Should you rent or buy? It’s not an easy question to answer. I do the math on buy vs. rent for myself every year when my lease is up. I make the decision to sign on, move, or jump into homeownership. So far it’s never tipped in the favor of owning, even as real estate prices have fallen or stayed flat in my city.
However, making the case for renting instead of buying rarely is met with a positive response.
Rent vs Buy: What will make you richer?
You might think there’s a simple answer to this question, but there’s not. There are rich renters and poor homeowners, and vice versa.
When it comes to whether or not renting or buying is financially the best choice, it’s determined entirely by one single thing: where you live.
Real estate markets vary tremendously across Canada, which you can see in our post The Income & Down Payment You Need to Purchase a Home in Canada’s 25 Largest Cities. In some places, residential real estate is a surefire win. In others, it’s a breakeven investment at best.
The stock market is the best place for you money
From a purely numbers standpoint, the stock market is your best bet if you want to build wealth. The good news is you can invest in the stock market whether you’re a renter or a homeowner — though how much you have to invest will likely be determined by the housing you choose.
You can even rent a home and then invest in real estate in the stock market. Which means you can invest in real estate without actually living it. And sometimes that makes the most sense.
Rent vs Buy
This might shock some people, but being a homeowner doesn’t guarantee wealth, just like renting doesn’t mean you won’t be financially secure. And both renting and buying offer tangible and intangible benefits, depending on the lifestyle you value.
Benefits of renting a home
- Rent is often cheaper than a mortgage payment + utilities & property taxes, allowing you to save money to invest elsewhere
- Your landlord is responsible for repairs and maintenance
- Flexibility so you can move across the country for a job offer and the biggest consequence is breaking your lease!
- Renters usually live in smaller homes, which means less furniture costs and less time to clean
Benefits of owning a home
- Have a place to “call your own” that you can customize and decorate to your liking
- A home eventually becomes a financial asset as you build equity by paying down your mortgage
- No one can evict you!
- Homeowners are perceived as more stable and financially secure by banks and other creditors
Homeownership is as much an emotional investment as a financial one
Should you rent or buy? It’s up to you. Even if the math says “hell no!”, homeownership might offer enough emotional benefits for you to decide to buy anyway.
Likewise, buying a house might be cheaper but the benefits of renting far outweigh the cost of ownership. The way you want your life and your finances to look is entirely up to you, so spend and live accordingly.
Homes are emotional investments even more than they are financial ones. For most people, buying a home symbolizes adulthood as much as it does a retirement plan. Suggesting someone would be better off renting challenges the largest financial and personal purchase of their life, which is why everyone is so defensive about it.
What homeowners need to admit to themselves is that they are renters, too.
You either rent money from the bank or rent space from a landlord
A homeowner is a renter, so long as they have a mortgage.
Interest charges are rent. Taxes are rent. If you’ve found yourself in a situation where you pay both of those, you are a renter.
There are many places where renting money is preferable to renting space, but Canada’s major cities are not one of them. For example, here is a townhome currently listed both for sale and for rent in Calgary:
It is for sale for $399,000 and for rent for $1,650 per month.
If you were to put 10% down on this condo and financed it at 3.39%, your monthly mortgage payment would be $1,827. This is a townhouse so it has $225 in condo fees which bring your total monthly cost to $2,052.
I don’t know what utilities are, but it doesn’t matter because utilities are not included in the rent. Both the homeowner and the renter would have to pay the same amount.
However, the homeowner will need to pay property taxes. The Calgary Property Tax Calculator tells me were $2,560 in 2018, or $213 per month. This brings the monthly cost of owning the condo to $2,265.
Finally, homeowners are responsible for any repairs, maintenance, and renovations. Renters are not. Homeowners should always set aside 1-3% of a home’s value per year for when repairs and renovations are needed. We’ll lowball this just to prove the point and say you only set aside 0.5% of the home’s value per year, or a piddly $2,000. This is still an extra $167 per month the homeowner is paying that the renter is not.
- Total homeowner monthly cost: $2,432
- Total renter monthly cost: $1,650
The renter is now ahead $782 per month. If they invest this in the stock market and earn a return of 10%, they’ll have $57,290 after 5 years. If they’re a bad investor and only got a 6% return, they have $52,898. Meanwhile, the homeowner will have paid down just over $51,000 on their mortgage during the same time frame.
But who is really ahead? It’s hard to say. If the renter also had $40,000 cash around for a downpayment but left it in the market while adding their $782 per month, they now have $122,000. Or $106,000 if they’re a bad investor.
The homeowner still owes $318,790 on their mortgage, but if their house has increased in value by 2% each year, it should now be worth $440,528, giving them $122,000 in equity. If their house only increased in value by 1% in each year, they have $100,563 in equity.
Result: renting and buying came out financially equal
The numbers are almost exactly the same. This is a good thing. It means the home is fairly valued compared to its rental price, and vice versa. But these numbers are speculative guesses, not fact.
