Proper Way to Look at Cost of 2 Buying Options

[UrbanVigor]

I am looking for a condo in Toronto and currently have a down payment of $40K which would be less than 20% down and would afford me a purchase of a $334-$350K condo on the resale market.

I am interested in a new condo development whereby after continuing to save and make deposits I'd be putting 20% down on a $389K condo.

I had found this Buy Now or Later calculator which was created to analyze whether to delay a purchase should the price be expected to go down a couple of years later. I piggybacked off it, added a calculation for mortgage default insurance on a resale unit and added a calculation for occupancy fees on a new unit. My hope is to determine what is a more financially prudent buying decision.

It calculates the cost of each alternative over the next 5 years. Interest, expenses, and property tax on a resale condo and continuing to pay rent and then occupancy fees before the mortgage kicks in on a new condo.

My question is is this the right way to look at things? Are there flaws in this calculator? Am I out to lunch in calculating a lower cost on the new condo by continuing to pay rent for a couple of years and then occupancy fees before the condo registers? Or is this payment of rent and occupancy fees before the mortgage begins on the new condo actually financially beneficial to paying interest, expenses, and property taxes immediately on the resale condo today?

Here's a link to the spreadsheet... hope you have no problem accessing it...
http://www.netspace1.com/temp/BuyNoworLater.xls

Thanks for your help in advance.

 

[daveto]

UV, three things.

First, in calculating your savings rate of return you base it upon the 20% deposit amount of $77k. However I don't think you have that amount at present, correct? Thus you should only be crediting the savings rate of return on the amount you have at any given point of the 5 years. Also, if you are buying a new condo then you would need to make deposits (15%) in the first 6 months or so after signing the paperwork (I think, I'm not an expert in preconstruction deposits)

Second, you are summing the payments nominally with no allowance for inflation. You should add in a discount rate to reflect that a payment of $1000 in five years (for example) is less than a similar payment today, etc.

Third, I question many of your assumptions (1% savings rate of return? 5.5% fixed mortgage rates in 3 yrs? 8% annual increases in cost of a property?) But these are up to you.

Regards
dt

 

[cdr108]

UV, regarding the interest rate for occupancy fees.

The interest is calculated on a monthly basis on the unpaid balance of the Purchase Price at the prescribed rate. The prescribed rate of interest is the rate of interest that the Bank of Canada most recently reports as the chartered bank administered interest rate for a conventional one year mortgage as of the first of the month in which the purchaser assumes interim occupancy or such other prescribed rate.

currently it is 3.80%.

 

[UrbanVigor]

Thanks... both your replies are very helpful.

cdr, I was looking for that rate and couldn't find it anywhere. Updated with 3.8% though I suspect it would rise a couple of years from now during occupancy.

dt, good observations... you're right, I don't have the 20% deposit right now, but rather buying new allows me to accumulate it. So I would need to factor that in over the course of 2 years.

Very good point about the present value of the future payments.

1% savings rate of return is conservative. I know developers pay interest on deposits, but not sure how much and currently ING interest is 1.05%. Assuming interest rates will increase a couple years from now, but perhaps can have it capped at this point in time. Not an 8% annual increase in the value of the property... this spreadsheet was initially intended to compare a single property, but I'm using it to compare buying a resale condo today with the down payment I currently have compared with buying a new condo and making further deposits over the next couple of years.

Certainly not every detail in this spreadsheet will be perfect, but am I going down the right path?

 

[UrbanVigor]

I do wonder if this is the best tool for me to conduct this analysis.

I essentially want to compare whether I'd be farther ahead continuing to pay rent, make deposits over the next couple of years, incur occupancy fees and then begin making mortgage payments on a new condo that is at a price that I otherwise wouldn't be able to afford today with the down payment I currently have. The mortgage would be the same in either case except one would be on a resale unit that I'd move into today versus a new unit that I'd more into a couple of years from now after it's built.

Is there a tool out there that's best to use to determine this?

 

[Epi]

If you want to fully appreciate the difference between the two options, you have to ask yourself, whether or not you're willing to pay more for the convenience and happiness of owning your own place earlier vs renting for a few years. Not to mention, you never know where your life might take you in a few years...

 

[UrbanVigor]

Yep, that's true and I'm not overlooking the pros and cons of each. I still want to compare from a financial perspective.

 

[luxome]

i took some time to read your post. Personally, i would recommend buying a resale today because 1) take advantage of the low interest rate while you can; 2) you can start accumulating equity on your home; 3) you are likely to enjoy the appreciation of your property over the years; 4) you won't have to worry about the construction delays that may throw off your plans....there are lots more.

