Would We Be Richer If We Had Bought a House?

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FIRECracker is a computer engineer/children’s author, who used to live in one of the most expensive cities in Canada. But instead of drowning in debt to buy a house, she saved and invested instead. What resulted was a 7-figure portfolio, which has allowed her to retire at 31 and travel the world.
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photo credit: Mark Moz @ Flickr

Since I’ve been ranting non-stop about the unaffordability of the Toronto and Vancouver housing markets, every day someone has come after us in the comments or email by saying “You’re not taking into account house appreciation!” or “If you had bought a house in 2012, you would’ve been even richer!” Followed by all sorts of questionable and hand-wavy justification to make themselves feel better.

To which my response is: “You wanna dance?”

Hey, if you want to bring feelings to a math fight, go right ahead my friend. I will be more than happy to hand your ass back to you, all red and spanked.

Let’s math this shit up!

Let’s say we suffered the sufficient traumatic brain injury required to buy a house with the cash we saved in 2012 for $500,000 and sold it at the end of 2014 instead of investing. What would’ve happened?

According to TREB, the average price of a Toronto home 2012 was $497,130, and increased to $622,120 by 2015.

This gives us an appreciation of $124,990 over 3 years. Sounds like a pretty good chunk of change. That is a healthy 7.8% year-over-year gain. A 60/40 portfolio had about the same gain during that time, so these should be pretty close, right?

And here’s the part that everyone forgets. There are reams of little (and not so little) costs of ownership that would’ve eaten into this appreciation. Stuff like real restate agent commissions, land transfer taxes, lawyer fees, maintenance. You know, the stuff that real estate agents always brush off while saying “yeah, but prices always go up.” Let’s pull back the ugly curtain on that, shall we?

Item Cost
Real-estate agent commission (5% to sell): $622,120 x 5%= $31,106
Land transfer tax (municipal AND provincial) $12,085.20 (source: TREB LTT Calculator)
Property Taxes: $3,420.12 (2012) x 3 = $10,260.36 (source: Toronto Property Tax Calculator)
Lawyer fees: $500 x 2 (buy and sell) = $1000
Home inspection: $500
Home insurance: $100/month * 36 = $3600 (source: Toronto Home Ownership Costs)
Maintenance: You should set aside 1-3% of the price of your home for maintenance per year. So let’s say 1%. $4971.3 x 3 years = $14,913.90 (source: Toronto Home Ownership Costs)
Gas, Electricity, Water (included in our rent): $125/month (hydro) + $125/month (gas) = $250/month * 36 = $9000 (source: Toronto Home Ownership Costs)
TV Cable (included in our rent): $25/month * 36 = $900
Furniture We would need to buy furniture to furnish the addition bedrooms. Assuming 10K and a 50% resale value = $5000
Total costs over 3 years $88,365.46

Holy shit. Even I was surprised by how high this was. This is like a whole Engineer’s salary in ownership costs! And that’s after taxes!

And keep in mind, in many ways I’m being extremely conservative. This house was bought with CASH, so there are NO interest charges. And most people then follow up their unaffordable housing purchase with a severe case of Keeping-Up-With-The-Jonsitis, filling their 2-car garage with 2 cars (bought using borrowed money, of course), then hiring maids and landscapers to take care of their house for them, then remodeling their kitchen because they HAVE to have the newest granite countertops, etc. We will ignore all that, but you KNOW the actual extra costs over renting are much much worse.

So our net profit would’ve been $124,990 – $88,365.46 = $36,624.54

Meanwhile, a 60/40 portfolio of $497,130 generated after-fee returns of 7% (2012), 8.39% (2013), 8.1% (2014). This gives us a return of $126,129 by 2014.

Extra costs of owning this portfolio? None. No insurance, no commissions, no stupid 2% MER, and not even taxes since the gains are either unrealized capital gains or dividends, which are basically untaxed up to $50k.

But, since we continued renting, we’ll need to deduct the cost of rent from the gains. We paid $850 per month for 36 months of this time, so our gains are now

$126,129 – $850 x 36 = $95,529

So that’s a gain of $95,529 over 3 years from investing and renting versus $36,624.54 from buying the house.

Actually sitting down and doing the math surprised even us!

By investing instead of buying, our gains were 2.61X the gains from the house. And this is during one of the most powerfully accelerated booms in house prices in Toronto! Both houses and stocks appreciated at about 7-8% year-over-year during this time, and yet investing absolutely MURDERS housing!

I find it hilarious when people say “the majority of your portfolio came from your savings not investing. That has nothing to do with not buying a house.”

Wrong. It has EVERYTHING to do with NOT buying a house.

Would we have been able to save and invest that much had we bought a house? Nope. The costs would’ve eaten up OVER 70% of our gains!

Clearly they people that chant “House! House! House!” do not understand the real costs of owning a home. If you just punch some numbers into the mortgage calculator (like the real-estate agent told you to), and ignore the real costs of owning a home, you have NO IDEA what you’re doing.

And that’s the real problem of houses as a wealth-generating tool. Yes, people have gotten rich off real estate, but if you were to ever dig deeper into their analysis, you realize that people like Financial Samurai or Paula Pant understand the complexity and math behind their decision on a level of complexity that most people aren’t even aware exists. The vast majority of people walk into an open house, look around for 10 minutes, coo at the granite countertops and fancy faucets and say “Wow, I could really see myself living here.” And then promptly get into a bidding war for more money than they’ll ever earn in their lifetime.

