Buying in your Twenties (Globe)

[grey]

Your first hint that the market has gotten so far beyond the fundamentals is that the cost of ownership has so vastly exceeded the cost of renting. Deciding to own when the gap is as far as it is today is driven primarily by the illusory benefits of ownership propogated by the developers/marketers/agents/banks/mortgage insurance companies/designers/etc.

Maybe I'm not understanding exactly what you meant, but in almost every case that I've seen, monthly rent payments are significantly higher than what monthly mortgage payments would be for the same space at current market rates. In many cases, you can throw in maintenance fees and utilities and still come out way below what you'd be paying in rent.

 

[urbandreamer]

Oh really? You can rent a one bedroom @Avenue Rd and St Clair for $800/month. Or you can rent a condo in the same area for $1400/month. Renting in a rental building is the better deal.

 

[mdot]

Grey,

It should shock me to ever find a situation where the total costs of home ownership- mortgage payment, property taxes, condo fees, insurance, opportunity cost on down payment/equity come within $400/per month of the equivalent cost of renting.

Here's some basic bath for you- a $400 per square ft. condo that's 650 sq. ft. probably rents for about $1,500 but costs $260,000 + parking + legal fees and closing costs, so roughly $300,000.

5.5% on $300,000 = $16,500 per year in debt service (no amortization)
Property Taxes = $3,000 per year
Condo Fees = $4,000 per year ($0.50 year square ft.)
Insurance = $1,000 per year
Repairs = $500 per year
__________
$25,000 per year

So you are spending almost $2,100 per month to own it but you can rent it for $1,600 per month.($1,500 +$100 parking)

I think my numbers are very conservative as well.

The costs of ownership can work out to roughly the same as the cost of renting. My fiance and I bought a unit last year at College Park (I know this building has been universally panned on UT but the interiors and layouts suit us) which rents for $1800/month with parking and a locker.

Monthly mortgage cost (25 year amortization) = $1233.00
Monthly maintenance (including utilities and insurance) = $395.00
Monthly taxes = $250.00
Total monthly cost = $1878.00

We were 24 when we purchased our unit and know many people our age who have done the same. I have nothing against renting, I rented downtown for 7 years, but there comes a time when buying is a good decision (especially if you are not willing to live in a crappy $800/month apartment).

We’ve also seen our unit and several smaller units in the building sell for $90K-$110K more than we paid for ours last year.

 

[grey]

math

Thanks, that makes sense. I wasn't considering other expenses besides monthly mortgage payments.

My case may be a little less common since I managed to buy under $500psf and made a large downpayment, so I'm not leveraged as much as most. I find that my monthly payments are a few hundred below the going rents for the same or slightly smaller suites at my building.

 

[Therion]

One thing that a lot of people forget is that if you have a 25-year mortgage, every year you are paying less and less of your real money into it. That's because inflation slowly eats away at the value of your payments. However, your income will rise, hopefully at least keeping pace with inflation, but probably even faster as you gain seniority and experience at your particular job. So a couple today that makes a combined $125,000 and has a $400,000 mortgage would pay roughly 30% of their after-tax income into the mortgage. Add condo fees or repair bills, and property taxes, and you're looking at about 40%. In 20 years, if their income only keeps up with inflation, they will be making roughly $200,000, while paying the same mortgage amount.

During this time, rent would slowly keep up with the rate of inflation, which means you would be paying the same ratio as now.

 

[DarnDirtyApe]

I know of buildings where the rent has gone down in nominal terms since 2001. The rental market was very tight back then, but since then the supply of rental apartments has gone up (due to new construction of condos) and the number of renters has gone down as people moved into their new condos. I don't really know why so many people think it's easy to rent out a condo they've purchased, as there's no way there will be enough renters to go around when all of the current projects are completed. It might be possible to cover carrying costs on a unit that was bought pre-construction in say 2003 or 2004, but condo prices have gone since then while rents have remained stagnant.

Nevermind the fact that there's a limited pool of people willing to pay $1500+ for a 1 bedroom apartment, especially given the huge number of older apartments available in the $1000-1200 range. I rent in a 'luxury' dedicated rental building and have had 2 consecutive years of no rent increase, presumably because the building manager know that the market is very soft, and getting worse.

 

[Hydrogen]

Oh really? You can rent a one bedroom @Avenue Rd and St Clair for $800/month. Or you can rent a condo in the same area for $1400/month. Renting in a rental building is the better deal.

If you buy you plan to pay off your mortgage within 25 years. Then the debt is gone. It takes some discipline, but it can be done.

If you rent for your whole life you will pay far more than what it costs to buy.

 

[cabbagetowner]

rent vs buy math doesn't make a lot of sense if you're taking into account the principal which is being paid in the mortgage payments. your landlord isn't going to give you a cheque at the end of your tenancy.

in the end the choice between buying and renting should be made with personal considerations (you like the location, could call it home, plan on staying a while) not external (market appreciation) if you plan on living in a place for a while and you're going to maintain it then it usually is better to buy.

 

[whatever]

The math does make sense because when they're doing the numbers for ownership they're talking about the interest payments on the mortgage (ie, the rent), and not the payments against the principal (which aren't really payments at all, per se, since all you're really doing is moving your money from one pocket to another).

So no, your landlord isn't going to give you a cheque at the end of your tenancy, but if you pocket the differential between renting and owning every month you can end up with just as much, if not more, to show for it.

 

[urbandreamer]

^Translation: If you're a cheap hard core saver (like me): renting a cheap apt can make sense; bonus if you use the savings to invest in equities!

If you're living p2p and like living beyond your means, but have $50k from daddy and have the potential to earn more (aka a professional career in banking, etc), then buy!

But use extreme caution either way in today's over-priced market.

 

[cabbagetowner]

The math does make sense because when they're doing the numbers for ownership they're talking about the interest payments on the mortgage (ie, the rent), and not the payments against the principal (which aren't really payments at all, per se, since all you're really doing is moving your money from one pocket to another).

So no, your landlord isn't going to give you a cheque at the end of your tenancy, but if you pocket the differential between renting and owning every month you can end up with just as much, if not more, to show for it.

agreed but there are exceptions, for example if you bought in toronto in the last decade, you probably would have done well for yourself. ask around, most people who own in toronto probably will tell you they've made money on their place.

 

[lowesthangingfruit]

agreed but there are exceptions, for example if you bought in toronto in the last decade, you probably would have done well for yourself. ask around, most people who own in toronto probably will tell you they've made money on their place.

I suspect most have not made a dime cuz they haven't sold. Or they sold and bought a bigger place and are still levaraged and in the market. The only ppl that I can see that made any real profits are the serial flippers and agents that milked the market for every cent of this bull market run. I haven't met alot of ppl that sold in the last few years and moved to rental markets. It always amazes me to meet ppl that brag about their "profits" they made when they haven't made a dime cuz they haven't pushed the sell button and crystallize their gains.

 

[cabbagetowner]

I suspect most have not made a dime cuz they haven't sold. Or they sold and bought a bigger place and are still levaraged and in the market. The only ppl that I can see that made any real profits are the serial flippers and agents that milked the market for every cent of this bull market run. I haven't met alot of ppl that sold in the last few years and moved to rental markets. It always amazes me to meet ppl that brag about their "profits" they made when they haven't made a dime cuz they haven't pushed the sell button and crystallize their gains.

great point about the agents.