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!
Amazing! It should be worth noting that in the next 12 months 47% of mortgages in Canada are up for renewal. This will likely severely impact the housing market and the economy. No one can tell what will happen which is why buying for a “guaranteed return” on a house should never be a factor in purchasing a home.
Another thing is that in the major cities we have had a huge run up on real estate for the last decade or so and for some agents/mortgage brokers they have never seen a bad market in their careers. I believe that they are likely not going to know what to do if the major cities really take a hit and correct. Which is pretty scary to people who are selling their house and they are working with someone who never had to make an effort before because houses “sold themselves.”
I’ve seen stats like that! It is legit terrifying that half of homeowners are going to be subject to increased rates over the next year.
I feel like when I do buy it’s going to be at the top lol. Good thing it’s not an investment to me!
We went through the pre-approval process and then learned that my then-fiancé (now husband) was ruining everything (wink) with his low credit score. So we took him off the loan entirely and got approved. I am a teacher. Five years ago, I was a teacher. I don’t even think I made $50k. If that doesn’t prove your point, I don’t know what does.
(Also, we are fine. I made sure we wouldn’t be house poor even though the lender was all ??♀️. US 30 year fixed at 3.5%. But I hate my mortgage with every fiber of my being.)
30 year fixed rate at 3.5%. The planning that you can do with that information is incredible!
We closed 5 years ago got 5 year rate of 2.99% and renewed in mid-2016 when interest rates were low for 2.19% for 2 years. Had to pay a penalty but it was worth it as it saved us about $5000. Our mortgage is up for renewal again this year and with the new rules for homebuyers as well as the higher interest rates we would be thrilled if we got 3% but we know we will likely get 3.5% or so. At this point we can’t do too much planning on when the mortgage will be paid off because we have no idea what the interest rate will be in 6 months nevermind 5 years from now. At this point we will likely lock in for 5 years if we can to provide some stability to the next years with daycare.
This was a great post. I live in Barrie which experienced the insane housing market earlier this year. Prices have corrected a bit but it’s still bad. If I would of bought 3-4 years ago I could of easily got a 1 bedroom condo for like $180k. Now the same condo would be $350k minimum. But I liked the ease of renting and having no responsibilities.
I got approved for a mortgage back in October. Despite having a great job and near perfect credit I have never felt so hopeless as going through this process. What I was approved for back in October I felt was basically nothing (for my city anyway) but since it’s been over 90 days I had to re apply and now am approved for $40k LESS because of the increase in rates.
I currently rent but would like to buy in my 30s when I have a sizeable down payment saved.
For me, the biggest perk of renting right now is that I’m satisfied in a 1 bedroom unit. If I were looking to buy right now, I’d want much more space.. Renting allows me to rent what I need right now, instead of anticipating what I want down the road.
100% agree! I’m renting a 2-bedroom apartment but I know when I buy it will be a 3-bedroom condo/house.
Everyone definitely has a tendency to go bigger (and thus more expensive) for a “forever” home.
“Mortgage Brokers and Real Estate Agents are the Payday Lenders of the middle class”
YES! I have been waiting for someone to say what I have been thinking for years! When I first moved to Calgary 8 years ago, my new bank pre-approved me for a $350K mortgage. I almost fell out of my chair! I knew darn well that on a single income, there was no way I could afford a mortgage that large, plus all the other home owner payments that go along with it. Thankfully, this was not my first home owner rodeo so I knew what I could realistically afford and only looked at homes that were in a set price bracket. Yes, if you buy a more expensive house, you stand to gain more if prices go up, but if prices go down you can be in real trouble, real fast. In the meantime, who wants to be house poor every month waiting for the real estate investment ship to come in?
I applaud you for always being so honest about homeownership. The decision to buy vs. rent, in my opinion, always comes down more to where you are in life and what you want, its emotional more than financial. Yes, you have to be able to afford it financially, but you also have to know yourself and what you anticipate for your future before deciding which way to go.
I think the argument that a home is an “investment” is absurd. If you look at the historical trends (like 30+ years) in the US, home values have risen by an amount almost exactly equal to inflation! It is not an investment and you should never buy a house anticipating earnings on it when you sell. Think about all the interest, taxes, and insurance you pay over the years, plus the maintenance that you will have to pay for at some point. Its almost guaranteed that you will not make money on a home.
I prefer to view homes as similar to cars. They are both just things you need to live that will cost money and maybe one day you will get some of that money returned to you when you sell.
And I took out a mortgage about a year and a half ago to purchase a home because at that point it made a lot of sense for my husband and I based on our lifestyle.
Great post. For some reason the rent vs buy debate is the most highly contested debate in personal finance and everyone feels the need to rationalize their own choice by bashing the other side. The reality, like with all areas of personal finance, is that the decision is personal. There’s no one “right” answer. As you describe, different life circumstances all help factor in to whether it’s better for a person to rent or buy.
