The Commerce Times

Easy, Peasy Property?

The only semi-habitable piece of construction on the site of Minto King West at Bathurst and King streets is a one-level, green and dark brown sales centre. Adrienne Lem, first time buyer and journalism student at Ryerson, gazes across the empty lot where her dream of a studio was crushed because of what apparently was a faulty floor plan. Her first payment of $13,000 was returned with interest and is now back in her bank account.

Research the builder, is Eric Kuzuian’s, broker at Boutique by Homelife Romano Realty, best advice. As a student, you don’t want to put down your 15% down payment, only to get a call a year later from the builder who says “Oops, the project fell through.” “That money did nothing for you,” says Kuzuian. It didn’t do much for Adrienne, but she has no regrets. She did her research and purchased from a well-known, quality builder. Usually, projects fall through due to a lack of investors. In this case it might have just been bad luck.

It’s a chilly market. Students, recent graduates and first-time home buyers are facing one of the best times to buy, but real estate also entails a mace of hidden costs, mortgages, speculation and swanky finishes that might cloud your focus and make it challenging to find your way home.

“Purchasing real estate is like anything else, you need a business plan,” says Kuzuian. Students often fall in love with everything from the rooftop patio to the sleek plasma TV in the lobby. But those amenities won’t do much if the condo is in the wrong neighbourhood, in a low-quality building, or one that never gets built. You need to know what you’re looking for. Is this going to be your home for the next seven years, or are you looking to make some fast cash?

Letting your first couple of properties be money-making purchases is not a bad idea, especially because first-time buyers can often easily move a couple of times without loading the Uhaul with a spouse and two kids in addition to the rest of your life. But traditionally, real estate should be bought as a seven-year investment. “The only time you can make money on short-term real estate is in a really hot market,” Kuzuian says.

Last year was particularly hot. Ryan Coyle, a REMAX real estate agent, says prices have gone down 5%, and thinks the recession might have been a good thing. “Prices were brought down to where they should be,” he says. “Emotions were flying and people were throwing $5,000 here and $10,000 there. If they lost one bidding war, they would just move on to the next.” Coyle got tired of pulling graduates out of new jobs because they had to go look at properties at 5 p.m. Now there are less multiple offers and people actually have time to consider a purchase.

But downtown real estate is still not cheap. Coyle is showing a $185,000-studio in the Suites at 1 King West. The room hardly fits a queen size bed, a desk, TV and shelf unit. Although there is a fridge the size of a mini bar and a combo washer and dryer, the unit probably wouldn’t suit the most domestic souls out there, and the closet wouldn’t fit much more than your parkas. What you do get is a piece of property in a prime location.

But be aware, is both Coyle’s and Kuzuian’s advice. Buyers who do decide to make a dent in their savings are often completely foreign to the hidden costs involved. Kuzuian often hears property virgins exclaim “What, I have to pay $400 in maintenance fees on top of my mortgage payment?” These pricey surprises could be expenses such as property tax, which will appear in the mailbox of all homeowners every month, courtesy of the Government of Ontario; utilities (those hot morning showers do not come for free); maintenance fees (usually includes building insurance, amenities and parking, but varies in different buildings), and closing costs. The latter normally adds $5, 000 to the price of your home, and includes hiring a lawyer to ensure it’s a clean deal (e.g. Joe Blow doesn’t owe $8,000 in property taxes that the previous owner failed to pay), title insurance (in case the previous owner’s fraud goes unnoticed), a potential home inspection (less common for condos), and land transfer tax.

“And you haven’t even eaten yet,” says Kuzuian.

The good news: First time buyers are exempt from land transfer tax up to $2,500. If the taxes exceed $2,500, they pay a small percentage of the regular rate. Both rates and taxes depend on the price and location of the home, but downtown properties generally pay more.

First-time buyers also have the option of using their RRSP when purchasing their home, without incurring a penalty. This helps increase the size of their down payment, which again helps lower their mortgage insurance. With a 20% down payment, you don’t pay mortgage insurance at all.

“I don’t think a 20% down payment is realistic for a student,” says Kuzuian. But he recommends putting down at least 10%. CIBC’s current posted interest rate for the average first-time buyer is 5.55%. “But you can always negotiate,” Kendra says, who works for CIBC’s customer service. “The bank is trying to sell you a mortgage like any other store tries to sell you a product.” The interest rate you get is based on your credit and income. No monthly mortgage payment can end up being more than 40 percent of your monthly pay.

No matter how happy you are about your new job out of university, your entry-level salary will most likely not finance a penthouse on King West. Dreams dropping from buildings downtown is not unusual. One way to make your purchase more realistic is to look at older buildings. Their floor plans are usually bigger, and some of them have healthy reserve funds that might pay for future upgrades in the common areas and raise the value of your unit. All new condos now have a ten-day “grace period.” For re-sells, you can put in a conditional offer that gives you time to review the building’s status certificate, which includes information about upcoming renovations, if maintenance fees are going to increase, and other details that might give you reason to revoke the offer.

Purchasing pre-construction is another way to save. But you’re still buying at market value. The selling point is that your unit will (hopefully) have appreciated by the time it’s finished. There’s always a risk involved, and the longer you’re looking to invest the better. “You will get emotional when making a purchase. You will fall in love with the sunlight that comes into the unit, the location, the amenities downstairs, or the fact that there’s a Starbuck’s underneath you,” says Kuzuian. With pre-construction, make sure you research the area, the builder, and the standard of each unit. Is the view you’re paying for still going to be there in three years? Does your unit come with the Fendi couch portrayed in the catalogue, or the thick, granite counter you saw at the sales centre? “Sales centres are like store windows, Kuzuian says.” Another helpful hint to make eager home buyers more grounded is that developers usually charge anything from $500-$5,000 per each higher floor.

The thought of living in a shoebox on street level might be a few steps down from your dream home. But in spite of the lack of space, cheap laminate flooring and extended Spartan lifestyle, your monthly payments go back in your own pocket. Anything in the downtown core is a reasonable buy, says Coyle. “This is downtown Canada.” Kuzuian compares Toronto to New York in the 60’s and 70’s. “In ten years, it’s likely that no one with an average income will afford to buy a home here,” he says. “Everyone who can should have a piece of it.”

What does a condo cost?

Example (typical price for a new one-bedroom condo downtown)

Price: $200,000

Down Payment: $20,000 (10%)

Loan: $180,000

Closing costs (lawyer charges, title insurance, potential home inspection, potential purchase of status letter, potential portion of land transfer tax if over $2,500): $2,300 (average)

Mortgage Insurance: $3600 (CMHC sets their insurance rate at 2.00% for mortgages that cover 90% of purchase price).

Total cost: $205,900 (The bank will give you a loan based on the condo’s price of $200,000. If you require a loan for the closing costs, your mortgage insurance goes up. It is recommended to settle the closing costs outside of your mortgage.)

Monthly Payments: $946.84/month, based on a 10% down payment ($20, 000), and $180, 000 loan at a 4% interest rate, amortized over 25 years (the time you will take to pay back the loan).

Utilities: $200 (estimate)

Maintenance fees: $200 (estimate)