I was speaking to my uncle tonight about owning a house vs owning a condo. He's been a realtor for over 16 years in the red hot Vancouver market, and he told me that even though you're paying a little more for a house, the value of your house will always increase faster than a Condo, PLUS you don't have to pay strata fees, which tend to go up over time, never down. In fact, as your condo ages, the strata will want to do renovations to the whole strata like painting fences, or changing windows or some silliness like that. In which case, you, as a condo owner, will need to pay, if the strata doesn't have enough funds put aside, and you can't back out if the strata votes the improvements in. These can be anywhere from a few hundred to a few thousand dollars out of your pocket.
Right now, I live in a Condo/Townhouse with a mortgage amortized over 15 years. I paid about $150,000 for the place and it is now appraised at $250,000 in less than 2 years. So overall, I've done extremely well in the market. In fact, it's probably closer to $275,000 since a few of my neighbours have moved on and have gotten very attractive offers. However, since this is my principle residence, it really isn't a profit since I'm going to have to replace it with something else.
I could hang onto the house, live through the strata wide improvements, and even in ups and downs, the market pricing of homes always comes back up and levels off to higher than it was before. Technically, I can just hang onto this place and pay it off faster. What am I giving up vs buying a house?
Well, if I hang on to my townhouse, and let's just say the price climbs another 10% in the next year, my house will be worth $275,000, so it went up $25,000. If I go out and buy a house tomorrow for $500,000, my increase in a year would be $50,000. So yeah, he's right, my house would increase in value faster than my townhome. But how can I afford a mortgage that is three times the one that I paid before?
Well, obviously, I'm not going to be hanging onto my townhome. So let's say that I sell the townhome for $275,000. My original mortgage was $150,000, and lets assume the bank takes care of the fees for porting the mortgage, I should have enough to put down $125,000, so that makes my 25%, so no need for income verification documents, which means I should be able to borrow the remaining $375,000 from the bank. That would make my new mortgage payment, roughly, $3000 a month, so still, 2.5 times more than what I've been paying on a monthly basis. Hullo??? How the heck am I going to afford to go from paying about $1200 a month to $3000 a month??
Well, there are a few points to consider here. Chances are, my new home would be an upgrade, which means that I will likely look for a place with a 2 bedroom basement suite that I could rent out. I charge $1000 a month for rent. I'm down to $2000 a month. Since there will be three bedrooms upstairs, I can rent out at least one of them for $600 a month. Now I'm down to $1400 a month...just $200 dollars more than my old mortgage payment. But wait! I was paying strata fees of about $150 a month.
$1400 - $150 = $1250 a month. Hmm... This is only $50 a month more than where I was with the townhouse. Not to mention, that in the next year, my house will appreciate by $50,000, vs. $25,000 for the townhome. Plus, as the price of my home increases quicker, I would have access to a larger equity line of credit for emergencies, and of course, investments.
Many of you are thinking, gee, if it was that easy, why don't people go out and just do it? Well, there is a comfort factor. Many people see the $3000 mortgage and all the what ifs that come with it. This can be very stressful seeing a $3000 mortgage, and a take home of about $3000 a month. If you can't find any tenants, you're not eating out of even a KD Mac box. You can't pay your utils, and you certainly can't pay your property taxes, or save for retirement. To pull it off, you either find good tenants, or you find more money and some people just aren't happy with being in this scenario.
Bottom line is, he was right. In the end, if things work out, and they could in my case, I could really own a new home for just a little bit more than what my mortgage is now. I'll talk about what I could do with the extra lending in some other posts. I have a few ideas.