Love this post. I am curious though about what you think of real estate agents who take the time to educate clients on what they can actually afford rather than sign them up for the most house that the bank will let them buy and who talk about things like having 10% down in cash. I’m not saying there are many agents that do that, I know there aren’t, but just wondering. 🙂
The ones that are honest and careful and do what’s best for their clients are saints.
I wonder if they get much business?
I really liked your post! I wish I’d read it about five years ago.
My partner and I are in our early 30s and just recently sold our house because we had to move for work. Between the repairs we had to do while we owned it and the money we lost breaking our mortgage, the real estate bubble popping, and other fees, we estimate that we lost about 65K.
If we’d rented the whole time we would have paid off all our student loans by now. We loved that house and had a wonderful time, but me vs me also wonders whether being debt free right now would be worth giving up those happy memories…
Best article I have seen on this topic to date!
The comment that buyers are also paying rent, at least until their mortgage is paid off – I would stretch it even further. Even after your mortgage is paid you are still paying taxes and maintenance costs. This is essentially still paying rent even AFTER your mortgage has been paid. There is no “no longer renting” in my mind.
I love your blog and for the most part you are providing some excellent, needed financial advice. I won’t debate renting vs owning as there are way to many factors and assumptions to be made to make a definite case either way. It is certainly a personal choice individuals should make based on their personal situation, wants and needs.
I don’t think it is fair for you to vilify EVERYONE in the real estate industry. As with any industry the financial services industry has people with different knowledge levels, service levels, ethics, etc.
I have come across some “no so great experiences” with financial planners as I am confident you have as well. This in no way means everyone who refers to themselves as a financial planner or works in the industry is not good at what they do. I would not discount everyone based on some bad experiences. These types of generalizations are not fair.
One another note, I am going to send you a quick note via your contact page. Please have a look, I didn’t think it was necessary to post it here.
I’m not a financial planner. No idea what that has to do with anything.
Plenty of people that are financial advisors/planners are swindling consumers with high-fee investment and insurance products.
I received your mansplaining email and replied. In the future, don’t hesitate to voice all your concerns and opinions in the comment section. I’m a big girl, I can take it.
I generally agree with your conclusion, BUT 10% a year is a pretty unrealistic return for index fund investing (it’s been true in the past but most experts think the market will slow down going forward). I’d rather call 6% an “average” investor’s return, and 4% if you’re a poor investor.
10% per year is the average stock market return. Experts have been saying the stock market will slow down going forward for the past 2 years. last year was one of the best years ever.
Preach sister! My husband and I are early 30s renters in Calgary and it works so well for us. Houses in the neighborhood we rent in sell for well over $500,000, some are even in the $675,000-$850,000 range, but our rent is a measly $1200/mo (which we’ve negotiated down twice in our 3 years there). Our mortgage would be well over $3000/mo if we were to buy and a %10 down payment would be at least $50,000 which is a pretty substantial chunk of change, especially considering some of the houses are 60s bungalows that need a fair amount of work. I just can’t see how adding at least $1800/mo to my basic living expenses can possibly be better than investing, and I feel like we would be priced out of living in a neighborhood we love. Renting has allowed us to build a 6 figure investment portfolio and save enough to take a year off work to travel the world with a healthy buffer of a nest egg to come back to. I honestly think that if we succumbed to the pressure to “grow up and stop paying someone else’s mortgage” we would be way worse off financially and not able to so easily make our travel dreams come true.
That said, I do love your point that there are reasons other than financial ones to own a home. If we ever become the settle down and have kids types, home ownership might look a lot more attractive, but for now renting provides us with the cash in hand and freedom to be the budget-minded world travellers we love to be!
Wow…terrific post! You make multiple great points and you articulate the expenses associated with home ownership very well. I post about similar notions as well. I often advocate to those who are not financially educated that maxing out (or dumping as much as possible) your retirement accounts, especially at an early age, is the much better choice as oppose to purchasing a house.
Everyone’s downfall seems to be, “But I am wasting money when I rent”. As soon as I hear people say this, I know that they are not educated regarding personal finances. It is a shame. Too many people get caught within the trap of home ownership. The trap can be very dangerous if too much house is bought and the expense consumes a large portion of your cash flow.
However, recently I have been reading more and more about purchasing real estate with the sole purpose of renting it out. Leverage seems like an enticing component. If so many individuals can become extremely wealthy through investing into real estate, it must be lucrative. However, I want to continue to max out my retirement accounts and build up my cash buffer to ensure two things:
1. I can always be able to max out my retirement accounts
2. I will never have to tap my retirement accounts.
One thing is for sure, I will not rush into anything regarding real estate. It is very expensive!!
I loved the article, previous times I had asked this since many times it is said that a house is an asset and for many others it is an asset. When one is young and begins to think about their future there are many doubts about what should be done or what should not be done. Personally I do not have any kind of experience so articles like these help a lot.
I will read more of your punctuations.
Well, both have their own set of benefits. For instance, renting a house offers you flexibility, predictable monthly expenses, and someone to handle repairs. Comparatively owning a home offers you a range of intangible benefits such as pride of ownership, a sense of stability, equity, and tax deductions.