Summary

According to average real estate statistics, a condo in Toronto will currently run you around $260,000. This is the most affordable housing option available and so the most likely decision for a young person looking to invest in the real estate market. It is common that the buyer will have the required 5% down payment and (assuming they have impeccable credit) be able to get a 6.84% fixed rate mortgage (over 25 years).

This ultimately means that if we include mortgage insurance and other closing costs, plus property tax, house insurance and average condo fees, owning this condo will cost us $23,693 initially plus $2,431 every month.

Much of this analysis hinges on the value appreciation expected from our condo. A recent forecast from a reputable bank pegs this yield at 4.2% yearly (compounding). This value seems on par with other sources and also with statistics for the last 3 years culled from MLS averages. We can therefore expect that after 5 years the value of our condo will have risen to $320,000. After we pay back the bank what we still owe them and pay the real estate agent their 5% commission, our acquired equity and appreciated value will leave us with $106,400 in our bank account. Not bad, until we consider some other strategies:

If we assume that we can afford this $2,431 each month, we could quite easily get a nice apartment for $1,000 instead and use the extra $1,431 just to stash in a bank account (let's assume no interest). After 5 years, we'll have saved up $85,860 plus we had that initial $23,693 so our total bank balance will be $109,553. Notice that just saving up our money is better than the losing proposition of condo buying.

But what if we could expect to earn some profit off our all that money in our bank account somehow? As you'll see in my detailed analysis, it is a standard assumption based on historical context that money invested in equity markets will grow by 10.7% each year. We don't have as much leveraged credit but if we have $23,693 at the beginning and invest $1,431 further each month -- even after considering the buy and sell commissions of our broker, we'll be left with a bank balance of $140,640 after 5 years. This value is clearly better than our condo buying scenario.

Full Analysis

There are much higher monthly costs involved with owning a condominium than there are with renting an apartment. With the additional money, we could invest it in other ways such as in a savings account or in the stock market. Let's have a close look at each of the 3 scenarios using average statistics. Then we'll run through a few extra variations to see how the results are affected by the cost of our condo or how much of a down payment we can come up with.

To start off, we'll assume that we've saved up $13,000 and we're going to buy a $260,000^[1] condominium. We have good credit so we'll be able to score a great 6.84%^[2] fixed rate mortgage over a 25 year repayment period. Beauty!

First we must realize that we're going to need more up-front than our saved $13,000.

Any major bank requires a 25% down payment. If you don't have that, the Canadian Mortgage and Housing Corporation (CMHC) will help you out by loaning the bank the rest of the down payment on your behalf. What's the catch? First, you need at least 5% or they'll tell you to screw off. Second, they charge you a fee up front for the service. It ranges between .5% of the mortgage amount up to 2.75%^[3], depending on how much of a down payment you've saved up. In our case, we only have $13,000 (5%) so we need to pay the CMHC a fee of 2.75% ($6,793) to top up our deposit^[4].

Additionally, we have to pay closing costs which cover a whole assortment of things:

• Appraisal Fee
• Estroppel Certificate Fee (condo's only)
• Home Inspection Fee
• Land Transfer Tax
• Prepaid Property Tax & Utilities to be reimbursed to previous owner
• Legal Fees
• Title Insurance (Seriously!)
• GST (if your unit is new)

Generally a bank will estimate these costs at 1.5% of the selling price when considering your mortgage application. I'll just assume that they know what they're doing, so for our $260,000 condo price we'll need another $3,900 for closing costs.

That brings our total cost of buying up to $23,693.

So we move in and buy lots of new furniture and appliances, but we won't count those expenses. :)

Here's how much we have to pay per month to live in our new condo:

Mortgage Payment: $1,721^[5]

That includes principal repayment and interest. Actually that breaks down like this for our 6.84% mortgage:

Principal Repayment:	$823
Interest Payment:	$898

These are generally based on the value of your property:

Property Tax:	$180
Home-owners Insurance:	$130

Oh, and since we can only afford a condo, we have to pay this too:

Condo Fee:

$400[6]

At least we don't have to cut the lawn!

