House, Condo or Apartment. How do I Choose?

Now that hockey and the Blue Jays are done for the year, Canadians can return to a discussion of their favourite topic, real estate. The cost of shelter, be it buying a house or a condo, or renting a property, is very high, and is consuming a large and increasing share of personal expenditures for most Canadians. For our older clients, many of whom have lived in the same house or condo for many years and have long since retired their mortgages, a different question arises. Should I sell the house where I raised my kids and have lived for many years? If I do, should I buy a smaller house, buy a condo or rent an apartment?  This is not a trivial question, and the answer is not obvious. We recently went through an exercise with a client who did sell his long-time family home, and after much discussion, he decided to rent an apartment, rather than buy. Here are some of the issues we considered.  (For simplicity we are ignoring the effects of inflation).

  1. How much income will I give up by tying up my capital in a house or a condo?

In the case of this client, he was looking at houses and condos with a cost of about $2.5 million. In Toronto that buys a nice 2 to 3 bedroom condo (1,600 sq. ft.), or a semi-detached house in a good neighbourhood. On the other hand, investing $2.5 million will likely produce an after-tax return of about $100,000 per year; economists would call this the “opportunity cost” of investing in the house or the condo, because it is a choice. You can own the real estate, or you can have the $100,000 after-tax, but not both at the same time.

  1. How much will it cost to live in a house or a condo?

Most people moving out of a large family home have a pretty good idea of what they are paying for property tax, utilities and insurance. Moving into a smaller house will save on all these items, and what costs as much as $40,000/yr in the old large house might fall to $30,000 year in a new smaller one. Surprisingly, the annual costs of a condominium will generally be higher than those of the small house. Property taxes on condos (at least in Toronto) are 50% higher than the taxes on detached and semi-detached homes and in this case would be about $27,000/year. Monthly condo fees on top of property taxes range up to  as much as $1 per square foot per month. In this example, that might amount to around an extra $15,000 per year.  However, every homeowner knows that maintenance costs cannot be ignored. Things break and wear out; in a condo there is no roof to replace, no deck or exterior walls to paint, and so on. Probably allowing $1,000 month for the added maintenance of a house over a condo would be conservative. That equalizes the annual cost of each at about $42,000/year.

  1. What are the transaction costs of buying a house or a condo?

Land Transfer Taxes in Toronto on a $2.5 million house are currently just short of $100,000. Lawyers’ fees, title insurance and other incidentals probably add $5,000 to this. A prudent buyer will also consider the costs of disposition, chiefly real estate commission on a sale. At 5% that amounts to $125,000, plus another set of legal fees. If we assume a 15 year period of living in the new home or condo, amortizing the total transaction costs, both coming in and going out over that period adds about $15,000 per year to the cost of ownership.

Altogether, the true cost of owning the new smaller house or a condo will amount to about $157,000/year or $13,000 per month, including foregone investment income and transaction costs including future disposition.

  1. How much does a nice apartment cost to rent?

There is a shortage of high quality rental apartments, particularly in Toronto, but new buildings are coming on the market offering space in good neighborhoods for around $4 to $5 per square foot per month. For our hypothetical 1,600 square foot apartment, this would be between $80,000 and $100,000 per year. In most apartments the landlord pays property taxes, utilities and maintenance; the only extra expense is tenant’s insurance, which is very minor.

On a straight financial calculation, it will be substantially cheaper to rent. Probably as much as $50,000 to $60,000 per year less than owning.  Over a 15 year holding period, that would amount to a savings of $750,000 to $900,000 after-tax dollars. However, there are three other considerations that enter into the decision. They are psychic income, the flexibility premium, and the chance of making capital gains over time.

Psychic income can be thought of as pride of ownership, or the joy one takes in controlling the environment. When you own a house, you can (within reason and City By-laws) paint it any colour, add or subtract features, plant a garden or whatever. To some extent the same is true in a condo, but generally not true in a rental apartment. How valuable is this? It depends entirely on you. Some people care much more than others.

The flexibility premium is the value of being able to walk away. While a house or a condo must be sold, a leased apartment can simply be vacated, usually on short notice and at minimal cost. Particularly in our later years, this can be very important. We all know that as we age our circumstances can change radically, and in short order. The ability to move out to be closer to children and grandchildren, the need to move into an assisted or sheltered care facility, or in the event of death, the desire to simplify affairs for one’s heirs, are all possible future events to be considered. As with psychic income, it is hard to put a value on flexibility, at least until it is needed.

Finally, ownership brings with it the possibility of capital gains, or simply put, selling what you bought at a profit. Residential real estate ownership has been a source of serious wealth for many Canadians over the past thirty or so years. The fact that the gains are tax free is, at least for now, an added benefit.  Can you count on capital gains? I would say it is impossible to know, but I would say that the price run-up we have seen in the last ten years or so is very unlikely to be repeated. The ability of new homebuyers to enter the market has been sharply curtailed by the high prices of both detached homes and condos. We do know, however, that on our hypothetical house or condo the selling price would have to rise by $750,000 to $900,000 over a fifteen year ownership period just to break even compared to renting an apartment. Not only can that gain not be assured, you also can’t spend it now. The apartment dweller has an extra $50,000 per year or so of disposable income to pay for travel, entertainment and other things, when such things can still be enjoyed. The capital gains, if they come, will likely come at a time when they will chiefly be of use to your eventual heirs.

In every case the decision to buy or rent will be highly personal. The intangible factors outlined above will have very different values for different people. The one thing we can say for sure is that the decision should never be taken impulsively or suddenly. It deserves serious consideration.

David Baskin



Media Appearances 

Barry Schwartz on BNN’s Market Call – June 7, 2024

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Long Term Investing podcast 

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