In other words, most people bring feelings to a math fight.

And that’s what makes real estate such a seductive and dangerous thing. We’ve gotten countless emails from people saying “the stock market seems scary and I don’t understand it, so I don’t want to invest.” There’s a natural fear of the unknown when it comes to investing, and in many ways that’s normal. There’s a natural tendency to fear what you don’t understand.

That fear is completely missing with real estate. People will absolutely throw good money after bad towards a house purchase they don’t understand. And that’s why most people never get rich.

Don’t bring feelings to a math fight people!

Math always wins.


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72 thoughts on “Would We Be Richer If We Had Bought a House?”

  1. Well when you put it like that… Math wins again! 🙂

    I’ve always thought that buying a house to live in was a good way to (mostly) remove rent payments from your annual expenses (assuming purchase price to rent ratios make sense in your area).

    But it’s a horrible investment (compared to the alternatives) in general, on average, across most geographies. The costs of buying and owning more housing than you need swamp the gains you can get in all but the most bubbly of housing markets.

    So let’s lay to rest the old saying “buy the biggest house you can afford because housing is a great investment”. Buying a house might make sense to live in, but not so much if your goal is building net worth.

    However, there is one reason to buy a house. If you absolutely suck at saving money and need a forced savings account, paying several thousand per month toward a mortgage you can barely afford is slightly preferable to blowing it all on useless crap or frivolous expenses. Just slightly. At least at the end of 30 years you’ll have a paid off house instead of nothing. But that’s one of the worst reasons ever to buy more house than you can afford instead of simply buying real investments (be they stocks, bonds or anything else that tends to go up in value over time).

    1. Ha ha. Yeah, if they have to force themselves to do something, that’s an emotional response not a mathematically one. But hey, if they choose to make themselves miserable, they should be allowed to make that choice.

  2. I could use a good ass kicking, I’ll be very honest with you. (My Cousin Vinny)

    You make some really solid points about the inadequate financial analysis most people do when calculating the cost and return of a home purchase. And the over abundance of good feelings that overshadow rational decision making. We need to teach people when and how to buy homes properly.

    That said, I think a math fight might be a good idea. Let’s dig deeper and see how the ‘investments’ compare.

    Disclosure: I am a real estate Broker in California and believe there really are appropriate circumstances, both personally and financially, for owning real estate.

    1) The returns for both housing and the stock market were very strong in those years. It makes comparing financial returns possibly misleading. But, that’s what we have to work with.

    2)I would never advocate buying and selling a home within a 3 year window. About half the costs you propose are transaction costs and are one time only. Owning a piece of real estate should be long term only. Think 10 to 20 years. Better yet, never sell and own an income producing property. What a great retirement plan!

    3) You did not include the rent you paid in the analysis. This investment saved you 3 years in rent. What would a comparable (similar size, location and quality) rental have cost you?

    4) What would taxes be on the gains of each of these transactions? In the US there are tax advantages on sale of primary residence.

    In the end, these are very different things (financially speaking) and there is obviously a place for both.

    I’ll wait here here for that ass whoopin’ I know is coming.


    1. “I would never advocate buying and selling a home within a 3 year window. About half the costs you propose are transaction costs and are one time only. Owning a piece of real estate should be long term only. Think 10 to 20 years. Better yet, never sell and own an income producing property. What a great retirement plan!”
      – This post is about answering the question “you would have made more money if you bought in 2012”. And from 2012 to 2015, that’s 3 years. So clearly that argument has been debunked.
      – Also, if you own for 10 to 20 years, the costs I mention above still apply, year after year. And during this time, the stock market would’ve also ramped up higher (over 20-25 year period, stock market has historically beat the housing market). So I fail to see how that changes anything.

      “You did not include the rent you paid in the analysis. This investment saved you 3 years in rent. What would a comparable (similar size, location and quality) rental have cost you?”
      -Yes I did. Read the post: But, since we continued renting, we’ll need to deduct the cost of rent from the gains. We paid $850 per month for 36 months of this time…” And no, it’s not about a comparable rental. I already had a rental. So the choice was to stay and invest or go and buy a house.

      “What would taxes be on the gains of each of these transactions? In the US there are tax advantages on sale of primary residence.”
      – There is no tax on the primary residence, but we can’t deduce mortgage interest like you guys.
      – For the portfolio, we don’t need to sell (unlike a house) to get the passive income needed in retirement. The dividends are tax free up to 50K, allowing us to pay essentially no tax.

  3. Praise the spreadsheet gods! And math, let’s praise math too. Thanks for setting my mind free from the jail of home ownership. Pinky ring cheers!

  4. I’ve always thought of a house you live in as a consumption item, you buy it if that’s what you want to spend your money on. And all the fees and expenses you spend are just a part of that consumption item you chose to buy.

    The only time I really see housing as an investment is if you are buying it as a rental. In that case, I see it as similar to investing in a business.

    As Justin pointed out, housing could be viewed as a form of forced savings, but it’s a pretty expensive way to save.

    1. hmm, a consumption item that’s returned 8.7% ROR (tax free btw) over the time I’ve lived in it – not shabby.
      oh and my housing costs (property taxes, maintenance, utilities (no cable though), no mortgage ) run around $900/month currently (lower in the past) so I get to live in a nice place with no landlord for about what Firecraker pays in rent – not a bad deal.

      each to his own

    2. “housing could be viewed as a form of forced savings, but it’s a pretty expensive way to save.”