Maybe next year the stock market crashes. Or maybe the housing market does. We won’t know which was the best place to put your money until the time has passed. Until then, all investments are speculative.
There are no guarantees on any investment. But that doesn’t mean it’s a bad investment.
What are the financial downsides to homeownership?
Owning a home you love is great, especially if it appreciates in value to give you a return on your initial investment. But that doesn’t mean it doesn’t have some potential financial downsides.
Homeownership doesn’t always build equity
“Building equity” and “forced savings plan” are the biggest arguments for buying instead of renting. However, most home owners don’t actually leave the equity in their homes alone.
More than 3 million Canadians have home equity lines of credit, or HELOCs, which represents nearly 1/3 of Canada’s homeowner population. The average balance is $65,000 but as many as 1 in 4 are carrying over $150,000. And 25% of HELOC borrowers are making interest-only payments.
If you’re going to build equity in your home, you have to make sure the money stays there!
Missed retirement savings
If a 20- or 30-something stretches themselves to get into the housing market right now, they often do it at the expense of retirement savings or paying down debt.
This can make sense if homeownership is a cornerstone of your retirement plan. If you’re going to miss RRSP contributions, it better be because your house is going to take care of you in retirement! Otherwise, you’re just postponing financial insecurity to old age.
If you put 10% down on a $500,000 home and the mortgage payment plus all your other bills leave you with only $40 in leftover cash each month, it doesn’t matter if your house increases in value. You will still only have $40 leftover each month.
Unfortunately for many new homewoners, when the additional costs hit them, everything from property taxes to the expense of a longer commute, many financially drown.
More than half of Canadians are a mere $200 away from not being able to pay their bills. How did they get in this position? They have large student loan balances, they financed their cars for seven years, and they took out lines of credit to make 5% down-payments on houses they cannot afford.
The main reason I’m not a great advocate of homeownership is that I know the average Canadian is in a precarious situation of financial vulnerability.
They are extremely sensitive to even minor increases in costs of living and interest rates. For those whose mortgages come up for renewal, even a 1% increase can eradicate the pitiful change leftover from their monthly budget.
Someone who put only 10% down on a $500,000 home and financed it at 3% will still owe $396,559 when their mortgage comes up for renewal in 5 years. If rates have increased 1% during that time (and remember, they recently went up 0.5% in just 6 months) they will renew at 4% and their monthly mortgage payment will now be more than $200 higher.
Canadians cannot afford interest rate hikes or increased gas prices. They cannot afford the cost of food, electricity, or utilities to go up. They cannot manage a $500 emergency.
This is the real problem with the math of homeownership, not the home itself.
Mortgage Brokers and Real Estate Agents are the Payday Lenders of the middle class
Why are mortgage brokers, banks, and real estate lenders defending home ownership to the death? Because they make wild commissions to do so.
Someone who has a vested financial interest in you buying a home will not bring a balanced financial argument to the table.
Their bias runs so deep, even they believe it. And why wouldn’t they? If they acknowledge that Toronto is a real estate bubble, they’d be forced to admit to being a charlatan leading Canadian families into financial ruin.
But I don’t think they do actually see themselves doing that. I don’t think anyone has any more faith in the Canadian housing market than the professionals profiting from it. They stand to gain the most from it continuing at its irrational pace forever.
So they will do what they can to make sure that it does.
Like payday lenders preying on the economically vulnerable, mortgage brokers also trap people in a debt spiral they cannot escape from. No down payment? No problem, your mortgage broker will move heaven and earth to get you a line of credit, so you can buy debt with debt.
Your mortgage broker or real estate agent does not care what happens to you after you buy your house.
It doesn’t matter to them if you lose your job or get divorced. They do not care if interest rates rise or the market collapses and you end up underwater on your mortgage. It does not affect them if your debts remain unpaid, your retirement underfunded, and your budget stretched to its breaking point.
How do I know if I should rent or buy?
Even after all this, there’s still no wrong answer. You can rent, even if it’s slightly more expensive if it gives you the lifestyle you want. You can make the same decision for homeownership.
Here are some questions to help guide your decision:
- Are rents close to higher than the average mortgage payment in your city?
- Is owning a home part of your retirement plan?
- Does owning a home provide an emotional payoff you value, such as a sense of accomplishment or stability?
- Do you feel pressured by friends or families to buy a home?
- Would owning a home limit you from traveling, accepting a job opportunity, or moving with a partner abroad?
- Can you manage all the financial obligations of homeownership while still saving in your TFSA and RRSP?
- Can you manage all the financial obligations of homeownership and still pay off all your debt?
- Do you have a downpayment of at least 10%?
- Do you feel confident that the best decision for you personally doesn’t have to be the one with the highest financial ROI?
These are the things you have to consider when you evaluate the costs and benefits (financial and otherwise) of homeownership. Then pick whichever is best for you!