Should I Wait to Buy? (Quick Answer: NO)
When you rent, you’re paying off your landlords mortgage. What you’re paying covers the mortgage itself, strata fees, taxes and other operating costs to hold the asset.
Your landlord is not getting rich by collecting your rent. They make their REAL money through market appreciation. In Vancouver residential single unit cap rates are low at initial investment only around 1-4%. This means if you pay $2,400 per month in rent, your landlord may only clear around $1,100 per year. That modest number will change over time as they pay down the principal amount on the mortgage, giving them more cashflow 2-5-10+ years out.
Wait, that seems crazy, my landlord isn’t netting cash right away? Well, actually it’s not crazy. Investors are willing to basically break even on cashflow because HANDS DOWN the largest financial benefit is market appreciation.
In Vancouver, the RE market averages around 2-6% increase per year over the past 10 years. This past year, was not a great example. During the peak of the pandemic we witnessed record breaking numbers across Vancouver. Some neighbourhoods had prices jump 1% or more in a single month.
All that aside, speaking in real numbers…let’s set a modest growth rate at 3% for this example. At 3% growth a $650,000 condo would increase by $19,500 per year. In 5 years now it’s worth $753,528.15 (+$103,528) and so on…
If you haven’t entered the housing market, year over year, you will face an uphill battle against a slow and steady rate of growth.
Let’s take a 5 year example and put it into play. Bob & Mary would like to buy their first condo in Vancouver. They have been setting aside $1,000 per month for 5 years and now have $60,000 in the bank allocated to a downpayment.
They have been pre-approved for a purchase price of up to $650,000 with a 25 year term at 2.10%.
They do not have 20% down so they will be charged a CMHC fee of $23,600. All costs in, the monthly mortgage payment of $2,628 is similar to their current rent.
However, Bob doesn’t like the idea of a CMHC fee. The premium is almost half of their savings over 5 years! He thought it was “ridiculous” and convinced Mary now was not the time to buy. “Let’s wait for the market to cool off and then we have 20% down to avoid the CMHC fee.”
5 years pass and Bob & Mary have managed to save a total of $130,000 for a downpayment. They start house hunting and are alarmed to find out the same condo they could have bought 5 years ago is now worth over $753,000. To avoid the CMHC fee they will now need 20% down or $150,705.60. Since they still don’t have enough to cover 20% down the CMHC fee remains in play at $17,458.78.
If they had paid the $23,600 CMHC fee 5 years ago they would have gained $103,528 in market appreciation. Instead, they are now paying over a hundred thousand more for the same condo plus still paying the CMHC fee.
Don’t be like Bob. Bite the bullet, pay the fee, get in as soon as you can. Unless you win the lottery or come into a large amount of cash, the market will always outpace your savings.
I know you’ve been reading the Vancouver Real Estate headlines for years now. The headlines say…“the bubble will burst” but history, basic land economics, data and statistics… indicate the complete opposite. If you believe those headlines, you’re leaving money on the table.
10 years ago a 1 bedroom condo in downtown Vancouver was worth an average of $382,840 and today it’s $660,125. That figure is almost 280k over 10 years or $27,728 per year in average appreciation. If you listened to the skeptics, you’re now $280,000 (and counting) behind those that truly understood the opportunity at hand.
Your first home doesn’t have to be perfect. It’s about getting into the market, and building equity. The MOMENT you can scrape enough money together to afford it is the time you should buy real estate.
If you are considering buying a home in the next few years please feel free to reach out and we can work on a plan to get you there. We may even be able to get you in a home sooner than you thought. A simple conversation could change your life and your ability to grow real wealth.
Nevada Cope — REALTOR®
call/text 604-897-6971