      Agree. And not to mention “forcing yourself” doesn’t yield the best results since it’s triggered by emotions not math.

  5. There is a bit of confirmation bias creeping into your comparison of two different investments in order to support your thesis. I do not deny that the math still likely favours renting/stock investing versus home ownership price appreciation.

    However, a couple assumptions above are estimated higher than it should be IMHO.

    1. Realtor fees are typically 7% on 1st $100K and 2.5% on the balance, so a $622K house would cost closer to $20k + GST.

    In a heated sellers market it would not be too crazy to expect a house to sell itself quite easily, so using a discount realtor such as 1% Realty could bring cost down to maybe $8K or so.

    2. If your home ownership holding time frame was really limited to 2 to 3 years, then there is no sane way you spend over $10k on maintenance. Realistically maybe $2k max for fresh paint and updating to help the house sell, but nothing more.

    3. Profit from selling your home as principal residence is exempt from any taxes. Sale from stocks, which the bulk of it is likely outside your RRSP & TFSA, would be subject to 50% of it reduced by capital gains tax.

    4. Gas & electricity cost estimate is double what we pay for a family of 4 residing in Vancouver ( $75 gas & $50 hydro). However, I think you neglected annual City Utilities (not typically part of property tax unless it got lumped in together in the above), so it is probably a wash with the higher figure listed anyways.

    So potentially one could realize another possible $36k profit from the house in above scenario or $73K net profit (tax free).

    Compare that to net profit of stocks of 95.5k less about 48k * 30% marginal rate or 14.4k or net overall profit of about $81k. Assumption not considering TFSA/RRSP assets though.

    Just my two cents for various factors to also consider. But fascinating subject and article to let someone unemotionally reason it out.

    1. “Assumption not considering TFSA/RRSP assets though.”

      Exactly. If you structure the portfolio properly in TFSA/RRSPs, you essentially pay no tax. And especially now in retirement, our income has essentially dropped to 0, we can withdrawal the investment proceeds tax free.

  6. Great analysis, but I think you’re being inconsistent by assuming that you sell the house (triggering realtor and legal fees), while ignoring the tax on the capital gains you’d have to pay if you sell your portfolio.

    This is tricky to quantify, because it depends on three factors. First is whether the investments are unregistered, held in a TFSA, or held in an RRSP. Second is whether those are total returns (capital gains plus dividends) or just capital gains (as the tax treatment differs). Third is what tax bracket(s) the income falls into.

    For simplicity, let’s assume these are unregistered investments, the return come solely from capital gains, and all of the income falls in the 43.4% tax bracket.

    In this case, the total tax payable would be approximately $31K ($126,129 * 0.5 * 0.434). So that would really be a gain of about $64K for investments, versus $37K from buying the house.

    To be clear, this doesn’t change your conclusion. You’re still better off financially had you invested. (Also, there are a host of qualitatively issues with real estate – it’s not easily divisible, it’s hard to diversify, etc). But I think the comparison needs to be apples-to-apples.

    1. “the return come solely from capital gains, and all of the income falls in the 43.4% tax bracket.”

      In the accumulation phase, we didn’t need to sell anything, so no taxes were paid. And now that we’re in retirement, our income essentially drops to 0, so no, we would not be in the 43.4% tax bracket. We would be able to gradually withdrawal the proceeds tax free.

      1. Let me know if I’ve misunderstood you, but I think this is what you’re arguing:

        You’re saying that, in order generate an income stream from your house, you’d need to sell it, triggering realtor fees, legal fees, etc, referenced above.

        In order to generate an income stream from your investments, you have discretion as to when you sell the investments (to access the capital). You don’t have control over when you receive the dividends, but I agree the tax would be minimal based on the size of your portfolio.

        Thus, you’re not actually being inconsistent by assuming you’d have to sell the house, and not doing the same for the investments. Your approaches are different because real estate is difficult to divide into pieces. If this is your argument, then I agree with your position.


        To quantify the second point – let’s assume you live off of $40K per year as a couple. You each earn $10K in dividends (assume all are eligible dividends for Canadian income tax purposes) and you each take out $10K of capital from your RRSP. My calculation shows that in Ontario, in 2015, the two of you would pay a combined $456 in income taxes on $40,000 worth of income.

        A poor old salaried couple earning that same $40,000 would have to pay nearly $2,800 in income taxes alone, plus another $2,400 in payroll taxes (CPP and EI).

        Thus, even though both couples earn the same amount of income, the salaried employees are paying about 13% in income and payroll taxes, while the two of you could be paying 1% – a result of smart planning and hard work.

  7. We owned for 7 years, in a slightly lower growth area and the realtor/lawers/taxes fees wiped out most of the return, particularly when you considered keeping the house up with the neighbourhood as it had been a new build.

    My main criticism of your analysis is that you couldn’t rent the equivalent house to the buy case for your basement apartment level rent and would have had to pay your own cable package for the apples to apples standard of living. But, the difference isn’t enough to swing the math to favour owning a house.

    1. “My main criticism of your analysis is that you couldn’t rent the equivalent house to the buy case for your basement apartment level rent”

      It was basement apartment level rent but it wasn’t a basement apartment. That’s the beauty of it :). It was a second floor 1 bedroom apartment with everything we needed. So I definitely would not have traded it off to rent a house.

