Categories
Investing

We Sold our House at a Profit and Still Lost Money

A while back, we argued that purchasing our house in the suburbs was a good financial move for us and the actual cost of ownership would compare to a $703 per month rent. To know the actual true cost of house ownership, the only accurate way to know for sure is to look back at the past 3 years and count every penny we have put in the place.

This was a great exercise, not only for our own finances but to give you a clear idea of the actual costs of home ownership. Some expenses would still incur if we were renting, therefore, in that situation, we just calculated the difference in cost.

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Inevitable buying costs

To purchase a property in Canada, we have to go through a notary. They are basically real estate lawyers. As the buyer, we had to pay $1,200 to close on this house. This cost varies a lot depending on where you are, some will charge as low as $500, while some lenders even pay for it.

In addition, our municipality charged a land transfer tax equivalent to roughly 1% of the property value. We paid a total of $2,550 in land transfer tax at the time of signing. This varies between cities, Toronto for example, charges a tax on top of the provincial one so you end up paying almost 2%.

We also did a house inspection before putting in our final offer. This protects buyers from any hidden faults with the property. They go through the house and look for all the possible issues with the property. Of course, this by no means guarantees that nothing will go wrong with your property but it is a good safety measure to take and it gives you negotiating power if the inspector finds small issues.

We paid $700 for our inspector and after she mentioned that the shingle roof had to be replaced in the next 3 years, we negotiated with the seller to get all appliances included. They were all brand new, stainless steel appliances, so we saved roughly $4,000 there.

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CMHC insurance (or PMI)

At the time of purchase, we decided to put only a 5% down payment on the house so we had to pay mortgage insurance. This added a total of $8,079 to our mortgage. The only way around this would have to put a $54,000 down payment, which we did not have on hand at the time.

In the United State, PMI would be very similar. For the same amount, PMI would add 117.79 to your payments for the first 90 months which comes out to $10,601 in total premiums.

Sometimes, it makes sense to spend a little on insurance to put less money down. Depending on current interest rates and your expected rate of return on investments, it can be more profitable to invest your money in the market rather than in your home.

The same goes for paying off your mortgage faster but sometimes, it is not all about the numbers. Feeling financially safe has its value too.

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Home owner’s insurance

During the three years, we paid $39 per month in homeowners insurance to protect against fires, theft, damages, liability etc. The total cost over the years adds up to $1,404. Compared to renter’s insurance, which only covers liability and your furniture, we were paying $14 per month so the difference here over the three years is $900.

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Municipal and school taxes

Every year, we paid $2,800 in municipal taxes and $450 in school taxes. This adds up to $9,750 in taxes over the three years. We also had a small issue with our subversive pump recently and that added $600 to our water tax bill so that didn’t help.

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Maintenance and remodeling

The general rule of thumb for maintenance costs is 1% of your property’s value. U.S. News and World Report say that homeowner’s spend anywhere between 1% and 4% of a home’s value each year on maintenance and repairs.

In our case, we have very little maintenance expenses over the three years we were there. The only thing we changed was our hot water tank before it got too old. Total cost: $450.

We did spend on small remodeling projects but never spent a considerable amount of money. We always did our projects ourselves so we saved a lot on labor.

The first thing we did was to paint the dining room. Total cost: $60.

We then changed the cabinet’s handles to give a modern look to our kitchen. Total cost: $100.

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How much does it cost to buy a house

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One of our weekend projects was the accent wall in our master bedroom. We bought flooring on sale at the hardware store and glued it to the wall with PL. We invited a friend over and made it a day. Total cost: 100$. (Plus $20 for the beers!)

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DIY cheap remodelling projects

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Inspired by this DIY, we remodeled a bathroom with the same technique as our bedroom since that wall turned out so well.

Instead of tiles, we waited until the wood flooring was on sale and given the smaller surface, we barely spent anything. We even had some leftover glue and paint. For the mirror, we found a nice one in a discount store for $40. We then ordered LED strips on eBay for $10. Total cost: $90.

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Weekend projects

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We also changed the electric baseboard heater of our bathroom simply for aesthetics and noise and changed the bathroom fan for a silent one since it felt like we had a turbojet in there every time we took a shower. Total cost: $240.

This summer, we redid our patio since we never liked the one originally built. The old deck was grey, started to rot, and unappealing.

We sanded the base, changed the look of the railings completely, and secured a closed off section for the pool. Then, opted for modern steel balusters to give a brand new look to the place.

At the hardware store, we had the option of premade railings that went for about $120 per 6’ or we could assemble our own railings for about $30 per 6’. We went the DIY route and saved another 15% off the purchase price since we waited until a sale.

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Patio renos

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The worst part of the project was to get the stair railing to fit properly. We could not get the balusters to fit, the angles we off, and we ended up starting over 3 times before getting something solid in place.

After replacing some rotten beams, redoing a section what was not well supported, and building our railings, we ended up buying $150 of wood. Our biggest expense here was the steel balusters. Total cost: $450.

Finally, after having our house on the market for months and months, we had the floors sanded and varnished to spruce up the property. After getting a few estimates, we went with a guy who did the whole job in a day for $1000.

