Yesterday, I drafted a comparison of renting versus purchasing a 1.4 million dollar property in Vancouver, BC, Canada. Many assumptions were needed to make the comparison, one of which was that the person facing these decisions had the necessary down payment of $280,000 sitting in a bank somewhere.
Today, I'd like to make a more realistic comparison.
Let's assume a couple earning gross salaries of $60,000 each, are looking to purchase a one bed, one bath condominium in Downtown Vancouver - Yaletown, more specifically. Let's assume they want to weigh their purchase against continuing to rent. Again, we're going to assume they have some savings (either saved on their own or gifted from a family member) to use for a potential purchase - in this case - $44,800.
I was looking to make this comparison with a 5% down payment but discovered that a purchase price over $500,000 requires a higher down payment - more details on this later.
Similar to yesterday's example, there are a million variables that can shift the outcome of this comparison. In order to make the comparison I'm forced to make some assumptions - so I will.
Again, you can use this framework loosely if you want to make the same comparison in your own marketplace.
Here is my BIG disclaimer: Keep in mind, when it comes to taxes and legalities, it's best to reach out to an accountant or lawyer. I used online tools to calculate certain pieces of this comparison, but individual situations can broadly shift the numbers that result. As an example - grants can be claimed for property taxes (reducing the amount payable) so long as the property is a principle residence, rebates are available for GST (which is applicable for new property), and so on. The bottom line is, your own situation will be so unique that this won't be a perfect method for drawing your own comparisons.
To start our comparison, I'd like to move back to our 'couple'. I mentioned they each make $60,000 per year. To find their REALLY ROUGH, net income, I'll use the Ernst & Young Tax Calculator to get an idea.
Essentially, after taxes are paid, they each have $48,895 annually, or, $4,074.58 per month. This equals $8,149.17 combined.
Doesn't look to bad, does it?
SCENARIO ONE: RENTING
Now, we need to look at what rent looks like in Yaletown. I turn to Craigslist.
There was a sweeping range of rental rates, so I took the four depicted here, and used an average. Let's assume that rent for a one bedroom, one bathroom in Yaletown (unfurnished) will cost $2,400, and that it's roughly 650 square feet.
Like yesterday, calculating the cost of a rental over a 5 year period is simple.
Rent $2,400.00 Multiplied by Months Rented (60) = $144,000.00
Again, we're assuming that this couple has some money saved and they're deciding to rent or purchase.
Let's assume they have $44,800.00 and it's in a low-interest bearing savings account earning 3% annually. In five years, their money will have earned $7,135.00 and will now be worth $51,935.00.
Note: Although, we've measured the monetary cost of a rental, what we haven't measured is the risk associated with renting - this might include the landlord choosing to sell during the tenancy. In addition, we're making a big assumption that the rental rate will remain stagnant - likely it would increase. According to TenantsBC.ca, the allowable rent increase for 2017 was 3.7%, so in the case of $2,400.00, the rent could increase by $88.80 per month.
In summary, rent cost $144,000.00 over five years, and $7,135.00 was earned on savings. There is a net loss of $136,865.00.
SCENARIO 2: PURCHASING
In order to compare renting to purchasing, I'll use Realtor.ca to find the asking price and potential cost of purchasing a one bedroom, one bathroom, property in Yaletown.
Similar to rental rates, asking prices for properties are widely varied. I looked at a number of available listings…
... and decided on something mid-range. A one bed, one bath, 648 square feet, priced at $698,000.
Here is the property:
Similar to yesterday, this part of the comparison gets crazy complicated because there are so many moving pieces to consider. Considerations include the down-payment available (we are using the minimum requirement for the sake of the example), the interest rate, the type and details of the mortgage selected, the strata fees, and the future price of the condo.
So, we have to make some assumptions to work through this.
Let's assume, the property doesn't change in value over 5 years. It's $698,000 now and will be worth $698,000 in 5 years.
Let's assume the mortgage interest rate is 2.8%, fixed 5-year, with an amortization of 25 years, and no-lump sum payments are made during the 5-year term.
Below is a list of expenses associated with the purchase:
- Down Payment - as mentioned previously, this couple has saved $44,800 - the minimum required (as per CMHC) for this purchase price.
- Canada Mortgage and Housing Corporation Insurance (or CMHC) - this insurance premium is likely applicable to the purchase, as the down payment available is less than 20% leaving it considered as 'high ratio'. The buyer can either pay it in one lump sum, or add it to the mortgage. In this case, we'll blend it into the mortgage. To find the premium payable for this purchase price, I used the CMHC calculator.
- Appraisal - prior to lending money, the banks want to ensure that the price you've offered the seller is similar to the actual market value. To do this, an appraisal is likely required.
