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CARRYING COSTS AND ROI

Written by Jeremy Van Caulart

In this blog post, I will break down the carrying costs for a hypothetical home purchase. 

But first, a disclaimer: This blog should not be considered financial advice. This blog is hypothetical and uses historical figures from TRREB. The market changes frequently, and I can’t predict what will happen in the future. The following hypothetical situation uses past statistics to predict future performance. The opinions in this blog are mine and mine alone.

I’ll use sale data from an actual MLS sale in the past 30 days. I’m using the current 5-year fixed rate of 2.59% from RBC amortized over 25 years.

The home will be a $620,000 1-bedroom condo in downtown Toronto using an insured mortgage (less than 20% down). This condo includes a parking spot and a locker.

 


THE $620,000 CONDO



Price: $620,000
Down Pyment: $37,000
Mortgage Required: $583,000
Mortgage Insurance: $23,320
Mortgage Total: $606,320
Taxes (per year): $2,181.32
Condo Fees (per month): $435.67

 

Your maintenance fees cover the following: heat, hydro, water, central air conditioning, building insurance, & parking.

You’re required to have mortgage insurance on this purchase because you’ve used less than 20% as a downpayment.

Your total monthly cost is $3,361.

 


END OF 5TH YEAR



Total Interest Paid: $72,385
Total Principal Paid: $92,216
Total: $164,602

The estimated five-year appreciation in Toronto’s condo market is 61% (12% average annually, calculated by comparing May 2021 to May 2016 condo apartments in C01 using TRREB data).

The total estimated appreciation is $378,200.

Your percentage gain between total mortgage paid and estimated appreciation is 129.77% or 25.95% annually (averaged). This calculation is appreciation vs. mortgage paid, and it doesn’t consider that you’ve just also saved $92,216 in the form of principal paydown.

If you add the principal paid to the appreciation, you get $470,416.


MINUS LOSSES



Condo Fees (estimate): $26,160
Taxes (estimate): $10,906.80
Interest Paid: $72,385
Total Loss: $109,451.80

Total principal + appreciation $470,416 minus total loss $109,451.80 equals total gain $360,964.20


INVESTMENT LOGIC



Currently, rent for the same unit is $2,300/mo.

It requires $1,061/mo more to buy vs. rent. 

If you were renting the exact unit, you’d be paying $27,600/yr or $138,000 over the same five-year period.

The renter and buyer would end up like this.

Rent: -$138,000 (rent is a 100% loss)
Buy: $360,964.20 (buyer total gain)

The buyer will have paid out $201,660, and the renter will have paid out $138,000. 

The buyer paid $63,660 more than the renter over the five years.

The buyer’s net worth will have gone up by $390,964.20, and the renter’s net worth will have gone down by $138,000 (assuming the renter doesn’t have any investments, and this is the only investment for the owner. It is also assuming equal income)

The difference in net worth between the two is $138,000 + $390,964.20 = $528,964.20.

All it took was an additional $63,660 over five years for the buyer to have a net worth half a million dollars higher than the renter.

You tell me which you’d prefer.

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