I have seen some people who got married and forced themselves into buying a house even though they haven’t had a chance to save at least 20%-40% of house price. So many people also think that buying a house is the best investment that an ordinary family can make. I strongly disagree. What’s good about buying a house? Has it generated strong historical returns? Does it produce positive cash flow? Does it have low expense ratios? Does it have low transaction fee? Does it give you a lot of free time (Time= Money)? My answers are no, no, no, no and absolutely not. Now let’s consider ETF(Exchange Traded Fund) as an example. Has it generated strong historical returns? (Yes) Does it produce positive cash flow? (Yes) Does it have low expense ratio? (Yes) Does it have low transaction fee? (Yes), Does it give you a lot of free time? (Yes). Then why so many people have a misconception about buying the house is the best investment that they can make? Let’s see briefly why buying isn’t as favourable as it seems.
1. Strong historical returns
S&P 500’s historical return between 1990 and 2013 is 11%. What about hosing market? Overall return of average housing market appreciation in North America is only 5.5%- 6%. That 5-6 % of difference will adds up every year and can make a substantial difference.
2. Positive cash flow
I am not saying you should never buy a house. You should buy it when you can afford it. I live in Toronto and average 1 bedroom condo is priced at 300-400K and detached house at 500K~ 900K. Crazy huh? I know. That’s why I haven’t purchased a house or a condo. I could probably afford at least 20% of down payment of a condo to avoid payment mortgage insurance but I don’t think the time has came yet. Let’s say I want to purchase a condo at 400K then I will have to borrow at least 300K at 5%. Then my monthly mortgage will be about $1,700. I know that there will be property taxes and monthly maintenance fee of at least $500 per month which brings up my negative cash flow as $2,200. I can rent a similar place for $1,500-$1,600 and have no headaches of being a house owner and the difference would be invested at 7%-8% of investment return every year.
3. Low expense ratio
Typically house owner pays about 1.5-2% their current value of the house as property taxes. Also maintenance cost is about 0.5%-2%. You will have to get a mortgage insurance and and property insurance. You will also buy more stuff for your house/ condos than apartment. Can you hear your money screaming in agony? ETFs have only 0.1%-1.5% expense ratio.
4. Transaction fee
The transaction fee of owning a house is about 5-10% of your current value of house fee for real estate agent fee. electrician, inspector, lawyer, accountant fees. If you are buying 400k house then you are paying at least 20k to 40k for transaction fee. Only transaction fee you will be paying from ETF is exchange conversion and $9.99 per trade at major banks.
House and Condo needs your time to fix something or maintain. My time is my biggest asset and fixing stuff around house definitely isn’t my favorite things to do in my free time.
I will buy a house when I am ready( At least save up 30-40% of value of property or purchasing income properties) My heart tells me not to rush as I have so many advantages of renting. I can move anywhere I want and I could be close to work. I don’t need down payment and can have my investment growing at steady level. I do not have to pay property taxes and other maintenance fee and my rent is fixed so I can plan my future finance better. I am not responsible when things like appliances, plumbing go wrong as I can simply call my landlord to deal with the problems. Most of all, I can enjoy my weekend freely with my beautiful wife and a dog.
What is your thought? Can you afford to purchase a house? When do you think is the best time to purchase a house?
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