If you’re a millennial, you’ll likely find what you’re about to read interesting and also irritating. According to the Urban Institute, the millennial generation has the lowest rate of homeownership compared to Gen Xers and Baby Boomers. It seems that homeownership is an unrealistic option or expectation for millennials. But how unrealistic is it?
The mindset of 5 to 10 years ago was to rent an apartment in a city like Toronto for 1 or 2 years, bank some savings, and then buy a house or a condo. But that 1-to-2-year renting plan has turned into 5 years, 10 years, or even 15 years for some. And the realistic expectation of purchasing a house or a Toronto condo anytime soon has fallen farther and farther out of sight.
It’s not because homeownership has become a poor choice. Not at all. Buying a home remains a smart move, personally and financially. Our cities and our real estate, however, have become startling expensive and our incomes have not risen to match. The average annual income in Toronto is around $58,000. The average one-bedroom condo apartment in Toronto is roughly $540,000.*
For many millennials, the act (or should we say art) of saving money is difficult. The metropolitan lifestyles of cities like Toronto and Vancouver, combined with their prices, makes spending large percentages of your monthly income almost unavoidable. And, of course, millennials like to travel, shop online, buy the latest tech gadgetry, etc. And who can blame them? We want to live, damn you!
Faced with this unfortunate truth about becoming homeowners, we’ve thought of some ideas . . .
5 ways for millennials to become homeowners
1. Borrow money from your parents and/or family.
Not everyone has access to this option, but it is probably the #1 avenue to homeownership for those that do. There are a few different ways that this option can work.
Ask your parents or family to gift you the money now rather than waiting for the funds as inheritance. This is a smart move because it can help you immediately pay down any debts you have, such as student loans. The financial help of mom and dad can also help you reduce the size of your mortgage, and save you interest every year.
Your parents can purchase the house or condo themselves, then place your name on the property title. They probably have better credit than you, anyway, and will have an easier time with a mortgage approval. Effectively, they buy the property for you, and you pay them back on the mortgage.
If your family happens to be uber wealthy and you are able to buy the property outright with cash, that’s great. Moving the money out from the vaults and into smart, real estate investments is always a wise financial consideration.
2. Group together and buy with friends
This option is often easier said than done, but it’s still an available avenue to homeownership. The most obvious difficulty is simply picking the right group of friends and agreeing on what to buy. It’s not uncommon for millennials to live with roommates, often 3 or 4 people in the same apartment or house, so if the opportunity presented itself why not buy a property and pay your “rent” into a collective mortgage?
Future considerations need to be addressed, however. We spoke with real estate law firm, Feld Kalia Professional Corporation for a breakdown of some of the legal considerations of purchasing property with friends and/or family.
1. What is the best group size for a collective purchase?
The smaller the better. Two to three people is what we normally see. The larger the group, the larger the chance of discord, and the more difficult it becomes to make decisions about the property.
2. Is it better or worse for the members of the group to be married couples or single individuals?
Normally it is better for the members to be single because other investors don’t have to worry about having their property becoming entangled in a nasty split between a married investor and her/his spouse. As well, a disenfranchised spouse can attempt to call this a matrimonial home and tie things up for everyone.
3. What legal precautions should group members take to avoid future financial problems or conflicts?
There should be well drafted agreements between the parties, including how one can EXIT the arrangement if they want to.
4. Are there any big problems with group real estate purchases from a legal perspective?
We don’t see it happen that often, so it is not that common. Friendships change over the years, so be sure that you know who you are getting into bed with and have a good exit clause to avoid issues later, should/when they arise. Most “legal” problems start out as interpersonal ones.
This option has many considerations but, given the current real estate climate in which a lot of people live in rental apartments with roommates, grouping together with close friends that you trust and love may be a great way for all of you to enter into the real estate market and turn your monthly rental expense into a collective (and personal) investment.
3. Wait & Save
While the real estate climate has dramatically changed, the old model of renting an apartment, saving your money, and waiting for the right opportunity to buy still applies. You may just have to be extra patient.
We wrote a blog post a few weeks ago with 10 things that will help you become a first-time buyer. The wait & save strategy is the safest and least complicated avenue to home ownership, but it requires self-discipline, creativity, and patience. Try to think of it as a lifestyle change. There are people that rent, and there are people who own, and then there are people who are renting-while-saving-to-own. It becomes a lifestyle choice when you consider how you spend your money. Things like going out less for dinner and drinks, skipping your morning Starbucks, taking TTC instead of Uber, holding off on that trip to Argentina, paying down debts, and building healthy credit.
You may also want to talk to a financial advisor (or a savvy friend) about more aggressive investing strategies to help grow your savings faster. If a savings account is growing at a rate less than the rate of inflation, you’re actually losing money.
4. Buy at a lower purchase price
This is a strategy that we have seen many times before, and it’s perfect for a first-time buyer who wants to jump into the real estate world. That being said, it’s not glamourous.
This approach involves searching for houses or condos that are less desirable by market values and therefore asking for a lower purchase price. They might be found in less desirable neighbourhoods, farther away from downtown, or in less desirable buildings that lack exciting amenities; they might also be the “ugly duckling” unit in a really great building (such as a unit that happens to face a brick wall). There are many reasons why a house or condo could be below market value. The savvy buyer simply needs to search them out.
The main idea behind this strategy is that you buy something cheap, something easily affordable (whatever that happens to be on your budget), simply to get yourself into the real estate market and then you hope that overall property values continue going up. At the end of the day, this avenue to homeownership is a gamble. If the gamble pays off, however, you’ll find yourself with a cash-flow positive real estate investment, and after a few years you’ll be primed to make a second purchase.
5. Buy somewhere else
This is what most millennials seem to be doing. It may have less to do with real estate prices and more with a lifestyle choice, as many millennials are adopting a “work with your hands” philosophy, choosing more traditional labour-intensive jobs like craft brewers, barbers, butchers, and artisans. Homeownership is the next on the list. Buying an old house in a small, rural town outside the GTA, growing vegetables and raising some chickens, does have its appeal.
As a way of becoming a homeowner, it is pretty straightforward. The only caveat is that in most cases it requires you to move away from Canada’s metropolitan centers and embrace a new (small town) lifestyle.
The opportunity to buy condos in smaller towns is harder to find, but we have seen projects in Kingston, Kitchener-Waterloo, and Cambridge. Even these, however, tend to be catering to buyers who want a luxury lifestyle, investors, or retirees.
Similar to buying at a lower purchase price, buying outside of the major metropolitan centres of Toronto or Vancouver is a move that will get you into the real estate world. As we discussed in a blog about the benefits of homeownership, you will be building your own net worth and priming yourself for a second purchase one day down the road.