So every month we have to pay $2,431.

[As a side note, if you think you didn't have to pay rent as an owner then what would you call the things you pay which don't go anywhere near your equity -- mortgage interest, property tax, home-owners insurance and condo maintenance fees? In this case those costs total $1,608 each month - much more than most people I know pay in rent.]

After 5 years, we will have paid a total of $2,431 times 60 months plus our initial cost of $23,693 for a total of $169,531.

We can expect the value of our condominium to rise by 4.2% each year^[7]. So at the end of 5 years, we'll be able to sell our condo for $320,000. We'll have acquired $62,400 in equity and $60,000 in appreciated value! After we pay our real estate agent their 5% sales commission ($16,000), we're left with $106,400.


Scenario 2: Rent an apartment and save the excess money from our monthly budget.

Let's assume that we still have the $23,693 saved up and we still have the same great job which affords us a housing budget of $2,431 each month. But we don't need that much to rent an apartment, so we get a $1,000 apartment and save the other $1,431 each month in a bank account.

After 5 years, we'll have $1,431 times 60 months = $85,860 plus our initial $23,693 savings = $109,553.

Note that our end result from just saving the money is slightly better than investing in the condominium.


Scenario 3: Rent an apartment, invest the excess money.

If we're already doing better just by saving our money, what would happen if we invested in something where we could expect gains?

Let's consider "average" returns on some other types of investments:

US Stock Market 1990-1999 Average Annual Return:[8]	18.0%
Toronto Stock Exchange (Composite Index), 2003 return:[9]	18.9%
Toronto Stock Exchange, 2004 return:	11.6%
Toronto Stock Exchange, 2005 return:	25.7%
Toronto Stock Exchange, 2006 return:	11.3%
Gold Bars, 2003 gain:[10]	19.6%
Gold Bars, 2004 gain:	5.6%
Gold Bars, 2005 gain:	18.1%
Gold Bars, 2006 gain:	23.0%

Looks good! But the typically accepted stock market return^[11] is 10.7% compounding, so we'll use that.

To make the math easy, we'll assume that we'll only contribute to our investment once per year. After 5 years (and considering the 1.8% buy & sell commissions of our broker) we should expect to have around $140,640^[12].

In each of our 3 scenarios, we invested the same amount of money overall but the results are surely surprising. A summary of the 3 outcomes is presented in the table below.

Condo:		Rent + Savings Account:		Rent + Stock Market:
Down Payment: $13,000 Initial Cost: $23,693 Monthly Payment: $2,431 Total Investment: $169,531 Balance After Selling: $106,400		Initial Balance: $23,693 Monthly Contribution: $1,431 Total Investment: $169,531 Balance After Selling: $109,553		Initial Balance: $23,693 Monthly Contribution: $1,431 Total Investment: $169,531 Balance After Selling: $140,640

VARIATION 1: What if we buy a really cheap condo to reduce our costs?

How much is a cheap condo in Toronto? Let's say you could get one for $195,000. I certainly haven't heard of any much cheaper than that. We'll say we have the required 5% down payment -- $9,750. With our mortgage insurance and closing costs, we can expect to have an up-front cost of $17,769.

Our mortgage payment will be $1,290 and once we add our house insurance, taxes and condo fees we can expect to pay around $1,923 each month.

So our total cost after 5 years will be $133,148. We will have acquired $46,800 in equity. We can expect our condo value to rise up to $239,000. When we add the appreciated value and subtract our realtor commission, we'll be left with $78,850 in our bank account.

How does this compare to our other 2 scenarios?

We have $17,769 initially. If we rent an apartment and stash away our $923 extra cash each month in a bank account, we'll have a balance of $73,149 after 5 years.

In our stock buying scenario, we'll be left with a balance of $94,704.

Clearly, buying stock is still the clear winner even though our investment costs have been significantly reduced.

