# A what price point does it make sense to buy?



## bobsyouruncle (Dec 25, 2016)

Assuming rent is $1400/month, utilities are the same whether you buy or rent, and you buy somewhere new that doesn't need renovations, and you can get 5% return on investments, at what point does it make sense to buy regardless of the market?

By my calculations $330,000 seems to be around the sweet point. 

Too much over that and renting makes sense. But around that and regardless of the housing market, buying makes sense.

Thoughts?


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## Nelley (Aug 14, 2016)

bobsyouruncle said:


> Assuming rent is $1400/month, utilities are the same whether you buy or rent, and you buy somewhere new that doesn't need renovations, and you can get 5% return on investments, at what point does it make sense to buy regardless of the market?
> 
> By my calculations $330,000 seems to be around the sweet point.
> 
> ...


IMO a reasonable estimate-assuming that what you are renting for $1400 a month actually has a market value of 330.


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## sags (May 15, 2010)

I did a different calculation to see what would be the break even for us paying $1000 a month plus hydro rent.

If I deduct :

$200 a month condo fee
$100 a month heating cost
$200 a month municipal taxes
$50 a month water and sewer charges
$50 a month additional home insurance costs (owner versus renter)
$50 a month maintenance for repairs a landlord would normally pay for.

I end up with $350 a month for an mortgage payment. 

I didn't include any costs to lost revenue on the down payment or rise in property values.

I have concluded there is nothing we can buy that won't involve a higher monthly cost.


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## bobsyouruncle (Dec 25, 2016)

Nelley said:


> IMO a reasonable estimate-assuming that what you are renting for $1400 a month actually has a market value of 330.


What we're renting is an older detached bungalow that in the current market is a max of $360k I'd say, with a finished basement for a total of about 1500 sq ft.

What we'd be buying is a new duplex, a similar size not including the basement. 

But the real point has little to do with size, price, or location, but to have equivalent outgoings yet to own a suitable property rather than rent. 

I could spend the next 10 years paying approximately $168,000 in rent. Or I could spend the next 10 years paying approximately $168,000 on a mortgage and taxes, with perhaps $80k of that being principle. 

So I'm $80k ahead.

But that's not counting what the $66k downpayment could be in 10 years. Let's say I double it. That's $132k while renting in comparison to $66k downpayment and $80k paid off the principle of the mortgage, which is $144k.

Not a big difference, but if the house goes up in 10 years, that could make a positive difference. If interest rates go up, that could be a negative difference.

I'm kinda thinking out loud with this post! Am I thinking about it correctly?


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## Saniokca (Sep 5, 2009)

My post in another thread:

Here is an actual example of how I'm being subsidized by my landlord. An identical apartment a few floors above is listed at 330k (similar apts were listed and sold for similar prices in the past year). I am ignoring any down payment since that could be invested for a return. I am also ignoring the buying/selling costs which would only help me I think. This a one-bedroom apartment in GTA.

price	330,000 
interest	3%	
interest/yr	9,900 
interest/month	825 A

maintenance/m	900 B

taxes	0.50% - this item is just a guess - not sure how accurate this is	
taxes/yr	1,650.00 
taxes/month	137.50 C


cost per month	1,862.50 A+B+C
rent	1,550.00 (this is what I actually pay and includes all utilities including cable but not internet/phone).
subsidy	312.50


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## mordko (Jan 23, 2016)

Whether or not it makes sense to buy from the financial point of view, depends primarily on how long you are going to live in a place. Running costs are secondary. If it's 20 years, you will certainly be far better off by buying. If it's 10 years, almost certainly. If it's 2 years, you might well be better off renting. 

Worth noting that the government encourages buying houses by creating an extremely favourable regime of taxation.


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## Just a Guy (Mar 27, 2012)

My initial thought is that this is a question to which you've already got a strong opinion. It's very typical of the kind most people ask.

You don't want to hear that the cost of ownership is much higher, that housing prices are very high and could correct significantly (making you lose whatever capital you think you're accumulating), you don't want to hear that Canadians move every 7 years on average, or that it usually takes more than 7 years to break even on the resale of a house.

You don't want to be told how by renting and investing the difference in costs can put you further ahead, or that if you can't put the extra costs away today, you may find it hard to pay those extra costs every month...

As someone who owns his own house, as well as a lot of rentals, I could try to convince you that your numbers are skewed to show you greater profits in home ownership, but then that's not what you really want to hear from someone very familiar with the numbers apps they deal with them daily.

Is home ownership a mistake? Not at all. Will it be cheaper than renting? Probably not. Does it provide some benefits over renting? Yes it does. Does renting provide benefits over ownership? Most certainly.

In the end, I think you've already made up your mind which is fine, but you'll also find your numbers aren't as rosy as you think they'll be.


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## bobsyouruncle (Dec 25, 2016)

mordko said:


> Whether or not it makes sense to buy from the financial point of view, depends primarily on how long you are going to live in a place. Running costs are secondary. If it's 20 years, you will certainly be far better off by buying. If it's 10 years, almost certainly. If it's 2 years, you might well be better off renting.
> 
> Worth noting that the government encourages buying houses by creating an extremely favourable regime of taxation.


It's for the long term.

My thinking is that according to how I'm calculating things, there's a price point at which, say $400k, where if your rent for what you need is $1,400 as mine is, then you're better off continuing to rent, perhaps regardless of the timeframe.


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## mordko (Jan 23, 2016)

bobsyouruncle said:


> It's for the long term.
> 
> My thinking is that according to how I'm calculating things, there's a price point at which, say $400k, where if your rent for what you need is $1,400 as mine is, then you're better off continuing to rent, perhaps regardless of the timeframe.


Timeframe is very important, more so than the entry point. The other key factor is location. The story is very different for Vancouver and some place in NB. 

Essentially, if you own your home long enough, and if the location is desirable, you WILL make money. And it will make running costs small in comparison. And your capital gains will be tax free. And you can attribute half the proceeds to your spouse, who may earn just 10 percent of what you do. There is no other investment that is treated so favourably.

Running costs are important to ensure you can actually afford the place. And the purchase price is a determining factor impacting both running costs and how long you have to own the property to make a significant profit.


