Thinking About Buying Your First Home? (Toronto, Ontario)
Disclaimer
I am not an expert on finances or real estate so take my thoughts and opinions with a grain of salt. If you want to know more about investments or realty please contact your friendly neighbourhood banker and real estate agent.
To Buy
Judging by the title, you know what this post is about. Buying your first home will arguably be the most expensive purchase of your life thus far. It’s scary. To contemplate being in debt to the tune of 6 figures and the mental gymnastics it takes to even qualify for a mortgage still makes me sick to my stomach...So why did I choose to buy a condo? Two main reasons;
1. Life Goal
One of my life goals is to own a home. I made it a savings priority ever since I got my first full-time career job almost five years ago. Some people prioritize saving for a dream car, a designer bag, an exotic trip etc. for me it was a home.
To me, a home symbolizes a safe haven, a place that I can always come back to that's reliable and consistent. It also symbolizes a blank canvas. When you own your home, you have more autonomy over choices that are more than just cosmetic. If you want to break down a few walls to make a space more open you can (as long as a contractor says it’s OK!).
2. More Investment Options
When you own your home more investment options become available to you. If you want a larger home in a few years, you can sell your current home (hopefully for more than what you purchased it for), and use the profits on the down payment on the new house. You can also refinance your mortgage if you need the money for a renovation or any other large purchase/investment. My strategy, however, uses none of these.
When I moved out on my own for the first few months, I was bouncing from one Airbnb to another trying to find a long-term apartment that had affordable rent and was close to work (a tall order in Toronto in 2019). During this time, I kept having a recurring nightmare. I was 75 years old and I had run out of money to live on. The only job I could get was at a bakery working long hours with my arthritic hands and knees, and an aching back. At the time, I didn’t know a lot about fiscal responsibility. I took this as a sign that I needed to educate myself so I could learn to manage my own money so that when it was time to retire, I was going to be OK financially (this will make more sense in a second, I promise).
Now to reveal my strategy!
In a perfect world, this home that I purchased would eventually turn into an investment property. For context, I purchased a condo. Condos historically have not performed well as a short-term investment (for example, buying a condo, flipping it and reselling it at a higher price) but they do perform well as a long-term investment (for example, renting it out to tenants). In this perfect world my master plan would be as follows;
I would live in this condo for 5 years putting in as much money as I could into the mortgage so if someone were to rent the condo (in year 6), their rent would cover the mortgage payment, condo fees, utilities, etc.
I would get a home equity loan (using the money I paid into the mortgage) to buy a house, and keep renting out the previous condo for as long as it is financially viable.
Fast forward to when I’m 60 years old and want to retire, I can sell the first condo (which should be mortgage free for almost 10 years at this point) and use that money to add to my retirement funds (I will refer to this as my “retirement nest egg” in future posts)
As you can see, my investment strategy is very retirement focused. My ultimate goal is to make sure that when it is time to retire, that I can live comfortably and still afford to travel once a year and pursue other interests (see?, adding the nightmare story was relevant).
To Rent
Now to discuss the other side of the coin, renting for the rest of your life.
I am a millennial, and stereotypically my generation is known for spending money on experiences and events rather than saving for long-term goals like home ownership or retirement. Now while I don’t agree with putting off savings for retirement, if you’ve resigned yourself to the idea that you are going to rent for the foreseeable future…that’s OK! There are several benefits to renting compared to owning a home. (I will list what I think are the two most important below).
1. It’s Cheaper!
In Toronto and the Greater Toronto Area (GTA), the majority of the time, it is cheaper to pay rent and utilities than to pay a mortgage payment and utilities. With housing prices continuing to climb, many people pay rent because they can’t afford a mortgage. While this doesn’t give you the same investment options as discussed previously, it does save you from paying thousands of dollars per year in interest fees that come with owning property.
It is also cheaper in terms of the maintenance of your home. If your window is broken, or your fridge is on the fritz, it’s your landlord’s responsibility to fix and maintain your dwelling. If you were a homeowner, you would be responsible for paying for all repairs (and they can be costly).
2. It’s Easier to Qualify
Part of what makes buying a home so frustrating is qualifying for a large enough mortgage to pay for a home. If you go with a traditional bank, there are several hoops you have to go through to try and maximize your loan amount. As a guideline, the bank will usually loan you about 4x what you make per year (gross). If that loan isn’t large enough you can try and get a cosigner or a guarantor (more on this in a future post). Having a good credit score will also help, but if you don't have financial support from friends/family, or have another person to be your cosigner/guarantor it’s almost impossible to afford something on your own (unless you have a job that pays 6 figures).
As a renter, you don’t have as many hoops to jump through to get an apartment. Most places will require you to fill out an application. Application details usually include; a government ID, your last pay stub, the phone number of your place of employment (or someone who is acting as your personal reference), a credit check (sometimes), an employment letter, bank statements, and rental history. Once accepted that’s when you’d need to pay a deposit and first and last month’s rent.
In short, it is far easier to qualify for a rental apartment than it is to qualify for a mortgage to buy one.
Disclaimer (Another One)
Now this isn’t the case for everyone, there are landlords in the city that ask for multiple months of rent upfront (or other shady business dealings), or for a cosigner if they feel that you can’t afford rent on your own etc.
On the other hand, if you are renting a room in a house, generally you don’t have to produce as much paperwork as you would for a regular rental application. Every rental situation will be different but what I have outlined above is the general idea for the average apartment.
Final Thoughts
If you want more disposable income per month then renting may be the better option for you. If you can afford the mortgage premiums and you want access to more investment opportunities then buying a place may be the better option.
Above all, think about what’s most important to you and your life goals. Don’t pressure yourself to buy a home because society deems real estate as a status symbol or sign of success. Don’t buy a home because your parents say that’s what you should be doing at your age. If you have the option of buying a home and it is something that will fulfill a life goal/make you happy, go for it!
Keep in mind that renting and buying are both valid options for a place to live and one is not universally “better” than the other.
Everyone’s path is different.
Side Tangent
If you’ve made it to this part of the post (congrats) and you’re a millennial, and have a full-time job…
Start Your Retirement Savings Now! (if you haven’t already, you’ll thank me later)
