Photo: James Bombales
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’ll build equity — 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.
“I believe that real estate is a good investment. The longer you hold it, the better it is,” explains Jeanette Brox, a Toronto-based certified financial planner. “Statistically, 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’s important to always go in with eyes wide open and know your numbers.”
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 — without having to peer into a crystal ball.
Photo: Marco Verch
Before you choose a mortgage plan, put in the time.
“When I’m speaking with clients, I want to have an understanding of how long they’re going to stay in the property because the mortgage product they get really depends on how long they’re going to stay put,” explains Cooper.
Many Canadians default to a five-year fixed rate mortgage, but if there’s a possibility you may be moving on before then, the penalty for breaking the term can get costly. “Going for a variable mortgage can be a better option because you’ll only pay a three-month interest penalty,” says Cooper.
Say you unexpectedly have to move across the country to be closer to family — 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 ‘portable upon approval.’ Meaning, it’s their house too, and if they don’t like your new pad across the country, they can say no. “It’s important to always have an exit strategy,” says Cooper. Put in the time — literally — to choose a mortgage plan that is right for you.
Don’t forget those pesky closing costs
“Generally speaking, I would recommend that if someone is moving into a house they should aim to live there for at least five years,” says Cooper. “The main reason is because of the transactional costs of real estate, which many people forget.”
Every time you buy and sell a house, you face closing costs like the land-transfer tax, real estate lawyer fees, your realtor’s commission and more.
“Typically, those closing costs end up being between four and five percent of the property value,” says Cooper. “It’s certainly not a drop in the bucket, so it’s really important to factor it in.” Cooper’s mother recently moved from one condo to another and got dinged with a land transfer tax. “It wiped out a lot of her retirement savings,” says Cooper.
And then the sheer effort of moving your stuff from one place to the next can get costly.
“People really have to cost things out,” says Brox. Anytime there’s a U-Haul in the driveway, prepare for a hefty price tag.
Photo: James Bombales
Trading up every five years can be a good move. Sometimes.
It’s unlikely your first home will check every box on your list — and you don’t 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 — just remember, during the first few years of your mortgage, you’ll mainly be paying off interest, instead of making a dent on the principal loan.
“Mortgages 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,” says Cooper.
Trading up is right for some people, in some markets — but others not so much, which is why Brox avoids making sweeping statements: “You 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.”
Photo: James Bombales
Flipping properties? Beware of the tax man.
If your home is your principal residence for every year you’ve owned it, you do not have to pay tax on any capital gains from the sale.
When property flipping — buying and reselling homes in a short period of time for a profit — 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.
It’s important to include taxation in your investment strategy. “It can really affect your rate of return,” says Cooper. “When it comes to profits on real estate, you want to make sure you’re filing taxes appropriately. You don’t want the CRA to come after you and say that you owe them money because you didn’t file your taxes properly.”
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Instead of timing the market, follow your own timeline.
“My advice to my clients is always the same. There will always be opportunities in the market. You don’t want to jump on the bandwagon just because everyone else is doing it,” says Brox.
“I hear people saying they could have gotten $1.8 million for their house last year but didn’t act on it. I always say, ‘Why are you selling your house? What’s your plan here? You have to live somewhere. What were you going to do, buy something for basically the same price?’”
Instead of timing the market, Brox recommends honoring the timeline that make sense for your life. When you’re ready to buy or sell your house, play your best card.
“It’s hard to control what’s going on in the real estate market,” says Cooper. “What you can control is the condition of your house. What I would say is if you’re buying and selling in the same market, it’s kind of a wash. Let’s say the market is hot. You’ll probably get good value for your property. You might pay more for the property you’re buying, but you’re probably selling your property for more.” On the flipside, if you’re selling in a cooler market, the property you buy will likely be less, or you’ll be able to negotiate more.
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 — 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. “People like to talk about the Toronto real estate market as if it’s one market. But the truth is, every real estate market is different,” says Cooper. “Every property type is different. Right now, with the mortgage stress test in place, we’re seeing more appreciation with condos in Toronto than we are with detached homes.”
Photo: James Bombales
Not sure? You don’t have to plan everything.
In 2015, at 30 years old, Sean Cooper paid off his mortgage in just three years — and detailed the experience in his book, Burn Your Mortgage. Despite owning it outright, he doesn’t have an exact timeframe for how long he’ll live there. And that’s okay.
“I don’t have a crystal ball and I don’t know what’s going to happen in the future,” says Cooper. “Maybe I’ll decide that I don’t want to be a landlord anymore. I don’t know what will happen. I don’t plan to sell it, but who knows what the future will hold.”
