One thing I would like to share, which no one else mentions is that people tend to exaggerate the profits from the house sale. We just hear big numbers like, oh I made $50k or $100k or whatever in 2-3 years. But they do not include all the other costs of Interest Payments, taxes, renovations over the years.
One of my colleagues was so happy that he made over $100,000 profit from the sale of the house. But numbers came down so much, once we started adding up all the cost over years.
CHECK OUT THE VIDEO: IT’S JUST CRAZY HOW MUCH MONEY SELLER MADE DURING SELLER’S MARKET
HOUSING IS INVESTMENT IN CANADA\US
In countries like Canada and the US, housing is more of an investment than its place to live. People tend to put all their money in their houses and keep wishing that prices keep going up.
Looking at Canada’s housing market, it has made people millionaires. It is getting impossible to buy a house for newcomers in Canada. Like all Canadians, I hope the housing market will cool down a little bit and people will be able to afford housing again.
We know buying a house is very expensive in Canada but anyhow we will take an example of someone who bought a house for $500,000 and see when it is the best time to sell their house to avoid losing any money and make some profit.
I will try my best to get all the actual cost to buy and sell to get real numbers.
Let us go on with our example then.
- Purchase Price: $500,000
- Down Payment: $100,000 (20%)
- Inspection: $1,000
- Notary\Lawyer: $1,000
- Welcome\Land Transfer Taxes: $6,000
- Other Cost (Just in case): $1,000
- Final\Actual Total: $509,000
Other Yearly Cost of living in the house
- Interest payment for the Mortgage: $9,500
- City Taxes: $5,000
- House Maintenance\Improvements\Others: $2,500
- Home Insurance: $1,000
- Total Yearly Cost of owning a house: $18,000.
Now we know that we have bought the house for $509,000 and yearly it costs around $18,000 to live there.
SO, WHEN IS THE BEST TIME TO SELL?
Sometimes profitable selling depends on multiple factors like in what kind of housing market you purchased your house in and how the housing market is at the time you want to sell. We will check three different scenarios to see if it makes sense.
WE WILL BE LOOKING AT HOW HOUSE PRICE IS DOING IN 2 YEARS AFTER THE PURCHASE FOR OUR COMPARISON. YOU CAN ADD MORE YEARS FOR LONGER PERIOD COMPARISON.
SELLER\HOT MARKET
In a hot market, we can assume that the prices are going up by 12-15% a year. This probably will not be happening for a lot of consecutive years, but this is nothing impossible. We have seen how the real estate market in Toronto\Vancouver is going crazy year after year.
EXAMPLE:
Purchase Price: $509,000
Year 1 (13% increase in value): $66,000
Year 2 (15% increase in value): $86,000
House value after 2 years: $661,000
Cost of keeping house for 2 year: – $36,000.
Realtor Commission (4%): – $26,500.
Bank Charges for early mortgage cancellation: -$20,000 (This can be lot more based on your mortgage)
Final Amount after all the expenses: $578,500
PROFIT: $578,000 – $509,000 = $69,500
Normally, people are going to tell you that they made over $150,000 profit from the sale of the house in 2 years, but in reality, it is only $69,500.
You will have more profit if you keep this house for more years in the HOT Market, this can easily be over $150,000 for keeping the house for 4-5 years but the HOT Market must last for that many years.
It is good profit but now you must find another house to live in, and it is not going to be any cheaper because you enjoyed 12-15% growth and similarly other people want a good price for their house. So, you will end up with an overpriced house as well.
IT IS A BEST INVESTMENT, SO WHY NO ONE DO IT?
NORMAL MARKET
This is the data which can be used over a long period of time to analyze housing returns. Housing markets can be hot and cold over a small period of time, but we can expect appreciation of around 5-6% over a long period of time.
I believe, waiting around 5 years will make sure that you will not lose any money and will end up with some profits. Anything less than 5 years may make you lose money for paying realtor commission and bank fees for any early closing.
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EXAMPLE:
Purchase Price: $509,000
Year 1 (5% increase in value): $25,500 Year 2 (6% increase in value): $30,500
EXAMPLE:
Purchase Price: $509,000
Year 1 (5% increase in value): $25,500 Year 2 (6% increase in value): $30,500
House value after 2 years: $565,000
Cost of keeping house for 2 year: – $36,000.
Realtor Commission (4%): – $26,500. Bank Charges for early mortgage cancellation: -$20,000 (This can be lot more based on your mortgage)
Final Amount after all the expenses: $482,500
LOSS: $482,500 – $509,000 = -$26,500
We can see there will be some loss of money if you sell your house within 2 years.
3 years seems to be a break even point and you should make some money by selling at least after 5 years.
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BUYER MARKET
In this case, you may even have to wait longer than 5 years. Like in the 2008 crash, people bought their houses at very high prices before 2008 and anyone who wants to sell must wait around 5 or more years to avoid losing money.
There can be big drop in house prices like we saw in 2008 and it will take a very long time to bring your money back, forget about making profit.
People can lose a big chunk of money and selling a house in bad times means going through bankruptcy.
EXAMPLE:
Purchase Price: $509,000
Year 1 (-1% decrease in value): -$5090
Year 2 (2% increase in value): $10,078
House value after 2 years: $514,000
Cost of keeping house for 2 year: – $36,000.
Realtor Commission (4%): – $26,500.
Bank Charges for early mortgage cancellation: -$20,000 (This can be lot more based on your mortgage)
Final Amount after all the expenses: $451,500
LOSS: $451,500 – $509,000 = -$57,500
In the long run, buying real estate is one of the best ways to build wealth. If you are buying a home to live in, then there is no reason to worry about losing money because you always need a place to live.
We should be buying houses as a place to live, not as a business.
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