Shopping for a house was a huge consideration for us and it should be one for anyone in the process of moving since it is likely the biggest purchase one will make in his life. Buying too little might not be wise, just like buying too big might not be wise. Depending on your location and plans, renting might be the optimal choice rather than buying and living slightly further from work might be better than living downtown. There are so many variables and so many considerations to take into account before signing anything.
Is smaller better?
In Canada, the average household spent an average of $17,509 per year on shelter in 2015. This represents 28.9% of household expenses or $1,459 per month. In the U.S. the average household spent $10,742 per year on shelter in 2015. This represents 19.2% of the average household expenses or $895 per month. These figures include rent, mortgage payments, repairs and maintenance costs, property taxes and utilities but actual spending greatly differs from state-to-state or city-to-city.
With that in mind, it is critical to shop around for the right house. Buying a smaller, cheaper, house might be a great way to save money but it is not always the case.
You can save on the purchase price, taxes, heating, and maintenance on a smaller residence but if you are buying a starter home, then it is a whole other story. If you are not planning on staying there at least few years, buying a starter home is not the best decision. Not only will you need to pay moving fees but also notary fees, realtor fees, taxes, and appraisal fees.
We thought roughly 5 years ahead and bought a house that would cater to us now, then, and even 10 years from now. We have extra bedrooms for future kids and, for now, we rent those out on Airbnb to generate a little side income.
Having a place you can grow in is the key to moving less often. I am not saying you need a 10-bedroom mansion but having one or two extra rooms is not always a bad financial decision. The length of your stay will greatly affect the impact of buying instead of renting simply because moving, as an owner, is expensive.
To buy a property, there is a whole list of fees that you might incur;
- Your bank might charge you for the appraisal (~$300, most bank pay for it)
- You certainly want to have an inspection, even on new construction, to make sure everything is well built (~$500)
- You will need to see a notary or lawyer (~$1,000, some banks will pay for it)
- You might have to pay a land transfer tax; this is a percentage of the total value of your purchase and is only charged in certain states and cities. In some cases, first-time buyers are eligible for a rebate or full waiver of that tax. (We had to pay ~1% to the city)
- If you put less than 20% down, you will have to pay PMI or mortgage insurance (In Canada, CHMC is 0.6% to 3.85% of the mortgage amount, charged once. In the U.S. PMI is 0.5% to 1% of the entire loan amount per year)
Once you are ready to move, however, there are even more fees such as;
- Unless you list your house yourself through flat-fee online services, you will probably pay a realtor’s commission. (3% to 5% of the sale price)
- You will also need to see a notary or lawyer to discharge your mortgage ($500, usually cheaper than when you are buying but still considerable)
- You will need to pay a mortgage discharge fee (~$250) plus any penalty if you are breaking a fixed-term mortgage agreement. (3 months’ worth of interest plus the lender’s penalty)
After considering all of these, it becomes clear that having a starter home might not always be the best. If you buy a 2 bedroom house, I am sure you could make it work and have the kids sleep in bunk beds but it is not ideal. Furthermore, the difference in real estate prices has little correlation with the actual room divisions. Location, demographics, total square footage, land size, condition, and seller motivation has much more effect on the listing price.
Just for the fun of the exercise, I have compared two very similar properties currently for sale in our area.
Asking Price: $200,000 Features: 9 Rooms, 2 Bedrooms 2 Bathrooms
Asking Price: $204,900 Features: 9 Rooms, 4 Bedrooms 1 Bathroom
Both properties are semi-detached bungalows, built in the mid-90s, and sitting on a similar plot of land. The first one offers only 2 bedrooms in the basement and is only $4,900 less than the second one offering a total of 4 bedrooms, two of them on the main floor. Personally, I would much rather purchase a property that offers room to grow, rather than limiting myself to smaller living quarters to save a few dollars.
In the long-run, you will save tremendously if you take the time to find a house that will last rather than purchasing a starter home, just to upgrade a few years later. Even if you do not need the rooms right now, you could find a roommate or list them on Airbnb to help pay the rent.
Inefficiency can be a huge wealth killer and spending too much on a house can tie you down. Being a mortgage-slave is no means to attain financial freedom.
Is renting the solution?
Renting is not necessarily throwing money out the window as some say. Renting can be a great solution if you are not sure about your future or depending on your location if the market is more favorable to renters.
The extra flexibility rent allows you to have when you are starting out your career is a great plus. Being able to move to a different state or country for a new job opportunity can be a huge advantage. Even if you are not moving very far, the fact that you are not ready to live at the same place for at least 5 years makes it hard to justify buying a place. Whether you are skipping the starter home and not sure about your preferred area yet, renting is rarely a total waste. Using this great tool from the New York Times, you can estimate the difference between renting and buying in your particular situation.
In some neighborhoods, it is very hard to buy and have the finances in your favor. You would be better off renting even if you are not planning on moving anytime soon. In a case where rents would be considerably cheaper than the cost of buying, such as in most condominium in downtown cores or in markets where the rent/buy demand is unbalanced, then you would be better off renting and investing the difference.
By renting cheaper, you can save a little extra each month and invest in other asset classes than real estate such as index funds.
Think about the future value
Wealth killers like high condo fees or high taxes can quickly tilt the equation towards renting. For example, a $100 per month expense would equal a loss of $17,300 over ten years or $52,000 over twenty years. Of course, this whole calculation assumes you invest that amount instead of spending it.
This goes, not only for housing but for any spending you do. The tricky thing is to find the balance between spending and saving in order to live a happy and fulfilled life without emptying the bank.
Find your balance
To find the perfect balance, simply live a conscious life. Live in a comfortable habitat for your well-being. Live in a neighborhood that makes you flourish. Live in a house, or apartment, that makes you happy and remember to enjoy your good fortune. We live in a beautiful house and we are conscious that not everyone has the same luck, even to have a roof over their head. We are fortunate, stay happy! Xyz.