Our real estate background
As a progressive accounting & advisory firm we are close to the real estate space and have expertise in this sector in Toronto and the GTA. We service personal real estate investors, real estate developers, and young professionals looking to purchase their first home. When it comes to a personal residence, there are a lot of factors when it comes to whether to buy or rent.
Conventional Wisdom vs. Today's Market Place
Conventional wisdom jumps to the conclusion that it is always better to purchase a home than to pay for rent, because your house is an investment and the value will always increase. This may great, especially since home prices have increased rapidly in the past 10 years and recent price increases year over year as at June 2016 were up 15.7%. We are in a market where rapid price increases have created a euphoric buyers market . We are now seeing a lot of first time home buyers enter the market on the premise that next years prices will become less affordable and they need to buy now. However we suggest to our clients to make decisions based on logic and systematic approach vs. making emotional financial decisions
Buying vs. Renting
At the end of the day the decision to rent or buy is a financial one. You need to asses the answers to these 3 key questions:
1) Do you have enough for a down payment?
- We suggest a conservative approach and putting 20% down on your personal residence, more if possible.
- You will also want to ensure you have enough savings as well after this down payment. It doesn't make much sense to lock in your life savings in a house does it? You will want to ensure you have emergency savings for expenses, or sudden changes in employment, health conditions, etc.
2) Does your career involve a lot a of travel at the moment and maybe a future re-location?
- It's a lot easier to pick up and leave and become more flexible when you are renting should you require to re-locate for a current job opportunity. If you own your current home and have an global career opportunity, you may be forced to sell your house and be stuck with paying closing costs twice in a short period of time ( when you recently purchased, and now on the sell side).
-This is why we suggest when purchasing a home, you need to have a long term commitment. When you look at the transaction costs of getting into a home, you are looking at least 10%, which will include real estate commission, land transfer taxes, and legal fees.
3) Affording the monthly payments vs. how much debt you are taking on?
- We all know interest rates at historical all time lows and this has driven real estate prices through the sky in Toronto in the past 10 years. The market is no doubt over heated and we have seen proof of this via bidding wars.
- You need to understand that when you are making the decision to purchase a home at the current market levels, you are taking on a lot more debt than others would have in the past. The reality has shifted from whether to rent a home or purchase vs. renting money at cheap rates.
- We suggest that you analyze the overall amount of debt you are taking on and assess whether you can afford the overall debt in the long term. and not just looking at the short term monthly payments. Should interest rates increase you need to factor this into your decision. The historical interest rates on mortgages in Canada have been somewhere around 5-7% ( vs. the 2.5%-3% currently in 2016 ), for more information please visit the Bank of Canada Website for this information. We suggest to be safe you need to run the numbers and see if you are comfortable servicing this debt over your lifetime, both at the current rates and at the historical average rates.
- Factor in the total cost of your mortgage, or the interest component over the amortization period of your mortgage. Use this calculator for a simple guide.
Contact us for additional assistance
If you have have any other questions on whether our thoughts on real estate in Toronto or how to best make a decision on whether to rent or buy, contact an MP Group Advisor at 416-214-0527 or visit www.mpgroupcpa.com