Read the first post in my series Buying A Condo - Fun Facts About Ottawa Real Estate.

Calculating what you can afford is a tough exercise.  On one hand, you want the best deal, and on the other, your eyes are bigger than your stomach.

One of the best visualization tools I’ve ever run across is the New York Times’ Rent vs Buy Calculator.  I strongly encourage your to try your own scenarios after reading below.

My Target Condo

First, I had to decide what I wanted:

1. 1 Bedroom + Den at 700+ sqft
2. Located in Central Ottawa
3. Great amenities including a gym, pool, and BBQs

This meant that I’d be spending around $350,000 + closing costs.  Yikes.  Prices have skyrocketed to nearly $500/sqft for a small place in downtown Ottawa.

My Assumptions

1. $350,000 purchase price
2. $20,000 for closing costs, upgrades and miscellaneous fees
3. 40% down payment (approximately $150,000)
4. $0.48/sqft in condo fees
5. 5.75% interest rate (about 2% higher than today’s best rates)
6. 10 year amortization period
7. 2% annual appreciation

Rent vs Buy: My Current Crapshack

My current place is a 2 bedroom, 1000sqft apartment for around $975/month.  Living in the ghetto has its advantages.  It’s also nicer on the inside than on the outside (twss).

The NYT calculator tells me that there’s no way I should stop renting given my current situation.  In fact, I’d be substantially better off continuing to rent.

Rent vs Buy: Rent Someone Else’s Condo

But, I want to increase my standard of living.  To get this, I’d have to rent a condo from someone else at around $1600/month.

Again, it’s actually better for me to rent unless I stay in the same place for the next 22 years.  Chances are this won’t happen.

Rent vs Buy: Everything’s Comin’ Up Millhouse

Let’s assume for a moment that I hit the real estate jackpot.  This means:

1. Interest rates stay at 4% for the foreseeable future
2. Real estate in Ottawa continues to increase at 7% per year

To clarify, I don’t believe this will happen.  But it outlines the choice one is faced with today.

As you can see, after the second year I’m making money hand over fist.  You’d be stupid not to buy.  But wait…

Rent vs Buy: Things Take a Turn For the Worse

What happens if real estate takes a turn for the worse?  People already stretching their affordability are mercilessly squeezed by ballooning mortgage payments, or forced to renegotiate into substantially longer terms.

Even a 1% annual market retraction leaves this once sound “investment” at a significant disadvantage over alternatives investment vehicles. Setting aside the rule of thumb that real estate always appreciates, this presents a sobering scenario.

So What Now?

Proceed, with caution.  The goal is to increase my standard of living while maximizing wealth.  Real Estate may be the first answer, but not necessarily the correct one.