The top reasons anyone should purchase real estate are:
What is "Capital Growth" and why should you care?
The plain and simple explanation is, Capital growth is an increase in the value of your real estate purchase (asset) over time. Essentially you're buying low and selling high in terms of price, and you keep the difference. Knowing your investment is secure in value that it won't decline like the car that you drive every day, but in fact increases in value so you can sell for a profit aids in building wealth, and financial security in the future.
Some of the key metrics in determining if the market is displaying a positive growth trend are:
October is certainly displaying signs of price and volume growth over 2020.
Is it cheaper to own versus rent?
For our purposes, we will assume utilities are over and above for both buying and renting.
A common starter home in Red Deer that has 3 bedrooms, 2 bathrooms, no garage will rent for $1,600/month. We're seeing homes with basement suites get $900 down and $1,200 or more up in some cases. Rates may vary by location and age.
For our example, we will compare to a home that is built after 2000 and older than 2010. The location for that home will most likely fall in the Inglewood, or Johnstone areas with sale prices ranging from $275,000 - $300,000.
To purchase a comparable home today we will use a value of $285,000. Is the monthly payment including taxes going to be less than $1,600?
Let's break it down...
Typical taxes in Red Deer for that style of home, age and price are averaging 1% of the sale price so $2,850/ year or $238/month.
Using the Financial Calculator Page here. If we were to finance $285,000 with a 3% interest rate, amortized over 25 years, the monthly mortgage payments would be approximately $1,352. Note we're not taking into account a down payment, and CMHC premiums., for simplicity we're financing the full amount.
For a second opinion on our calculations, we encourage you to visit your favourite mortgage professional such as https://www.wehaveamortgageforthat.com/
Mortgage + Taxes = $1,352+ 238 = $1,590
Yes, it is comparable to renting. So next question, what's the benefit of buying then?
Real Estate is one of the very few assets you can purchase with a 5% down payment, make payments over time and get growth. Leverage is when you use debt to multiply the potential return on your real estate investment. A mortgage is a straightforward example of leverage in real estate. With 5% down you are using 95% leverage. You can not walk into a bank and ask to buy a $100,000 GIC with only $5,000. With real estate, you can borrow up to 95% of the home's value for your benefit.
Refer to our charts above as to whether or not the market is displaying positive growth signs.
Leverage reduces your RISK. IF that $285,000 home declines in value, the bank stands to lose more than you do.
To yield a positive return on not only the selling price but your minimal initial investment and monthly payments we will have to make some assumptions on how much real estate will increase over time.
Selling in 5 years?
It's ok if your first home is not your forever home. Families grow, and things change. So what would happen if you bought that $285,000 home and sold it in 5 years. Would you make any money?
Example 1: No Growth.
Bought at $285,000 and sold for $285,000. IS the profit $0.00? Well not exactly. You are still making monthly payments. 60 monthly payments. Your mortgage balance in the future after 60 payments will roughly be $244,000 (using our previous example).
Sale price of $285,000 - Mortgage Balance of $244,000 = Equity balance of $41,000.
Example 2: Growth of 3%
Let's pretend the market slowly goes up by 3% per year. Hypothetically then $285,000 in 2021 would grow to $330,000 in 2026.
Sale price of $330,000 - Mortgage Balance of $244,000 = $86,000.
I would buy now versus waiting.
What are your thoughts? Are these real-world examples? What variables are missing from the equation besides a 5% down payment requirement of $14,250?
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