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(Kevin Van Paassen/The Globe and Mail/Kevin Van Paassen/The Globe and Mail)
(Kevin Van Paassen/The Globe and Mail/Kevin Van Paassen/The Globe and Mail)

Financial Facelift

To rent or to buy? Add to ...

Thirty-three and single again, Sakura has some money in the bank and wonders whether she should buy or continue renting.

She is paying $1,650 a month for her downtown Toronto condo, affordable given her $98,000-a-year banking industry salary. She's reluctant to buy because she anticipates a drop in condo prices.

"I've always been very worried about how condos maintain their value," Sakura writes in an e-mail. "I know the main value of a house is the land." As well, condo fees are expensive and to some extent beyond an owner's control. Still, she needs a place to live and a house would be too expensive.

"To buy a house very close to the subway line in Toronto could cost $700,000, and while I can afford it, I don't think it makes a lot of sense for me to buy a house at that price."

If she continues to rent, she will invest her money either in a rental property, perhaps in the Maritimes where she comes from, or in the financial markets. Neither would give her an after-tax return sufficient to offset her rent, she acknowledges. If she bought, she could borrow $100,000 from her parents to add to the $300,000 in her investment account.

"I'm not looking at home ownership as a goal in itself," she writes, "… but it seems that even from a purely financial perspective, owning may make more sense."

We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities Inc. in Toronto, to look at Sakura's situation.

What the expert says

As a young, single professional with a new job, Sakura aspires to the good life, Mr. Rosentreter says. The decisions she makes now will affect her future financial course, which no doubt will take many twists and turns before she reaches retirement age decades hence.

"Her decisions on saving today and real estate plans must consider goals she hasn't even envisioned yet," the planner notes. Whatever amount of money she spends on a home today will take away from her retirement savings and perhaps affect future plans such as remarrying, having children and taking maternity leave.

While she can't afford a $700,000 house on her $98,000 salary, Sakura can afford a $350,000 condo, Mr. Rosentreter says. If she could pay mostly cash, she could avoid "the constraints on her net worth from carrying a huge mortgage for the next 25 years."

Sakura figures she'll need $70,000 a year pre-tax when she retires, part of which will come from Canada Pension Plan and Old Age Security benefits (about $15,000 a year combined for someone retiring at age 65 today). So her savings would have to provide the other $55,000 a year.

Sakura's employer offers a defined contribution pension plan to which both the bank and the employee contribute. If she stays with the bank, that DC pension plan will form the core of her retirement savings. (Because she's new, she's not yet in the plan.) The rest will come from her savings, registered and non-registered.

Sakura's $70,000 target pre-tax will be $100,000 31 years from now assuming an inflation rate of 2 per cent a year, Mr. Rosentreter says. To generate that much money, she will have to have saved as much as $1,537,000 including her company pension. That assumes a 5-per-cent average annual rate of return on her investments.

She will have to save $28,000 a year from this point forward (including her employer's annual pension contributions) to amass that sum. She already has $107,000 in registered assets.

If she buys, borrowing from her parents rather than the bank would be advantageous because she may get a better interest rate or some flexibility with payments if she were to lose her job, quit or take maternity leave some day.

Like Sakura, Mr. Rosentreter is suspicious of condo ownership in cities such as Toronto where the units are high-priced. From a cash flow perspective, renting would be cheaper, he says. An alternative may be to buy a house with one or more rental units to help pay down the mortgage.

Client situation



The Person



Sakura, 33.



The Problem



Whether to buy a home or continue renting.



The Plan



Weigh the tradeoffs, and if the balance tips in favour of owning, either buy a condo for cash or a multi-unit property so tenants can help with the mortgage.



The Payoff



Security now and later without an unwieldy debt load.



Monthly net income



$6,910



Assets



Chequing account $10,000; LIRA $7,000; TFSA $10,000; investment account $303,515 ($201,645 in GICs and term deposits, $77,580 in stocks; $24,290 in government bonds); RRSP $109,350 (GICs, term deposits $47,500; stocks $21,290; government bonds $20,240; corporate bonds $20,320). Total: $439,865.



Monthly disbursements



Savings $1,500; groceries, takeout $400; clothing, dry cleaning, personal $150; drugstore $40; cleaning $80; tech tools $40; gifts $35; rent $1,650; insurance $25; hydro $45; telecom, cable, Internet $120; furnishings $25; courses, hobbies $40; vacations $150; reading, music $25; gym $60; subway $150; disability, group insurance $220. Total: $4,755. Savings capacity: $2,155.



Liabilities



None



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