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## bobsyouruncle (Dec 25, 2016)

Just a Guy said:


> My initial thought is that this is a question to which you've already got a strong opinion. It's very typical of the kind most people ask.
> 
> You don't want to hear that the cost of ownership is much higher, that housing prices are very high and could correct significantly (making you lose whatever capital you think you're accumulating), you don't want to hear that Canadians move every 7 years on average, or that it usually takes more than 7 years to break even on the resale of a house.
> 
> ...


Some of these assumptions aren't true of us. Perhaps I'm skewing numbers slightly. I'm not accounting for maintenance. It will be a new house, so is it wrong to assume that will be almost non-existent for a good few years? I can't predict interest rates, but I also can't predict the return on the downpayment. 

Also, I've already prepared my wife and myself to rent for the long term. We did the numbers some time ago, and given the price of what we would want to buy and so on, it made sense to continue renting.

What has changed? Calgary housing market. The builders building cheaper duplexes in our price bracket instead of larger detached homes. 

I do tend to look at things in the cold, hard numbers. We live frugally. No debt at all, no TV, cheap cellphone of about $25/month, and $50/month on internet. No expensive habits. We almost never eat out, and no drinking, drugs, or gambling.

This is purely about the numbers. I'm only considering a home which is equivalent to renting, and not entertaining a $450k detached house (which is normal in Calgary). $350k would be the max I think I would consider, but I'd much prefer to keep it well under that.

As for moving, no one knows the future, but I have as high a job security as one could ask for and I hate moving, so if this happens it would be as permanent as I can foresee. 

If you can dispense a cold, hard dose of financial reality to keep me from buying, then I'm happy to hear it. It is a purely financial decision. I am assuming if mortgage + taxes = rent, then in normal conditions it ought to make sense. No?


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## Just a Guy (Mar 27, 2012)

Well, you should also factor in higher insurance, maintenance (even a new build requires it, and new houses, I find, are poorer quality than before I don't see houses today lasting a 100 years for example), higher utilities to start.. You also need to put away a little each year for those once a decade or two big ticket items (windows and roof may only need to be replaced in 20 years, but you need to budget upwards of $100k to do both, that's 5k a year to save). Just because you don't need to do repairs today, doesn't mean you shouldn't budget for the repairs of tomorrow. 

We've talked already about he correction in Calgary which is far from over, so your equity will probably erode short term at least. All signs are pointing to higher interest rates at renewal time but, as you said, no one can predict the future.

Finally, you could be locked in to your location. With renting you can leave pretty easily with owning, you've got an illiquid asset you need to divest yourself of...not easy in a falling market.

People who move often don't do it because of work by the way, Canadians move for all sorts of reasons (upsizing, downsizing, better neighbourhood, better neighbours, whatever). Duplexes mean communal living which most people don't tend to like...biggest complaint I hear from being a landlord is about the neighbours (noise, habits, pets, whatever). 

When I run numbers on how much I need to earn to make a rental real even, $1400 on a $350k property won't work, so if I can't break even at that rate, as an owner I doubt you'll be able to meet the bills either. True, you'll save some costs (a property manager for example), but not that much, and some of my expense (insurance for example) are lower than a homeowner's.

Have you looked at moving or renegotiating a lower rent? I'm sure there are some options in Calgary right now where you can improve your current renting situation...vacancy is increasing.


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## bobsyouruncle (Dec 25, 2016)

Just a Guy said:


> You also need to put away a little each year for those once a decade or two big ticket items (windows and roof may only need to be replaced in 20 years, but you need to budget upwards of $100k to do both, that's 5k a year to save). Just because you don't need to do repairs today, doesn't mean you shouldn't budget for the repairs of tomorrow.


$100k??? Really? On a relatively small house it would take $100k to replace windows and roof? While new builds have many deficiencies over some older homes, I would have thought windows were better made. And surely $15k tops would cover a smallish simple pitched roof?



Just a Guy said:


> Finally, you could be locked in to your location. With renting you can leave pretty easily with owning, you've got an illiquid asset you need to divest yourself of...not easy in a falling market.


This is a concern. A small one, but a concern nonetheless. I wonder how bad things can get here. Apparently detached homes in some SE Calgary communities are down 7% in the past year: https://betterdwelling.com/city/calgary/calgary-real-estate-sees-detached-homes-decline-7-2016/



Just a Guy said:


> Have you looked at moving or renegotiating a lower rent? I'm sure there are some options in Calgary right now where you can improve your current renting situation...vacancy is increasing.


We know the landlord well enough that negotiating could be awkward to be honest, and in reality we aren't paying over market price (although it's not as good value as it once was relative to the current market). It's a good bungalow on a sizeable plot with detached garage. The downside is the general area, though we're on a good street. I could happily stay here. I'm also the loyal type who wouldn't want to leave our landlord in a sticky spot without good reason, and I almost feel like the only reason would be to buy.

I'm not in a rush. I've just been back to the drawing board lately, wondering if the right place came up in good area of Calgary that it might make financial sense. When I first came here I was considering places up to $425k, but when I did the math it didn't make sense so I settled on renting. However, if I can get something for circa $330k it might be different.


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## mordko (Jan 23, 2016)

Over a 21 year period, I owned 3 different houses. Our maintenance expenses never got anywhere near 100k for the full duration, let alone in a single year. We did replace the roof. That cost was staggered, the total cast for replacing an asphalt roof was certainly under 10k. Depending on a type of window, replacement may cost between 500 and 1000 dollars. You need an aweful lot of windows to get to $100k.

There were other things we had to replace every now and then, like a furnice, a deck or air conditioner. At no point did we have to spend more than 5k a year, most years maintenance costs were under 1k. 

We sold 3 times, for various reasons. It is a somewhat painful process, takes a lot of effort. However, in all cases we found buyers within a month. Would have been different had we lived in the middle of nowhere.

And over a 20 year period the prices on our houses went up by more than 8 percent annually, which was similar or better than the stock market. And all these capital gains were earned tax free. Of course everything depends on individual circumstances and there is no way to predict future performance other than direction of changes over long term.

