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Following our last reader case from Edmonton, I got this little gem in my inbox:
“My husband and I are 40 and have a 2 year old. We move often due to work. We are both employed with a combined salary of $200K. We have previously owned homes in Ontario and Alberta and have made profit on each. However now we live in Saskatoon, SK where the economy has slowed due to oil crash. It is hard to get statistics but my sense is that employment is still high but the oil money is gone. There is still money here due to farming and mining.
We are currently renting for $1800/mo plus utilities. We have been hoping to buy but the only homes comparable to our current rental are $450-550K. We are not picky – that is the price you pay here for a good location. The condo market is almost non-existent. Given we are set to retire in 15 years and plan to move away, we are debating whether it’s worth buying at all. I am learning how to invest but at age 40 I may be too late to the game. What should we do, in your opinion? Also, should we buy our retirement home (in a very desirable location elsewhere in Canada) now, where I think prices will hold, or wait?”
Oh goodie, yet another rent-or-buy comparison. These are always fun because people often come to us with their mind already made up hoping that we’ll give them the green light to go ahead and pull the trigger on their obviously bad decision.
This isn’t one of those situations.
First of all, the usual red flags that I yell about aren’t there. This couple makes decent money, and isn’t contemplating going into too much debt. With a $200k combined salary and a $450K-$550K purchase, even if they screw up this purchase and buy a money-pit, they’re at most 2-3 years away from getting out from underneath that mortgage, so the debt is hardly monstrous. Remember, we aren’t actually anti-housing, we’re anti-crushing-debt.
So with that said…
Let’s Math this Shit Up!
Our reader claims that comparable homes are in the 450k to 550k, so we’ll split the difference and use $500k as the buy price, and since this couple makes a healthy salary of $200k a year, I’m going to give them the benefit of the doubt and assume they can put in the minimum down-payment of 20% to avoid CHMC insurance. Plugging these values and current skinny interest rates of 2.25% in our trusty amortization calculator, at the end of the 15 years this is what that mortgage would look like:
OK great. And because this is Saskatchewan and not some crazy out-of-control real estate market like Toronto or Vancouver, we will assume that the house appreciates at the same average rate as all real assets: the rate of inflation. This means that in 15 years with a 2% appreciate rate, the house would be worth $672,394.
So given that sell price, our homeowner walks away with a cool $672,934 – $187,178 (remaining balance on loan) = $485,756. Pretty sweet. (Note that the $100k down-payment is included in that $672,934 number since its part of the sale price).
But…let’s not forget about all those pesky ownership expenses:
|Real-estate agent commission (5% to sell)||$672,934 x 5% = $33,647|
|Land Transfer Tax (0.3% of buy price)||$500,000 x 0.3% = $1500|
|Property Taxes||Saskatoon's property taxes are actually the highest in the country, about 1.33% each year. Note that the property is re-assessed every 4 years.
Year 1-4: $500,000 x 1.33% x 4 = $26,600
Year 5-8: $541,216 x 1.33% x 4 = $28,793
Year 9-12: $585,829 x 1.33% x 4 = $31,166
Year 13-15: $634,120 x 1.33% x 3 = $25,301
|Lawyer fees||$500 x 2 (buy and sell) = $1000|
|Home insurance||$100/month * 12 * 15 = $18,000|
|Maintenance||You should set aside 1-3% of your home's value every year for maintenance, so let's say 1%
$5000 x 15 years = $75,000
So that means in order for our reader to get that $485,756 bank account, they actually had to spend $100k (downpayment) + $100,819 (interest on mortgage payments) + $212,822 (principal on mortgage payments) + $241,507 (ownership costs) = $655,148.
Which means, they actually made $485,765 – $655,148 = -$169,383.
Wait, what? They LOST money?
Even though they have a bank account now filled with almost half a million bucks, they had to spend $655k to get it!
Uh-oh. This does not look good for housing here. Remember in our previous article when we showed how a house making 7% annualized over years somehow made the homeowner NO money because all the expenses ate it all up? Well, in this scenario of a homeowner staying put for 15 years, under more normal house appreciation (i.e. inflation), they LOST money even as the home prices went up.
Hmm…maybe this is why so many homeowners brag about how much their house is worth all the time yet can’t afford to stop working.
Now just for shits and giggles let’s see what would happen is they rented and invested for 15 years instead!
15 years is a GREAT investment timeframe, since over that period of time the S&P500 NEVER lost money, and in fact made a median of 12.2% year-over-year! But we’ll continue to use the average returns of a 60/40 portfolio of 6% to be more conservative.
So if this reader were to take that $100k and invest it, and then continue to invest the amount of money he WOULD have been spending on his house ($249,941 cost to own, plus $313,641 in mortgage payments), minus that $1800 rent, this is what we’d get.
Yearly Savings = ($249,941 + $313,641) / 15 – ($1800 x 12) = $15,972. Let’s see what happens over 15 years…
Yowza. Our reader now has $611,419 in cold hard cash, versus the$485,756. they had with a house. And that’s not even addressing the question that’s been staring us in the face the entire time:
Who the Hell pays $1800 a month in rent in SASKATOON?
According to CMHC, the average rent for a 3-bedroom apartment in Saskatoon is $1097 a month, not $1800. What happens if our reader rents one of these instead?
YOWZA. Now we’re up to $800k!
So to our reader here, we’d say that unlike most of the reader questions we get, you aren’t contemplating taking on an insane amount of debt, so by buying that house you won’t exactly blow yourself up or anything. But if you were willing to bring your crazy rental assumption down to the average, you could be looking at a nice honking $800k retirement gift.
But enough of me talking. What do you guys think? Should our Saskatoon reader buy or rent?