Introduction
These days, renters are feeling the pressure of high interest rates just as much as home owners with rents going up 20% in a year.
But here’s where it gets more interesting– buying a home now could be the cost-effective choice, especially with some houses in Toronto selling below $700K lately. Let’s begin!
Rent and real estate trends
Rents have gone up a lot in Toronto, and the bigger the unit, the higher the increase it seems. For home owners, the impact of interest rates were actually a lot more by and mortgage payments have grown by almost 70% for the same size loan!
Because of this, this also pushed Toronto real estate prices down and these days, it looks like we’re hovering at around 15-20% below peak prices.
Here’s the trickier part – the data doesn’t tell us what types of houses have been selling and what people are buying has been changing too.
When the market was hot, both houses that needed a lot of work were selling just as quickly as those that were in great condition, ready to move in.
Nowadays, there’s less buyers and because it’s tougher to borrow money to fund renovations too, houses that need a lot of work are actually much tougher to sell and so the actual change in prices that we’re seeing might actually be more than what data is telling us.
Here’s an example to try to explain what I mean. I wanted to add that these are not real numbers because we don’t have them, I’m doing this to give you a super simple example to show what I mean a bit better.
Let’s say at the peak, house that don’t need work were selling for $1.4m and those that need work were selling for $1.1m. If there were the same number of these types of houses sold, then the average price during that time would be $1.25m.
Now, let’s exaggerate and assume nobody is buying houses that need work, and move-in ready houses are selling for $1.05m.
Averages tell us prices have dropped 16% but in reality, move-in ready houses have actually come down 25%, and we might be seeing even bigger drops for if houses that need work were actually selling.
Lately, we’ve also see a few more things that are changing. Offers dates aren’t nearly as popular as before, but if a listing agent is still using this strategy, instead of listing at $999,000 to drum up attention, it looks like this actually needs to come down to $699,000 these days, which is a 30% discount!
October data shows that prices haven’t moved much yet but in the more recent days, we are noticing something new and we’re also seeing lower list prices with no offer dates.
When this happens, it gives us a better idea of the actual price the seller wants instead of an offer date situation where the expected price from the seller could be much more.
This is a big sign that sellers are probably now finally starting to adjust expectations lower in our softer market.
What is house hacking?
When prices drop and rents coming up, it also becomes more interesting for renters who are looking to buy. It could work even better if you buy a house to live in, and were willing to rent out part of it to help cover your expenses and this is what we called house hacking.
Last year when prices dropped, it still didn’t work as well because rents were as good and sellers weren’t as motivated to sell, and so the math just didn’t work as well as today unless:
- you were willing to do major renovations, and not many first time home owners would realistically have the money for that
- or if you were willing to live in the smaller basement unit, which didn’t really work for young professionals either because it felt like a downgrade compared to their nice rented condo.
But things have continued to change and you can now house hack without big renovations and live in the nicer upper unit, it’s still better to buy than rent, which is huge.
Renting vs. house hacking - the complete breakdown of numbers
If you rent a 2-bedroom condo, you might have to pay around $3,300 a month, plus the cost of hydro and insurance, which adds up to $3,400 a month.
These days, you can buy a bungalow in Toronto for $749,000 that’s all done up and split into 2 units. If you rent out the basement for $1,750, you might end up with a monthly cost of around $2,750, which is less than renting a condo!
When you buy a house, you’re not only out of pocket less each month but you’re also gaining on the house side too. Here’s how it adds up each year:
- You save about $7,800 each year out of pocket.
- You gain $7,400 each year because you’re slowly paying off the mortgage (that’s called “principal”).
- Your house can go up in value by around $22,000 each year, based on an average annual increase of 3% over ten years.
So, in total, if you house hack instead of rent, you could end up with about $38,000 in benefits each year. And that is a pretty smart choice!
What do you need to house hack?
Here are a extra few things you need to know if you are thinking of house hacking:
- It’s only a good choice if you don’t plan on moving anytime soon because there are big fees each time you buy and sell In our $750K bungalow example , buying and selling fees combined could be around $70,000, which ends up cancelling out the benefits if you only own the house for a couple of years.
- In order to get a mortgage, you’ll need enough income to qualify. Based on TD’s calculator, to buy the bungalow in our example, you’ll need around $160,000 in income. The good thing with our example is that if you rent out the basement, that rent you get also helps you qualify for a bigger mortgage.
- And finally, you’ll need to have enough savings for the downpayment and closing costs which is around $175,000 in my bungalow example based on a 20% downpayment. If do have an option to go with a lower downpayment with an insured mortgage if you can qualify for a bigger loan, just note that you will end up having higher monthly costs if you do that.
How We Can Help
If you’re interested in seeing how you can make smarter real estate choices or what kind of house hacking options are out there, we can help.
We’re not your typical real estate sales brokerage. Instead, we focus on using data and numbers to help you make smarter real estate decisions in Toronto.
Just reach out to kick things off – book a free call with us!
What Toronto Real Estate Investment Is Right For You?
Check out our complete Toronto real estate investment guide for all the details and real-life examples. If you’re ready to dive in, just book a call with us!
