Save money- Buy Real Estate
Recently, a great friend of mine had the pleasure of speaking with a great Canadian producer regarding how to live life as a musician. One of his most potent tips was to buy real estate.
For most musicians (and even most non-musicians), dealing with money and always making sure you have enough is easier said than done. I hate to generalize, but most musicians I know live from paycheque to paycheque, aren’t planning for retirement (what’s that?), and are fearful of most commitments (money, relationships …). I believe it is possible to make ends meet (and even to make them meet well) in a musical career, but I’m not going to say it will be easy. In terms of one’s finances, many steps are required for safeguarding hard earned cash and making sure there is always a reserve for the future. One of the best ways to build a reserve is to buy real estate.
Buy a house, buy a condo, buy a chunk of land in Nunavut, just buy something. Yes, like any market, real estate prices fluctuate over time, but in the long run, it’s probably the safest type of investment there is. Companies go bankrupt, stocks crash and banks fail, but your chunk of real estate will always be there. If you are like most people, you won’t be able to pay cash for you purchase and will likely need to borrow a very large sum of money (a mortgage) from a bank. Just like when you borrow most things, borrowing money also costs money- ironic, eh? Banks call that interest, and despite common disbelief, interest that your bank will charge you for your mortgage will almost always end up being minuscule in the long run if you compare it to what you would have thrown away if you just rented a dwelling for the same period. Let’s take a look at a comparison between renting and owning:
1. Total rent over 25 years: $655,515
-this is based on a current average rental cost of $1800/month for a 2-3 bedroom home/condo) and takes into account an increase of 1.5% per year as a result of inflation. FYI, if you rent for $1800/mo now, inflation will likely raise your rent payment to $2,612/month 25 years from now.
2. Cost of Owning, using a $400,000 mortgage (with 20% down payment- so a total loan of $320,000) paid off over 25 years at an interest rate of 5%: $241,206 (total interest you will pay). Yup, that’s a lot of interest, but note that this option now leaves you with $400,000 in the form of a home that you could sell at any time and make your $400,000 back. Let’s not forget about inflation though. Your $400,000 investment 25 years from now will likely be worth $580,378! Good enough for me.
So, let’s crunch some numbers:
Renting will leave you $655,515 in the hole with no savings to speak of. But what will a $400,000 house or condo really cost?
$241,206 (mortgage interest over 25 years)
+ $91,044 (strata fees for condos, or maintenance in a home) calculated on an initial $250/monthly payment and taking a 1.5% inflation rate into account.
$332,250 – TOTAL COSTS
$580,378 (Future value of your home in 25 years)
- $332,250 (Total costs)
$248,128 (Total amount that you have truly gained from home ownership)
Put another way, given these two options, which would you choose:
1. Spend $21,600/year for renting your desired house/condo or
2. Live in that house or condo for FREE under one condition: you put away $9,925 per year into a savings account each year and after 25 years, that money is all yours and so is the house!
Well, I think a monkey could figure that one out. A classic example of having your cake and eating it too!
Okay, that’s all well and good. Except that for most musicians, $400,000 is far more money than a bank will consider lending you. All is not lost. Consider purchasing your living space with another friend, family member or significant other. This way, you will not be personally responsible for such a huge lump of money or for all of the ownership costs. When applying for your mortgage, banks will want to see that you are generating a steady flow of income and have been doing so for at least 3 years leading up to the current date. So make sure that you keep good records of the gigs you play (don’t just stash the cash under your bed or blow it on junk), and most importantly, file your taxes every year. Banks will look at your Notices of Assessment to determine your yearly income, so if you haven’t been accurately filing and your income is recorded as being lower than what you know it actually is, you’re out of luck and the banks will not be as generous as they otherwise might have been.
Chances are that the numbers for your particular scenario won’t be exactly what I have been working with here, so I’ve been so kind as to include my spreadsheet calculator for you to punch your own numbers into and have some fun with. Use it to see how much rent you’ll actually pay over given period, or customize your mortgage amount and amortization period to see how much money you can save by owning a home. Watch this quick video to get familiar with the sheet, then have some fun.
It’s important to have a solid understanding of the jargon used in the mortgage world, so I suggest you check out these resources before going any further in your pursuit:
1. ING DIRECT: Mortgage Jargon Buster (Definitions boiled down to plain English)
2. Buying and Selling a Home For Canadians – For Dummies (Book)
1. Inflation: Inflation typically hovers between 1-3% each year
2. Mortgage interest rates: At this day in age, you can probably do much better than a 5% interest rate. Some banks are as low as 1.5% right now for short term mortgages
3. Make money living in a condo: if you are smart about picking your location and get close enough to public transit so as to not need a car, consider renting your parking space to someone else on a monthly basis and bank some extra income that you could put towards your strata fees.
4. Strata fees: These are fees charged by your building management committee if you own a condo. They take care of all maintenance and upkeep for the building and your condo. Don’t think you can get away from these if you own a house. It’s a smart idea to put away a similar reserve even when owning a home so that you have money for miscellaneous repairs and upkeep. Strata fees can range from $100-500 depending on your location and amenities.
5. Down Payment: Most banks will want a 20% down payment, but some will accept as low as 5%. Be aware though, if your down payment is less that 20%, you may be required to get mortgage insurance (because you are borrowing more money from the bank and are thus a higher risk to them) which will increase your monthly payments and the total cost (interest and insurance) of your mortgage.
I hope this hasn’t been too much information, but you really will need much more if you’re going to seriously consider purchasing a home. Do lot’s of research.
If you are reading this and have noticed that I have missed or overlooked anything, please post a comment. I’m still learning too!
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