Imagine if you will that you have an opportunity to purchase a home for the first time but had to sell it in 2 years. Would you become a home buyer if your exit time-frame was that short?
My vote would be no. First and foremost is the fact there are several hidden costs to home ownership. The average sale price of a Canadian home is approximately $326,000. In Ontario, this means the land transfer tax is $3,365.00 less the $2,000 first time home buyer rebate, giving you a $1,65.00 bill. Add moving costs, cost of installing new phones/internet/cable, lawyers fees etc. and you most likely have another $500-$1,000 bill.
This is a relatively insignificant dollar amount compared to the fact that very rarely has anyone moved into house that is just perfect. Most people I know engage in some touch-ups: painting, gardening or replacing some facets. Some people I know undertake some medium to major renovations: install new flooring, buy new kitchen cabinetry, build a new bedroom. EVERYONE I know who ends up being a first-time home buyer becomes an accumulator of stuff. We can’t help it. See that empty space in the corner there? Fill it up with something. Anything. Basement is empty? Buy used exercise equipment to create a gym.
Economists obsesses over housing stats for a reason. They know it is a harbinger of consumption; it is a rare story of someone who buys a home and leaves it unfurnished for many months afterwards. This is especially so in a first time home since first time home buyers have relatively little possessions. When I bought my condo I owned an Ikea love-seat from my university days that fit my cozy student apartment and looked so tiny in my new place that I “had” to get a new couch (not to mention it had survived 4 moves and looked and felt like it had survived 4 moves). Then I needed side-tables to go with the couch and then I got lamps for the side-tables and then and then…
Add all this “stuff” to the price of the home and suddenly you have sunk more than $326,000 in your home. This does not include on-going maintenance costs in any home, which can be steep for anyone who lives in the snow belt with raising energy costs. Some estimate property tax, condo fees, maintenance costs of up to 5% of your acquisition costs a year depending on the state of your home and how heavily you are taxed.
…now, you have to exit 24 months later so would you get your money back on exit? According to the National Association of Realtors, the average gain in real estate in the U.S. has been 6.4% per annum over the last 40 years, or 1-2% over real inflation. Add commissions from the sale to costs and, given this really rough calculation, you may not be getting much back in return ASSUMING the housing market does not go sideways in the short-term (any prediction about the future is fanciful these days).
This also ignores the more practical consideration of actually why you buy a home. To enjoy it as your castle. Two years flies by quickly. You don’t get to enjoy something you worked hard to acquire.
At the end of the day, I tend to agree with a host of a HGTV show I once watched. Everyone should look to own their home for at least 5 years, short of life-changing circumstances, to both enjoy their place and for enough time to elapse to earn back what you invested in the home.
Other opinions are certainly appreciated.
July 28th, 2009 at 7:26 am
Alright, I’ll bite. Lets say for instance you purchase the home for $300000 You use $30000 down, you put $5000 in for other costs, and you sink $5000 in for renovations/updates or whatever. Your hour appreciates at 5% per year. Your mortgage payment (5%, 25 year, 10% down, includes insurance) is $1601.74 and property tax $3000/year.
If you sell in 2 years you have paid 40000 in costs, plus 6000 in taxes plus 38442 in mortgage payments for a total of 88442. You receive 330750 for your home, and the real estate agents take 16500 in vulture fees, and you have to pay 263674 for your mortgage, assuming you were pretty open. That leaves you with 50576 that you walk away with, but you sunk 88442 in to the place meaning it cost you 37866 to live there, or 1577 a month . . . kind of similar to if you rented the place.
How about after 5 years? You paid 40000 in costs, 15000 in taxes, plus 96105 in mortgage payments and I’ll include an extra 5K for maintenance here for a total of 156105. You sell for $382884 the vultures take 19150 and you owe 243750 on your mortgage. You walk with 119984, but you paid 156105 for the place so it cost you 36121 for 5 years of living . . . 602 bucks a month. You going to rent a similar place for that?
How about 10 years? 40000 in cost, 30000 in tax (I know, it will increase, but my estimate was high anyway), plus 192210 in mortgage. I’ll include 15K in maintenance here for a total of 277210. You sell for 488668, vultures take 24450 and you owe 203235 which means you walk with 260983 but have paid 277210 making your cost of living for 10 years 16227, or 135 bucks a month . . . good luck renting.
So, how is renting any better in any case? Of course, all my estimates are with a 5% yearly return, flat property taxes, sale by realtor at a 5% commission, and lots of other assumptions.
July 28th, 2009 at 9:02 am
I am not a home owner myself, but I would venture to say that the rental prices in the local market and the liquidity of the housing market as a whole would be possible indicators which might make short term home owning attractive.
Though personally, I lean more towards the idea of a house being primarily a residence and expense, and not an investment vehicle.
July 31st, 2009 at 8:48 pm
Nah, a two year stay would probably not lead me to want to buy a home, just for the hassle of selling it again so soon when I moved. Four years? Yeah, I would consider it. Longer than five, I’d say there’s pretty solid insurance that I’d want to own.
Jerry
August 1st, 2009 at 8:12 am
A home should be owned as long as possible, buying and selling is just losing money. We have been taught to buy a condo, then 2 years later buy a TH, then 2 years later buy a semi and so on..this is nonsense..I have owned a TH and recently sold it..the next house I buy, I will stay there a long time..currently renting and will keep on renting until REAL prices return not this manipulated market due to low rates.
August 8th, 2009 at 10:09 pm
All depends on what you do with it and what you are buying. As well as what you are capable of. Few ideas off the top.
1. Buy with built in equity, at say a 25% discount at current market value and fix it up over two years and then sell it.
2. Buy property with a mortgage helper component – duplex rent out main floor live in basement and live mortgage free for two years.
3. Buy property and rent it out for two years, and rent out something else for yourself. Use the cash flow for your current rent.
As a side note if I only had 24 months, I would probably do number 2 since I would need to have an exit strategy in mind. I would also look for a tenant who would be interested in a lease with an option to buy the property. Use the lease option money for the purchase and have a 2 year option on the property and avoid the realtor fees on exit.
Take Care