Can you have the best of both?
There have been many articles over the past few weeks that state home ownership will change how millennials plan for retirement. Some will purchase homes with friends or family, and many will decide to forgo homeownership altogether for the flexibility and predictable costs that come with renting. But when it comes to retirement plans, renters may have to save twice as much as homeowners.
Let's break down the benefits and pitfalls of renting or purchasing a home.
Homeownership allows you to invest your time and money into an asset in your name. Once you have paid down some principal on your mortgage, you now have equity in your home and you can harness that equity as purchasing power for future investments.
However, it is easy to underestimate how many unexpected costs can arise when you own property. There are regular costs such as property taxes, general fees, and maintenance that you can predict. But now and then you will unexpectedly need emergency plumbing services or to repair potential hazards. When you are responsible for managing a property, you are responsible for the maintenance and any injuries that take place on-site.
Are homes an investment?
Depending on where you live, your property value may not be seen as a strong appreciating asset, so you may lose money when you sell the property. In provinces such as Ontario or British Columbia, over extended periods we have seen a consistent price increase. In other areas of the country, property is not always seen as a long-term investment.
The Canadian Real Estate Association (CREA) tracks home prices across the country over their MLS® Systems. Check out this map from the CREA to compare the value of homes across the country. We know Toronto and Vancouver are expensive as can be with buyers spending millions even outside of the city into the urban sprawl. However, if you look at Manitoba or New Brunswick, you can see a decline in prices. The price you pay for a home as listed does not take into account additional mortgage interest, transfer tax, realtor and legal fees, and other ongoing costs in the upkeep of the home.
An investment is when we put money or other assets into a business and earn a profit. When we purchase property to rent or use the land in other ways to make money, it is an investment. Keeping a roof over your head is a necessary expense, but your home won't always make a profit when you sell and can be separate from your investments.
Let's think of our home and real estate investments separately.
Renting gives us the flexibility to move as we need to. When you own the home you live in, you need to sell and pay off the existing mortgage balance while you sort out a new property in a new location. When you rent, your focus is to pack up your things and relocate life to another city. It is far more flexible to pay only for what you need and adjust as your life evolves. According to Statistics Canada, more Canadians are living alone than ever*. That means we can live in smaller spaces and what we can afford shifts as quickly as our employment status.
Figure out how much you can afford.
When purchasing a property, a bank will approve a mortgage based on income and real estate value. Once you have your name on the deed and the debt of the property, you will have a monthly payment which covers accrued interest until that date. The remainder of the payment will go toward the principal amount outstanding on the mortgage. Confirm how much money you can afford - according to the bank and your comfort level and start searching for houses in that price range.
If it feels impossible to consider purchasing and maintaining a property physically and financially, it is because you were never meant to do it alone. Investments and money will change your relationships, but family members or close friends can work together to afford the property. You will find everyone will bring new skills to the table, which will work out as you manage taxation, renovations, tenants, or just the contrasts in personalities among the homeowners.
When you invest in real estate as an asset, you do not need to do it alone.
Before they were married, my parents purchased an old bungalow in Richmond Hill. They lived on one floor and renovated it themselves while renting out the other floor. I have a friend who purchased a duplex with their brother so they can have their own space in each unit to live or rent out while sharing the costs of home ownership. I purchased a triplex in Montreal with two friends back in February of 2020, and one of them currently lives in one unit while the others have tenants that have been in the building longer than we have. Where there is a will, there is a way and if you intend to invest in real estate you can be creative and make it happen. Think carefully before entering a financial arrangement, and make sure you have it in writing so you can reference or amend should any issues come up.
Are you a resident of the rental unit, or have you purchased a home? Let us know and share what you learned at https://www.waverleywealth.ca/forum and you can contact us at theteam@waverleywealth.ca for any questions.