However, if you do decide to go buy pre-construction, don't be afraid to negotiate the deposit terms.

As an investor, i don't like to get too technical because a lot of the times numbers/calculations don't take into account of what really happens in reality (e.g., construction delay may throw off your personal plans such as a wedding, etc.)

Don't assume that the more you save, the more greater the options you'll have in buying something bigger or better location (especially in downtown) because you may be surprised that the amount you saved over the years can only buy you the same thing.

 

[UrbanVigor]

Great points, luxome, thank you.

The reason why I'm considering pre-construction is because my monthly rent is incredibly low and my bi-weekly savings are exceptionally high.

Currently, I have $40K for a downpayment and can afford a $334-$350K home.

I don't believe that if I save more and buy later that I'll get more. But if I make a deposit on a $389K unit in what appears to become a great building in a fantastic location, and continue to save then by the time my mortgage kicks in I'll have 20% down and my mortgage payments will be the same as they would today if I bought on the resale market.

The only drawback is the lack of instant gratification.

 

[X2 Buyer]

Great points, luxome, thank you.

The reason why I'm considering pre-construction is because my monthly rent is incredibly low and my bi-weekly savings are exceptionally high.

Currently, I have $40K for a downpayment and can afford a $334-$350K home.

I don't believe that if I save more and buy later that I'll get more. But if I make a deposit on a $389K unit in what appears to become a great building in a fantastic location, and continue to save then by the time my mortgage kicks in I'll have 20% down and my mortgage payments will be the same as they would today if I bought on the resale market.

The only drawback is the lack of instant gratification.

I have not gone through your spreadsheet at all for all the details because you may lose your focus of the big picture after all.

Let us assume an upward real estate market (most likely) for the next three years - say an average 6-8% every year. This assumption is not rocket science I only based that on TD Bank's estimate: a 10% increase for Toronto housing price next year. So it will be a 20% increase (1.06*1.06*1.06). Then comparing the profit by assuming you have bought a $350K house the future price from today for over the next three years it will be $420K.

Then taking a look at the pre-construction condo price; will they meet up the increase % of an existing one? Depending on the location we all know the past several years the downtown condo's prices have been increased very aggressively. To keep the math simple assuming you have bought a same equivalent profitable one for $389K then the market price after three years it will become $466K.

So the profit is $70 the previous one vs. $77 the latter one.

For any upward market my point is no matter it is an existing house or future one, purchase as much as you can afford, go with the higher priced one. Although you may lose the interest rate today it only guarantees you most of 5 years. And by the way the interest rate as what I have stated in one of the posts before the Canadian government cannot afford the impact from the expensive dollar which will upset our importing industry thus the economic growth. Therefore I expect it will be higher than current rate but not too far up.

 

[Kenny]

Let us assume an upward real estate market (most likely) for the next three years - say an average 6-8% every year. This assumption is not rocket science I only based that on TD Bank's estimate: a 10% increase for Toronto housing price next year. So it will be a 20% increase (1.06*1.06*1.06).

Their forecast is 9.4% for next year, 1.6% in 2011, 1.3% in 2012 and 2.0% in 2013.

That's far less than 20%.

 

[X2 Buyer]

Their forecast is 9.4% for next year, 1.6% in 2011, 1.3% in 2012 and 2.0% in 2013.

That's far less than 20%.

Ok, although it will not affect my answer previously, let us revise the profit:
1.094*1.016*1.013*1.02 = 1.149 so a 15% increase.

 

[daveto]

Indeed, Toronto RE prices only 5x of income. At LEAST a 15% percent over the next few years - it's not rocket science people. Analysts and economists know what they are talking about, and if you can find a report that says 15%+ increase, then it is guaranteed!! Awesome!!! Buy the most you can get, because the more leveraged you are the more profits you will make. Ka-ching!!!

Thanks for your great analysis X2 Buyer!!!


ps. Sure, some might say that is the highest multiple in history and that history has shown that RE markets throughout the world revert back to 3-4X income on average. But what does history and/or fundamentals know about anything. They're just old fuddy-duddy's.

 

[cdr108]

^ ^ ^

for those new to the forum ... end of sarcasm.

 

[UrbanVigor]

I'm new to the forum, but the sarcasm is so clear it's splish splashing all over the board.

A question though... where do the calculations for 5X income come from? In other words, where does income basis come from? Is it derived by average incomes and then is the region taken into account? Or is it then the target market for that condo within that region?

Does anyone have links to any analysis related to prices versus income?