Quote:
Originally Posted by Gerbs
Can someone provide a better analysis how sonick could be correct about buying is better in the current climate? The calculation is under the assumption that I am renting the same unit I'm buying. In my personal situation, I would go even cheaper and roommate a brand-new condo and split the $1,000 - 1,500 in rent which is more savings.
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I think your analysis is based on a few flawed assumptions/details which are skewing your result significantly.
1) Taxes. Owning your primary residence is highly tax efficient in Canada, while interest income from a GIC is taxed at your highest marginal rate. Obviously there are some choices around RRSPs, TFSAs, etc but for the sake of an apples to apples comparison, this should be analyzed as a taxable account and on that basis, you'll be getting WAY less than your GIC's posted rate when you consider the tax you'll pay each year.
2) Actual interest rates used for both your "investment" assumption and your debt assumption. While you can probably find a few odd mismatches here and there, generally speaking the rate you can earn in a GIC is significantly lower than what you'd pay on a mortgage. Basing a 25 year decision on a promo GIC rate from a very small niche institution is probably a risky decision at best.
3) Appreciation in real estate. What are your assumptions here? These will move the needle a LOT.
To accurately build a financial model for this that is worth a damn, you need good inputs and to consider:
1) Reasonable assumed investment return for your cash in the "rent scenario"
2) Your projected income tax rate over 25 years
3) Assumed annual real estate appreciation
4) Assumed debt costs (suggest these be linked to your estimated investment return such as investment - 1.5%)
5) Net monthly cashflow difference between renting and owning
With that, you can do some actual math. For me, I might consider something like:
Investment return: 5% (I am going to assume it's not a GIC, it will help this argument)
Real estate appreciation: 3.5%
Projected income tax rate: 35%
Net cashflow difference: $1000 cheaper to rent per month
Therefore, the math for that scenario looks like:
Rent Scenario
Future value of:
$130,000 starting balance
$1,000 monthly investment
5% annual return, compounded monthly
=$1,048,077 in your investment account, 25 years from now. However, to access it, you'll pay capital gains taxes of $108,163 which leaves you with $939,914.
Own Scenario
Future value of:
$700,000 starting value
3.5% annual growth, no tax consequences
=You own an apartment valued at $1,654,271 with the mortgage paid off, 25 years from now
In your roommate scenario, the math is even more powerful towards own as you can put some cash into an investment account at the same time as enjoying the real estate appreciation.
-Mark