Owner of my residence since the age of 24, I have no embarrassment in saying that this is perhaps one of my worst financial successes in my twenties! My enrichment would probably have been greater if I had acquired a building with a rental portion or if I had simply accelerated my savings and my stock market investments. Of course, there are advantages to becoming a homeowner. The primary residence is a fairly safe asset, at least in many markets. The increase in the value of your home is exempt from capital gains tax at the time of resale. Moreover, for many people, it represents a form of “forced” saving.
The dream of becoming an owner, with its symbolism well established in our social conventions, gave me the impression of having achieved a goal of which I was proud at the time! Also, observing all these first buyers throw themselves into the lion’s den since the surge in real estate prices, I now feel a lot of compassion for them. I too know this deep desire to leave a home for a more comfortable, larger place; my nest!
The rational investor is also rational in real estate
Many real estate experts say without hesitation that house prices will never go down — the worst-case scenario leans in favor of a plateau. These believe that it is therefore necessary to hurry to access the property, even at all costs through purchases without inspection at prices inflated by overbidding. However, a probable recession combined with a significant rise in interest rates could theoretically force a swing of the pendulum and mark a return to a more favorable market for buyers. So, should you buy now or postpone your purchase plan?
If one of the rules of investor success is to remain rational in the management of his investment portfolio, why should it be any different for one of his most important investments, that of his principal residence? In the absence of a crystal ball, the decision to buy your first home or to move on to a larger property should first be preceded by a serious analysis of your needs and, above all, by an estimate of your long-term needs. term. Indeed, buying in a context of such high prices could require more time to make your investment profitable.
Could buying at very high prices harm the long-term profitability of your purchase? I doubt it, unless you think it’s a transient or temporary property. I come to the recommendation that a rational real estate investor does not buy if he doubts his desire to stay in this new property for the long term.
The questions to ask
Before moving on to property visits, the rational investor must clearly establish the budget available for his real estate project. Knowing his standard of living and its costs, establishing it without being complacent, will allow him to visualize the repercussions of these new housing costs. Be careful not to limit your comparison only to the price of your present rent. The costs inherent in the maintenance of a house are often underestimated, as are the decoration and landscaping.
It would be wise to ask yourself if, given the high price paid to acquire your real estate project, you will still be able to limit these expenditure items in the coming years… In addition, I invite you to plan a budget for life insurance and disability (individual, not the products offered by creditors) that you should use to protect this new investment which will make up a significant portion of your estate.
The old adage says don’t put all your eggs in one basket. If at the end of the fiscal year you notice that your new owner’s budget no longer allows you to free up the sums available to save for your retirement (RRSP, TFSA) or to contribute to your children’s RESPs, I invite you to ask you serious questions about the feasibility of your acquisition project.
If the conclusion is favorable, go for it, as long as you will feel like you are paying the right price. You may be tempted to put 20% down on the purchase amount to reduce the cost of your loan. Given the stock markets since the beginning of the year, however, I invite you to do your calculations with your mortgage and investment broker. Indeed, you should compare the borrowing rates applicable under different scenarios to the loss you could potentially materialize if you sell your investments at a loss.
Younger investors, whose accumulated returns in 2020 and 2021 have been eaten away by the markets that have been falling for a few months, could be more concerned by this aspect, especially if they have not been able to take advantage of the significant growth in their portfolio. in the last decade.
In short, the opportunity costs of these projects should never be underestimated in today’s market. This is true for everyone, even for first-time buyers who can take advantage of a gift from their parents for the down payment. Ditto for couples enjoying a high family income who are considering a larger property project.