If you watch the Lang & O’Leary exchange frequently, you will know that Mr. Kevin O’Leary in all of his financial wisdom refuses to own a home and prefers to rent. This may be surprising to some, as generally it is considered that purchasing a home is a good investment.
This past week the staff at MoneySense Magazine posted an article What You (Really) Made On Your Home which examines the profit earned by selling real estate after all expenses are covered.
In their example, they calculate the real profit – after expenses- if you bought a typical home in the Greater Toronto Area 10 years ago, and sold it this year. They assume that it was purchased with a 10 per cent down payment and a five per cent fixed-rate mortgage. The home would have cost $248,601 to buy in 2001 and today it would sell for a hefty $456,147.
So does that mean you made $200,000? Not even close.
2011 sale price: $456,147
Subtract:
• $168,434 for the amount still owing on the mortgage;
• $4,000 for legal fees to buy and sell;
• $22,807 in realtor fees for the sale;
• $159,265 for 10 years of mortgage payments ($1,327 per month for 10 years);
• $42,000 for 10 years of property taxes;
• $19,000 for 10 years of home maintenance;
• $2,211 for the land transfer tax when the home was bought;
• $24,860 for the original down payment; and
• $358 in provincial sales tax on the mortgage insurance.
Actual profit: $13,212
Surprising isn’t it? Now be careful when interpreting this number….This calculation isn’t meant as an analysis of rent vs. purchasing. This is purely an analysis of profit vs. expense. For all the money spent over 10 years your net profit works out to only $13,212. Of course when you sell you would receive a cheque much larger than $13,212 because you are receiving your built up equity in the home but this number shows that the return on all the money spent is laughable from a pure investment point of view. Luckily our human need for shelter and other “irrational” needs supersedes profit as our sole motivation for owning a home.
Which brings me back around to Kevin O’Leary. He will gladly tell anybody who listens that he is motivated by money and profit (watch any episode of Dragon’s Den) but if you think its just fluff for polemic T.V consider that it even supersedes that very capricious yet basic human desire to own a home to call your own. Then again I am sure Mr. O’Leary can eek out a return greater than the one in the example above with his money.
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