Here’s what your rent could buy you!
If you live in Toronto, chances are, you are renting. Some of you may be lucky enough to live at your parents’ house, or some of you may be renting a house with roommates in order to keep your expenses as low as possible. Everyone’s living situation is unique and different. But we can all agree, renting in Toronto isn’t cheap.
Do you know what the market rents in Toronto are? The average lease price of a 1 bedroom condo in these past 2 weeks was roughly $2,230 (Calculating this on April 1,2019). That’s a lot of money! If you calculate how much that is in a year…
$2,230 (per month) x 12 months = $26,760 — That’s over $100,000 in just 5 years!
That’s money that goes out of your pocket and into your landlord’s bank account. It’s a living expense and of course this money pays for a roof over your head. But doesn’t it feel like a waste that your $26,760 goes towards someone else’s mortgage payments and helps them grow their wealth? In addition, as a renter, you have restrictions on what you can do with the unit. You can’t paint walls without your landlord’s approval. If the landlord decides to move in or wants to renovate the unit, you have to leave and find a new home. It’s your home, but you don’t have control over it.
When I first realized how much money I was giving to my landlord to grow his wealth, I felt a little helpless. Maybe you’re feeling like this too..
So let’s take a step back and see what the picture could look like if you bought a place for the same monthly payment you’re currently paying for your rent. What do I mean exactly when I say that as a tenant you are “helping the landlord grow their wealth“?. To understand this let’s look into the investment side of real estate. There are three ways you will build wealth (a.k.a. make money) in real estate.
Three ways to build wealth in real estate
#1. Cash flow
Cash Flow = Rent - expenses. This applies if you are buying an investment property, and renting it out to tenants. It’s one of the ways you could make money so I want to take a second to talk about it.
I live in Toronto. My city, admittedly, doesn’t offer a lot of investment properties that have amazing positive cash flow on a monthly basis. Unless you’re putting down a lot more than the minimum required to buy a property, you’re not coming out ahead with hundreds or thousands each month. Not right away, anyways. That cash flow will come in the future, it’s just not great on day 1. For me, personally, I’m ok to expect no positive (or even a slightly negative) cash flow when I buy a property. I’m not concerned about cash flow at the beginning (#2. and #3. listed below, more than make up for the difference). And again, cash flow doesn’t apply when you’re buying your first home that you will be living in anyways, but #2. and #3. do come into play.
#2. Principal mortgage pay down
When you’re making your mortgage payment, you are GUARANTEED to pay down the mortgage. And this GUARANTEED return isn’t low! If you buy a place with a 20% down payment, and get a mortgage at 3.5% for 25 years (which is typical as of the time of writing) - your return on your investment is 10.2% in the first year just by paying down your mortgage! AND the return is higher every year after the one before it.
This is where home runs in real estate are hit, and anxiety is destroyed. Home prices really do increase over the years. Property values rise, and far more predictably than other investments, like stock markets. We won’t see the 50% gains in a year that a stock market may make, and we certainly haven’t come across the 50% drops in value that a stock market can have. The peaks and valleys are muted in real estate pricing. Though through the years, nobody can deny that real estate appreciates.
Look at this chart. We’re comparing the Toronto Stock Exchange TSXS&P60 (aka: “the stock market”, the blue line) against home prices from the TREB (Toronto Real Estate Board, the red line) since 1996. The slow-and-steady real estate investment closely matches the trend of the stock market - though with none of the anxiety of down years. I mean, look at the prices in 2006 to 2008. What if you HAD to sell your stock or mutual funds in 2007 or 2008, you would have lost a ton of money. If you HAD to sell your real estate investment, though, you’d have been just fine at the time.
Now, doesn’t it make sense to invest in real estate?
What if I told you that you could purchase a 1 bed condo with the rent you’re currently paying and start building your wealth?
I recently did this calculation for a client who wanted to get out of the renting cycle and start building her own wealth. I even showed her a unit that she could potentially purchase! Take a break from reading this article and watch this video. :)
Isn’t that a beautiful unit? Imagine entertaining your family and friends in this open concept kitchen!
But wait a minute.. if I can support the monthly payment for this property, why isn’t everyone else doing it? That’s because of the down payment. When you purchase a property, you will most likely get a mortgage, but in order to get a mortgage, you need a down payment. A down payment is upfront money that you pay as part of your purchase. You will need immediate access to this money when you make a decision to buy a property and it usually comes from your savings. Typically, a down payment is 5-20% of the purchase price. So if you are buying a $500,000 condo, you need between $25,000 and $100,00 upfront. So the first obstacle that you will face is saving up for the down payment. That’s a big chunk of money!!
I know saving $100,00 or even $25,000 feels like long ways ahead. However, when you have a clear cut goal of what you need, you’re already a few steps ahead of most people.
5 tips that I did myself when I was saving up for my down payment
1) Automatic transfers to your savings account: The easiest thing you can do is to automatically send a portion of your salary to a savings account on your pay day. It doesn’t matter if it’s a percentage (20% of your paycheque) or a fixed amount ($250 of your paycheque). Either way, you will be saving. :) The key is that it’s automatic. Make it painless for yourself!
2) Selling items you don’t use anymore: I’m not telling you to have a garage sale. But think about all the things you have at home that you no longer use. That old iPhone and laptop just sleeping in your closet. A lamp that’s a little outdated for you. Nice dresses you wore only once.. Consider cleaning up your closet (use that KonMari method), selling these items, and making those extra bucks that you can put towards your down payment.
3) Saving bonuses and raises: Save that raise and bonus and make that count towards your down payment! I get you want to on vacation or buy that new furniture piece, but remember the goal you want to achieve. :)
4) Saving gifts and tax refunds: When someone gives you a cash gift, save it. Inheritance and tax refunds can also count towards your down payment.
5)Tapping into your RRSP account: There is a program run by the federal government called the Home Buyer’s Plan, which allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) if the intention is to purchase your first home. The best thing is that the withdraw is tax free!! You can only tap into the RRSP if it’s your first time purchasing a property in the world. I highly recommend you open an RRSP account and take advantage of this.
Another important tip
Start with these 5 steps and save up for your down payment. If I can give you another piece of advice, talk to a mortgage broker. Everyone’s financial situation is different and so is your mortgage. How much you need to save up for your down payment is unique to you.
Your mortgage depends on many factors: How much is your salary? How is your credit score? Are you buying a property with someone? How much debt/monthly payments do you have? What are your living expenses?
Talking to a mortgage broker early on allows you to understand where you stand and gives you a goal to work towards. An actual number you need to save up to, whether it be $25,000 or $100,000. Having a goal will make it easier for you to save up. I remember thinking to myself “I’m 50% there!“ and celebrating with my fiancé. And the best thing is that talking to a mortgage broker and coming up with a financial plan with them is absolutely free. No commitment. Take advantage of it!
Becoming a home owner isn't an unrealistic dream that most of us will never achieve. It's very possible. I am telling you from first hand experience, that with some hard work and an understanding of what you need to do to get there, you can do it!! The home buying journey will be unique for everyone, but I hope that I've opened up your eyes to the possibilities that are out there for you, and most importantly that i've motivated you to turn your rent payments into mortgage payments.