What you (really) made on your home

You may not want to know.

  31

by

From the Summer 2011 issue of the magazine.

  31

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In recent years, homeowners have been feeling pretty smug about their investing prowess as they’ve watched home prices surge. But the costs homeowners face to buy, sell and maintain their homes mean they haven’t made nearly as much as they think.

In this example, we calculated your real profit — after expenses — if you bought a typical home in the Greater Toronto Area 10 years ago, and sold it this year. We assume that it was purchased with a 10% down payment and a 5% fixed-rate mortgage. The home would have cost $248,601 to buy in 2001 and today it would sell for a hefty $456,147.

So does that mean you made $200,000? Not even close.

2011 sale price: $456,147

Subtract:
• $168,434 for the amount still owing on the mortgage;
• $4,000 for legal fees to buy and sell;
• $22,807 in realtor fees for the sale;
• $159,265 for 10 years of mortgage payments ($1,327 per month for 10 years);
• $42,000 for 10 years of property taxes;
• $19,000 for 10 years of home maintenance;
• $2,211 for the land transfer tax when the home was bought;
• $24,860 for the original down payment; and
• $358 in provincial sales tax on the mortgage insurance.

Actual profit: $13,212

Plus, you got a place to live for the last 10 years, of course.

31 comments on “What you (really) made on your home

  1. Shouldn't I get some sort of credit for all the money I saved on rent? Ya gotta live somewhere!

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  2. Pingback: What you (really) made on your home | Financial Debt Solutions

  3. Great point, Morag. This article seems to have been written by a rental property manager.

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  4. $4 grand in legal fees? Find a new lawyer – $4-500 now, less 10 years ago.

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  5. Add back $1500 per month rent over 10 years, or $180k, and you get pretty much right back to $200k profit. Not a bad return over 10 years on a $24k down payment. Certainly better than buying the S&P500 index… over the last 10 years there, you'd probably have a negative return.

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  6. interesting and true….just think about it
    if you are renting there is no property tax, no improvements, no down payment, no transfer tax and no real estate/legal fees…..rent and/or mortgage payments cancel each other out….
    so , if you rented you would have had an extra 110,000 to invest over the ten years…with about a 3% return you could have about 140,000……
    and i think that 2,000 a year for home maintenance over ten years is low…..
    home ownership works the best if you can get rid of the mortgage…..

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  7. Assume if home owner had rented his property, the landlord would have paid legal fees, property taxes, maintenance, land transfer tax, and the interest component of the mortgage and mortgage insurance as quantified in this article, if the landlord also incurred a mortgage to buy the house. In order to breakeven the rent would have been around $1429/mo or $171,527 over 10 years. Total profit would have been ($13,212+$171,527) $184,739. Total cost is $442,935 according to this article. Total return is ($184,739/$442,935) 42% tax free. S&P/TSX composite index from 2 Jan 2001 to 24 Jun 2011 grew by 50%. This equity return would have been taxable. I think the home-owner is ahead.

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  8. This is a fun with numbers story. It looks 'true' but doesn't make sense as a few people have suggested re: rent/have to live somewhere.

    I could make a 1.5% GIC look good if I factor in an average -.5% return on equities.

    YAY I'm statistician now!

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  9. I'm not sure who wrote this article. but • $168,434 for the amount still owing on the mortgage; sure came out of no where. Once you sell the house, you don't owe mortgate(your loan is paid off when the BUYER pays you the 450k. You walk over to your bank and use that 450k to pay off your $248,601 mortgage that you initially got. You're then left with around 200k. I'm really not sure where t hat 168k$ phantom number comes from.

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  10. Im not sure about the actual numbers and Im not weighing in on the 'gotta live somewhere' argument but it does make a good point. Many people who walk away from a house thinking they made X amount in profit may not have taken into a account all of the costs involved. BTW the lawyers fees are pretty much on the mark with what we found having just gone through the process ourselves and calling around for estimates. This amount probably includes land transfer costs. As a small biz owners we balancing our emotional view of our house with a financial one to ensure we will enjoy the house while we live there but also hopefully come out a bit ahead. A good saying…something is worth exactly how much someone is willing to pay for it when you want or need to sell it.

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  11. A $24,860 downpayment with only a $13,212 ROI in 10 years? Disgusting. And forget the " I gotta live somewhere" credit – yes you do, so take it out of the equation. That $24, 860 should have at Least doubled in ten years. Real Estate as an investment is safe, ( somewhat) so not high-yielding.

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  12. Looks good to me. With $24k downpayment, you made a 50% return (13k) over and lived there for FREE for 10 years! Sign me up!!

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  13. Also subtract food costs and other living expenses you will have even less. The thing is, if your house didn't increase by 200k, you would have been in the hole big time. So consider your house increase covered a lot of your costs comparing if you have rented. In effect, the people that brought house is still way better than the ones that didn't, that is as good as making 200k.

