Looking to buy a home? Your realtor, mortgage broker, financial planner, Uncle Jon, the grocery store clerk and their hamster all want to know : how long do you plan to live there? Like fine wine in the cellar, when you own a home, you\u2019ll build equity \u2014 so long as you live in it for a while. Selling too soon can hurt your equity, or even leave you at a loss, depending on how the market is performing at the time of sale.<\/p>\n
\u201cI believe that real estate is a good investment. The longer you hold it, the better it is,\u201d explains Jeanette Brox, a Toronto-based certified financial planner. \u201cStatistically, over the long run, people always make money in real estate. Where I get concerned is when my clients are going to invest in a property for a short period of time. It\u2019s important to always go in with eyes wide open and know your numbers.\u201d<\/p>\n
Livabl spoke to the finance pro and Sean Cooper, a mortgage broker and the author of Burn Your Mortgage, to help you navigate this daunting question \u2014 without having to peer into a crystal ball.<\/p>\n
Before you choose a mortgage plan, put in the time.<\/strong><\/p>\n \u201cWhen I\u2019m speaking with clients, I want to have an understanding of how long they\u2019re going to stay in the property because the mortgage product they get really depends on how long they\u2019re going to stay put,\u201d explains Cooper.<\/p>\n Many Canadians default to a five-year fixed rate mortgage, but if there\u2019s a possibility you may be moving on before then, the penalty for breaking the term can get costly. \u201cGoing for a variable mortgage can be a better option because you\u2019ll only pay a three-month interest penalty,\u201d says Cooper.<\/p>\n Say you unexpectedly have to move across the country to be closer to family \u2014 can you take your mortgage with you? With a portable mortgage, you can, but you have to read the fine print because a lot of lenders make it \u2018portable upon approval.\u2019 Meaning, it\u2019s their house too, and if they don\u2019t like your new pad across the country, they can say no. \u201cIt\u2019s important to always have an exit strategy,\u201d says Cooper. Put in the time \u2014 literally \u2014 to choose a mortgage plan that is right for you.<\/p>\n Don\u2019t forget those pesky closing costs.<\/strong><\/p>\n \u201cGenerally speaking, I would recommend that if someone is moving into a house they should aim to live there for at least five years,\u201d says Cooper. \u201cThe main reason is because of the transactional costs of real estate, which many people forget.\u201d<\/p>\n Every time you buy and sell a house, you face closing costs like the land-transfer tax, real estate lawyer fees, your realtor\u2019s commission and more.<\/p>\n \u201cTypically, those closing costs end up being between four and five percent of the property value,\u201d says Cooper. \u201cIt\u2019s certainly not a drop in the bucket, so it\u2019s really important to factor it in.\u201d Cooper\u2019s mother recently moved from one condo to another and got dinged with a land transfer tax. \u201cIt wiped out a lot of her retirement savings,\u201d says Cooper.<\/p>\n And then the sheer effort of moving your stuff from one place to the next can get costly. Trading up every five years can be a good move. Sometimes.<\/strong><\/p>\n It\u2019s unlikely your first home will check every box on your list \u2014 and you don\u2019t need to stay there for two decades to make it a worthwhile investment. Buying and selling can be a good strategy to help you climb the property ladder \u2014 just remember, during the first few years of your mortgage, you\u2019ll mainly be paying off interest, instead of making a dent on the principal loan.<\/p>\n \u201cMortgages are front-loaded but the advantage of getting a property sooner rather than later is that you can build up equity and hopefully your wages and income will go up, too. So if you choose to move in five years, you can continue to move up in the real estate market,\u201d says Cooper.<\/p>\n Trading up is right for some people, in some markets \u2014 but others not so much, which is why Brox avoids making sweeping statements: \u201cYou have to look at the individual. If a young couple is starting out from a small condo and they want to grow a family and move to a bigger place, then yes, maybe.\u201d<\/p>\n Flipping properties? Beware of the tax man.<\/strong><\/p>\n If your home is your principal residence for every year you\u2019ve owned it, you do not have to pay tax on any capital gains from the sale.<\/p>\n When property flipping \u2014 buying and reselling homes in a short period of time for a profit \u2014 you have to report the money you make on all real estate transactions. Any profits are generally considered to be fully taxable as business income.<\/p>\n It\u2019s important to include taxation in your investment strategy. \u201cIt can really affect your rate of return,\u201d says Cooper. \u201cWhen it comes to profits on real estate, you want to make sure you\u2019re filing taxes appropriately. You don\u2019t want the CRA to come after you and say that you owe them money because you didn\u2019t file your taxes properly.\u201d<\/p>\n Instead of timing the market, follow your own timeline.<\/strong><\/p>\n \u201cMy advice to my clients is always the same. There will always be opportunities in the market. You don\u2019t want to jump on the bandwagon just because everyone else is doing it,\u201d says Brox.<\/p>\n \u201cI hear people saying they could have gotten $1.8 million for their house last year but didn\u2019t act on it. I always say, \u2018Why are you selling your house? What\u2019s your plan here? You have to live somewhere. What were you going to do, buy something for basically the same price?\u2019\u201d<\/p>\n Instead of timing the market, Brox recommends honoring the timeline that make sense for your life. When you\u2019re ready to buy or sell your house, play your best card.<\/p>\n \u201cIt\u2019s hard to control what\u2019s going on in the real estate market,\u201d says Cooper. \u201cWhat you can control is the condition of your house. What I would say is if you\u2019re buying and selling in the same market, it\u2019s kind of a wash. Let\u2019s say the market is hot. You\u2019ll probably get good value for your property. You might pay more for the property you\u2019re buying, but you\u2019re probably selling your property for more.\u201d On the flipside, if you\u2019re selling in a cooler market, the property you buy will likely be less, or you\u2019ll be able to negotiate more.<\/p>\n In 1933, Homer Hoyt pioneered the study of property cycles by studying a century of real estate in Chicago. Hoyt recognized that property values follow a predictable cycle \u2014 a boom, slump and recovery. They tend to run in 18-year rhythms, with the chance of appreciation if you hold for at least seven years. But it can be dangerous to view any market as a whole. \u201cPeople like to talk about the Toronto real estate market as if it\u2019s one market. But the truth is, every real estate market is different,\u201d says Cooper. \u201cEvery property type is different. Right now, with the mortgage stress test in place, we\u2019re seeing more appreciation with condos in Toronto than we are with detached homes.\u201d<\/p>\n Not sure? You don\u2019t have to plan everything.<\/strong><\/p>\n In 2015, at 30 years old, Sean Cooper paid off his mortgage in just three years \u2014 and detailed the experience in his book, Burn Your Mortgage. Despite owning it outright, he doesn\u2019t have an exact timeframe for how long he\u2019ll live there. And that\u2019s okay.<\/p>\n \u201cI don\u2019t have a crystal ball and I don\u2019t know what\u2019s going to happen in the future,\u201d says Cooper. \u201cMaybe I\u2019ll decide that I don\u2019t want to be a landlord anymore. I don\u2019t know what will happen. I don\u2019t plan to sell it, but who knows what the future will hold.\u201d<\/p>\n
\n\u201cPeople really have to cost things out,\u201d says Brox. Anytime there\u2019s a U-Haul in the driveway, prepare for a hefty price tag.<\/p>\n