OWNING VS. RENTING: The debate continues.
I thought I had schooled you in this subject before, but alas, I see you still stuck in the mindset of an industrial revolutionist. Being an IP means doing whatever it takes to grow your empire until it is supporting your butt, then when you are financially set, you can buy your corvette limousine.
I realize everyone likes to own stuff. It makes us feel secure. However my logic has not wavered. I'll lay it out for all the people to see, thus showing my infinite wisdom. We'll do it over ten years so it is feasible to all.
Let me preface this exercise by saying that rent in this part of the world we live in is quite a bit less than the average mortgage, thus making this logic of mine make sense.
Owner
$216'000 - Mortgage Payment for a 300'000 house over 10 years ($1800/month)
$ 10'000 - Land tax
$ 5'000 - Improvements
___________
$231'000 - for ten years of livin'
Luckily your house has appreciated @ %5 every year for the ten years, and is now worth $346'000. So you sell, and pay the bank back the remaining 235'000 . Leaving you with 111'000 which you promptly pay income tax on to the tune of %35 (depending on your tax bracket I'm too lazy to figure it out) So you are left with 72'000. Not bad considering you lived for free the last ten years.
Now lets look at the other side
120'000 - Rent payment for 10 years ($1000/month)
$0 - tax
$0 - Repairs
Now, of course you've been putting the additional $800 away in an RRSP fund each month earning a modest 8%. You've earned 146'000 without taking on the risk of a high mortgage, or a volatile housing market.
Of course you could say the housing market has gone up %10 a year recently, but then you're just gambling. Tradition trends have the market going up at 4% per year.
I'm getting a headache from thinking so hard.
Does this make any sense?
Mr. Taylor (#2)
6 comments:
Taylor #2,
There is a reason why you are number 2 and I, number 1, but for the sake of time, I shant digress.
With preliminary insults put aside and me feeling better, let me now compliment you.
I feel that your approach is a very unexplored one for the average Joe, but maybe not for Disposable Joe, or your Average Joe. But we'll have to wait to see what he has to say. I very much like the idea of sheltering investment money from capital gains in a RRSP-like device. However, in your example, you didn't mention the fact that the said person selling their home and being taxed on the 110K they made on their home, still needs a place to live. The good news for them is that in Canada, they can turn around and upgrade their home (size, neighbourhood, age, etc) with the equity they've built over the years. I would guess most people would do exactly that because your primary residence is the one thing in Canada that isn't massively taxed. Or is it? I'm much to lazy to investigate taxes on upgrading... If you aren't buying new then I don't see what you'd pay.
Another thing that you didn't mention is credibility and leveraging power that comes from the same house. A bank will not easily hand out a line of credit to someone without something to back it up. A house does just that. So, a house can actually make available even more investment opportunities. For example, if the bank were to give me a 25-50K line of credit based on my primary residence, I'd be able to immediately start looking at northern BC and eastern Canada for a rental investment place.
Just some thoughts.
Yes. I thought that handcrank on the side of your head was for something. You are now thinkin beyond the sandbox.
EXCEPT
You get just as much leverage and credibility on a rental property.
Okay, let me lay it out for you ... again.
If you are looking at renting or buying and either way you will pay $1200, then by all means buy. But why go broke on a mortgage when you don't even own investment property.
silly
Your Number is Up
This is another number game. For the investor, what it comes down to is, "what are you going to do with your money?"
This point of view is similar to leasing vs. buy a car. If you are a strong investor, then you don't want your money tied up in a big purchase. You can use that money to invest and make money in something else.
So to clarify, the choice depends on where your money is going, and how much income you are getting from your investment.
But it's not always so black and white. Suppose you buy a home, and sublet the basement or some other part of the property while you live there as well. Then your monthly expenses are greatly reduced.
Living to Invest vs. Investing in Life
I guess the question then is are you buying primarily to live or to invest?
Owning a home has non-monetary value such as being able to hold on to history while raising kids and do what you like with the place, etc. And you can control your "rent" somewhat.
Just because it's your principle residence, doesn't mean that you actually have to live there, but then you probably can't rent the entire thing out either, cuz that just might be against the rules.
Investing on its own is different, as you might not hold on to the property for as long (i.e. 10 years) and so if you can buy at the right price and/or renovate and sell it quickly, you might get a bigger bang for your banana than if you put your money in RRSPs.
Some RRSPs and GICs also lock in your money for a fixed period of time, which makes it unavailable for better investments if they come along.
Hedge your bets or bet your hedge?
In any case, you have to do the math.
Money in.
Money out.
Money made.
Maximize!
Also calculate the risk. Buy definitely has more risk involved. If you miss mortgage payments, then you go into foreclosure, lose your home, be unable to buy for a while, and be forced to rent. If you miss rent, then you might have to rent somewhere else.
Supposedly both cases give you credibility for loans, but collateral speaks louder than credit.
The goal is to maintain control and access to your money while making it grow. Am I right?
DJ (Disposable Joe),
Unlike many of my comments are educated and calculated. I struggle greatly with the last part - calculating. To me, I like the fun of it, not the work of it. But at our stage, we have to be willing to do more work, a little less risk and perhaps take slightly longer to prepare.
I thought it was a good point to share a piece of a discussion I had with a seasoned invest to whom I am teaching English. He is one of the only brokers who survived the Korean IMF crisis in 1997. It was tough times and even more tough for brokers as the market crashed around them. To cut to the chase, I said to him "I just threw a few bucks into XYZ stock because it couldn't go lower and I figured it had potential to go higher". Mr. Investor's face was quite shocked when I told him "it was only $400". He said "I could have made you thousands with that."
His advice was to take however much time it takes to become fully aware. His advice was to read the business section and stock pages every day. Stay permanently in the know and then boom. The opportunity will cross your path and you'll have the knowledge to make a well-informed and less risky decision.
I thought that was appropriate to share as it inspired me to be smarter and wiser with our funds.
NEVER TRUST A MONEY MONAGER WHO DOESN"T HAVE HAIR ON HIS OR HER BACK.
As for Joe, dude, I think you're secretly agreeing with me without trying to offend #1. True dat if you rent our your basement you are offsetting your mortgage so as to save money for investment, but what is Taylor 1 going to rent...his living room? Actually, in his defense, he probably has a low payment considering he had a larger downpayment, so let's not refer to him. I have a huge house that I pay 1250 rent on enabling me to save thousands a month towards new property. It works for me. If I were to buy, with four kids, I would need a HUGE house, not a little love nest like Taylor 1.Thus the door swings both ways.
Actually, what's funny is that Mr. Taylor #1 is more or less renting out his living room to two too young boys.
Laugh out loud. That wasn't meant to sound pedophile-like. Home stay students can also be a source of income.
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