How much wealth are you leaving on the table?

Thursday Feb 06th, 2020

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“Should I buy now or should I wait?” -- This is one of the most common questions I receive from both new and past clients.

It is not an easy question to answer, as there are many variables to consider. But if we look strictly at the numbers, without taking into account the added emotional benefits of owning a home, the numbers confirm, year after year, that if you plan on owning real estate for at least the next 4 to 5 years - you are financially better off to purchase now, building equity during that time frame, than to hold off buying and attempt to get into the market at a later date. 

Allow me to explain with a current example:

You purchase a home to live in, placing a 5% down payment (ie. $25,000) on a $500,000 property. Let’s assume the property goes up in value by 6% in the first year. 

How much is your investment or equity worth now, after the first year? A 6% increase in market values also means that the value of your property has increased by $30,000 and you have paid down your mortgage by $12,005.64*. So your investment has now appreciated by $42,005.64.

I purposely chose to use 6% as an estimated appreciation. Some may say that this projected value increase is too conservative given that average prices in Toronto increased by 11.2% year-over-year in December. But I do like to be careful with my numbers when projecting growth of an investment, and I would rather use historical average increases in Toronto to illustrate my point, which is about 6%.  As you can see, even with my conservative appreciation value, a considerable amount of net worth has been established through the purchase of a property.

If you are looking to move, let’s look at your other option – you choose to rent instead of purchasing. To accumulate more money to be able to make your purchase at a later time, you decide to save your left-over funds each month - how do the numbers look one year later?

Let’s assume that you are able to save $1,000 per month, and that this investment is growing by 5% annually - based on compound interest, after one year this investment would only be worth $12,322.58.

Thus, we see that the opportunity cost of not purchasing a property in Toronto is in fact high.  The above example shows a difference of almost $30,000, in one year’s time. That is the money that you are leaving on the table. With appreciating property prices in Toronto, waiting to purchase typically does not provide you with greater net worth. The reality is, most prospective buyers will not be able to “out-save” the potential increase in equity that Toronto real estate provides.

I have seen examples of prospective buyers who engaged in a property search, did not find that perfect place and decided to wait out the market for a year or two – only to jump back in and realize that prices have risen to the point where they are now looking at smaller spaces or locations further away from their original search area.

My message to people today is: if you are interested in buying real estate, if you qualify for a mortgage and if you have a sufficient down payment, you are better off buying a property in Toronto today than to wait.  While you might not be able to own your dream home right now, being “invested” in a property in Toronto will allow you to watch your net worth increase over time. This strategy will provide you with future opportunity to up-size and get into your forever home.  Not everyone looks at their principal residence as an investment, but the truth is, it is arguably the most tax efficient investments in Canada, which incurs no capital gains on the sale.

There is a great line I once read: “Don’t wait to buy real estate, buy real estate and wait.”

I think that is more applicable today than it has ever been.

If you are thinking of buying real estate this year, let’s chat about your options and we can go through some scenarios together.  Our aim is to work with you to achieve your goals - current and future.

Alex

 

*based on a 25-year amortization, 5-year fixed term and a mortgage rate of 3.59%, bi-weekly payments; source: TD mortgage payment calculator

 

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