The Benefits of Home OwnershipWhen weighing the options involved in purchasing a home, there are emotional and financial factors to consider. Most people can easily articulate their emotions such as a desire to be free of a landlord, to decorate and renovate as they wish, to set down roots in and enjoy the pride of homeownership. Financial considerations can be more complex and less obvious.
One of the main benefits of homeownership is tax-free capital gains. If a buyer purchases a home for $200,000 and sells it for $325,000, they can enjoy $125,000 in capital gains without tax. In today’s economy, tax-free is a rare and wonderful concept!
Real estate also offers the benefit of being a leveraged investment. This means that a mortgage allows a buyer to enjoy a home and take as long as 30 years to pay for it even as the value of the property increases during the intervening years. Consider the previous example with a mortgage:
• Home price: $200,000
• Down payment: $40,000
• Mortgage amount: $160,000
• Interest rate: 3.9% *
• Amortization: 25-years
• Bi-weekly payments (26 per year): $384.12 each
In this example, the buyers would spend $249,678 on the principal and interest over 25 years. Adding in the down payment, the total expenditure is $289,678. Canadian real estate generally appreciates over the long term so, if the value of the home is $325,000 after the mortgage is paid, the appreciation is $35,322. That is a nice, tax-free nest egg for retirement! In the unlikely event that the property did not increase in value at all, the owners still have a property worth $200,000.
*Note: interest rates will fluctuate but for this example, it was 3.9% for the mortgage duration
How does renting compare to purchasing? First and foremost, renting does not build equity. At the end of 25 years of renting, a person would have zero property assets. As well, the types of properties available to rent vary greatly.
Using the previous example, a $200,000 property in a medium-sized city could purchase a nice one or two-bedroom condominium. The owners would spend $832.26 per month on mortgage payments (384.12 x 26 payments/12 months) plus approximately $140 for strata fees for a total of $972.26 per month. Renting the same condominium, if something comparable was even available, would cost approximately $1,150 per month. At current low interest rates, owners are enjoying accommodation for less and, at the same time, building equity.
Clearly, purchasing a property offers many emotional and financial benefits. The challenge, of course, is choosing the time, place and property where the investment will grow.
Location is an important factor in price appreciation. Location refers to both the community and the neighbourhood within a community. While not everyone has the luxury of choosing where they will live due to job and family ties, when options are available, it pays to research. Some Canadian communities are thriving while others have suffered due to the loss of major employers, demographic shifts or environmental changes. There are costs and benefits to both. Prices in thriving communities generally increase steadily over time but are more expensive markets to enter. Struggling communities typically have lower priced properties but the trade-off may be longer commutes to work/social activities and less price appreciation.
The old phrase ‘location, location’ says so much. A property with a great view of a lake or parkland will always be in demand. Properties in close proximity to train tracks, busy roadways, industrial areas, landfills, etc. are a fact of life too. The latter generally offer great value in terms of home and yard size compared to view properties. The choice usually comes down to family size and personal requirements.
Remember that not every property is created equal. Buyers will ask for as much as the market will bear—and that may not accurately reflect the true value! Prior to purchasing a property, a home inspection by a qualified professional is essential. Inspections can reveal potentially expensive problems such as mould/moisture, roof and foundation damage, etc. In some cases, problems are worth fixing for a price adjustment.
The style of a home can also affect its price and long-term value. A very unusual design may attract fewer buyers when it comes time to sell. The same is true when the style of the home is not suited to the neighbourhood such as a log house in a city. A very old home may or may not last another 25 years depending on the construction and upkeep. The quality of a condominium complex is directly related to the care taken by owners and the decisions by strata representatives.
A well-built, attractive home that is maintained over the years is most likely to appreciate in value. A REALTOR® can provide market-specific expertise to help buyers make decisions that satisfy both emotional and financial needs far into the future.