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  14. Great discussion here. Thanks to everyone for their thoughts. We here are MoneySense do believe that in the long term, home ownership is a great way to build wealth and prepare for retirement. This article just points out that the amount you think you made on real estate may be (much) less than you think.

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  15. The posted 5-year fixed rate mortgage in January-June 2001 was about 7.75%. http://www.bankofcanada.ca/wp-content/uploads/201

    So, even assuming a discount from the banks' posted rates (say, to 7%), for the first 5-year term the monthly payment would have been much higher: $1,567 per month vs. $1,301/month listed in this article.

    After 5 years at 7%, the mortgage would have still stood at $203,706.70.

    Then, in 2006, the 5-yr fixed was around 6.5%-7%. So, on the renewal (with a discount from the banks' posted rates) would have been at say 6%. This would have given a monthly payment of around $1,303 (pretty much the same as the example in the article), but the mortgage remaining after 10 years would have been $183,005 vs. $168,434 listed here.

    So, if all the other numbers stayed the same, the actual profit goes down from $13,212 to -$1,359.

    I still agree that once the comparable rent is added back, you'd end up far ahead.

    That is — unless you had put that down payment in something like Gold @ $300/oz (up 5x since 2001) or Silver @ $5/oz (up 7x since 2001).

    Reply

    • Whoops – I forgot to include the extra $266 per month that you'd be paying during that first 5-yr mortgage.

      That's another $15,960 in the negative… total loss would be $17,319.

      However, 120 months of rent (10 years) would be $180,000. So, you're still pretty far ahead.

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  16. Since the question is how much has your investment appreciated or depreciated, if you compare to a renter you have to match total housing costs spent and what was done with the difference. If the savings of rent over mortgage + house maintenance are invested for retirement, then there is a growing nest egg over 10 years that the homeowner does not have. There is a missing piece of the total portfolio that is missing under "ideal" circumstances.

    I am not suggesting though that we debate the merits of how you house yourself or what people should be doing for retirement. It's just the requirement to match apples to apples.

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  17. You only 'make' money on real estate if you move to a place where the market moved in the other direction.

    If my house doubles in value, but so has the house that Im moving to, I havent made any money.

    Housing inflation doesnt make you money unless you can sell up and not have to buy a new place. It just makes it harder and harder on first time buyers.

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  18. I bought a brand new home for 265500 in 2003. On May 2011 – It's fully paid plus the house wort 425000. I sure made money!

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  19. I have to agree with Paul. You can not say you made any kind of profit if you sell your home and move into a new home that has a 2011 price instead of a 2001 price tag.

    The only way to make any sort of profit in real estate is to pay down your mortgage as soon as possible. Saving on mortgage interest by paying down your principal early and investing that once your mortgage is paid is what leads to profit; ownership does not.

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  20. this is missleading at best. Simplified in not considering the interest over the 10 years
    Putting down the major value , that is you have the right to do anything with the asset (ie live in it, rent it) and the value of it) the fact that the value of the asset increases when there is rent increases/inflation. that interest rates vary
    Paying down mortgage is not relevant to this, it is only a choice in where you want to invest money, either in the mortgage, or in some alternate means

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  21. I arrange lots of real estate deals, $4,000.00 in fees is way too high, a basic transaction should be under $2,000.00 for legal fees.

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  22. $23,000 for the realtor is a crime….

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  23. This article was simplistic – but it provides an interesting viewpoint. The points made above also valid. To lend my view, I have posted an article on What makes a good property investment. You may be surprised by Point #5.:
    http://www.asimkhan.ca/blog/p/whats-the-better-in

    Reply

  24. Not sure how they deduct about $168,434 for the remaining mortgage since technically, the math of Sale Price – Purchase Price, means that you've paid off all the mortgage. This does not even take into account the fact that you've built equity over the past 10 years and as such, the remaining mortgage is less than the Purchase Price.

    In addition, I agree that you would still need to pay rent elsewhere so this example doesn't work out that well.

    You can make an argument about all the interest paid while you have a mortgage to show the major opportunity cost of buying but the example is flawed.

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  25. $4 grand in legal fees? Find a new lawyer – $4-500 now, less 10 years ago and than x for sharing it….

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  26. If you thought that you have been profitable in your home making you cannot be more wrong. You have to follow the calculations to read all about it

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  27. This guy does not know whatb he is talking about. Plus the original down payment is not lost. It is still in the value of the house this person should go back to grade 9 math class.

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  28. Well, it was a nice read but I really do not agree with it. I own my own property and I consider it an investment for my future and for the future of my children. Meanwhile I do not have to pay nearly as much by owning it as I would spending my money on the renting an apartment..

    Reply

  29. wow, with all that taxes…. so many to pay, but worth it i guess

    ron
    foreclosure

    Reply

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