      And if I was the type of person that would give up a perfectly good rental and throw money away to rent a house? The cost of ownership would be WAY higher than $88K over 3 years! That type of person would go buy a car (probably 2), spend more than 10k on furniture, pay people to mow the lawn, etc. So that case, the math would still favour renting.

      1. My error on your accommodations. I’m glad it worked for you. My brother and wife have a similar setup near High Park, although I believe more expensive, but works well for them.

        Personally, I go crazy in those types of accommodations. I took mechanical engineering for a reason. It fits my personality. I like to tinker, I like tools, to fix things to build things. I’d get kicked out of a second floor apartment if I tried to fire up my wood working tools. We are now renting a house because that suits us.

        My point is that to some, there is a huge lifestyle gain by renting a house. Having more money just for the sake of having more makes no sense if you have to put the things that are important to you on hold.

        There needs to be balance in both life and finances, but the right balance is very personal.

  8. So I’ve read your posts on home buying and I agree with you that it’s a waste of money that’s better off being put towards investing. When you buy a house, there’s money that’s thrown away such as with Property Taxes, Closing Costs, & Mortgage Interest just to name a few. So with that being known, I invest instead of buying a home. My question though is what about the money when you sell? Say I can rent & pay utilities for $1,000/mth, or I can buy a house with PIMI (Property Taxes, Interest, Mortgage, Insurance) over a 30 year mortgage & Utilities for $1000/mth. Let’s say even that 1-3% of maintenance/yr could fill in that $1000/mth. Yes you’ll waste money on taxes, interest, increased insurance, maintenance, etc. but what about renting where that $1,000/mth is put to nothing?

    Basically it’s the sunk cost of renting vs. retained value of home ownership. If you have rent for $1,000/mth ($12,000/yr) then over 15 years, for instance, that’s $180,000. If I buy a $130,000 home, but paid more via interest, insurance, tax, maintenance, etc. then I still get somewhere near that $130,000 when I sell it. Even if I spent a cumulative $200,000 to buy that home over 15 years, I still get roughly $130,000 back when I sell depending on property values and how well I improved it. Net loss would be $70,000 vs the loss of $180,000 to rent over the same time frame. I’d much rather invest to make a solid 7% at least per year, but then again I need to live somewhere too. Bringing the home value proposition down to a reasonable $130,000 instead of a $600,000+ home-which is absurd and I’d rather house hack than buy that- what are your thoughts on this?

    1. If you can buy a home for $130,000 and the rent in that area is $1000/month, then that’s an insanely good cap rate, and completely unheard of in Toronto or Vancouver. And hey if that’s what reflects the reality of where you live, then I would agree buying makes sense for your city.

      1. This is how the housing market in our area is. An acceptable apartment is usually around $1000 a month. We ended up finding an amazing deal and bought our house for $95,000. We did also put up a new garage which has increased the value of the house and plan on keeping the house to rent out when we decide to move on. It isn’t always a bad idea to buy a house but you really have to be in the right market. If I were in a larger city or weren’t planning on staying in the area for quite some time I wouldn’t have bought a house. I cant imagine having a $500,000 mortgage. I think it would stress me out far to much!

        1. Wow. That is an amazing deal. You can’t even buy a parking spot for $95,000 in Toronto.

          And you are right about the house needing to be in the right market. That’s the thing with houses. People see house appreciation in Toronto and they think they’re going to make a killing. But after you add in all the costs, 70% of their gain is gone. They don’t realize that a rise in price also means a rise in costs. They also don’t realize the opportunity cost of not investing the money lost to ownership costs.

          In your area, you can’t shoot yourself in the foot too badly. If houses are less than 100K, you could have a paid off house in 5 years. And with rents at $1000, buying makes more sense.

          1. North west Minnesota. It’s generally very insulated from market swings. The area I live in has a huge rental housing shortage at the moment. It doent seem to be getting better. There also isn’t the issue like many larger cities of crazy housing inflation. You do have to search for good deals and our realtor thought we were crazy for buying much less house than we could afford…

  9. I’ve been trying to break it down in terms like this to my friends who are current and prospective homeowners for the last 6 months.

    6 months ago I found Garth’s website; a month after I had been house shopping and a few days before I planned to put an offer in on a house.

    6 months later I’ve got a 5 digit ETF portfolio (and a bit of a remaining MF chunk that needs to be switched over ASAP) and am living in South Korea.

    Glad I found you guys through Greaterfool, a nice balance to what he does. Very inspirational! Keep it up


  10. Math – what about the tax difference, extra leverage if you only put 20% down, and if you held the house for a normal period, say 5 years? Only $850 for rent -wow. Have you checked how much a $500k condo rents for in Toronto? I find your blog very inspiring btw.

    1. Leverage would be even worse, because then you have to pay the bank interest. That’s an added cost to the house side of the comparison.

      Yeah, we definitely lucked out with the $850 rent. Though there’s no way in hell I would ever rent a $500k condo. Why? You can find much cheaper rents if you just go a bit further out (east york instead of downtown). Those townhouses and apartment are a bit older, but since the landlord bought them way back when housing was affordable, they offer cheap rent.

      And thanks for the kind words and for reading the blog!

      1. Leverage increases return on investment by reducing the cost base. Mortgage rates are super low. Just ensuring you’re making an apples to apples comparison, hence, 500k vs 850 rent doesn’t make sense. Plus, holding period and taxes..