- Move-In / Move-Out - most condo buildings charge a fee on both the move-in and move-out
- GST - in the province of BC, GST may be applicable to New Housing. In our example, the home is a re-sale (not new) and therefore is likely not subject to GST.
- Inspection - as part of the purchasing process, a building inspector may be hired to validate the quality of the home.
- Property Taxes - these will be adjusted at closing in most cases. To make our example simple, we can assume that this home will complete on January 1st. For this reason, the property taxes won't be included in the closing costs but will reappear in our ongoing costs. In the case of Vancouver, $3.1657 is payable for every $1,000 of assessed value. To find your own property taxes, just google the municipality where the home of interest is located and look up property taxes. You should be able to find a current 'mill rate' which you can use to estimate potential taxes.
- Legal Fees - the cost of using a lawyer or notary to complete the sale
- Property Transfer Tax (or PTT) - there are some exemptions for this tax, but generally, 1% on the first 200K, and 2% of the balance is payable for Property Transfer Tax. If you want to calculate your own potential PTT, use the following calculator: http://www.bcrealestatelawyers.com/ptt-calculator/
Here is a snapshot of the potential purchase expenses for this property:
The cheque required at closing, would be $59,210.00, of which $44,800.00 is considered equity and $14,410.00 are expenses and essentially 'lost' costs.
I want to point out that additional lost costs include CMHC premiums (see image below) resulting from an inability to put a minimum of 20% down - in this case $26,128.00. TOTALLY INSANE, BTW!!!
Once the sale process has completed, there will be ongoing costs associated with ownership that are unique from a tenancy situation.
Ongoing costs of Home Ownership include the following:
Mortgage Payment - this can be made monthly, bi-monthly, bi-weekly, and weekly. For this example, I'll assume monthly. There is a big acceleration in decreasing the principle owing by paying either bi-weekly or weekly when compared to only making one payment each month. To get an approximate sense of this, I used CIBC's Mortgage Calculator - you can do the same by using the link below.
Strata Fees: This can widely vary too. The strata fees help to pay for the common parts of a strata. Elevators, parking, overall building insurance, landscaping, water, waste removal, etc. In our example, the strata fees are posted in the listing details. They are $252.09 per month.
Property Taxes: As mentioned previously, the City of Vancouver charged $3.1657 for every $1,000 of assessed value in 2016.
Insurance: Insurance policies can vary widely. For our example, let's assume $500 per year for contents only, as the broader building insurance is covered by the strata corporation.
Note: For the sake of this example, I'm not including electricity, cable/internet, etc. as these would be required in either the case of rental or home purchasing.
Here is a snapshot of these expenses per month, and then for 5 years.
The ongoing expenses of ownership equate to $202,313.69. Of course, a portion of the mortgage payments would be applied to the principle resulting in some home equity.
The tricky piece of this comparison is separating the expenses that are lost (interest, strata fees, etc.) and those which are savings.
In this case, of the $173,640.00 paid in mortgage payments, $73,059.00 was lost to interest and $100,581.00 was applied to the principle. Additional lost costs include the strata fees ($15,125.40), property taxes ($11,048.29) and insurance ($2,500). Also, the initial outlay of the purchase itself included $26,128 in CMHC fees and $14,410.00 in closing costs.
So total lost expenses after 5 years of ownership is $142,270.69.
The remaining/outstanding mortgage is $578,747.00, resulting in $119,253.00 of equity, again, assuming the property is still worth $698,000.00 five years later.
In the case of a purchase, there is $119,253.00 in equity, of which $44,800.00 was already earned. So, $74,453.00 was 'saved' by way of principle payments, and $142,270.69 was lost to expenses, resulting in a net loss of $67,817.69.
In Summary, renting resulted in a net loss of $136,865.00, while owning resulted in a net loss of $67,817.69.
In this example, owning out-weights renting. That being said, one would still need to sell to entirely reap their 'earnings' which comes at a high cost. In addition, the monthly home-ownership costs are VERY high. While renting cost $2,400 per month, owning costs $3,371.89, it could be argued that if a person could afford the home ownership costs, they'd get WAY further ahead renting for $2,400.00 and banking the extra $971.89 otherwise spent on maintaining a home.
And, I can't ignore some big assumptions made in this article. One is that the value of the home remained unchanged - many would suggest that the home could appreciate significantly in this time thus bolstering the case for home ownership. I've also ignored the selling costs associated with disposing the property, which can be significant too.
Recall at the beginning of this article, I mentioned the couple earned gross salaries of $60,000.00, resulting in an after-tax monthly income of $8,149.17? After paying housing costs (in the case of ownership) of $3,371.89 monthly, they have $4,777.28 for the rest of their other expenses. Is it enough?
I will cover that question in my next article. Stay tuned….