Then again, you get lots of non financial advantages for owning a house, like the ability to make changes to suit your needs and tastes. For families there is often better choice if you buy and a bunch of other intangibles.


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## Just a Guy (Mar 27, 2012)

Prices do depend on the specific house, the Astra you live, and the local economy. There are always cheaper alternatives, and differrring risk levels associated with that. I've seen people get cheap work that was fine, others who needed it replaced right away. I admit my price may be high, but I also know people who've spent near those numbers. I prefer to plan for worse case scenario, and I also have no idea about your specific place. 

As for price increases, and potential corrections, the interest rate has been steadily falling for more than 25 years. That has been fuelling the real estate boom for that entire period. There is an entire generation who has never experienced rising inflation, so has no idea what that implies. People have short memories, and usually are short sighted in their thinking. 

I, on the other hand, really enjoy studying history, looking at how things worked in the past. While not an accurate way to predict the future, it does point out what one can expect to happen in certain circumstances, especially those which one has never personally experienced. Alberta, without oil and in a time of high inflation, is not a pretty place. Take a look at things like the NEP, which occirred as the bright idea of Justin's, who stated recently a comment about "phasing out the oil sands, father. Add to that the fact that the overnight rate is down to nearly 0%, with little room to decrease further, and one can envision a scenario of rising interest rates coming sooner than later. 

Again, I can't predict the future accurately any better than the next person but, as someone with far more real estate exposure than most people, I can tell you I'm a lot more cautious and worried about the future than the average homeowner. I try to understand where things are likely to go, and why they went where they did, instead of relying on where they have been going in the past, blindly believing everything will continue. 

In other threads I've outlined the reasons i think real estate may be overvalued in some areas by as much as 40-60%, the best argument against my numbers seems to have been "I don't believe it". 

Real estate is a house of cards right now in my opinion. If interest rates rise, I think it'll all come tumbling down. 

That being said, I'm still a buyer in this market but the prices I'm willing to pay are so low, many people on this board think it's impossible. 

If I'm wrong about the future, you may miss out on owning your own place this year, though nothing I've seen implies Calgary is going to turn around any time soon. A new carbon tax isn't going to help the oil sands any, so Calgary's prices will level out at best, and probably continue to fall in the short term at least. 

If I'm right however, and the government starts to increase the interest rates (the USA has already started btw), then we could be in for something unimaginable. 

Personally, with my exposure, I can't afford to be wrong, so I'm probably more pessimistic than most. If I'm wrong in my prediction, and prices continue to rise, I'm going to win anyway. 

One final thought, if you're not willing to negotiate over your rent, or move in a favourable time to save money, then you obviously aren't really all that worried about your finances...which is rather typical for Canadians. However, the typical Canadian also isn't very good at making and keeping their money, preferring to rely on the "hope and pray" method to ensure their future financial security. Having personally seen how that system can fail you at a fairly early age, I changed my technique.


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## mordko (Jan 23, 2016)

The future is an event tree. Certain factors may trigger house price falls in Calgary, e.g. if NAFTA is killed, if interest rate were to jump or oil prices to fall. Then again, Keystone may get built, oil prices may rise, US may boom and impact Canada and the anti-business NDP will be kicked out. 

The probability you assign to these and other similar events will determine your estimate of risk. 

Regardless, there are non financial factors involved and the likelihood of losing money over renting for a 10 year ownership period is very, very low.


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## mordko (Jan 23, 2016)

Having said this, I tend to agree that the Canadian market is due a correction. It would work for me as right now I am out of the market.


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## nobleea (Oct 11, 2013)

bobsyouruncle said:


> $100k??? Really? On a relatively small house it would take $100k to replace windows and roof? While new builds have many deficiencies over some older homes, I would have thought windows were better made. And surely $15k tops would cover a smallish simple pitched roof?.


Yes, 15K would cover a basic gable roof with mid level ashphalt shingles in AB. 
Windows depends on how many, how big, and how fancy you want to get. Basic white vinyl could run you 20K ish for a full house. You go fibreglass or aluminum clad outside, wood clad inside, you can probably double or triple that.

On our brand new house, roof, soffit and fasia cost about 9K. That's about 1400 sq ft of roofed area, gable and shed.
Windows for the house were 25K and that is alum clad exterior, highest efficiency triple pane vinyl available. That's a lot of windows too - 4 of them are 8' tall.
We replaced the windows in our old bungalow with plain vinyl triple pane at various times. I would guess 20K for a full replacement.

The crappy vinyl double pane sliders they put in a lot of entry level tract homes aren't going to last a long time or perform well. Code changes have happened recently that mandate triple pane on all new builds, among other things.


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## Eclectic12 (Oct 20, 2010)

mordko said:


> .... Essentially, if you own your home long enough, and if the location is desirable, you WILL make money. And it will make running costs small in comparison. And your capital gains will be tax free ...


Fair enough ...




mordko said:


> ... And you can attribute half the proceeds to your spouse, who may earn just 10 percent of what you do ...


This I don't get ... if the CG from the primary residence is capital gains tax free ... what is the need to split proceeds with a spouse or the income earning level of said spouse?

Tax free is tax free ... is it not?


Cheers


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## Earl (Apr 5, 2016)

I think it's a mistake to consider only the financial aspects of the equation. There are other benefits to owning. Like pride of ownership. The ability to make any modifications to your house without begging someone for permission. Not having to move every few years because your landlord sold and the new owner wants to occupy it. Not having to let the landlord in to inspect the place. I rented for many years before I finally bought my own house and I enjoy owning much more. I would own even if renting was cheaper because the benefits of owning are worth the extra cost to me. There are many stresses you have when you rent that you don't have when you own. There are other, different, stresses you have as an owner but they are easier to deal with because they are mostly under your control.


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## bobsyouruncle (Dec 25, 2016)

Just a Guy said:


> *In other threads I've outlined the reasons i think real estate may be overvalued in some areas by as much as 40-60%, the best argument against my numbers seems to have been "I don't believe it". *
> 
> Real estate is a house of cards right now in my opinion. If interest rates rise, I think it'll all come tumbling down.
> 
> ...


