BY: MAURICE ANDERSON
The importance of having a good plan includes getting the right financial service advice and support before and after you buy. If you’re a millennial interested in buying a home, here are a few things you can start doing now to achieve your dream sooner. Pay yourself first. Set up an automatic monthly deduction from your paycheque to a TFSA and RRSP so your money for a down payment builds slowly but surely. Consider taking on a part-time job. Cut back on your day-to-day spending as much as you can and add that money to your savings.
Consider buying your first home with a friend. Don’t forget to add one-time purchase costs to your total including fees for real estate agents, mortgage insurance and an inspection as well as moving fees and legal fees. These costs may vary based on if you are a first-time buyer or not. The easy way to establish a budget is to use a spreadsheet – show your monthly gross income and then subtract taxes and other costs from your pay stub. This will give you your net income after taxes. Next, show what you pay for other monthly costs such as rent, student loans, car payments and credit card bills. Subtract these costs from your net income. It is because of an unrealistic expectation initially about the real estate market that keeps many millennials out of the market and the fact that at the age of thirty most do not have much of a career, no saving or a minimal amount but still expect to live the same lifestyle as people much older. There have been huge societal changes compared to the previous generations. Based on a survey from HSBC bank 27% of millennial non-owners who plan to purchase a home within two years have no overall budget in mind, while 53% have only set an approximate budget.
Every cash flowing property has three income streams which are cash flow, mortgage pay down and the appreciation of the property. Cash flow comes from the rent collected minus the expenses. A modest cash flow on a single-family home in any of the large Canadian markets can vary. For example, if you have a positive cash flow on a single-family home of $250 and multiply your monthly cash flow of $250 across five years of owning the property that’s $15,000 in extra cash flow addition to your equity growing in your property.
Mortgage pay down. While you are holding a mortgage on a property your tenant slowly pays it down. When you sell the property the difference from the first day you got the mortgage until the day you sold the property is yours in the form of equity. Appreciation of your property is the third stream of income and is usually the largest increase in an investor’s wealth. The Toronto Real Estate Board (TREB) said that it expects the average house price in the Toronto area to increase by another $100,000 this year to $825,000. Remember, that would be in addition to the roughly 20% increase that occurred in 2016. 2017 is set to become another record-breaking year. 2017 is a new year but will still accrue more appreciation.
When you invest in a property there are always unforeseen variables that can cause your returns to fluctuate such as vacancies, repairs, interest rate fluctuations, etc. Also, your appreciation can fluctuate, which is why it is imperative to buy your properties in an area with strong economic fundamentals and promise for growth. It’s possible to become a home owner in this day and age with the right plan in effect. Talk to an experienced real estate agent and mortgage broker before you start looking for a property.