        1. It makes sense in my situation because those were the choices I had at my disposal.

          Besides, you can rent a 3 bedroom house in East York for $1995/month (utilities included): http://www.kijiji.ca/v-house-rental/city-of-toronto/3bdrm-for-beautiful-house-in-east-york/1191847549?enableSearchNavigationFlag=true.

          That’s $126,129 – 36*$1995/month = $54,309 which STILL beats the $36,624.54 from the house.

          As for leverage, having to pay interest makes things worse. Not to mention the fact that the same home ownership costs apply:

  11. Love your writing. Very thought provoking and helpful for those who don’t want to be sheep. (baaaaaaaaaaaa!).

    While I 100% agree with the premise and the most important piece not in the equation is FREEDOM, I think an apples to apples would be:

    a) Making your rent the average versus what you were paying.

    b) Doing the math on a more conventional 20% down on purchasing. Yes… interest cost more but the homeowner gets the advantage of leverage on their money (driven by the government wanting to keep the scheme going). When I did it, in your example $400K would keep earning returns unfettered (total $100.9K over the period … 80% of your total) while $100K is used as a deposit secures the property. .. gains $130K over the period (less interest, mortgage payments and all of the other costs you outlined).

    Net-net, the returns are roughly going to be the same. Of course this is using metro GTA in one of the craziest bull runs in housing in the country’s history… and a loss of flexibility not to mention having to live with having the debt (which could go upside down – see USA in 2008).


    1. a) if we made rent the average versus what we were paying, then I’d have to make the owning house more reflecting of what a spendy person would pay. No way would they only spend 10K on furniture, not have a car, and not pay someone else to do the gardening, cleaning, snow removal. So you’re looking at an extra $30-50K just for the car. And they would probably buy 2, so that would make it an extra $60-100. So it would still work out in favour of investing.

      b) This is actually a trick the banks use to make you think leverage is better. Sure, you’re borrowing money but most of the profit will go to the bank and real-estate agent, and you still have the same costs of ownership. Will do a future post on this.

      And I agree with you that this is using GTA, which is in an abnormal bull run that is not reflective of house appreciation on average.

  12. Great analysis guys! Don’t forget to take inflation into account. Inflation goes up by about 1-2% each year, so the house would have naturally increased from $497,130 to $527,420 just by keeping up with 2% inflation (i.e., not really making a profit at all). So, if you were to sell it for $622,120 in 2015, you would only be making a profit of $94,700 in today’s dollars, and that’s before you took the additional expenses into account. Subtract the crippling expenses over the years and you’re not making much at all.

    When people say their house went up by 200k in 10 years, they often don’t realise that a majority of the increase is due to inflation, causing sellers to feel much richer than they actually are. Similarly, when we say the stock market returns an average of 7-8%, at least 1-2% of that increase is inflation as well. So, for anyone who is working on building a million dollar portfolio, it’s best to forecast with a 5% rate of return, keep your forecasting in today’s dollars. For example, if you have 100k invested today, assume it will be around 127k in five years in today’s dollars. Of course it will be upwards of 140k, but that’s with inflation.

    You might want to check my numbers though. Math is hard!

    1. “When people say their house went up by 200k in 10 years, they often don’t realise that a majority of the increase is due to inflation, causing sellers to feel much richer than they actually are.”

      A very good point. But it’s the same for investment as well. Since inflation is reflected on both sides, we can disregard it for simplicity sake.

  13. I think some people forget that the home has to be sold in order to get this $126,000. Meaning the sales and transaction fees are applied otherwise the appreciation is not real, because it only potential value, simply put it had not generated you any money what so ever, but has only cost you money. Investing on the other hand year by year will either increase or decrease, but in this case increase which results in actual money being generated that you could then use… Thus it remains rent/invest wins in this scenario…. Of course nobody thinks of buying a home and selling in 3 years, but for sake of argument to receive anything the house MUST be sold or its $90k vs $0.00 , because you never sold to get the $30k you would have received after all of your fees.

    1. “Meaning the sales and transaction fees are applied otherwise the appreciation is not real, because it only potential value, simply put it had not generated you any money what so ever, but has only cost you money…. Investing on the other hand year by year will either increase or decrease, but in this case increase which results in actual money being generated”

      Well said! I would take it one step further to say that, with investing, even if the capital value decreases, money is STILL being generated…because of dividends.

  14. I thought I will give a real life example (with a 20% downpayment scenario). 🙂

    In 2011, we bought a townhouse in Toronto for 470k.
    — We had a downpayment of 95k.
    — OMG, the double land transfer tax was a killer, around 11k!
    — It costed me 1500 in lawyer fees to buy it. (I previously sold a condo at the same time which costed me 900 to sell in lawyer fees.)
    — There was hardly any maintenance because it was less than 5 years old. Our bills (HWT rental, gas, hydro, water, home insurance, internet) ran about 400/month on the conservative side.
    — We got quite lazy with doing upgrades. We did want to do some landscaping with interlocking in the front and 2nd level deck or finish the basement in the long run. We didn’t end up doing either. If we did, I think that would have cost us about 10k for landscaping and 10k for the basement on the cheap side. Thankfully we didn’t upgrade as in our hot seller’s market those things wouldn’t really matter.