I think the market is due a correction as well, and that Calgary is essentially 'hanging on' right now, with those involved in real estate trying to prop up the market as best they can. It is whether it will correct sharply or gradually. So you also have to account (in my case) for the $16,800/year you're spending in rent, which is about 5% of a $335k property. If it's dropping faster than 5% then it definitely makes sense to wait.

You make some huge assumptions about my finances in your final paragraph. Certainly money isn't everything, which is why my wife stays at home with the children, but to say I'm not worried because I won't negotiate rent with a friend, especially when I know I'm not paying over the odds for what I'm renting, is a bit of harsh judgment that I don't think is particularly fair. I think I've included sufficient information to show that I do care about finances, even by my reasoning in considering the price point of a house, or the fact I have zero debt, or the fact that I'm seeking advice on a money forum about these matters, are sufficient indicators that you're not addressing a 'typical' Canadian.



Earl said:


> I think it's a mistake to consider only the financial aspects of the equation. There are other benefits to owning. Like pride of ownership. The ability to make any modifications to your house without begging someone for permission. Not having to move every few years because your landlord sold and the new owner wants to occupy it. Not having to let the landlord in to inspect the place. I rented for many years before I finally bought my own house and I enjoy owning much more. I would own even if renting was cheaper because the benefits of owning are worth the extra cost to me. There are many stresses you have when you rent that you don't have when you own. There are other, different, stresses you have as an owner but they are easier to deal with because they are mostly under your control.


I agree, Earl. But I'm still looking at this from a financial point of view. If owning a house costs $2k/year more, that's fine by me as well, but I don't want to own if it means a mortgage payment that's significantly more expensive than renting. That's my personal threshold. 

My thinking is that, if I come out the other end of home ownership and I've spent approximately as much on my home as I would have renting, then whatever the house is worth at the end is just gravy for my financial situation, rather than depending on house prices going up.


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## FI40 (Apr 6, 2015)

Just a Guy said:


> Prices do depend ...


Hi JAG, I've got a question for you I'm curious about - sorry if it's slightly off topic.

If you put the odds of a 40-60% decline within a relatively short time frame at something (I don't know, say 30-40% chance of such a drop within 2-5 years), and then calculate your expected net worth in scenario A (keep all your properties) vs. scenario B (let's say you sell all your properties at today's market rates, invest in index funds) after 5 years, what scenario results in a greater expected net worth?

I ask because it seems like you're choosing scenario A, but your analysis (in these and other posts) seems to favour scenario B or some form of it. I'm sure with some of the deals you've gotten, you'll be fine with a large price drop, but if you trust your gut that these prices won't last, why not cash out and invest in something else (I just used index funds as an example) to avoid the drop altogether? I'm not trying to question your decisions/investing philosophy, I'm just curious about your reasoning so I can understand it better.


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## Rusty O'Toole (Feb 1, 2012)

From the rental standpoint the more expensive the house the cheaper the rent. Small cheap apartments usually rent for more than they cost to buy and own. The biggest houses rent for way less than they cost to buy and own. There are certain cities like Vancouver and Toronto where high prices skew the numbers and make practically anything cheaper to rent than to buy. But for typical small towns across Canada, the average 3 bed 2 bath bungalow selling for $200,000 is about the crossover point. From there up it is cheaper to rent. If you want a luxury home it is definitely cheaper to rent.


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## Just a Guy (Mar 27, 2012)

bobsyouruncle said:


> So you also have to account (in my case) for the $16,800/year you're spending in rent, which is about 5% of a $335k property. If it's dropping faster than 5% then it definitely makes sense to wait.
> 
> You make some huge assumptions about my finances in your final paragraph.


First off, you're comparing apples to oranges (very common) rent money is not the same as money spent on a house. You're not saving $16,800/year by owning a house. Neither are you paying down your house by $16,800/year.

The proper way to think about it is, renting costs me $16,800/year, how much will home ownership cost me per year. Forget about fudging the numbers with things like "equity paydown". You can't access that equity until you sell or borrow against it. If you have some at the end when you sell, it's a bonus, but you might not have any either, or worse owe money (it's a risk that doesn't exist with renting). Costs of home ownership are usually higher than renting. In reality, home ownership is more often better thought of as renting from the bank while being on the hook for all the maintenance and repairs. 

As for your second comment, I made no assumptions about your finances. I just made a comment that money isn't that important. When you've been dead broke, which I personally have been, you need to watch every penny, and get the best deals you can friend or not. I'm glad you're not in that situation, I'm not there anymore either, but it was just meant as a statement, not a judgement. 

I know plenty of people, some of them tenants, who are in that situation. When they tell me they need lower rent, I let them out of their leases to move, or cut their rent if they are good tenants, but it happens all the time with people.


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## Just a Guy (Mar 27, 2012)

FI40 said:


> Hi JAG, I've got a question for you I'm curious about - sorry if it's slightly off topic.
> 
> If you put the odds of a 40-60% decline within a relatively short time frame at something (I don't know, say 30-40% chance of such a drop within 2-5 years), and then calculate your expected net worth in scenario A (keep all your properties) vs. scenario B (let's say you sell all your properties at today's market rates, invest in index funds) after 5 years, what scenario results in a greater expected net worth?
> 
> I ask because it seems like you're choosing scenario A, but your analysis (in these and other posts) seems to favour scenario B or some form of it. I'm sure with some of the deals you've gotten, you'll be fine with a large price drop, but if you trust your gut that these prices won't last, why not cash out and invest in something else (I just used index funds as an example) to avoid the drop altogether? I'm not trying to question your decisions/investing philosophy, I'm just curious about your reasoning so I can understand it better.


If you read my postings, you'll see I don't think a correction will hit until interest rates start to climb. While there have been strong hints the government wants to increase rates, those have been going on for years without bearing fruit, in fact they've continued to fall making matters worse. 

Next, as you pointed out, the places I've bought already have a correction built in to the purchase price. I buy for cash flow, so after I buy I don't care about the value of the property much, since I don't want to sell, I care about the rental market. 

Since I buy at lower prices than my competition, I can afford lower rents than they can and still make a profit. 

