Buy or Rent?

[gorbie]

Hi there

My situation:

Recently sold my 1 bedroom condo in Brampton to move closer to Toronto area for work and school for my girlfriend.

Earn about $60,000k a year myself (GF is in school) and after my condo sale I have about $25,000k in cash plus another $10,000k in RRSP.

I have found a gorgeous 1 bedroom loft overlooking the lake in west Toronto for sale for $269,000 (condo fees $400)or the owner will rent it to me for $1700/month. Whats the wiser move?

Plan to live there 2-3 years.

I can buy it with 5% down and money for closing costs. But worried about the markets and if its better to just rent it?

What would you do?

 

[condoboy]

Buying is always better than renting...no matter what the economic situation is. Try to negotiate on the purchase price....check out what the comarables are, and get pre-approved. Everything in life is a risk...from choosing the girl you're going to marry to buying a piece of property....live for today and stop worrying so much. No need to waste money on rent when you have both the income and the downpayment to start reaping the benefits of home ownership. If not now...then when exactly? Good luck!

 

[EverythingZen]

Buying is always better than renting...no matter what the economic situation is. Try to negotiate on the purchase price....check out what the comarables are, and get pre-approved. Everything in life is a risk...from choosing the girl you're going to marry to buying a piece of property....live for today and stop worrying so much. No need to waste money on rent when you have both the income and the downpayment to start reaping the benefits of home ownership. If not now...then when exactly? Good luck!

I respectfully disagree. The OP will easily save thousands of dollars per year by renting and avoid any market risk. With a very short term holding period he is far better off renting. He will very likely be savings tens of thousands when you factor in commissions, closing and land transfer costs, and the likely drop in prices that we will experience in the Toronto housing market this year and into the future.

 

[rbt]

Hi there

My situation:

Recently sold my 1 bedroom condo in Brampton to move closer to Toronto area for work and school for my girlfriend.

Earn about $60,000k a year myself (GF is in school) and after my condo sale I have about $25,000k in cash plus another $10,000k in RRSP.

I have found a gorgeous 1 bedroom loft overlooking the lake in west Toronto for sale for $269,000 (condo fees $400)or the owner will rent it to me for $1700/month. Whats the wiser move?

Plan to live there 2-3 years.

I can buy it with 5% down and money for closing costs. But worried about the markets and if its better to just rent it?

What would you do?

For me the decision would depend on how long I intended to live there.

Variable rate mortgage is around 4.2% -- lets say 6% for a fixed 5 year.

Taxes + fees + mortgage interest (5.7%, 20 year amortization, weekly payments -- pcfinancial numbers) works out to around $1850/month. Rough notes gives me $183 + $400 + $1243. These can be confirmed for more exact numbers.

Mortgage principal is money from one pocket to another, so I do not count that in fees. Paying off a mortgage in 1 year for example doesn't mean you are out $25000 per month. It simply transfers from account to another.

As you pay off principal, the $1850/month actually decreases over time.


Many fees associated with buying and selling. If you buy this year and sell next year, you're in to a lot of pain. If you buy and hold for 5 to 10 years it isn't so bad (note, you can rent it out if you want to move).


The best option might be to sign a lease with an option to buy for $269900 in the lease. Live in it for a year and decide if you could stay there for 5 more years.


If you want to be fancy, take into account bank interest (4% before taxes for safe investment) versus inflation (3.5%) versus land value changes (1%??? in Toronto -- check the area around that specific location) and run the numbers that way.

 

[cdr108]

Buying is always better than renting...no matter what the economic situation is. Try to negotiate on the purchase price....check out what the comarables are, and get pre-approved. Everything in life is a risk...from choosing the girl you're going to marry to buying a piece of property....live for today and stop worrying so much. No need to waste money on rent when you have both the income and the downpayment to start reaping the benefits of home ownership. If not now...then when exactly? Good luck!

Typical RE agent spew.
Buying is NOT always better than renting .... especially in the current economic situation.

If you're only putting 5% downpayment of $269K, that leaves a mortgage of $256K plus CMHC fees (2.75 % of Loan Amount).

$263K @ 5.45% (3 yr fixed, 25 year amort) = $1600/m mortgage + $250/m property taxes + $400/m condo fees = $2250+/m.

Problem will be qualifying for $263K mortgage, since your income is $60K You may quality for $210K.