Condo:		Rent + Savings Account:		Rent + Stock Market:
Down Payment: $9,750 Initial Cost: $17,769 Monthly Payment: $1,923 Total Investment: $133,148 Balance After Selling: $78,850		Initial Balance: $17,769 Monthly Contribution: $923 Total Investment: $133,148 Balance After Selling: $73,149		Initial Balance: $17,769 Monthly Contribution: $923 Total Investment: $133,148 Balance After Selling: $94,704

VARIATION 2: What if we buy a more expensive, luxurious condo with a gym & pool. We'll be leveraging more credit, won't that mean more profit?

Just to pick a number, say our condo will be $350,000 and we've saved up quite a bit more this time -- 10%! That gets us a little lower mortgage insurance premium but we're going to have to assume higher condo fees for that pool maintenance, so we'll up that to $550.

When all is said and done, our initial cost will be $46,550 and we'll have to pay $3,162 each month for a total 5 year cost of $236,248.

We can again forecast a 4.2% gain each year, giving us a final sale price of $429,939! Once we pay back the bank what we still owe them and pay our agent their commission, we'll be left with $156,442.

In our savings account scenario, we have $2,162 extra each month for 5 years, plus our initial $46,550 -- giving us $176,248.

In our stock buying scenario and still assuming our 10.7% yearly yield, in this case we can expect to have $229,740.

Seems the more we have to invest, the more clear it becomes that stock investing is the more beneficial investment option.

Condo:		Rent + Savings Account:		Rent + Stock Market:
Down Payment: $35,000 Initial Cost: $46,550 Monthly Payment: $3,162 Total Investment: $236,248 Balance After Selling: $156,442		Initial Balance: $46,550 Monthly Contribution: $2,162 Total Investment: $236,248 Balance After Selling: $176,248		Initial Balance: $46,550 Monthly Contribution: $2,162 Total Investment: $236,248 Balance After Selling: $229,740

QUESTION: What would it take for our initial "average" condo investment to match our expected stock investing scenario?

After buying our $260,000 condo with $13,000 down, we would have $140,000 in the bank after 5 years if the value of our condo rose to $356,000 -- an average annual increase of 6.5%. I think you'd find that most real estate agents would give you much higher odds of accomplishing this than a bank economist or CMHC analyst would.




QUESTION: If we can save up more money for a down payment, how will that affect the returns?

A higher down payment would go directly towards our equity, reduce our CMHC mortgage insurance fee and it would also reduce the total amount we'd need to borrow and hence the total amount of interest we'll have to pay. But in our stock buying scenario, it also gives us more initial buying power which will earn yield for 5 full years. Let's look at which scenario will be most improved:

First, remember our initial results using our 5% down payment:

Condo:		Rent + Stock Market:
Down Payment: $13,000 Initial Cost: $23,693 Monthly Payment: $2,431 Total Investment: $169,531 Balance After Selling: $106,400		Initial Balance: $23,693 Monthly Contribution: $1,431 Total Investment: $169,531 Balance After Selling: $140,640

Now let's look at how the figures vary if we up our down payment to 10%:

Condo:		Rent + Stock Market:
Down Payment: $26,000 Initial Cost: $34,580 Monthly Payment: $2,340 Total Investment: $174,985 Balance After Selling: $116,800		Initial Balance: $34,580 Monthly Contribution: $1,340 Total Investment: $174,985 Balance After Selling: $151,585

Note that our stock portfolio increased in value by more than our condo investment. What happens if we up our down payment to 25% to really boost our equity and cut interest charges?

Condo:		Rent + Stock Market:
Down Payment: $65,000 Initial Cost: $68,900 Monthly Payment: $2,068 Total Investment: $193,004 Balance After Selling: $148,000		Initial Balance: $68,900 Monthly Contribution: $1,068 Total Investment: $193,004 Balance After Selling: $187,154

It is clearly difficult to make the condominium investment look good through this analysis without having unrealistic condo appreciation expectations.

If you'd like to personalize this analysis with your own #'s and speculation, feel free to download my spreadsheet.

-- Alex Boby