Then, you have to consider what's going to happen to the rental market when people start losing their homes, I expect the demand to increase based on the laws of supply and demand. 

I have been tempted, once in a while, to do a quick flip of my properties, but that's not my investment personality. There aren't a lot of other properties out there at my price point, so it's not like I could sell one and buy two new ones. 

As for the stock market, I think that's overpriced as well, so I don't really want to put my money there. I've read the perspectus on many REITs and, as someone who knows real estate, I'm not impressed with the numbers I see there. 

Also, with my purchases, I'm using leverage to its maximum. The real estate takes no money out of my pocket, while generating monthly cash. I use my own cash to invest in the market. 

Finally, there are the taxes to consider. If I bought and sold, I'd have to pay capital gains, cutting out a good chunk of my earning power. If I leave the "equity" in the stuff I purchase, I defer my taxes and I still earn on the full amount. 

I learned early that I'm a bit and hold, value investor. I'm not good at doing things in other ways. If I sold, I'd probably be sitting on a mound of cash waiting for something to come along...not earning anything.


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## bobsyouruncle (Dec 25, 2016)

Just a Guy said:


> First off, you're comparing apples to oranges (very common) rent money is not the same as money spent on a house. You're not saving $16,800/year by owning a house. Neither are you paying down your house by $16,800/year.
> 
> The proper way to think about it is, renting costs me $16,800/year, how much will home ownership cost me per year. Forget about fudging the numbers with things like "equity paydown". You can't access that equity until you sell or borrow against it. If you have some at the end when you sell, it's a bonus, but you might not have any either, or worse owe money (it's a risk that doesn't exist with renting). Costs of home ownership are usually higher than renting. In reality, home ownership is more often better thought of as renting from the bank while being on the hook for all the maintenance and repairs.


Yes, I appreciate I'm not saving $16,800/year. I'm over simplifying. I suppose what I was trying to say is exactly what you say in the second paragraph; $16,800 is leaving my account every year. I don't expect, or at least want, that amount to change much whether I rent or buy. But if there was a large enough correction, it could potentially go down if I was able to buy what is presently $335k and it went down to $280k. That would make waiting worthwhile (of course, that's not considering interest rates which could make it no difference at all in what I'm actually paying out).

My perspective is based purely on what leaves my account annually. If I can make buying approximately the same as renting, my only gamble is really on whether I expect there to be a huge interest rate hike. However, I would try to protect myself by continuing to save aggressively and if I needed to move money from investments to pay down the house faster, that could be done as well.

I'm still undecided. I'm also thinking of a home that would have a rentable basement, which could help if things got sticky.



Just a Guy said:


> As for your second comment, I made no assumptions about your finances. I just made a comment that money isn't that important. When you've been dead broke, which I personally have been, you need to watch every penny, and get the best deals you can friend or not. I'm glad you're not in that situation, I'm not there anymore either, but it was just meant as a statement, not a judgement.
> 
> I know plenty of people, some of them tenants, who are in that situation. When they tell me they need lower rent, I let them out of their leases to move, or cut their rent if they are good tenants, but it happens all the time with people.


Understood.


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## Just a Guy (Mar 27, 2012)

If you're going to factor in what's coming out of your account, don't forget the down payment. On $335k, that's at least another year of rent. Apples to apples means you have to look at all the money coming out of your account...not just select parts like the monthly payment. 

My mother was once proud to say she finally sold a house for more than she paid for it (she didn't have a good teprack record). I then asked if she factored in the garage she built, the landscaping, the new siding, the new windows...I didn't even get to the legal fees and interest.

Sure, if you take the buying price and the selling price you can make some things look like profits...when you factor in the real numbers however, things can be a little different. 

P.S. when I write responses, I don't target the original poster directly...I mostly post general statements to get other readers to think about their situations.


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## james4beach (Nov 15, 2012)

Just a Guy said:


> The proper way to think about it is, renting costs me $16,800/year, how much will home ownership cost me per year.


And don't forget things like repairs (both minor and major). It happens to everyone... driveways, roofs, windows, furnaces, boilers, garages, leaks here and there. And remember the property taxes and insurance, every year. If it's a condo, remember both condo fees and extra assessments and fees for one-off repairs. These costs are a lot more frequent than you might think.

Home ownership is very expensive. Major repairs are nearly a certainty if you're staying there more than a couple years.

I'm in a city with very rapidly rising average home prices (about 13%/year) and everyone at my office _really wants to believe_ that owning a home is better than renting. Virtually every day, I hear people justifying home "ownership" (it's not really ownership with such large loans) and mainly they talk about the cost of rent vs their mortgage payment. It's an improper comparison.


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## bobsyouruncle (Dec 25, 2016)

*Renting:*
Monthly Rent: $1,400
Annual Increase: 2%
Contents Insurance: $300
Investment Return: 5%

*Buying:*
Home price: $335,000
DP: $67,000
Property Taxes: $2,500
Cost to buy: $10,000
Cost to sell: $15,000
Increase in home value: 2%
Annual Maintenance: $3,000
Home Insurance: $1,200

With the above figures, the other variable is interest rates.

Interest Rate: 2.5%. Better buying after 4 years
Interest Rate: 3.5%. Better buying after 7 years
Interest Rate: 4.5%. Better buying after 18 years
Any higher and it's definitely better to avoid buying.

So I suppose it comes down to whether I think interest rates have a high chance of going over 3.5%.


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## Just a Guy (Mar 27, 2012)

I'd ignore the cost to sell, it doesn't factor in unless you sell.
I'd ignore increase in home value, as you don't know it's going to increase, and it's meaningless unless you sell. It doesn't put money into your pocket, nor take it out...it's paper profits at best. 

You could, however, factor in an ROI on the difference between the cost of renting and the cost of owning. That would include the down payment, property taxes, cost to buy (should probably be closer to $2000, not 10,000...unless you're factoring in cmhc fees) maintenance, and $900/year insurance difference. 

Don't get me wrong, I'm not against home ownership at all, I've always owned my house since I ended school (I did rent going to school). I just hate the falsehoods that come from arguments like owning is better than renting. Most people skew the numbers to prove their point, ignoring the true costs and the returns if you invested the difference.

