Investment for Canadian Employees PART 3 – House

hello. This is Miki’s Honey, MikiHoney.

The most expensive thing that an average employees buys in life is usually a house. Other than a house, there is no object other than a house that you purchase with a mortgage from a bank and then have to pay off for decades.

A home is a very important asset from a financial perspective. Of course, depending on where you live, you may view a house as an investment or as a residence, but in general, if you assume that the city is growing, a house is a good investment product.

Advantages of investing in real estate

A home has many advantages as an investment product.

1. First of all, the government provides a lot of loans when buying a house as a policy.
   We don’t lend such a large amount of money for anything other than your home.
   They only lend out hundreds of thousands of dollars when buying a house.
   The only way for an ordinary employees to immediately invest a few hundred dollars is in their home.
   For example, if you buy a house with a $100,000 down payment and a $200,000 loan, you will make a profit of $30,000 even if the price of the house goes up by just 10%. That’s a 30% return on an investment of $100,000.
2. The house has an inflation hedging effect.
   House prices rise in line with inflation, but the value of the mortgage amount borrowed decreases each year due to inflation.
3. Because the price fluctuation is low, you don’t make the mistake of selling out of fear like you do with financial products. When house prices fall, most people just wait and pay the mortgage rather than sell. On the other hand, when stocks plunge, people often lose money by selling out of fear.
4. A good home is something you can enjoy while living in it.
   If we buy Apple stock, Apple doesn’t give us an iPhone for free. However, if you enjoy using the house to your heart’s content and later sell it for the same price, you are buying the house for free. Of course, you have to pay taxes and management fees, but even if you rent a house, you still have to pay those costs.
5. Even if the price of the house you live in goes up and you make a profit when you sell it later, you don’t have to pay taxes!!! I think the only things that are subject to taxes on profits earned in Canada are profits received when selling a house and TFSA.
   If you make $200,000 when your house goes up and you sell it, your profit is still $200,000. Of course, this only applies to the house you live in. Taxes must be paid when selling a house for investment purposes.

So which house should I buy?

Without a doubt, you should buy a Detached House, commonly referred to as a Single-Family Home. There are many types of homes such as Condo, Townhome, Duplex, etc., but the home that most people prefer is the Single Family Home.

Currently, 55% of all homes in Calgary, Canada are single homes, and the rest are condos, townhomes, duplexes, and others in similar proportions.

Rental Property

So what about a house for investment purposes?

The concept is to buy a house, rent it out, receive monthly rent, and make a profit when you sell it later, but this is more work than you think and if the house price does not rise, there is not much benefit from the rent.

For example, assuming you make a down payment of $100,000 and take out a 5% mortgage for $100,000 to buy a condo worth $200,000 and rent it out,

A rough estimate of the total cost for the year is:

1. Interest $5,000
2. Tax: $2,000
3. Condo maintenance fee: $400 x 12 = $4,800
4. Other administrative fees: $1,000

If you set your income at $1,500 per month, your annual income is $18,000.

So your actual income is &18,000 – $12,800 = $5,200

This means you get a 5.2% annual return on an investment of $100,000. However, this cost does not include any of the homeowner’s efforts to maintain the home. Even if you assume that the tenant you are renting from is very nice and uses the house well, you will end up with a lot of work. If you hire someone, other management fees must increase to $2,000.

But there’s no way Tennant could be that nice. Of course, problems arise, the house gets damaged, and it costs money to fix it. There may be sections in the middle where there are no tenants, and there may be cases where major renovations are required.

Instead, when you sell a house over time, you can expect a profit if the house price rises, but in this case, you have to pay taxes on half of the profit.

For example, if you later sell the $200,000 house above for $250,000, you must pay taxes on half of the $50,000 profit, or $25,000. If your income that year is $100,000, you will have to pay taxes on $125,000. If you calculate the Marginal Tax at 40%, you have to pay $10,000 in taxes, so on the $50,000 profit, you have to pay a total tax of $10,000, or 20% in taxes.

If you have money and have multiple rental homes, you can generate profits by creating economies of scale like a business, but then you are no longer an employee. You should think of him as a businessman.

So, since an employees cannot continue to borrow money to purchase multiple rental homes, the conclusion I have reached is that it is beneficial to purchase a larger home when purchasing a home with the money used to purchase a rental home .

The next article is a tax-saving product that rivals RRSP! Let’s talk about TFSA, which I really love.

Series Navigation

<< Investment for Canadian Employees PART 2 – PensionInvestment for Canadian Employees PART 4 – TFSA >>