In a city like Toronto, whose housing market is among the most expensive on the planet; every 9 out of 10 Torontonians is priced out of the market for the average house. Among them are usually first-time buyers looking to buy their first-ever home.
Should first-timers consider the idea of purchasing a starter home, so they can enter the real estate market a bit early and take advantage of North America’s most expensive housing market? Experts believe they should.
But what is exactly a starter home?
Defining a home
In simple words, it is a below-average property where residents plan to live in for the next few years (or more). Then residents eventually hope to sell for quite a good profit so they can move into a new permanent home which will be an upgrade compared to their previous home.
A study conducted in 2015 by Genworth Canada showed that around 50% of first-time buyers in Toronto often observed their first home as a starter home. After purchasing such, they then plan on moving out from there within the next five or ten years.
The popularity of homes in Toronto
Starter homes in Toronto are quite in demand, as the layman can imagine. They often are needing a facelift (slight renovation) and are often priced competitively. A lot of Torontonians being the first time buyers have moved outside the city proper’s borders into the following areas:
- Richmond Hill.
Another fascinating fact: A considerable chunk of these buyers has often invested in Toronto condos.
Types of homes
There are four kinds of starter homes in the general sense, namely:
- Attached homes
- A home in need of repairs (often referred to as a Fixer Upper).
- Homes in less desirable areas.
Let us briefly describe each as under:
Attached homes refer to those homes that have at least one wall shared with another home. Because of this, they generally have a low asking price. Townhouses and semi-detached homes are included in this category.
Condominiums (colloquially referred to as condos). With Toronto’s inner-city area having them, apartments and lofts in higher concentration, they have become a popular option for residential property in Toronto. A lot of Torontonians are acquiring studio condominiums as their first-ever kind of home.
There has also been a new phenomenon happening in Toronto’s condo scene. Between the years 2012 and 2015, 6,500 units in total were available for purchase/rent. In 2019, only 3,000 units were available for purchase and rent.
A reason for such a decline was because a lot of owners who relocated to larger homes chose to keep their condos and rent them out to tenants. This limited the supply and raised condominium prices upwards.
3.A home in need of repairs (Fixer-uppers)
Homes in need of repairs are often referred to as Fixer-uppers. Buyers are often required to do repairs and renovations upon them (at times, they can be costly). Such costs are expensive, time-consuming and emotionally draining.
First-time buyers are advised against buying them. If no other option exists, then they can go for them, provided that such has very little costs for them to incur.
4.Homes present in the least desirable areas
This refers to homes present in areas away from the city proper and in the United States, they are often referred to as commuter towns. Such also refers to homes in areas that have bad livability, have high crime rates, just started blossoming or are car-dependent.
What should buyers consider before buying their own starter home?
The following are major considerations when it comes to acquiring a starter home:
- The area’s housing market.
- Buyers’ time limit.
- Buyers’ requirements.
- Any alternatives they have, or not.
1.The area’s housing market
If buyers are in hopes of earning a good profit off their starter home, then the housing market of that area must have rising values in terms of housing prices. If we check previous trends of Toronto’s housing market, prices have been rising and continue to be on the rise in the long run.
There is however a risk of a housing price bubble that will eventually burst in Toronto. This raises the risk of a housing price meltdown which also decreases the buyer’s time limit in deciding whether to buy now or later.
2.Buyers’ time limit
Seasoned real estate professionals recommend buyers in purchasing a starter home to keep it for 5 years at least. One of the main reasons for this is that it often takes around 5 to 7 years for buyers to just break-even with the transaction costs of buying, selling and all the costs of homeownership.
There is one thing a buyer must know. In their mortgage payment mechanism, they are mainly paying off interest in the early stages instead of the actual debt. Hence, they are making little equity at first. However, in Toronto; some people sold their starter homes in just 3 years and reaped huge profits. This depends on the way prices are rising and this is hard to predict.
Starter homes will be smaller and will be at a distance from downtown. There is also a chance that they can be present in bad neighborhoods. Those who are planning to have a family soon and desire to buy a starter home will end up moving in a few years and enduring a loss on investment in their starter home.
If buyers despise commuting and the notion of commuter towns, they are better off continuing to live on rent near downtown. They also need to check any alternatives they have.
4.Alternatives buyers have
In how many other ways can buyers use their savings apart from taking a mortgage in financing their starter home? One way is to continue renting and put in extra savings in other investments. Mutual funds, general investment certificates (GICs) and bonds are some good low risk & low return investments.
High-risk investments providing potentially higher returns are index funds and stocks. Another option is acquiring a small house and putting it for rent. This is what most Torontonians have done as a means of saving money.
Should first-time homebuyers purchase a starter home, or not?
Considering the above factors, it is a good choice for buyers to purchase a starter home for the following reasons:
- The housing market they live in has been appreciating.
- They have a time horizon of at least 5 years.
- Buyers find a starter home suiting their needs for 5 years at least.
- Alternatives present are not desirable.
Acquiring a starter home is a great way for buyers to enter Toronto’s housing market at their earliest. It is also important that they do not rush their entry. If buyers are not sure about purchasing a particular starter home is a good investment for them then it is advised they stay out of it.
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For those who are definitely sure of buying a starter home and live int it or at least 5 years (or give it out for rent, provided they bought it on direct payment) then this is a good move. Not only will they have solid collateral but also in the current market of rising home prices in Toronto, buyers of such homes will build on great equity giving them greater profit in the long run.