I'm also a value investor, overpaying for anything goes against my personality.


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## bobsyouruncle (Dec 25, 2016)

Just a Guy said:


> I'd ignore the cost to sell, it doesn't factor in unless you sell.
> I'd ignore increase in home value, as you don't know it's going to increase, and it's meaningless unless you sell. It doesn't put money into your pocket, nor take it out...it's paper profits at best.
> 
> You could, however, factor in an ROI on the difference between the cost of renting and the cost of owning. That would include the down payment, property taxes, cost to buy (should probably be closer to $2000, not 10,000...unless you're factoring in cmhc fees) maintenance, and $900/year insurance difference.
> ...


Yeah, I'm using this calculator which accounts for investing what you save: http://www.getsmarteraboutmoney.ca/...r-rent-calculator/buy-or-rent-calculator.aspx

Your advice for the figures above are helpful. It makes an interesting difference with the interest rates.

Interest Rate: 2.5%. It stays the same, I'm better buying after 4 years.
Interest Rate: 2.75%. It shoots up to 22 years!

That's makes it an even bigger gamble. 

Food for thought for sure!


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## mordko (Jan 23, 2016)

Eclectic12 said:


> Fair enough ...
> 
> 
> 
> ...


Once you sold the property, you can invest part or all of your profits into stocks. At that point it becomes important which spouse is going to pay tax on the stocks. Selling the house and then investing the proceeds is a mechanism for legally transferring part of your future income to a spouse with lower wages.


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## Just a Guy (Mar 27, 2012)

bobsyouruncle said:


> Interest Rate: 2.5%. It stays the same, I'm better buying after 4 years.
> Interest Rate: 2.75%. It shoots up to 22 years.
> 
> Food for thought for sure!


Compound interest is a dangerous tool... do you now understand why I see a correction happening to real estate prices if interest rates rise? Imagine what happens with it going up a couple of percentage points?

Of course, your interest rate is probably not going to remain static.

You'll probably lock in for 5 years at one amount, then lock in a lower amount, at a higher interest rate for the next 5 years, etc. Until it's paid off. Using a single interest rate for the entire amount is probably skewing your numbers. That .25% on the entire amount does make a significant difference. If you calculated using the reduced principal after 5 years you'd save several years probably. At these rates, about half your mortgage goes directly to principal.


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## FI40 (Apr 6, 2015)

Just a Guy said:


> If you read my postings, you'll see I don't think a correction will hit until interest rates start to climb. While there have been strong hints the government wants to increase rates, those have been going on for years without bearing fruit, in fact they've continued to fall making matters worse.
> 
> Next, as you pointed out, the places I've bought already have a correction built in to the purchase price. I buy for cash flow, so after I buy I don't care about the value of the property much, since I don't want to sell, I care about the rental market.
> 
> ...


Many good reasons there. Temperament/philosophy, tax, leverage, lack of other good investment opportunities, and considering the rental rate variable in the decision. The taxes are potentially a big enough reason alone why you can't just sell up - the properties are performing, why lock in a tax loss just keep the income, I get it. Maybe your highest cost base, worst performing, least levered property could be sold though. Long term, a balanced stock/bond portfolio will probably do okay even if markets are overvalued now. It just seems a shame not to take advantage of the ability to sell in this market.


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## Pluto (Sep 12, 2013)

for years some have been waiting for real estate to bust, so they could buy a home with less risk. Now Calgary has bust. there is probably a net migration of people out of Calgary making buyin a home during a downturn available. If I was in Calgary, I'd be very busy looking at the offerings now. the history of Alberta is boom and bust, they are in a bust now, and busts don't last for ever. 
sooner or later, other cities such as Toronto and vancouver will go into consolodation, but I don't think that will impact Calgary. 

Interest rate increases will impact asset values, but lets be realistic: how high can rates go before they break the back of the economy and come down again? (personally, I never locked in my mortgage, and always had a variable rate. I saved many thousands a year by that method and kept the money availabe just in case there was a sustained rise in rates.)

In general I'm not very keen on buying new as builders often have a 20 - 25% premium over what a similiar well maintained used place will be priced at. I'm just wondering what you could get for 330,000 on the used market? 

Regardless, I tend to lean toward buying as, when the Alberta bust ends, I think you will find prices moving up, and possibly beyond reach. I can't think of anyone who owned for 10 years and complained about it, especially when they bought during a real esate downturn....actually, that's not quite true....someone I know paid too much for a fixer upper. Just be careful.


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## Just a Guy (Mar 27, 2012)

Pluto, I think you're experiences are based on short term thinking. Variable rates are great in an interest falling market, you'll always save money. It's the exact opposite in a rising interest market. People who have bought houses in the past 20 years or so have seen great benefits to owning, but then it's been a fairly long bull market.

To bring things back to reality, or maybe a possibility, take a look at what happens when the pendulum swings the other way. Ask someone from Alberta how they felt about real estate during the 80's, a time of 18+% mortgages, the NEP, etc. Alberta, as I recall, had about 20 years of bad real estate issues before the latest run. So, you're looking at a generational difference in perspective...and maybe a 20 year cycle. What is the next 20 years going to look like? Personally I've got no idea, but I can tell you mortgage rates probably won't continue to fall and certainly won't go down in a similar manner as 18+% to under 3%.

To be successful in real estate you need to take the long term perspective. Remember, he average person needs 25 years just to pay off their mortgage, it takes almost 10 to reach a break even point for resale. That's a long time, and a lot of things change over that time period. 

I don't look short term, and to me short term is under 10 years.


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## Just a Guy (Mar 27, 2012)

FI40 said:


> Maybe your highest cost base, worst performing, least levered property could be sold though. Long term, a balanced stock/bond portfolio will probably do okay even if markets are overvalued now. It just seems a shame not to take advantage of the ability to sell in this market.


I think your missing an important point, I've got no cost base in my real estate holding. The properties I buy are at least 100% financed at purchase. I am literally creating money out of nothing. It may not be a ton of money, but it didn't cost me anything. 

