I am often asked “what do you do?” and I say “real estate.” That usually leads to people leaning in closely to start asking questions. Everyone seems to know someone in the real estate business but the truth is that many real estate sales representatives can barely make a living in the business, especially in downtown Toronto.  Hence, solid well-founded good advice is hard to come by.
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I have a friend in her 30’s that has been renting a basement apartment for many years for $900 per month, remained relatively frugal with her lifestyle and, as a result, saved up $50 000. She’s been dreaming of buying herself a convertible BMW and continues to ask me if she should use that money to buy it free-and-clear or if she should use it on a down-payment on a house. I love a nice car but I’m not big on buying a depreciating asset in lieu of something that could be making me money month after month while I live for free.
We’ve had this same conversation over and over for years. My answer never changes. In fact, I’ve been able to show her how, just in the past 5 years, she has missed out on more than one opportunity to be living for free. She could have had BOTH her dream BMW and a house that could be gaining equity while providing her with an equal quality apartment to live in.
I showed her a small 3-bedroom house costing $435 000 that had a basement apartment which was equally nice to the one she currently lives in. I explained how she could put a $43 000 downpayment (which she had saved) on the house and end up living in the basement for free.   The upper/ main part of the 3-bedroom house would easily rent for $2500 per month while the mortgage would cost about $2050. Taxes run another $300 per month. Utilities would be extra for the tenants – which she could split with them 70/30. Hence, all-in-all, she could be living in that basement apartment for free…and use her previous $900 per month rent towards the BMW she always wanted. I also reminded her that the house will be getting paid off by the tenants and gaining in equity month after month, year after year. I explained that, eventually, she may want to simply move upstairs and rent out the basement or rent out the basement and move on to another home where she can occupy the whole house and have her mortgage subsidized by that first house basement rent of about $900 per month (today’s rent.)
Here’s how that works…
List price: $435 000, downpayment of $43 500 (or 10%), open variable mortgage of 2.6% (at that time),  over 35 years paid monthly = $1451 per month. I reminded her that she could easily make yearly balloon payments with the extra money she may save during the year to knock down the principle only – rather than paying a higher monthly amount which only goes towards interest anyway. Then, in a year or two or five, if/when she decided to lock into a fixed mortgage, she would probably end up with a lower mortgage amount owing than had she of paid the conservative amount during that same time.
or going the ‘conservative’ route….
List price:Â $435 000, downpayment of $43 500 (or 10%), closed mortgage of 4%, over 25 years paid monthly = $2112 per month