,768 | –$4,840 to +$12,768 |
I didn’t give you any answers, but hopefully this article can help you understand a little bit why the debate is always on-going.