Should You Buy The Most Expensive House You Can Afford?
You may not like spending more than you planned, but in the long run it might be the right move.
Hindsight is always 20/20 but if you've ever worked with me, you probably realize I like to throw in a lot of my own personal experiences while we house hunt. I think by sharing those stories and experiences, it hopefully helps bring a sense of comfort to my clients - I've been there, I know what you're going through, so let's get through this together. Here's a perfect example of a story I used not long ago with a couple of different buyer clients.
When my now wife and I were looking for our first place together just over five years ago (we were engaged at the time), I remember being slightly obsessed with our budget. My spreadsheet brain loved it but I would run over our budget again and again to make sure we knew what we could afford and how comfortable we would be with a mortgage, condo fees (I'm a condo guy for life), property taxes, etc.
I'm also pretty frugal (wifey will say "cheap" ;) so that spreadsheet became the foundation of our condo search. We knew exactly where we wanted to be, which buildings we'd live in, and how much space we'd need.
Or so we thought.
We did have some deal-breakers - I absolutely needed my own bathroom (something I'm sure wifey is thankful for today!) and she absolutely needed a balcony. And since we were looking at 2-bed/2-bath units, parking was also a must. Neither of us had a car but I knew reselling a 2-bed/2-bath without parking in the future would be a challenge.
So the hunt began and after studying the market, our budget spreadsheet, and our must-haves, I knew we'd be able to find something within our budget.
Then we found the perfect place and jumped on it.
But looking back, I still remember seeing a few other options that were larger, with the added space that we really wanted, but that were more expensive. But we made the "responsible" decision and stuck to the plan and the numbers my magical spreadsheet said we could afford.
Everyday we talk about how it would be so nice to have a separate office rather than having me work out of our second bedroom so we could have a dedicated guest bedroom. I work from home and my crap is everywhere in that bedroom, I admit it.
Or how having an extra 150-200 sq ft would just make home feel a little more "roomy". We don't have kids but we have two cats running around (follow me on Instagram and you'll see my obsession with them) and they like space too.
Did that place exist when we were looking? Yup.
Was it more expensive? Yup.
Could we afford it at the time? Yup.
So why didn't we just spring for a larger place? Because saving $100k at the time seemed like the smart thing to do.
Now even though our place has gone up in value (as all condos in Toronto have), the larger places we had our eye on at the time have also gone up. And here's the thing - the absolute difference between what our place is worth now and what those larger places are worth has gotten even wider.
Here's what I mean:
I'm using hypothetical numbers but let's say the place we really wanted at the time cost $700k but we decided to go for the $600k "responsible" place instead. That's a 16.67% price difference between our place and the larger one.
Today, maybe our place is worth $1,000,000. That's a 66.67% increase in value and we feel great, right?
But what about that larger place we should have bought instead? I mean, that would have gone up in value about the same percentage, right?
So a 66.67% increase makes the larger place worth around $1,166,667.
So by not spending that extra $100k five years ago, it will cost us $166,667 today to upgrade to the same unit where we probably should have ended up to begin with.
And here's the kicker - We've already paid land transfer tax, lawyer fees, moving expenses, etc to get into our current place. So we'd have to pay those all over again if we wanted to upgrade now. Plus, selling real estate isn't free so there'll be Realtor fees to sell our place as well.
What does that mean for us? Pretty much means that we'll either stay put or wait and try to really upgrade to something that makes it worthwhile - if we can afford it.
We've resolved that the costs associated with a "small" upgrade - i.e. getting a den or a few more square feet - just aren't worth it. It has to be a big enough change to make the added transaction costs worthwhile.
And that's what I try to impress on my clients today who are looking for places well under their budget. Yes, spending less than you can probably afford is a responsible thing to do and maintaining your current lifestyle and not being "house poor" is a real thing.
But if you're sacrificing something you may end up needing 3, 4, 5 years down the road - like that 3rd bedroom in a house or that second bedroom or den in a condo - really be honest with yourself about whether you're prepared to suck up all those additional costs to make another move in a few years and if you'll really be ok with going through the house-hunting process all over again.
It might just be better to bite the bullet today, get into your "forever" home now, and pay the price now. If you can afford to, it could save you a ton of money, time, and possibly remorse, down the road.
Your Toronto condo lover,
iPro Realty Ltd, Brokerage
Direct: 647-223-1679 (call/text)