    Thankfully, our neighbourhood was high in demand and we sold this year under 665k so almost a 200k return in almost 5 years. (We did plan on staying longer but we moved to another city.)
    — We were able to get a 3.75%+HST realtor fees (1.5% for sell and 2.25% for buy) . I think my lawyer fees were quite high to just sell, probably 1500 (700 base rate plus disbursements and HST).
    — Our mortgage started at 375k with 30 years amortization at variable rate (prime-0.85%). We ended up around 305k with prepayments and increasing our regular payments. (We were only a few months away from renewal but I had to break my mortgage in both times I sold which cost about 3 months interest, so it was about 2k each time.)

    Overall, we netted about 325k from this transaction, maybe more as we used the proceeds to buy another house so we paid land transfer tax and lawyer fees for that. Now we have a paid off house in a cheaper city.

    Even with our good luck (as I made 75k from the first sale with the condo in 4 years and 200k from the second sale with the townhome in 5 years), I totally agree that if you invest “wisely” you can get those gains in the stock market too which is more liquid and avoid the headache of closing costs headache. I really really really wanted to put the proceeds into the stock market instead. But owning this home for me was more of a personal life decision.

    It is so risky to tie your entire net worth to your house. Even though housing is more affordable in this cheaper city, real estate prices only increase 2%/yr (ie inflation). Just a few years ago, people had to sell for less than what they paid for but the market in my suburb has corrected and is more stable now. I definitely agree that home ownership is a consumption item.

    We were really lucky that Toronto is doing well. If we sold last year, we would have missed over 60k in gains but if we sold next year, we might be selling for another 100k. Who knows?!?

    1. Thank you for giving a real life example! Very useful. And you make a very good point about market timing. If you sold earlier or later, you could’ve missed out on gains. So with houses you have to time the market. Not so with long term index investing.

  15. Why can’t people just realize that a house is another purchased item instead of an investment? It’s worth is only based on what someone else will pay for it. I love when people say they “own” a $700k house as if it’s in their savings acct when they really should say they “owe” a $700k house (because it’s not paid off yet and never will with an attitude like that!). How can it be an investment if a mortgage payment is the biggest monthly bill? I purchased a house well below our means, because frankly, I was tired of moving and sharing a wall. I didn’t buy a house because it was an investment, but just a place to settle for awhile. There are people who judge us based on our zip code, but it doesn’t matter. The zip code doesn’t define a financially independent person, it’s their net worth. And people who judge others based on zip codes will surely miss out on meeting authentic awesome greatness 🙂

    1. Completely agree with you. And good work buying a house below your means. This rarely happens since people are so busy keeping up with the Joneses. I guess those are the very people judging you on your zip code, but you’re going to be the one laughing when you’re FI and they’re not.

  16. Great Analysis! In my first property purchase, a lot of expense accumulated.

    If you live in a condo, condo fees increase every 1-2 years, and because they like to increase the fee as a percentage of existing fees. It snow balls very quickly. My condo fee was $700 before I sold it. Special assessments will also kick your ass. My ass was been bruised pretty badly this year.

    If you are a non-resident, that sucks even more. If you sell as a non resident, your lawyer is required to hold 20% of the sale proceeds until CRA approves and provides you with a certificate. I’m still waiting for my money. I had to pay my accountant to deal with that.

    There are a lot of pit falls when owning a property.

    1. You get confused whether it’s an investment or your home
    – When your house appreciates, your mentality is to never sell because it’s the greatest investment ever. Prices will keep going up.

    2. If you treat it like your home, you tend to spend a lot on fancy furnitures and renovation. I should not have spent $3K on a sofa. I believe a lot of homes (which are barely livable) needs reno. I have a family member who had a kitchen remodeling cost over 70K.

    It’s your home or it’s your investment. It’s difficult to be both because the objectives contradict each other.

    1. Thanks for sharing your experiences as a home owner, Pon! And very good point about the home or investment contradiction.

  17. Would you please provide some clarity regarding the investment portion, I have very little knowledge in investing.
    “60/40 portfolio of $497,130 generated after-fee returns of 7% (2012), 8.39% (2013), 8.1% (2014). This gives us a return of $126,129 by 2014”
    Do you mean to invest $497,130? Majority of the people don’t have that kind of money on hand, at least I don’t.
    Also, what do you mean by 60/40 portfolio, do you mean stocks (mutual funds, indexes, ??)
    Would you be able to give some examples or how to identify and invest in these types of stocks, please & thank you!!

    1. 60% stocks, 40% bonds. Using ETF’s (exchange traded funds), bought from an online discount brokerage like Questrade. Go read The Canadian Couch Potato website to learn more on how to invest in indexes.

  18. Would you be able to do a calculation for someone who bought the place in 2012 with 2% down, so around 100k? and take into account interest payments, say 3%… Let’s say for argument they still have 300k in the bank account, and invested that in index funds just like you did.

    I have a feeling that with leverage they might still be doing better, but if you have time to do the calculation and confirm, that would be good. thanks.

  19. Considering F&W’s financial objectives, it makes perfect sense to sell the damn house.

    It’s all about generating positive cash flow. OR I should say, its all about the SOURCE of cash flow, per Kiyosaki’s cashflow quadrant concept.

    As I understand it, F&W’s main objective was to have a steady income while they traveled the world over many months, maybe even years. And that having “steady jobs” during they journey was definitely off the table.

