Rob Carrick – The Globe and Mail

Question for all the young adults buying condos these days: What are you thinking?

Rent that little box in the sky and save your money for a house later on. Don’t buy something you’re going to grow out of in a few years.

Comment: Or buy a condo and build equity, then buy a house later on.

“When you run the numbers, renting is probably a bit cheaper,” said David Fleming, a Realtor with Bosley Real Estate and writer of the Toronto Realty Blog. “But [young adults] think the market is going to go up, they want to pay down principal, they want pride of ownership. I’ve probably sold seven or eight condos this year to kids under 25.”

Comment: It might be a little cheaper to rent, but every cent of that money goes out the window, you get nothing back. Paying a couple hundred dollars more per month to buy, you put equity into the condo, plus you reap the benefits of price appreciation. If you spend $1,800 a month on rent, you have nothing after 5 years. If you save $200 over buying, then you can put it away and have $12,000 after years. If you bought for $300k with 10% down, you pay your mortgage down to $230,000 over 5 years. Plus, even with slow appreciation, you could see 1-2% in annual price gains. That puts you around $330,000 after 5 years. So, with $30k down and an extra $200/month, you now have $100,000 in equity. Sure beats $12,000 you save by renting!

Mr. Fleming said some young buyers get help from parents to buy their condos, and then manage the monthly carrying costs of the mortgage and condo fees by finding a roommate to pay rent. Yet because young buyers tend to stay in their condos for only a short while, renting is still the better choice.

“I would say buyers in their 20s probably won’t live in that condo for five years,” Mr. Fleming said. “They’re going to either outgrow it, or find a mate and want a bigger, better or different place.”

Comment: Maybe. Some are getting married and having babies in small condos. They can last it out for longer, knowing they have to, before moving up.

Even if you meet someone and live together in your condo, you’ll probably want to move when you have kids. Mr. Fleming said an increasing number of couples are starting families in condos, but a house is still seen by most as the best place to do this.

Comment: Like I just said, some stay longer and profit from that time.

Moving from a condo you own to a house will cost you a lot. If you used a real estate agent to sell the place, you might pay a $15,000 commission plus HST to sell a $300,000 condo. “It’s expensive to move,” Mr. Fleming said. “Hopefully you purchased that condo for $250,000.”

Comment: It is expensive to move from anything to anything. Buying a house for the average $940,000 these days, that will cost you $30,000 in land transfer tax.

Condo prices are rising in some cities, so you might have that going for you if you buy. Data for May show the average condo price rose 6.7% in Edmonton to $251,688. Calgary condos rose 1.9% on average to $315,953, and downtown Toronto condos rose 7.6% to $401,809. “I was a bit of a condo bear and now I’ve basically thrown my hands up,” Mr. Fleming said of the Toronto market.

Comment: All condo bears need to give up. They have been wrong for around 11 years now. There are too many reasons for Toronto’s condo market to continue to succeed and no reasons for it to fail.

But, as he is quick to point out, not all condos are equally good investments. Mr. Fleming said there are some poorly built condos in downtown Toronto that won’t hold their value as well as higher quality buildings. His description of one particular development is hilarious: “There’s no soundproofing, people are partying and puking in the lobby, there’s honking, there’s no infrastructure nearby – where do I get a coffee, where do my dry cleaning?”

Rent a downtown condo, don’t buy one. You still get to live the urban lifestyle and reduce commuting times. You’ll also have a decent selection of rentals to choose from. Mr. Fleming said Toronto’s overall rental market is tight, but one bedroom condos available to rent are plentiful. Two-bedroom, two-bath condos? Not so much.

A quick run through Kijiji found downtown Toronto one-bedroom condos for rent at $1,500 to $1,600 range. If you bought a similar condo for $300,000, then your mortgage payments would be $1,391 per month, assuming a 3% mortgage rate and a 5% down payment of $15,000.

Comment: It could also be $574 every 2 weeks with 10% down and a 2.79% mortgage. If your parents give you $50,000 then you are laughing all the way and paying less than rent.

Renting becomes a cheaper option when you add condo fees to that mortgage payment at about $400 a month and property taxes at $180 a month. Factor in the kind of home improvements that owners tend to make and you’ve got an even bigger rent-buy spread in costs.

Comment: Not really. If you add $574 twice a month, plus $400 condo fees and $180 taxes, it is $1,728 a month – not far off what it costs to rent. And you own, getting all the financial benefits I listed about ($100,000 in equity after 5 years).

There’s a theory that buying a small condo is like training camp for owning a home – you learn about mortgages, interest rates, budgeting and maintenance costs. Here’s a better way to prepare to own a home: Rent a condo and park all the money you’re saving as a renter in a nice, safe high-interest savings account held in a tax-free savings account. In the example just above, you’d save about $370 a month by renting. In a high interest account paying 1.25%, you would end up with $22,894 after five years. That’s two-thirds of the way to a 5% down payment on a $600,000 Toronto house.

Comment: And only 1/5th of what you would make if you owned the condo. The $100,000 you could pull out by selling in 5 years is a WAY bigger piece of down payment. That would give you 15% down on a $600,000 house with $10,000 or more left over. If condo prices rise by more than 1-2% (such as the 7% we have seen recently) then you might get 20% down for a nice house, avoiding CMHC and getting into home ownership quite nicely. You could also buy a condo and rent it out, having other people pay your bills. In that case, you could invest half of what you would have paid, netting yourself $50,000 from your TFSA after 5 years, along with the $100,000+ in equity. AND you saved $900 a month. How is renting better than this? Please, try again to explain it to me.

What does Mr. Fleming, the real estate agent, think about renting a condo? “As a Realtor, I’m supposed to sell people real estate, not rentals. But I don’t think it’s a bad move.”

Comment: It is never a good move, never. Any way you do the math (and I have been doing this math over and over for a decade now), buying ALWAYS comes out better in the end.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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