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Water Heater 450
Paint: 60
Kitchen Cabinet’s Handles 100
Bedroom Accent Wall 100
Bathroom Accent Wall 90
Heater and Fan 240
Deck 450
Floors 1,000
Total $2,490

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Yard care

We never paid anyone to mow our lawn or to spray pesticides on our lawn but we do get some pretty nasty winters up here in Canada. We moved in the spring but for the next two winters, we spent $250 for a plowing service. This adds up to $500 for the three years we were there.

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Utilities

When we were living in a smaller condo, we were paying under $50 per month in electricity. Now that we had much larger square footage, we spent roughly $120 per month on electricity. This includes our heating since the whole house was heated by baseboards. Over the three years, we spent $2,520 more as homeowners.

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Furniture and appliances

We were fortunate to get all major appliances for included when we bought the house since we negotiated it in our offer. We got a brand new stainless steel fridge, stove, and dishwasher and used washer and dryer.

On top of all of this, we also negotiated to get the lawnmower, a weedwhacker, a hedge trimmer, and a few tools for free which saved us a lot of shopping.

In terms of furniture, the only piece we bought brand new was our couch. We got it for $600, on sale. Everything else came from hand-me-downs or we got it used from Kijiji or Craigslist. Finally, we furnished two guestrooms, which we later used to earn a few extra dollars on Airbnb, and office space.

We did not spend more than $1,000 in total.

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Opportunity cost

By renting, we could have kept our down payment invested in the market. Since the day we bought our house, the S&P500 increased 20.154% (with dividends reinvested). Therefore, our $13,500 down payment would have grown to $16,220 if kept it invested. We are assuming a single holding portfolio here for simplicity but it gives us a total opportunity cost of roughly $2,700.

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Interest

Each month, we paid $1,300 in mortgage payments. Out of that, about $535 has been going towards interest. Over the three-year period, this comes out to $19,260 in interest payments to the bank. As JL Collins puts it; interest is the cost of renting money.

There’s no free lunch in real estate.

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Transaction fee

At the start, we tried the DIY route and chose to advertise our house on a flat-fee website. Selling our house seemed easy, we did the visits and open houses. The package we bought gave us the exposer we needed to find the right buyer and all the support one could need to sell a house. The total cost for this was $699 for their basic package. However, after months and months on the market and multiple offers which did not go through, we ended up hiring an agent.

We negotiated with the real estate agent a lower commission and signed a contract until the end of the year hoping to sell in a few weeks.

We were at the peak of the market, received multiple offers but, again, none of them went through. Finally, after a year on the market, we finally sold our house for a total of $35,000 more than we had bought it three years ago. In the end, we ended up paying $11,800 in commission for the transaction.

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Appreciation vs inflation

In many cases, a home is not a great investment. However, it is not always terrible. Especially as your main residence, it is hard to see how renting would be better. A longer holding period would have helped us absorb more of the fixed costs such as the purchasing expenses and the realtor’s commission but no matter what it still costs a lot to buy and sell real estate. Even if the value of the home increases, it does not mean you are making any profits.

In this calculation, we did not even calculate inflation but that also eats up some of that $35,000 increase.

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The actual true cost of home ownership

In the end, the actual cost of owning this house was pretty high. Once we include every single expense, it is surprising to see how much we have actually put in this place.

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Notary 1,200
Land transfer tax 2,550
CMHC (or PMI) 8,079
Home owner’s insurance 900
Municipal and school taxes 9,750
Maintenance and remodeling 2,490
Yard care 500
Utilities 2,520
Furniture and appliances 1,000
Opportunity cost 2,700
Interest 19,260
Transaction fee 11,800
Total 62,749

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Of course, we sold the house for more than we bought it so we can subtract that amount: 62,749 – 35,000 = $27,749. So, over a three-year period, we spent $9249 per year or $771 per month to live there. Pretty close our $703 estimate from the New York Times rent or buy calculator.

For $27,000 over three years, there is no way we could have lived a similar lifestyle as renters. We now downsized to a small condo downtown and even this small property would rent for a lot more than $771 per month.

Unless you are moving every year, it is hard to see how renting would be better than owning. If you have any thoughts, please comment along. 🙂

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Categories
Saving

Why Rent When you can Buy? Homes on a Budget

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. Even if you are considering to rent or buy, there is a ton of factors to consider.

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.

 

More things to consider

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)
  • 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)
  • There might be a land transfer tax to pay; 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.

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Asking Price: $200,000 Features: 9 Rooms, 2 Bedrooms 2 Bathrooms
to buy or rent

Building style

Bungalow, Semi-detached

Year built

1992

Lot area

3,451 sqft

Parking

Driveway (2)

Fireplace/Stove

Wood fireplace

 

Asking Price: $204,900 Features: 9 Rooms, 4 Bedrooms 1 Bathroom

house for sale or rent

Building style

Bungalow, Semi-detached

Year built

1997

Lot area

3,875 sqft

Parking

Driveway (3)

 

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. In a neighborhood that makes you flourish. 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.

 

 

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