If I were to compare purchasing a home versus investing those downpayment funds, which would put me ahead at the end of the day?
This is a question everyone asks themselves; is the insurance based segregated fund better than the straight corporate class mutual fund? what are the real datapoints that I’m comparing here?
I would start by looking at commitment period, and make a list including expense cost of the invesment to be maintained, risk of losing money (by type) as the biggest section so you have fully visualized those risks (which may include property value, vacancies, market crash, corporate bankruptcy, penalties for exiting the investment if required), possible upside (to examine the risk/reward profile), complexity of the investment, time required to monitor and maintain the investment, and more as you deem suitable.
Lets take for example a real property versus a financial investment in a mutual fund that invests in bonds, debentures, corporate notes and warrants.
Real property investment is a long term commitment, approximately 5% in fees for the agent when sold (occurring at the final total market value of the property, and requires a loan to purchase, taking a bite out of net expected returns; National Bank currently offers a fixed 5 year in the neighbourhood of 3.5% as an ongoing expense. Since people primarily invest in condos for their investments, I’ll illustrate a $225,000 downtown Toronto 1 bedroom condo for this example.
Downpayment of $45,000 (20%) to avoid CMHC insurance fees creates a $180,000 mortgage at 3.5% is a fee of (semi annual compounding excluded) $6300 per year, in addition to the condo fees of a conservative ($350 / mo) $4200. So in the first year the investment is $55,500.
Rental income for this hypothetical condo would be in excess of $1,100, with an average vacancy of 5% generates an income of $12,540 net.
To summarize: 6300 + 4200 = 10,500 in costs, with an income of 12,540 equals a return of $2040 or 1.35% (on 55,500).
That’s a lukewarm annual return. Bearing in mind that the income from which is added to your taxable income, and capital gains are charged against the property on it’s sale (as 100% investment property). And remember, I haven’t included land-transfer taxes or school taxes or any additional heating costs that may be applicable.
Verdict? 10 years for rent to pay the realtor fee excluding property appreciation.. it better appreciate!
VERSUS
Mutual Fund that is mostly safe, invests in bonds and fixed payment financial products that pays a modest 3% per year after expenses.
$55,500 @ 3% = $1665 in profit
Additionally, if you could borrow the same $180,000 as you did for the mortgage at 3.5% and then invest it in the above mutual fund yielding 3% the cost would be a half percent, or $900 annually.
$180,000 @ .5% = $900, or $75 per month.
Net return On this option = monthly cost of $75, minus cash distributions, dividends, and asset growth over time.
Time? Commitment? Risk? Effort? I think the choice is clear on this one. Take the 3% on the $55,500 investment and consider carefully whether borrowing to invest is something that suits your financial plan. Speak to your registered advisor.
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