Some people buy properties as long term investments. Others plan to flip. And still others plan to buy and stay in their new home for a few years but know they will have to move because of work, or cost, or health, or retirement. And so the question I’m often asked is: how long do I have to hold onto a property to break even?
The answer, of course, will vary depending on market conditions, but here are a few considerations to take into account.
As the buyer, you don’t pay the real estate commissions directly, the seller does. But the amount the seller pays to an agent comes out of the funds you’ve paid for the property, so you do pay it, indirectly.
If you’ve paid $ 500K for a house, the seller has probably paid five percent, or $ 25,000, in real estate commissions plus HST, out of the proceeds ($ 28,250). Legal fees and disbursements have to be paid as well. For the sake of argument, let’s say that the sellers get to keep a net amount of $ 470,000.
You, on the other hand, not only had to pay $ 500K to buy the property, but probably had to pay Land Transfer Tax on top of that. (Here’s a link where you can figure out what that tax costs.) On a $ 500K purchase, that’s an additional $6,475 in Ottawa (it’s higher again in Toronto). Add legal fees on top of that, and you are probably up somewhere around $ 508K. If you have a mortgage, you’ll be paying those costs as well, but I’m going to consider those as a neutral, because you have to live somewhere, and if you hadn’t bought, you’d likely be paying rent.
Even if the market value of your new home is increasing steadily, you are going to have to come up with a sale price that is approximately $ 38K higher than what you paid to break even on your purchase taking into account the realtor commissions that you, as seller, will now have to pay from the proceeds. ($ 538,000 as a sale price will require you to pay $ 26,900 in realtor commissions at 5% plus $ 3,497 in HST. Add roughly $ 1,000 in legal fees and disbursements, and you’re still losing a little money as that adds up to $ 539,397, but you get the idea.)
Using our hypothetical example, if sale prices have been going up by 2% per year, you will be at the break-even point after about two years, again, exclusive of your carrying costs. But if they are dropping, or in a holding pattern (which is where the Ottawa market was last month with only a small .4 per cent increase in the value of properties ), then it’s going to take a whole lot longer before you get back what you paid, and that’s without taking into account the effects of inflation.
Over time, your property should go up in value but remember, real estate is cyclical. There will be times when it’s roaring ahead and it’s a great time to sell, and periods when it slumps. We went through a lengthy slump in the 1990s; the odds are that at some point, we’ll hit another. And then it will pick up again.
Now no one wants to lose money on a purchase, anymore than we like losing money on the stock market, but the principles are the same: buy low and sell high. But sometimes, when it comes to housing, we have no choice: we have to buy in a hot market and find ourselves considering selling in one that’s not so hot. We always want to make money if we can, but sometimes we have to settle for breaking even, and sometimes we have to take our losses to get where we need to be.
Be sure you talk to your realtor and have a realistic sense of how the market is doing when you’re making those decisions.