    So they needed an alternative source of non-job cash flow – ie. interest, rent, royalties, dividends, etc. In Kiyosakian terms, that is positive cashflow from the “right side” of the cashflow quadrant.

    Now, “owning” a personal residence, while offering a potentially great chance of capital gains, produces no positive cash flow at all. In fact, the opposite is true – it takes a big chunk of money out of your pocket for as long as you own it.

    So, to reach their objective, F&W would have been compelled to sell the damn house, but not their paper asset portfolio.

    The house would have needed to be liquidated and the proceeds invested in some other cashflow-producing asset. What good would their house do them while travelling? Uh, can you say zero…?

    Their paper asset portfolio, in contrast, was set up from the outset to produce a positive cash flow, without having to sell anything, no matter where they found themselves in the world….

    btw, brilliant distinction by Pon about getting caught between conflicting objectives.

  20. “Hey, if you want to bring feelings to a math fight, go right ahead my friend. I will be more than happy to hand your ass back to you, all red and spanked.”

    This is quite possibly my favourite line written in a blog post by anyone ever. I may have to borrow it to spank any of my friends or co-workers who spout the “renting is throwing your money away!” nonsense.

    The point made by someone above about how the discussion is meaningless unless the house is sold, because until it is sold it is only potential value, is one that I’m glad to see someone bring up. My biggest pet peeve is listening to people talk about how much their house is “worth” and how they’re so rich because of it (I live in Vancouver). I just want to grab them, shake them, and remind them that unless they sell, that gain literally DOES NOT EXIST. It is a made-up number that they keep in their head because it makes them feel good about themselves.

  21. What if you kept renting for 850, bought the house rented it out for the three years at the incredibly high rental rates that t.o. Has to offer, and sold privately.

    1. So total costs for rental house plus selling privately would be $44,500 approx. add 1200 for selling with com free or prop guys. So say 43,559.46 in costs. Plus 850 rent x36 months 30,600 total costs 74,159.46. Say you rented the house for 2000 plus utilities. This earns you 72,000. Plus appreciation of 124,990 you get 196,990. 196,990-74,154.46=122,835.54 PROFIT
      of course rental income minus costs of running rental would be taxed income. Plus you would need to manage the property.

  22. Amazing analysis!
    Anyway, to play as devil’s advocate:
    – Maybe you should mention that your rent is a little bit unrealistic for the same apartment: 850 per month is 10K per year, which is 2% of house value which is not realistic. I mean you’re comparing apples with oranges here. You should compare against the market value of the rent in the apartment under analysis.
    – Utilities I guess you paid them too in the rented apartment, so they’re neutral.

  23. Hi

    I completely agree with your post and your blog. Don’t get discouraged by the complainy pants.

    I have a unique situation where buying a home worked may or may not have worked out better for me then investing in stocks and bonds. Here it is

    I bought a home in Victoria, BC for 650,000 6 years ago with 200,000 down. It is a 4000 sqft 1994 build on 10,000 sqft that borders on farmland. It has 2 existing suites. I rented both suites out (3 bed 2 bath up and a 2 bed 1 bath down) for a combined 2700 including utilities. I then invested $12000 in the garage (500 sqft) and converted it into a full suite with a sleeping loft with skylight windows ( it’s beautiful). The home is worth about 685,000 now.

    mortgage (principal plus interest) 1900
    taxes 360
    hydro cable and internet and gas 490/month
    maintence 300 month
    total $3050 month

    income 2700 from rentals
    that means I 350 month for my monthly portion (the 500 sqft converted garage)

    if I invested the 200,000 in indexes I would have received about ~1300 a month
    so even with this “perfect” maximizing the properties money making potential I may have done better investing the money instead. That way I would have more freedom and not have to take care of a house with tenants lol.

    I think you are on to something by not buying and renting. Looking forward to your comments 🙂

    Thank you for your insight.

    1. Thanks for sharing your story, Matt! It’s always good to run the numbers and I’m glad you did just that.

      And you’re right, the freedom from renting and investing and not having to worry about tenants/housing costs is incredible. But you won’t know what it’s like until you’re actually doing it 🙂

  24. Selective math indeed. Few people buy a house outright with cash. In your scenario, if you bought a more expensive house and had a mortgage, you would have been far better off than investing in the markets. Mortgage rates have been flaccidly low ~2% which is essentially free money. Had you bought a 1M+ dollar house, you would have had a 7.8% per year gain for the money you didn’t have to put out. That and the fact it would be your primary residence, when it is time to sell you pay no capital gains tax.

  25. Why in the world are we comparing a $500k residence to a rental that must be worth less than $100k? Talk about apples and oranges!

    And I always find it funny when home maintenance costs are used as an argument against home ownership – as if rentals don’t have maintenance costs that are built into the rent. Guess who paid for the new furnace and roof on the rental – the renters.

    Then there’s the issue of fixed selling costs. The $44,691 of commissions, legal fees, and home inspection costs listed above may, or may not, be accurate – no doubt real estate transaction costs are ridiculously high. But there is an easy way to minimize those costs – move very infrequently. Spreading the selling costs over 15 (or 30) years, instead of 3 years, makes a world of difference. It’s worth telling people that they are better off renting than buying if they aren’t committed to living in one house for a long time. But, again, the deck was stacked in your example to include these huge transaction costs for a 3 year period when the average ownership period is probably somewhere between 7 and 15 years.

    It would be a heck of a lot more interesting and informative if every effort was made to actually compare apples to apples.

