Why Owning Property Trumps Renting: Capital Accumulation.

Credit card balances, monthly line of credit payments, car loans, rent; any of these wonderful facts of everyday life are only too well known and give a certain connation that might resemble, to most of us anyway, climbing up an ever reaching hill, fighting insidiously to reach the top – but what a hill it is and often saving is a fleeting concept as debt reconciliation often takes priority.

That’s the beauty of living in a credit economy where money or rather the illusion or it, is all too readily available to us and saving often takes a back seat. Even in the recent recession, which we climbed out of faster than any other G8 nation back in October 2009, many North Americans in Canada and the U.S. are transfering 80% of their pay checks towards monthly debt according to a recent article by Megan Thee-Bredanin the New York Times.
But are we doomed to perpetually live in this cyclical lifestyle of barrow, repay... barrow, repay, often allowing our dreams of financial independence via saving and investing to wither away until that glorious a modest 649 ticket turns out to be worth more than a coffee and bagel - it may happen but don't hold your breath. Even still, money is only money and cannot grow on it’s own, it needs to be re-directed in order to provide an acceptable return, that is when we have money to set aside ofcourse but the amount needed to start working toward that 6 figure amount in your checking account is be less than you think, read on...
Investment vehicles exist for those with aspirations of having an investment portfolio that will make our hard earned money grow, from RRSP contributions or GICs, high-interest saving accounts or government bonds, to the more risky and often stress ridden stocks and IPOs. With interest rates so low, the mentioned options make little sense, with the high interest saving accounts producing about 4% and GIC’s even lower, your retuned, if any, barely covers inflation, presently at 2.5%; growth is at a snail’s pace, clearly not a money maker in any sense of the word. Mutual funds do perform better but management fees and taxes on gains often make any increase in return minimal. Besides, the bank is not going to lend you hundred’s of thousand in dollars so that you can put it all in a mutual fund and reek the benefits of a 3% return on that same amount, but they will with real estate via a mortgage and this is where benefit of owning property becomes apparent, in leveraging.

So, what’s the answer? How can one generate capital accumulation on the side that provides extraordinary returns, often far above many investment vehicles currently available? Well, I’ve already answered it above. The answer is none other than the acquisition of real estate, but before you can truly appreciate not only the financial benefits but the emotional as well, let me throw some numbers at you.

I recently had two clients who listed with me who were previously paying approximately $750 a month each (utilities included) to live in a downtown property near Spadina and College, while they were attending Ryerson University. This equates to $18,000 annually in rental payments, that’s $36,000 over the two year period; money that will never be seen again, in their pockets anyway.

With a little convincing, they decided to purchase a property rather than renew an additional two year leasing contract. They decided to put an offer on a very nice 2 bedroom townhouse in quieter King West Village and the property became theirs following acceptance of their offer.

If they had renewed the previous contract with their landlord for an additional 2 years, that’s another $36,000 that they would have never seen again, coming to a grand total of $72,000 over a 4 year period!

However, they didn’t renew, they bought and now own a beautiful townhouse in King West with only little down and total monthly payments of only $100 more a month via mortgage payments, maintenance fees, and property taxes, which includes security and beautifully maintained private parks.

Assuming current property appreciation rates, provided from the Toronto Real Estate Board, the average cost of a homes in the year 2004 was $315,231.00, in 2007 the average price rose to $376,236.00, and in today’s Toronto market, the average price for June 2009 has risen to $403,927.00.

Current property appreciation rates are at 4%, but in the downtown Toronto core they are above average due to population density and urban demand, that means if they choose to sell in two years time, their property would have increased in value by $24,000.00, not to mention that all previous mortgage payments made would come right back to them once sold, getting back exactly what they paid for plus the increase in property value. That’s a savings of not only the $36,000 that would have otherwise been given away to a land lord, but an additional $24,000.00 in profit which remains tax free as it’s their principal residence. This is only one example of many mind you, as I’ve helped clients in similar situations save their money and also profit from appreciation growth.

So what does all this mean? Simply that credit card balances, monthly line of credit payments, car loans, rent; all these factors are normal facets of urban life, except one hinders substantially our ability to create a solid financial foundation. The choice of owning instead of renting, not only shifts one’s place of residence immediately form liability to an asset but also effects one (i.e. YOU) and one’s family emotionally, and that may be the greatest benefit of all!

Christopher J. bogoros