Years ago my dad and I marched in and out of studio and one-bedroom condos in, what is now known as Toronto’s gay village. I was just a hair’s breath past 21 and eager to get into the property market. Single and barely old enough to legally drink, I knew then that a downtown Toronto condo would be strong asset in a real estate portfolio—not to mention a cool place for a young, single homeowner to build some net-worth. Turns out, I’m not the only one who thinks that way. Across the country solo-dwellers buy just over 25% of all property sold. As a result, condo builders and city developers now plan and build with the single-property owner in mind.
Solo-dwellers, as they are called, are top of mind for urban planners, explains Brian Jackson, Vancouver’s general manager of planning and development. That’s because almost 30% of Canadian homes have just one person living in them, according to 2011 census figures — a number that’s more than doubled since 1971. For a single person, however, the actual process of buying a home is still fraught with difficulties and dangers. For that reason, I’d like to offer some advice and insight into how solo-dwellers can become successful property owners.
MAKE SURE IT’S RIGHT AND NOT JUST FINANCIALLY
Over the last couple of years many Canadians jumped into the property market because historically low interest rates made home ownership easier to finance—but this actually shouldn’t be the deciding factor on when to buy a home.
The primary factor on when you should move from renting to buying is when you can honestly predict where you and your career will be over the next five years. Essentially, this is the reason why I walked away from a beautiful one-bedroom condo on Maitland Street. Despite a steady, salaried job (with head-hunters calling me every month), I wasn’t convinced I’d found my calling. Walking away from that condo purchase meant that I was eventually able to quit my job and go back to school for journalism—a decision that would’ve been sorely hampered had I been responsible for a mortgage.
To decide whether you should keep renting, or if now is the time to buy, consider the following:
- Is your job stable?
- Will promotions at work keep you in the same neighbourhood/city?
- Can you see yourself living and working in this city for the foreseeable future?
- Can you commit to living in one place for the next three to five years?
- Are you willing to give up a few lifestyle perks, such as dinners out, weekends away and extended vacations?
If you can confidently answer ‘yes’ to these questions then you’re a good candidate for home ownership. A possible ‘no’ may be a sign of potential instability in your life, and, believe it or not, this can easily translate into a future real estate loss.
Don’t believe me? On a recent trip to Vancouver, I had the pleasure of talking to a few solo-dweller condo-owners—all of whom had independently bought into the thriving Vancouver market when interest rates were really low. Unfortunately all three of these condo owners were still in the process of building their careers—a process that was forcing them to sell their units so they could pursue promotions. Despite their low monthly mortgage payments and good, sizeable initial downpayment, each solo-dwellers was faced with the prospect of losing money on the sale of their unit. That’s because transactional costs for real estate are very high—factor in land transfer taxes, realtor commissions, legal fees, insurance and moving costs, and quite quickly the price tag for ownership adds up. For that reason, all real estate purchases should be considered from a long-term perspective.
GETTING THE RIGHT FIT
While I’ve known my fair share of solo-dwellers that bought single-detached homes, the truth is the vast majority of urbanites usually settle on condo or townhouse. Part of the reason is that these units are often built in areas that are well supported by amenities—close to transit, parks and stores. But a larger reason is that this type of communal ownership—where every owner pays a fee towards common maintenance work—enables solo-dwellers a certain turn-key lifestyle. While a monthly fee of $400 to $700 may seem steep, remember that it goes to pay for snow removal, grass cutting, and ongoing maintenance that goes hand-in-hand with home ownership.
To get the right fit create your own budget. Remember to include all your monthly and annual expenses, including weekend outings, morning coffees, cable or pay-per-view costs, along with rent, tenant insurance and other monthly bills. Ideally, your housing costs shouldn’t eat up more than 30% of your monthly income (although in larger, more expensive cities, many homeowners pay 40% to 45% of their monthly income towards housing costs). Do this and you’ll quickly learn what kind of monthly mortgage you can realistically afford. For those that want a quick and dirty calculation, just remember that home ownership will cost you about $500 more per month than what you currently pay as a renter.
COMMON ‘CENTS’ TIPS
If you’re still considering a jump into homeownership, here are my top five ‘common cents’ tips:
- Stick to your budget, not theirs: When banks pre-approve you, they will tell you the maximum mortgage you can afford based on a debt ratio that doesn’t take into consideration lifestyle expenses. That means you need to make your own budget and buy a place that you know you can afford. Ignore this step and you may find yourself sitting in an empty living room with no money for furniture and no cash for a night out. Another good reason to take this step is to plan for a rainy day fund. As a single homeowner, you’ll need to know you can get through setbacks, such as job loss or health issues—set up an emergency fund and you may find that your bank will also treat you better when you apply for a mortgage.
- Ask for help: When and where possible ask your family for assistance. By increasing your down payment, you can avoid mortgage insurance fees, which can quickly add up. For instance, if you bought a condo for $250,000 with only 5% down (or approximately $12,500) you’ll end up with a $245,000 mortgage that includes $7,500 in mortgage insurance fees (insurance that protects the bank, not you!). Increase your downpayment to $50,000 (or 20%) and you’ll avoid this fee and pay less each month for your own place.
- Hit the government up for a loan: Take advantage of a government program that allows first-time buyers to borrow up to $25,000 from their RRSP to use as a down payment. The Home Buyer’s Plan rules state that you must start repaying the loan within two years of the home purchase and pay off the balance within 15 years (or you’ll pay income tax on the outstanding amount). For some solo homebuyers, this might mean taking advantage of an already expanding RRSP. For younger home owners, run the numbers as to whether or not you should invest in an RRSP, for current year tax deductions, and then withdraw the money through the HBP. While many financial planners suggest keeping your savings in a money market fund (which allows for quick conversion into cash), I’m partial to the RRSP/HBP strategy. I can think of no other time when the government is willing to give you a no-interest loan. Yes: It’s your money, but you get to borrow for free, as long as you repay within 15 years (and you still get the tax benefits of the initial contributions).
- Sort out your finances well in advance: Even if you were voted as “most responsible” in your high school, many banks penalize single homebuyers. The theory is that the financial institution is taking a bigger risk because there isn’t a second person to help out should financial hiccups occur. Your age can also work against you. If you are in your early twenties, chances are you don’t have a 10-year track record in your chosen profession and this doesn’t look as good to banks. To make the best of your situation, consider talking to an independent mortgage broker, sooner rather than later. The more time you have to reduce your risk profile, the better chance you have of not only getting a mortgage but getting a preferred interest rate.
- Consider resale value and longevity. A short while ago a good friend called from Vancouver to say she was buying a condo and that she thinks she met the man of her dreams. My immediate response was: Buy a two-bedroom! OK, my very first response was to congratulate her, but I told her to “buy a two-bedroom” shortly after that. The rule of thumb for first-time home buying is to buy as big a unit as you can possibly afford. Even if the solo-dweller doesn’t partner up, a larger place can be a good strategy for earning extra income, should you hit lean times. Another, more extreme, option is to consider buying a home that has one or more rental units. Play your cards right and your tenant or roommate can pay a good chunk of your monthly mortgage. The downside is that you’re now a landlord and that means finding qualified tenants/roommates, taking care of repairs and maintenance, and carrying a larger mortgage should your renter up and leave.
Twenty years ago, when I was looking at buying that condo, it was fun and sexy being footloose and fancy-free. Flash forward and now the new sexy is a growing investment portfolio and your very own mortgage. So, for all you single-homeowners, take comfort in the fact that you’re getting sexier and sexier all the time.