It’s Never Too Late to Get in The Game
WHILE PRICES HAVE RISEN, YOU CAN STILL INVEST IN REAL ESTATE
With skyrocketing prices over the past year, many of those who wanted to get into the market, either as first-time homebuyers or investors, may be thinking that they have been outpriced and that it is too late to do anything.
We would probably say, think again! We’re certain that throughout time many have felt the same way. We’ve often imagined people in 1950’s Toronto complaining about the growing cost of real estate. We once anecdotally heard a story of a renter in 1970’s Toronto tell his landlord that High Park homes were overpriced and he would buy one when they fell below $40,000.
Indeed, growth in home prices today far exceed growth in average income. The National Bank of Canada’s Affordability Survey published earlier this year claims that to own a home in Toronto, you need a yearly income of $178,499 (using an average home price of $1.04 M), and for the average condo (at $625K) you need an average income of $124,334. While this is shocking for most Torontonians, these kind of stats have for some time been a sad reality for other major urban centres like New York, London or Berlin (in Germany, where home ownership rates are at 50%). While we may not like our new reality, it is further proof of our “world class city status”.
That said, those already “in the market” have watched in astonishment as their home has grown into their most valuable asset and most profitable investment.
Still, this leaves us to ponder, other than through inheritance, can we still “get into real estate”, be that as a new entrant or as an investor? What can we do now, during these “unaffordable” times?
If you’re looking at the real estate market for home ownership, our first practical piece of advice would be to organize your finances to maximize your purchasing power. This means lowering your debt payments to qualify for more of it. Don’t be locked into an aggressive amortization! Rather, make your payments as low as possible and utilize lump-sum payments to achieve the same amortization goals. Yes, it is the same thing!
If you can’t afford to buy in the city where you live, you still can invest in real estate. Many Torontonians have purchased rental properties in smaller towns while continuing to rent in Toronto (this is an especially smart strategy for those in rent-controlled apartments). If you already own your home and are looking at real estate as an investment tool, we still believe it’s never too late.
To begin with, your primary residence can serve as a source of down payment (through equity take-out) for your investment property. This is a huge advantage – you don’t have to “save up” for the down payment. What has changed though is that prices are so high in certain cities and areas that even with a 20% down payment, the rent most likely does not carry the cost of the mortgage. This is mostly true in Toronto and other Ontario urban centres, but does not mean that there are not other areas where you can still make good returns.
If you are buying in a different city, there is more due diligence and research involved. I highly recommend using professionals. For example, local real estate agents can help you chose good areas, will know the rental potential and if there are economic factors that will drive rental prices (e.g. a new company of university coming to town). They can also help with renting out the property. I also believe that you should engage a property management firm – you can’t manage an investment property that is over an hour’s drive away.
This advice goes for other professional services such as accountants, lawyers, realtors and mortgage brokers.
Down payments remain the largest obstacle for new home owners. While still only 5% for first-time buyers, down payments are still sizable because of property prices. For this we can only recommend looking for parental help, and moving out of other investments. While retirement planning is good, you can’t live in an RRSP… Also, if house prices continue to rise over the long term, you can look to your home to one day finance your retirement.
For prospective new home owners, our advice has always been that “time in the market beats timing the market”. This also means that getting into the market is more important than landing the perfect home. The tiny condo may not have been your dream home, but it does allow you to enter the market, build equity, pay a mortgage vs rent and position you to move up.
Photo vy Francesca Tosolini (Unsplash)