Investing 101: Buy low and sell high. This sounds like a good strategy but I have a different view. Selling is bad for you in this market.
Toronto’s real estate market has been appreciating in the double digit range for years now. Let’s do the math on a real life semi-detached purchased for $525,000 which needed $100k renovations in 2013 in the upper beach area….yeah these prices did exist!
Comparables are selling for $1 million now for a renovated semi-detached. That’s $375,000 appreciation in 4 years! So what you might ask. Let’s do more math.
Let’s be conservative in our calculation and use 7% annual appreciation to illustrate a point.
- Purchase Price: $525,000 + $100,000 renovations = Total capital invested with 20% downpayment $205,000
- Property Value after 10 years: $1,149,037
- Increase in Value after 10 years: $1,149,037 – $625,000 (including renos) = $524,037 not including any principal paydown
- The $205,000 investment increased by 255% to $524,037 in 10 years or 25% return per year
- This is the power of using other people’s money (aka mortgage). 7% annual appreciation results in 25% annual ROI
The compound interest snowballs every year. Selling a property generating 25% annual ROI is not a good financial decision. Keeping the property, renting it and pulling equity out to buy another property is a prudent approach to build long term wealth. The next time you think you want to sell a property in this market……look at the numbers above.
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