Rent or Buy?

Lets pick a popular investment these days – a 3 bedroom, 2 bathroom investment condo.

180K purchase price or rent at $1200 a month.
5% Down payment.

Your loan would be:
180,000
-5% Down Payment
+2.75% CMHC Mortgage Insurance (must be insured when you loan over 80% of value).
Loan = 175,700.

Payments?
Amortized over 35 years, 5 year fixed at 3.84%
Monthly Payment is $761.18

Let’s assume condo fees of $200 and Property Taxes of $1800 a year.

761.18
+ 200
+150 (1800/12)
= $1,111.00 per month.

Cheaper? Yes it is.

Now you’re telling me that $200 is low for condo fees, and what if taxes were higher – say $2000 a year?

Sure thing…

$761
+$300 condo fees
+ $166 taxes ($2000/12)
Total monthly payments = $1,227.00

Cheaper? You might not think so… but let’s really look at what is going on here.

That $761 monthly payment actually has a little over a $200 component of it going towards the loan itself (called the principal), while the other $561 of it goes to interest on the loan. Over time, this $200 figure gets larger and the $561 part gets lower until the loan is paid in full (in theory over 35 years of the amortized mortgage).

What does that mean? It means that $200 of the payment is actually being put into a savings account for you called ‘Equity’ in your home. What this means is that you are KEEPING that $200 component and putting towards the value of your home which can be recognized once you sell down the road. Just like a savings account – your money is being put somewhere to be withdrawn by you and for you at a later date.

So this means that out of the $1,227 payment (which was estimate high), $200 is being put back in your pocket and $1,007 of it will never be recouped.

Now if you were renting – how much of that $1,200 monthly payment will never be recouped?

You guessed it – ALL OF IT. Never to be seen again.

Now take into account the following:

As a general rule, real estate appreciates in value by 5% a year (more in recent years, but lets be conservative here), and what that means is that when you OWN your property, over the period of ownership the home becomes more and more valuable –which translates into a higher sale price when you sell compared to when you bought it. So you essentially MAKE money on the sale of the home! MORE MONEY you do not make when you rent. That $180,000 condo could be worth well over $200,000 in a number of years. In a great city like Ottawa that has a major economic driver like the employment rate being sheltered though the huge amount of public service employees – our economy is arguably a very stable one that would not be subject to huge fluctuations, and therefore see consistent growth over the years – exactly like what we have been seeing year after year.

So those are TWO ways that real estate make money.

But guess what – it gets better. There is a third. A little gem that should be sought out by all investors – POSITIVE CASH FLOW.

Let’s take that condo of $180,000 with payments (that were estimated HIGH) at $1227, and you rent it out for $1300 a month to a family. That’s about $70 a month in your pocket. That my friends, is called icing on the cake.

Now what if you wanted to live there? Or had a son or family member who wanted to rent out a room?

No problem. You live in one room, and you rent out atleast one bedroom for $500 or $600 a month. If there is a bedroom in the basement with a washroom – you might get $700 for the whole lower level. So apply this $500 – $600 dollars to your monthly costs of $1227 (on the high end), and you are OWNING a property for under $700 dollars a month, and $200 of it is being saved in your ‘equity’ saving account each and every month.

Less money out of pocket per month, your investment appreciating in value over the years, and potential for positive cash flow every month all mean a TREMENDOUS difference over time.

Finally – what if your numbers were better that what I described? Is that possible? Was I exaggerating?

Well – you be the judge. I have two investment condos for sale at the moment. One is $187,000 that has condo fees of $220 and taxes of $1700 a year. So the number would be better there.

I have another for $164,000 that (while needs a few thousand to upgrade), has a large bedroom in the basement that could fetch $600 a month easily, and the units themselves rent for about $1300 – while total cost would be under $1100!!!

You do the math. Either way, ownership is better. In a relatively stable and growing market like Ottawa, historically and as far as predictions go – we are not in a volatile market where property values are likely to drop, and therefore REAL ESTATE provides a great way to leverage your money, earn some income, save for retirement, and help secure your financial freedom.

Besides, you can’t live in an RRSP. Last time I checked – a roof over your head meant something.

Happy Buying, and Happy Selling!

Contact me anytime to chat.

Cheers.

http://www.MarcEvansRealEstate.com
marcevans@remax.net
613/868-4383