I'm not buying places for $300k, putting $60k down and hoping to get $1500/month rent. I think I'm paying about $75k on average, putting in about $5k of materials and labour costs, getting them appraised at over $100k, acquiring an 80% LTV mortgage and then renting them for around $1100/month on average. 

Sure I could cash out for a quick buck (maybe 40-50k in a few months minus legal/realtor fees of $10k and then pay capital gains). If I do 4 places a year I'd net maybe a good salary. However, there aren't a lot of properties out there, I've gone years without buying before and places don't always sell quickly...there's a big difference between what a bank thinks it's worth (or the city tax assessor) and what someone is actually willing to pay. I just love telling the tax department to cut me a cheque for their assessed value and watch them back away. The only time you know the true value of your property is the day you cash the cheque for it, everything else is just speculation.

So, instead of the quick buck, I aim for the "buy and hold" part of my investment personality. I own a lot of properties now, each making about $1100/month. In this interest rate, nearly half is profit, but let's take $400 as a number. If I buy 4 properties a year (as in the example above) in 3 years I could own 12 properties, making $4800/month profit or $57,600/year while getting $1.2M of real estate (12 places worth $100k each) being paid off for me as a retirement saving plan which My wife and I can't easily spend because it's illiquid. The alternative is to buy and flip, making $140k/year (flipping 4 places a year with and average profit of $35k) with no retirement plan. 

Even if real estate corrects 50%, by buying and holding I'll have $600k of retirement funds generated out of nothing...not to mention the rental income stream still.

Show me any other investment that generates these kinds of returns. 

In real estate, as I said above, you need to take the long term view.

Oh, and these numbers are only cased on owning 12 properties and three years of buying...imagine if you keep doing it, or started in your 20's.


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## bobsyouruncle (Dec 25, 2016)

Just a Guy said:


> Compound interest is a dangerous tool... do you now understand why I see a correction happening to real estate prices if interest rates rise? Imagine what happens with it going up a couple of percentage points?
> 
> Of course, your interest rate is probably not going to remain static.
> 
> You'll probably lock in for 5 years at one amount, then lock in a lower amount, at a higher interest rate for the next 5 years, etc. Until it's paid off. Using a single interest rate for the entire amount is probably skewing your numbers. That .25% on the entire amount does make a significant difference. If you calculated using the reduced principal after 5 years you'd save several years probably. At these rates, about half your mortgage goes directly to principal.


See, this is the thing. I could probably afford to pay down the house faster if I wanted.

For example, I could get a 10 year fixed at 3.59% and pay off the entire mortgage in that time at a rate of $2,658/month.

But then my savings will suffer for 10 years.

One way or another you're gambling on interest rates and the housing market.

On another note, as someone from outside Canada, I still have a hard time thinking of paying hundreds of thousands of dollars for a vinyl box. It may be psychological more than anything, but when you grow up in a place where homes are all built from blocks and bricks, the vinyl boxes don't have the same appeal.


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## Pluto (Sep 12, 2013)

Yep, if you could pay it off in 10-15 years that would be great. Then your savings is your home equity. You will save a heck of a lot on interest payments by paying it off that fast. once payed off, your credit rating will be fabulous if it isn't already and banks will love to lend you money. So what you do then - when you have the house paid off - is borrow 100 gand or so, and invest it all in dividend paying blue chip stocks where you can deduct the interest expense. The stocks have to pay dividends otherwise the interest is not tax deductable. Then you will catch up on your savings. 

Don't worry about 18% mortgage rates - that is a very very unlikly horror. Plus if you can afford 2658 a month in payments, if indeed rates went up making it unfeasable, you could refinance at a longer amatorization to keep monthly payments manageable. 

Be optimistic and bold, especially since your city is already experiencing lower house prices.


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## mordko (Jan 23, 2016)

bobsyouruncle said:


> On another note, as someone from outside Canada, I still have a hard time thinking of paying hundreds of thousands of dollars for a vinyl box. It may be psychological more than anything, but when you grow up in a place where homes are all built from blocks and bricks, the vinyl boxes don't have the same appeal.


New houses are not designed to last all that long. There are a few good builders but generally the quality of construction is slightly worse than awful. Not sure why Canadians love buying new houses so much. Older/refurbished properties tend to have better quality and cost less.


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## Just a Guy (Mar 27, 2012)

Never understood why people only look at extremes and then dismiss any of the middle ground along with them. No one said rates were going to 18%, but going back to the historical mean (8%) or even 6% would be devastating to people. 

The longer you amortize, the longer you're renting from the bank...

As for equity in your house, the risk then is a correction which can dramatically reduce your savings...not to mention it's very illiquid when you want to access it.


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## Spudd (Oct 11, 2011)

mordko said:


> New houses are not designed to last all that long. There are a few good builders but generally the quality of construction is slightly worse than awful. Not sure why Canadians love buying new houses so much. Older/refurbished properties tend to have better quality and cost less.


Agreed. For our first house we bought a newer home (3 years old in 2001) because we were drawn to the fanciness. Our 2nd house was a 60-year-old brick bungalow and after we moved in we were amazed by how much more solid and substantial it felt. I can't put my finger on exactly what it was but it just felt like it was solidly built. Of course it had issues but so did the 3-year-old one (basement leaked on both, furnace needed repairs on both). Ever since then I've been a fan of older homes.


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## bobsyouruncle (Dec 25, 2016)

It also makes a difference what maintenance rule you go for.

In the previous calculations I used the 1% rule. But if I use the $1/sq ft rule, then the maintenance is halved.

That means instead of...
Interest Rate: 2.5%. Better buying after 4 years.
Interest Rate: 2.75%. Better buying after 22 years.

It is...
Interest Rate: 2.5%. Better buying after 2 years.
Interest Rate: 3%. Better buying after 4 years.
Interest Rate: 3.25%. Better buying after 8 years.
Interest Rate: 3.5%. Better buying after 15 years.


