Toronto Real Estate: Rent Vs. Buy
Despite a lack of listings, Buyers continue to pile into the market to start off 2022. We have seen prices increase dramatically in the past two years reaching which some would describe as frightening heights. Prices have soared another 28% in February 2022 after already jumping 22% in 2021. The Bank of Canada increased interest rates last week for the first time since 2018. However, many are expecting further government policy intervention (likely to come in conjunction with the federal budget) to be needed to cool current demand for Canadian Real Estate. With so much confusion in the market let’s take a look at a few Rent vs Buy examples and see who may be coming out on top in current market conditions:
Leslieville Condo: Tough Choice
A 1 Bedroom + Den with Balcony and parking in Leslieville recently sold for 740,000 while a similar unit is renting for about $2,600. This is proving to be a tough choice based on our Rent vs Buy analysis. Things seem to be coming out pretty even for those with a 20% downpayment. It’s recommended that Buyers considering this type of purchase have at a 5 year time horizon in mind. You will want price appreciation to at least cover one time purchase and sale costs(land transfer tax, realtor commission, lawyer fees, etc.). If you are putting the minimal down payment down things are less appealing and you might be better off renting. While rental prices for condos saw significant drops through 2020 and parts of 2021, rental prices are rebounding towards pre-pandemic levels. We are likely to see rents continue to increase which could make purchasing with a larger down payment the more appealing option.
| Leslieville 1+1 Bed Condo With Parking | ||||
|---|---|---|---|---|
| Rental | 2,600 | Purchase | 740,000 | 740,000 |
| First/Last Deposit | 5,200 | Down Payment (20, Min) | 148,000 | 49,000 |
| Cash Required for Closing Costs Less FTB Rebate | 16,075 | 16,075 | ||
| Total Deposit | 5,200 | Total | 164,075 | 65,075 |
| Rent | 2,600 | Mortgage @ 2.79% | 2,726 | 3,324 |
| Property Taxes | Property Taxes | 200 | 200 | |
| Maintenance Fees | Maintenance Fees | 450 | 450 | |
| Insurance | 50 | Insurance | 75 | 75 |
| Utilities and Home Repairs | 150 | Utilities and Home Repairs | 325 | 325 |
| Monthly Cost | 2,750 | Monthly Cost | 3,776 | 4,374 |
| GIC Trade off @ 2.2% | 391 | Monthly Equity Gained | 1,467 | 1,781 |
| Net | 2,359 | Net | 2,309 | 2,593 |
| For Investors | ||||
| Annual Rent | 31200 | |||
| Additional Rental Costs (Vacancy/Marketing/PropertyMan.) | 5,050 | |||
| Annual Costs | 17,650 | |||
| Net Operating Income | 13,550 | |||
| Cap Rate (NOI/Purchase Price) | 1.83% | |||
Danforth 3 Bed 2 Bath with parking: Time to rent?
The decision to buy a home is often influenced by many factors: forced savings, control over your living space, stability, sweat equity; these are some of the reasons people may prefer to buy vs rent. However, renting this type of property instead of buying could have you come out $500/month ahead in the near term. The supply scarcity of single family homes in the city continues to drive prices. People are willing to pay to own a home with a yard but have not been willing to pay as much to rent that same property.
| Danforth (Danforth/Main) 3 Bed 2 Bath | |||
|---|---|---|---|
| Rental | 3,500 | Purchase | 1,400,000 |
| First/Last Deposit | 7,000 | Down Payment 20% | 280,000 |
| Closing Costs No Rebate | 48,950 | ||
| Total | 7,000 | Total | 328,950 |
| Rent | 3,500 | Mortgage 2.79 | 5,180 |
| Property Taxes | Property Taxes | 300 | |
| Maintenance Fees | Maintenance Fees | ||
| Insurance | 75 | Insurance | 120 |
| Utilities and Home Repairs | 300 | Utilities and Home Repairs | 800 |
| Monthly Costs | 3,875 | Monthly Costs | 6,400 |
| GIC Trade off @ 2.2% | 690 | Monthly Equity Gained | 2,776 |
| Net | 3,185 | Net | 3,624 |
| For Investors | |||
| Annual Rent | 42000 | ||
| Additional Rental Costs (Vacancy/Marketing/PropertyMan. | 6475 | ||
| Annual Costs | 17515 | ||
| Net Operating Income | 24485 | ||
| Cap Rate (NOI/Purchase Price) | 1.75% | ||
Scarborough Bungalow: Homes With Additional Income Win Out
Homes with separate rental income have always proven to be a more appealing cash flow purchase for budget conscious Home Buyers. The same rings true with this rent vs buy analysis. As long as prices don’t crater, purchasing a Scarborough bungalow is showing you will come out ahead over renting a similar property. It’s most likely why we are seeing this segment of the market outperform other areas in recent months. This property is also seeing the highest cap rate (Net Operating Income/Purchase Price, a common real estate investment measurement) of our 3 examples which will encourage more investors to purchase this type of product creating more competition for Buyers who are purchasing a home to live in.
| Scarborough Bungalow With Basement Apartment | |||
|---|---|---|---|
| Rental | 2,800 | Purchase | 1,300,000 |
| First/Last Deposit | 5,600 | Down Payment 20% | 260,000 |
| Closing Costs less rebate | 19,175 | ||
| Total | 5,600 | Total | 279,175 |
| Rent | 2,800 | Mortgage | 4,810 |
| Property Taxes | Property Taxes | 255 | |
| Maintenance Fees | Maintenance Fees | ||
| Utilities and Home Repairs | 300 | Utilities and Home Repairs | 800 |
| Insurance | 70 | Insurance | 120 |
| Monthly Cost | 3,170 | Monthly Cost | 5,985 |
| GIC Trade off @ 2.2% | 602 | Basment Rental Less Costs | 1,520 |
| Monthly Equity Gained | zero | Monthly Equity Gained | 2,578 |
| Monthly Expenses | 2,568 | Monthly Expenses | 1,887 |
| For Investors | |||
| Annual Rent | 54600 | ||
| Additional Rental Costs (Vacancy/Marketing/PropertyMan.) | 8087.5 | ||
| Annual Costs | 18587.5 | ||
| Net Operating Income | 36012.5 | ||
| Cap Rate (NOI/Purchase Price) | 2.77% | ||
Those Renters feeling an urgency to buy should take a deep breath knowing that as interest rates increase the Rent vs Buy scenario will continue to trend in Renter’s direction. Interest rates have increased and 5 year GIC rates can be found close to 3% for a 5 year term while most 5 year fixed mortgages are above 3%. This relief could be felt until the rental market becomes more competitive putting pressure back on increasing rental prices.