That leaves a difference of $46K ($269K - 13K) but you can use the rest of your $12K ($25k - 13K) from your original $25K savings. Unfortunately, you will not be able to use your $10K RRSP since you are not a 1st time home buyer anymore. You will have to wait for 5 years before you can access that money again.

If you can put 20% down (~$54K), that would lower the mortgage to $215K = $1300/m mort + $250 taxes + $400 condo = $1950+/m.

If you were to buy, live in there for 3 years, then sell it = alot of transaction costs like LTT, legal and realtors fees; that might equal to 10% of the original purchase price you are giving away ($27 K).

In 3 years the majority of your payments is paid towards interest and VERY little to your principal so it's not different than 'renting'.
If you buy, you would be paying $250-$550/m ($9K - 20K in 3 years) more than rent depending on what your DP is.

In addition, we haven't taken into consideration the risk of property value deflation in today's market.

I concur with rbt, where the best option might be to sign a lease with an option to buy for $269900 in the lease; that way you can gage the market conditions.

 

[AKS]

I would say neither rent or buy that unit. $1700/month seems pretty steep to pay monthly for a 1+1. Does it include parking? Since it's west of Toronto, I think the rental prices should be cheaper too. You could even rent in downtown Toronto for around $1500-1600 for 1bdrm with parking. As for purchasing, I think $400 seems pretty steep to pay for maintenance too. Judging by the cheap price of the unit, I think the size isn't very big? If you buy it, you would have a lot of misc costs a long with the maintenance fee.

 

[gorbie]

I would say neither rent or buy that unit. $1700/month seems pretty steep to pay monthly for a 1+1. Does it include parking? Since it's west of Toronto, I think the rental prices should be cheaper too. You could even rent in downtown Toronto for around $1500-1600 for 1bdrm with parking. As for purchasing, I think $400 seems pretty steep to pay for maintenance too. Judging by the cheap price of the unit, I think the size isn't very big? If you buy it, you would have a lot of misc costs a long with the maintenance fee.

Well we looked downtown Toronto and all you get is a shoebox size wise and no visitor parking thats what attracted us to the unit:

-It has Lake View
-Top Floor
-2 Parking Spots
-2 Floors
-over 900sq/ft

$1500/ doesnt get you much downtown to rent in all honesty.

 

[daveto]

Don't be misled by the asking rental prices downtown (and indeed anywhere else). "official" rental vacancies are quite high at present, and those stats don't include all of the amateur landlords out there with a condo they want to rent out.

If you make an offer of 15-20% below the rental asking, you might be surprised at the result.

 

[condoboy]

Okay now for some numbers...and for the record I'm not a Real Estate Agent but I wish I had been for the past couple of years with what has gone on in the Toronto real estate market .

Try to negotiate on the price, lets say you get the condo for 260k which is
9k less than the asking price.

With your downpayment of 20k, your total mortgage will come out to 240k.

Now what you can afford:

Monthly income is: 5k
Mortgage interest rate: 4.15 variable 5 years
Monthly property taxes: 200 dollars
Monthly condo fees: 400 dollars
down payment: 20K
Ammortization: 30 years

The maximum mortgage that you can afford works out to $247,911K
Maximum house price you can afford is $267,911
Maximum monthly mortgage payment is $1,200
CMHC Mortgage Loan Premium is $7,313

Therefore you would be paying: $1,200 + 200 + 400 = $1,800/month total

Now let me ask you....what's better? $1,800/month and you own your own home and are building equity or $1,800/month in rent and basically money out the window in the end?

Your maximum mortgage that you can afford is $247,911....and your actual mortgage would be 240k from the negotiated deal example above.

Once again good luck!

Btw...you still have 5k left from the condo sale in Brampton for closing costs and I'm sure the girlfriend can pitch in if she really loves you too .

 

[daveto]

Mortgage interest rate: 4.15 variable 5 years

The days of Prime minus .60 are over.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080930.wmortgage0930/BNStory/Business

Also, my understanding is that when qualifying a buyer for a mortgage, the lender will typically use the 5 year fixed rate to determine their maximum eligible mortgage (even if they are going variable). The intent being to ensure the lender is able to support a higher rate if/when their variable rate increases.

If I am wrong on this latter point, someone please pipe in.

