Here is the latest column from Joe Gunn of Royal LePage Performance Realty:
Real Estate as an Investment
In these days of financial uncertainty, no one can afford to make any investment decision on an impulse. Companies such as Nortel and Enron were once considered absolutely sure investments that couldn’t go wrong, but today, anyone with these stock certificates has little to show for it except some very expensive wallpaper.
Buying a house is without doubt the most expensive investment anyone will make, and for this reason alone, it is not something to enter into lightly. The current depression has hit real estate prices along with everything else, and stories about people defaulting on mortgages are all to frequent. On the other hand, with house prices at the bottom of the cycle, a house purchase can be an unprecedented opportunity, especially if you are renting your home.
There are major advantages to buying your own home, even given the risks in the real estate market. Let’s take an example. Suppose you buy a $100,000 home, with a 25 year mortgage at a fixed rate of 5%. Your monthly mortgage payment would be $581 per month. Over the 25 year period, because of the interest, you’d end up actually paying the bank $174,480. In other words, your $100,000 home will actually cost you almost double.
If, on the other hand, you took that $581 a month and invested it, and were lucky enough to get a 5% return, at the end of 25 years your investment would be worth almost $350,000. It’s almost a no brainer, isn’t it?
However, let’s look at the numbers more carefully. First of all, your home, originally worth $100,000, is also appreciating in value. Again, keeping the numbers simple, let’s assume its value rises by 5% each year. After 25 years, it’s going to be worth about $330,000. Of course, this doesn’t take inflation into account, but remember that inflation is going to hit your financial investment just as hard, so in the end there is no real difference.
But that’s not all. Under the current tax system, you’d be paying tax on your stock investments. You could shelter some of it by investing in an RRSP, but probably not all of it, and if you ever cashed it in, you could be in a position where you’d have to pay tax on all of it. On the other hand, the increase in value on your principal residence is tax free.
Finally, but most importantly, even if you can afford to invest $581 a month on the stock exchange, you still need somewhere for you and your family to live. That means paying rent, and once you’ve paid, that money’s gone forever. The real no brainer, then, is why pay rent when you can pay a mortgage, and actually increase your net worth?
Of course, this is a very simple example, and there is no way to know exactly what interest rates, inflation and taxes will be in the years to come. On the other hand, for most people, buying a home is not only their most expensive investment, but also their wisest.
Got any questions? Give me a call and I’ll be more than happy to help.