Time to simplify things a bit.

I’ve been talking all about corporations, rentals, businesses, etc. etc.

How about those of you who would just like to purchase your first home?

I was playing Cashflow 101 the other week and one of the players couldn’t decide if buying a property was a good idea. That made me sit and wonder for a moment. How many people are thinking the same thing in real life?

Certainly in the game the key to doing anything worthwhile must involve owning real estate. There is some that give you a little cashflow or passive income, but ultimately turn into a significant capital gain when the market goes up. And what do you do when you have more capital? Buy more real estate and generate more passive income.

But if you don’t get started on the cycle of buying real estate and just hope and pray that some day you’ll finally have enough saved to buy a property, you may be waiting a long time.
There’s an old quote, I don’t remember who has said it and I’m sure many have, “You can’t save your way to wealth.” At some point you need to invest it or leverage it to make it work for you. Those that do save their way, tend to just keep on doing just that. They save and save and no one knows (except maybe their bank) that they have any cash, as they never buy anything significant as they are too busy saving.

On the flip side, real estate is a get rich slow method of building wealth. Anyone who says otherwise is either selling you something or there’s a significant risk they’re not telling you about. Yes, there are no money down deals. It is possible to do flips and make significant amount of capital, however there are also significant risks you take on, in many cases without even knowing it. If you don’t have the background or experience, you’d better have your assets protected. See previous post.

Should you own your own home? Most definitely and as soon as you are financially able. The world doesn’t owe you a home, nor does it owe you a downpayment. Get over it. Owning one is a major responsibility. People that think they can own a home an not do any maintenance are in for a rude awakening when they try to sell.
There is a reason why banks or CMHC limit the amount of debt you can carry to 32% of your income. You absolutely need the rest to… well eating is a high priority… maintain the house.

You’ve decided to buy a house. Great. What can you afford? Well the maximum you are typically allowed to spend is 32% (GDS) of your gross income. There are lots of mortgage calculators out there that will help you determine what that value is, including this site, look under the mortgage tools button above.

Now you have a price target, right? Well, maybe. You also have to consider what other expenses you might have, like credit card debt or a car loan, student loan, etc. Your total debt load, which includes all your monthly payments plus your mortgage payment cannot exceed 40% (TDS) (generally, higher in certain situations, different lenders, or credit rating).

So if you decided that you just had to have that new Cadillac Escapade at a fleece, err I mean, lease of say $900/mo. Then this is going to impact your total monthly debt load and significantly lower your GDS or buying price.

OK, you are smarter than the average Joe and you pay cash for your cars (concept for many I know). You have a couple credit cards and you pay them monthly.

Credit. There’s a whole topic unto itself. Search this site for at least 3 previous posts on credit, how to mange it and how to fix your score.
Let’s just say, you’ve been following the rules and you have a score of at least 650 or better. You can buy a home with 10% down. But you heard that you could buy a house with only 5% down. Yes, if you credit score is above 680. If your credit is above 700, they you may also qualify for what the lenders call a cashback mortgage. I try to avoid putting clients into cashback mortgages, but the option is available and in certain situations makes sense.

You’ve got good credit (which you can check for free from equifax, except they don’t give a number for free). You’ve calculated what size of mortgage you can afford (32%). You’ve managed to save 5% for the downpayment (or you have a gift from your parents).

Next item you need to be aware of is the lenders also want to know you have enough cash to cover the closing costs. I could list all the items, but the lenders have done calculations and they estimate that you need 1.5% of the purchase price in order to close. The BIGGEST chunk of that is for the land transfer tax. Yes, when property changes hands the government has to get their grubby little hands on it.

Those are the basics for folks who are employed with a salaried income. Good credit, good income, buying within your limits, not carrying too much debt, can and have saved at least 5% for a downpayment and have a little more on top of that for closing costs.

Next time I will look at the options for self employed people (like me, although I like to refer to myself as self-unemployed. I like to fire and re-hire myself from time to time), folks who have an income but it fluctuates from year to year or their income is contained within a business.