Picture yourself being a 23-year-old, just out of university, working your first job in downtown Toronto.
Now consider that after living with mom and dad in Ajax for a year, you would do absolutely anything to get out of their house, stop commuting 90 minutes each way, every day, and get into a property in the downtown core.
You have many options at your disposal, but from my perspective, you have four choices as to what you do with your savings, how you much you pay each month, and the style in which you are going to live…
When I first started in this business, I used to work on a lot of leases for young people moving into the city.
In fact, I had one client who went to Queen’s University who I helped find a property to lease, and before I knew it, I had leased places to eight of their friends.
One group of the Queen’s crew consisted of three young guys, who were scraping together every penny to be able to afford the move. They wanted to look at a 2-bedroom, 2-bathroom condo, which I found to be a bit strange, given there were THREE of them.
Upon visiting the unit, one of the guys – the smallest one, went into this massive hall closet, and laid down on the floor! He stretched his arms out to both sides, got up, and announced, “Yeah, I could fit in here.”
Their idea was for the three of them to rent this condo, priced at $2,300, and apportion it as follows: the richest of the three would pay $1,200 for the large master bedroom with the ensuite bathroom, and he would take the parking space. The second guy would move into the smaller, 2nd bedroom, and pay $700, and the last guy would pay $400 to put his single-mattress in that giant hall closet!
In the end, they didn’t take the place, nor would a landlord have been in his right mind to allow three people to rent a 2-bedroom condo.
But it shows you what great lengths some young people are willing to go to in order to live on the cheap side. A client of mine who was renting out his property at The Icon went to inspect the property one day and found THREE mattresses in the 1-bedroom condo, which he found odd, since he only rented to ONE person.
The way I see it, young people have four major options at their disposal, which I’ll lay out below.
In the war between real estate bulls and bears, and with all the debt-conscious, and debt-loving folks out there, I’m sure that many of you will LOVE to comment on the pros and cons of the following four options:
1) Rent A 2-Bed, 2-Bath With A Friend
This option represents two drawbacks:
1) Renting rather than owning
2) Sharing accommodations
Or, if you’re a real estate bear, and financially conservative, you think that this is the best option on the board!
Either way, it’s often the first option for young downtown-seekers, and it allows them to get out of mom and dad’s house, and it doesn’t break the bank.
Let’s look at a listing near me:
109 Front Street
Right now, there’s a 2-bed, 2-bath, about 855 square feet, for $2,350/month.
The unit has a parking space, and both bathrooms are 4-piece, meaning each “roomie” gets his or her own bathroom, although the master bedroom will have an ensuite, meaning that the second bedroom defaults as the “guest” bathroom as well.
With this unit, ALL utilities are included, so there’s no heat, hydro, water, electric, etc. to pay for.
At $1,175 per month, it’s insanely cheap to live downtown.
The location is A+, although the unit itself is dated, and a bit dingy. But what do you want for $1,175?
And for those of you that thought CityPlace would offer cheaper options, you’re wrong. The cheapest 2-bed, 2-bath available right now is $2,500!
2) Rent A 1-Bed, 1-Bath
The cheapest condo for lease in the downtown core, on MLS right now, is $1,250 per month.
It’s 390 square feet…
Assuming you want to consider something a bit more liveable, let’s look at this one:
51 Trolley Crescent
That’s just a P – I – M – P terrace that measures 445 square feet, outside this 502 square foot condo!
Listed at $1,525, it’s an awesome unit, in a somewhat up-and-coming location.
The utilities are not included with this unit, so add on about $120 per month.
With this option, your all-in cost is $1,645 per month.
Does that make sense? Shouldn’t there be a premium to living without a roommate, and isn’t it worth it?
3) Buy A 1-Bed, 1-Bath
Now we’re completely changing gears, and you have to consider not just the monthly carrying cost, but also the down payment.
No doubt about it – the lifestyle is better owning than renting, as there’s something to be said for the freedom that comes without living with, under, or for another person, and there’s a value to the “pride of ownership” that allows you to feather the nest, and keep your home in good repair.
The lifestyle of living alone is also clearly better than living with a roommate, especially if your roommate turns out to be something like this:
But alas, you have to have this darned down payment!
So consider every tank of gas you pumped, every shelf you stocked, every shish-kabob you made while being yelled at by angry Italian men who may have been in the Mafia, every table you served, and every line of shots you poured on the bar (those pretty much sum up the jobs I had from age 14 – 19), and now think about putting all that hard-earned money into your primary residence.