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## bobsyouruncle (Dec 25, 2016)

Pluto said:


> Yep, if you could pay it off in 10-15 years that would be great. Then your savings is your home equity. You will save a heck of a lot on interest payments by paying it off that fast. once payed off, your credit rating will be fabulous if it isn't already and banks will love to lend you money. So what you do then - when you have the house paid off - is borrow 100 gand or so, and invest it all in dividend paying blue chip stocks where you can deduct the interest expense. The stocks have to pay dividends otherwise the interest is not tax deductable. Then you will catch up on your savings.
> 
> Don't worry about 18% mortgage rates - that is a very very unlikly horror. Plus if you can afford 2658 a month in payments, if indeed rates went up making it unfeasable, you could refinance at a longer amatorization to keep monthly payments manageable.
> 
> Be optimistic and bold, especially since your city is already experiencing lower house prices.


I'm trying to take home equity out of the equation. My rent is $1400/month. My hope is to buy a suitable home where it doesn't cost much more than rent. Essentially, my only cost would be losing the investable downpayment. 

Preferably interest rates would stay low and I'd continue paying out what I am now and investing what I can save. But I have to admit there's an appeal to paying of the mortgage asap. I hate debt of any kind. Borrowing $100k to invest in the stock market sounds like a living nightmare to me! LOL



Spudd said:


> Agreed. For our first house we bought a newer home (3 years old in 2001) because we were drawn to the fanciness. Our 2nd house was a 60-year-old brick bungalow and after we moved in we were amazed by how much more solid and substantial it felt. I can't put my finger on exactly what it was but it just felt like it was solidly built. Of course it had issues but so did the 3-year-old one (basement leaked on both, furnace needed repairs on both). Ever since then I've been a fan of older homes.


It's not the fanciness as such that makes some of the newer builds appeal to me, it's the more functional layouts. We host quite a bit in our home, and many of the older homes in our price bracket are not as pleasant in this regard for my wife. Furthermore, the home we're looking at has a walkout basement, which is unusual in a lower price bracket.

At the same time, I hate the idea of hail damaging my home, which makes the older homes with brick or plastered finishing on the outside more appealing. An older home that was more open wouldn't be out of the equation, but I doubt we'd get something in our price range that isn't in a crime associated area.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Never understood why people only look at extremes and then dismiss any of the middle ground along with them. No one said rates were going to 18%, but going back to the historical mean (8%) or even 6% would be devastating to people.
> 
> The longer you amortize, the longer you're renting from the bank...
> 
> As for equity in your house, the risk then is a correction which can dramatically reduce your savings...not to mention it's very illiquid when you want to access it.


I think you need to consider what economic forces would push interest rates to the extreme you mentioned, namely 18%, or the middle ground you mentioned, 8%. As I understand it current policy is to keep interest rates high enough to contain inflation at about 2 to 3%. I forget the exact inflation target but it is somewhere in that area. I'm not convinced 8% is required to keep inflation contained to 3% or less. Inflation would have to bolt upward to about 5 or 6 % to get rates to 8%. Granted, it could happen, but it just doesn't seem likely. Besides, the OP states he has about 2600 a month to devot to mortgage payments if it is needed. considering that he is looking at a modestly priced home, it doesn't seem very risky.


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## Pluto (Sep 12, 2013)

bobsyouruncle said:


> I'm trying to take home equity out of the equation. My rent is $1400/month. My hope is to buy a suitable home where it doesn't cost much more than rent. Essentially, my only cost would be losing the investable downpayment.
> 
> Preferably interest rates would stay low and I'd continue paying out what I am now and investing what I can save. But I have to admit there's an appeal to paying of the mortgage asap. I hate debt of any kind. Borrowing $100k to invest in the stock market sounds like a living nightmare to me! LOL


I get your point - its not a money making thing for you, its a lifestyle thing, and your question is, can you afford it, and does it make economic sense vs renting. To me it makes sense based on indications of your income, and price point. it also makes sense from the point of view that your area is in a economic bust thereby depressing prices to a degree. that takes a lot of risk out of it. 

Even if you try to take equity out of the equation, realisticly, it is part of it.


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## bobsyouruncle (Dec 25, 2016)

Pluto said:


> I get your point - its not a money making thing for you, its a lifestyle thing, and your question is, can you afford it, and does it make economic sense vs renting. To me it makes sense based on indications of your income, and price point. it also makes sense from the point of view that your area is in a economic bust thereby depressing prices to a degree. that takes a lot of risk out of it.
> 
> Even if you try to take equity out of the equation, realisticly, it is part of it.


Precisely.

I'm not sure yet when I'm going to jump, but I think around $330-340k (or under) is the sweet spot where it makes sense given our rent. I'd buy something cheaper, but unless you don't care about the neighbourhood, realistically it's not possible to get a family home (that doesn't have strata fees) for under $300k. If the market goes down more (which I hope it will), I might even be able to get a decent detached home for the budget. We shall see.


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## marina628 (Dec 14, 2010)

In regard to costs of windows and roof , we have done a house in past 5 years in Ontario and windows and new doors cost us $13,000 which included a $2000 garden door for patio.There was 3 bedroom windows ,two bathroom windows , one large living room window ,half size i think 4 feet x 6ft kitchen window and 6ft x 4 in dining room and 4 basement windows .All had push out easy clean features and energy efficient gas stuff vinyl windows.As for the roof we paid $9500 for new roof and another $2900 for new Chimney insert and eaves sofits.The house was a 1800 sq ft side split and had a porch on the rear which also had the roof replaced.


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## sags (May 15, 2010)

As an astute buyer of real estate, I am sure you were aware and prepared for these costs.

What I can't fathom is people lining up with a bunch of other people and putting bids on a house they have only done a quick wander through.......with a lot of other people standing in the way and being unable to check foundations, attics etc.

We don't hear much about it, but I wonder how many of these people get a huge "surprise" after the move in.

I have bought and sold homes over the years, and have always missed something despite what I thought was a thorough inspection.

Spending a million dollars on a quick tour in a bidding war...........I don't know about that idea.


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## sags (May 15, 2010)

If interest rates remain low or drop lower, it means the economy is faltering and that isn't good news for housing either.

Sooner or later home prices will reflect the reality of the economy.

Hopefully the economy strengthens before the "adjustment" happens.

Right now, I view it as a race against time.


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