    1. Again, this post is answering the question “would WE have made more money if we bought a house”. If the numbers aren’t applicable to your situation, just do the math yourself.

      1. Thank you for the reply. Here’s my math: We bought a house in the Denver suburbs 10 years ago for $339k. At the time it seemed pretty expensive to us. During the last 10 years we elected to finish the basement, remodel the kitchen, replace the furnace, AC, and hot water heater. But we did as much ourselves as we were comfortable with, given our limited skills. Total improvement costs were about 50k (paid with savings, not loans). The house is easily worth over $520k now. So keeping the math simple, the value of the house has increased an average of more than $1k/month, even through the Great Recession. That’s math that makes me pretty happy. As a percentage though, it’s only about a 3% return on investment, not taking into consideration the leverage of a mortgage – nothing spectacular by historical standards. Obviously that’s a lot less than stock market returns over that same period. But our family of four has had the pleasure of living in a much nicer home than could be rented for the equivalent monthly payment.

        Since we’ll be here for at least another ten years (until the youngest turns 18) we won’t incur any of those dreaded real estate transaction costs anytime soon. We now have a 15 yr mortgage at the CRAZY rate of 2.625%. Principle, interest, mortgage insurance, and property taxes are only $1.9k/month. Three bedroom apartments in our part of town rent for waaayyyy more than that. And there’s absolutely no comparison between our spacious three bedroom home and apartment living. For me, this is the most important argument against being a renter for life. We can be in a home that comfortably fits our lives at a fraction of the cost of renting a home this nice. So does home ownership work for us? Heck yeah!

        And if the question is simply “would WE have made more money if we bought a house” the only way to make a reasonable comparison is to compare the rental against the purchase of an equivalent size and quality of home. It’s simply not fair to compare a rental worth less than $100k to the purchase of a $500k home, sold 3 years later, and conclude that renting wins. And it’s not simply that you’re asking that question – you’re making the case that buying a house is a dumb financial move. For some, it really is. But for most people, home ownership is a great move, especially when compared against renting an equivalent quality property, assuming that you can and want to stay in that property for a long time.

        BTW, I really do love your writing!

  26. The RE industry is stubbornly holding on to a 5-6% selling commission rate here in the US even though the internet has lowered practically ALL selling costs in every industry! Maddening and insane.

    Hence, I’m on strike and will NEVER sell until the selling commission is lowered to around 2%-3%. They will never get my money at 5%-6%. It’s just absurd.


      1. We managed to cut the “normal” fees almost in half when we sold our home. We simply paid an agent a few hundred dollars to list it on the MLS (which is crucial) and lend me a yard sign, then offered the standard commission to the buyer’s agent. Buyer’s agents had no problem working with me since I offered them their normal compensation.

        Then on the buy side I found an agent that offered to rebate of part of his commission based on how much (or little) work he did. I did all of the internet research and preliminary drivebys. He simply opened a few doors and helped a bit on the contract negotiations. It was win-win. I took less than 8 hours of his time and I got $6,000 of his commission refunded to me at closing.

        I’d would do all of that again in a heartbeat if I ever moved again. Luckily, I have no plans to move any time soon.

  27. I can’t get over the Toronto housing costs!!

    When I moved to my current city (Flyover Midwest Metro, US), I ended up buying because it was so much CHEAPER to buy than rent– total costs were about $750/mo for a nice house in a nice neighborhood vs >$1000 for a one br apartment. Now that I’m moving, I’m seriously considering holding my house and renting it for almost double my mortgage.

    The costs you cite are UNREAL! This is why it’s better to do the math first!!

    Great blog, I’m compulsively reading it from start to end now. I’m like you guys but only 4 yr in… so only 8-10x expenses saved so far…and about to switch to a cushy working from home arrangement. At least, I hope it’s cushy!


    1. Americans have a much more realistic view of the housing market than us Canadians. You guys also have WAY better Price to Rent ratios, so I’m not surprised that in your area it’s better to buy than rent.

      Thanks for reading and hoping your cushy working from home arrangement works out!

  28. On the whole, excellent analysis. I only have one quibble, and it’s more for what you don’t make explicit in your analysis, which is that the real trap that folks fall into time and time again when they buy, and that is the ‘Upsize me!!!’ game. You rightly stated that you were only paying $850/mo. all-in for renting. Even by 2012 standards in Toronto, that sounds like fairly modest digs. The average house price you quoted, on the other hand, while probably needing some work, is still, well, a whole house, i.e. I suspect much larger & fancier than your rental. A truly equal (but dispassionate) comparison would have had you buying the exact equivalent space as what you were renting (or perhaps by manufacturing it, by buying the house and then renting out all the additional space), but, of course, as buying is often an emotional experience (aided and abetted in many cases by artful staging and all those ‘helpful’ folks telling you that you need to ‘stretch’ your budget or move farther away), most people end up doing the apples to oranges that you’ve provided above. Plus, of course, the exact reason for buying is to live there…not to sell again 2 1/2 years later. Of course you’re going to be hit by excessive transaction costs if you do. Particularly if you can’t negotiate better fees. 🙂

    1. “the real trap that folks fall into time and time again when they buy, and that is the ‘Upsize me!!!’ game”

      Very true. People who rent wouldn’t have the same emotional attachment, and thus can avoid the whole “upsize me” and “upgrade everything” frenzy.

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