Let’s take a look at this listing:
333 Adelaide Street
The condo is about 525 square feet, and has a bedroom separate from the living space, albeit with no window.
The unit is open concept, with enough space for a living room couch and TV, as well as a dining room.
It’s not a massive space, but it’s only $305,000.
Let’s assume that you’re putting down 10%, or $30,500. Remember that this isn’t a sunk cost, so don’t say that “renting costs less because you don’t put any money down.” You’re not exactly losing this money…
The sunk cost you DO pay is Land Transfer Tax, but if you’re a first-time buyer, your rebate for the municipal LTT would cover the whole portion payable in this case, and your rebate for the provincial LTT would cover all but $1,050.
Your monthly mortgage payment at current rates would end up being about $1,301.92, and that includes the CMHC premium of $18.30 per month, since you don’t have the necessary 20% down payment to avoid the fees.
The maintenance fees on this unit are $266.74 per month, plus about $100 for heat and hydro.
You’re also looking at about $162 per month for property taxes.
All told, to buy this property, with $30,500 as a down payment, $1,050 in land transfer tax, and likely $1,800 in legal fees to close the purchase, it’s going to cost you $1,830.66 per month to live here.
That’s a good chunk more than both the rental options, but of course, I have to mention something called mortgage principal.
Of that $1,301.92 mortgage payment each month, only roughly HALF is interest. The other half is principal, which doesn’t come back to you in the form of cash in your pocket, but does so as equity.
So if you want to take out $640/month from the $1,830.66 cost of living, now we’re down to $1,190.66, and that’s about the same price as it cost to live in the 2-bedroom, 2-bathroom with the roommate.
4) Buy A 2-Bed, 2-Bath And Rent To A Friend
Here’s a crazy story, that sounds unbelievable, but I swear is true.
Back in 2007, a friend of mine bought a 2-bedroom, 2-bathroom condo, and decided to rent the second bedroom out. He was looking for just anybody, and after a couple of pretty random dudes sleeping on a blow-up mattress, basically paying by the week, he found a long-term tenant who was new to Canada, and lived there for two years, paying an insane $1,000/month for that tiny room.
In 2009, that young renter called me and said that he wanted to buy a condo. Guess what he wanted? Yep – a 2-bed, 2-bath, so he could rent out the second room. I sold him a place up the street, and he found a 20-year-old Ryerson student to rent the second room from him for $850/month. I guess he soon realized that the $1,000/month he was paying was nuts, but live and learn…
As you might guess from this story, in 2013, after living in that small second bedroom for about 3 1/2 years, the Ryerson student, who was now in his second year of a “big boy job,” came to me looking to buy a condo, also a 2-bed, 2-bath. He ended up renting to his younger brother..
This isn’t a bad way to get into real estate, and it can certainly help your cost of living.
Let’s look at this property:
50 Lynn Williams
The deal is fantastic – a 2-bed, 2-bath (both baths are 4-piece) condo measuring about 840 square feet, with parking and locker, for $400,000.
Assuming you make the same 10% down payment that we used in the above example, here are our working numbers:
Down payment: $40,000
Legal Fees: $1,800
Monthly Mortgage Payment: $1,707.43
Maintenance Fee: $411.73
Rent for 2nd Bedroom: $1,100
So your monthly cost is $2,378.03, but you’re getting $1,100 for the second bedroom, so it only costs you $1,278.03.
But if we consider that about half of the $1,707.43 monthly mortgage payment is mortgage principal, and subtract $835 in principal from the $1,278.03 cost after the roommate pays his or her rent, then we’re only left with a paltry $443.03 per month.
$443.03 per month, to live in a 2-bed, 2-bath condo in Liberty Village with a roommate, after you’ve made a $40,000 down payment on the condo.
Well, I certainly didn’t set out to make this a column on “why you should rent instead of owning,” but the numbers would lead us to that conclusion.
I know I dumbed this example down a little, but we’re not looking to build an Excel model here; just get the feel for the options out there for young, first-time downtowners.
At the risk of sounding too “pro-buying,” let me give you two advantages to renting:
1) Short committment. It’s only 12-months, and you can leave afterwards, and rent elswhere, or buy once you’ve learned the city.
2) Cost of selling. I won’t pretend like it’s not expensive to transact in real estate in Toronto, and there’s a cost associated with disposing of the asset. However, considering prices have increased every year for 17 years, the appreciation of the condo should more than outweigh the cost of selling.
And now, I open the floor.
Bears, try not to get run over by the bulls…