In the past, I have demonstrated to several clients that it is quite possible to get rich and achieve your financial goals by choosing not to become a homeowner.
Scenarios simulating return projections on the additional savings possible with the reduction in housing charges often presented surprising results; for a client with a balanced investor profile, this could mean becoming richer by remaining a tenant.
Is the comparison still valid given the transformation of the real estate market that has taken place over the past year? The purchase price of houses is only increasing, but, at the same time, the cost of rents is doing the same.
The question from our reader Caroline is therefore timely: “I separated last December and I am selling a family cottage which offers me the possibility of a down payment of approximately $100,000. I am 41 years old, without children, and I wonder if I should use this amount to buy a condo on my own. Is this a good investment for me? »
personal assumptions
For this type of simulation, it is important to understand the influence of personal assumptions specific to each situation. Our reader mentions having a stable income and job, and benefits from an employer pension plan to fund her retirement at age 65.
She also co-owns a rental chalet with her family, representing an asset potentially available for retirement. Theoretically, she should therefore not fear the choice of becoming an owner.
Currently, she has no additional savings in her group plan; the amount of $100,000 is therefore a major asset for her with a view to achieving her financial objectives. Should she invest it in the stock market or buy her condo?
To answer this question, it is important to examine the targeted real estate market more precisely. Our reader told me that properties meeting her needs could sell for up to $415,000 in her neighborhood. Thus, with a hypothetical borrowing rate of 4.3% (according to the standards of the Quebec Institute of Financial Planning), the monthly payment on a mortgage exceeds by $400 per month the price of its current rent ($1450) .
In the simulations performed, additional monthly maintenance and condominium fees of $500 must also be considered. Thus, based on a hypothetical personal cost of living of $4,000 per month, the amount available for additional savings as a tenant is significantly higher than the owner scenario, which then presents a cash deficit of nearly 20 $000 per year. How is it possible ?
It’s that the gap is not just the difference in housing costs. Since Caroline is late in her RRSP contributions, the savings possible in the tenant scenario also generates tax efficiency: less taxes to pay, more cash to reinvest!
You now understand why the acquisition of a home is often perceived, rightly or wrongly, as a good investment: it is above all a question of forced savings.
The cash flow deficits present in the owner scenario thus mean that Mrs. TFSA.
The simulation is based on a balanced investor profile that can, depending on the assumptions used, generate an annual return
of 3.68%.
But compared to a theoretical annual increase of 2% in the value of the condo, the client’s projected net worth does not show such a large gap at age 65 at the time of retirement.
However, this makes it possible to understand that the composition of your portfolio and the data of the real estate market selected for the purchase will strongly influence the conclusions of such an analysis.
Criteria other than financial
Since financial planning is not only made up of calculations, but also of human factors, Caroline should probably question her deep desire to become a solo owner. Does it have the knowledge or skills to coordinate or even carry out maintenance or renovation work?
Otherwise, it will have to deal, in the coming years, with higher maintenance costs, headaches from navigating in a context of labor shortages and difficulties in supplying materials. .
In co-ownership, we must also reflect on our desire to manage our residence as a community. It’s an exercise that involves a lot of consultation and communication. Finally, the weekends formerly synonymous with freedom could well sometimes become less exciting considering the responsibilities inherent in becoming an owner. All the more so when buying solo.
Last week, I stressed the fact that the acquisition of a property in an overheated market like ours probably comes with the need to keep your property for a longer period to make it profitable.
Our reader Caroline should therefore be honest with herself by asking herself if she wants to rebuild her life as a couple in the short term since a quick resale in the current context seems to me the most risky element.
So, if her desire for home ownership prevails, she should choose a condo whose location and characteristics are favorable for a possible rental so that she can keep it as an investment when love rings again. at his doorstep… as an owner!