June 20, 2013
Investment Property Vs. Mutual Funds
I was chatting with a client recently around tax time who was deciding what to do with a savings she had of $80,000. She’s a home owner and is comfortable enough now to start putting some money away for her retirement. She was debating two different options.
1) Put $80,000 into mutual funds and contribute $650/month - Historical mutual funds rates show you’d expect about 6% a year. End result is $807,600.
2) Put $80,000 towards her mortgage and put $650/month into mutual funds - She would save $34,000 in interest - Get her $80,000 on resale - Earn $450,500 at the end of 25 years on the mutual funds - Total of $565,500.
This got me thinking and I crunched some numbers for her and I came up with another option.
3) Buy an investment property
Use the $80,000 to put 20% down on a $400,000 condo. At today’s mortgage rate your payments will be $1,850/month including your strata fees and property taxes. It will rent for around $1,200 which means you’ll be putting $650 a month towards it. With a modest growth of 5% a year your condo is worth $1,355,000 in 25 years. Considering your initial investment and realtor fees you can expect to net about $1,200,000 when you sell it. Even after taking into account capital gains tax and accounting for some vacancy you’re still way ahead. 10 years ago a new one bedroom condo downtown was selling for $203,000. Today, that same condo is selling for $420,000 on average which means a growth of 7.5% a year. If that trend continues, buying a newer $400,000 condo today means it could be worth $2,450,000 in 25 years!