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This is not to bash home ownership. Relative to renting it’s often a better long term option and there is also an emotional component to home ownership. That said personal use property is not an investment and you should not stretch yourself financially to buy a bigger home. A home should be treated as an expense and the reason is due to carrying costs such as mortgage interest, maintenance costs, taxes, and insurance. In the long-run carrying costs are likely to meet or exceed the property appreciation (after inflation). Furthermore, unless you’re selling privately, closing costs will be at least 5 percent of the selling price if not slightly higher due to legal fees and miscellaneous costs.
To clarify, personal properties should be differentiated from investment properties due to rental income. Historically, a solid single family or small multi-family investment property can have a compounded annual growth rate in excess of 15 percent (appreciation, mortgage pay-down, and cash flow).
Below is the mathematical proof taking a look at a $200,000 townhouse in Hamilton in Ontario. Figures have been simplified for illustrative purposes:
Assumptions:
Property Price: $200,000
Down Payment: $50,000
Appreciation: 5.45% (Historical Data Source TD Economics)
Inflation: 2%
Maintenance: 7% of Market Rent (Source: Axum Investments)
Property Taxes: 1% of Property Value
Selling Costs: 5 percent of Market Value