 

[EverythingZen]

Hello Condoboy,

The issue isn't what can he afford. The issue is what's a better move financially.
You neglected to account for the opportunity cost on the downpayment and further
neglected to factor in the 5% sales commission in year 2 or 3 when the
OP wants to move. Finally, while you may be correct about the variable rate,
you cannot lock in a 5 year mortgage rate for under 6% and in this environment.

The 'building equity' argument is specious at best as the 30 year amortization mortgage
doesn't pay down hardly any prinicpal at all.

The only advantage to owning would be to partially recoup the cost of any improvemets
that he'd make to the unit- painting, lighting, wall coverings, build-in, etc. A renter
would be out of pocket all those costs but an owner may be able to sell them to the
next buyer.

Financially it appears that the OP could literally save $10,000x if he only intends to occupy
for 2-3 yrs in my opinion.

Do you believe the condo market will be higher in 2-3 years than it is today?

Peace & Kindness

 

[urbandreamer]

Rent. But don't be silly: why pay $1700/month on a rental loft when you can rent a perfectly fine 2 bedroom apt in an older rental "slab" for $1200/month?

Your end goal is to own another house, right? So practise discipline, and be cheap. Save your money! Wait for the coming real estate correction (and yes, it will be a major correction....), then with your bonus savings from renting a cheaper apt, you can pounce on your dream home.

 

[condoboy]

Mortgage interest rate: 4.15 variable 5 years

The days of Prime minus .60 are over.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080930.wmortgage0930/BNStory/Business

Also, my understanding is that when qualifying a buyer for a mortgage, the lender will typically use the 5 year fixed rate to determine their maximum eligible mortgage (even if they are going variable). The intent being to ensure the lender is able to support a higher rate if/when their variable rate increases.

If I am wrong on this latter point, someone please pipe in.

I don't know the details about qualifying buyers, but if you notice in my very first post I wrote "get a pre-approval" before purchasing anything! I just purchased and got a variable rate of 4.15% for 5 years. I guess I bought just in time...maybe one of the last ones according to your globe and mail article .

 

[condoboy]

Hello Condoboy,

The issue isn't what can he afford. The issue is what's a better move financially.
You neglected to account for the opportunity cost on the downpayment and further
neglected to factor in the 5% sales commission in year 2 or 3 when the
OP wants to move. Finally, while you may be correct about the variable rate,
you cannot lock in a 5 year mortgage rate for under 6% and in this environment.

The 'building equity' argument is specious at best as the 30 year amortization mortgage
doesn't pay down hardly any prinicpal at all.

The only advantage to owning would be to partially recoup the cost of any improvemets
that he'd make to the unit- painting, lighting, wall coverings, build-in, etc. A renter
would be out of pocket all those costs but an owner may be able to sell them to the
next buyer.

Financially it appears that the OP could literally save $10,000x if he only intends to occupy
for 2-3 yrs in my opinion.

Do you believe the condo market will be higher in 2-3 years than it is today?

Peace & Kindness

Yes, I think the condo market will be higher in the next 2-3 years in Toronto. And I certainly don't think that there is going to be a major correction or crash either. Prices in Toronto will stay steady in the next couple of years, with modest price gains in the range of 1-3 % annually (in my opinion). For many years the condo market in Toronto has been under valued and we are only now catching-up to other major cities in North America and the world as far as values go. The areas where I see major price corrections are in the West (Edmonton, Calgary) where we have seen major double digit appreciation over the last few years and over inflated values. I am an optimist and I think Toronto's real estate market is going to pull through any turmoil in the coming years!

 

[EverythingZen]

For many years the condo market in Toronto has been under valued and we are only now catching-up to other major cities in North America and the world as far as values go.

I'm afraid I can't share your optimism.

Can you please explain to me how condo prices in New York or Miami (both falling rapidly btw) are
relevant to condo prices in Toronto? I don't follow that logic. A condo is not a transportable object
like a car that you can purchase in Buffalo for 20% less, pay the duty and drive across the border.
It only has value to a local user/occupier. Shouldn't the value of that condo be determined by the local
demand for condo living, including the local demand for rental accomodations? How is it at all relevant
what values are in a foreign city?

I don't understand that logic. Perhaps you could enlighten me with your understanding of it b/c I've heard
that argument before and it never made any sense to me.

Peace & Kindness