Many people have strong opinions about which is better: buying your own home or renting from someone else.
In reality, both have their benefits, and which you choose will depend on your lifestyle, budget, needs for the future and views on the future of the real-estate market. (Easier said than done, right?)
How to break it down
One of the arguments against buying is that owning a home costs more money than renting, depending on the market you live in. While cash expenses can often be higher for owning in the short-term, it’s important to consider the long-term implications of renting versus owning. Let’s break down the numbers so you can understand the trade-offs.
Renting
Rent $1,500
Rental insurance $30
Utilities $70
Total $1,600
Owning
Mortgage interest $1,200 interest
Mortgage principal $300 principal
Property taxes $250
Utilities $125
Home insurance $50
Total $1,925
You’ll notice that it is more out-of-pocket expense when owning, but it’s important to understand the benefits of homeownership. Ask yourself a few questions:
Notice in the example above that $300 is going directly to the principal of your mortgage, meaning I’m investing that amount. “If I rent, will I actually save money in another way, like in an RRSP or TFSA?” Be realistic with your own savings habits. If you’re not forced to put money against the principal of your home, will you regularly transfer money into your savings?
“Am I comparing equal properties when comparing costs? For example, am I moving from a 1-bedroom rental to a 3-bedroom house?” Be sure costs are comparable in your renting and owning scenarios.
“How will this look in 10 years? Or in 30 years?” Keep in mind that homes can appreciate at a faster pace than many investments, like mutual funds or GICs. Keep in mind that you will, at some point, pay off your mortgage, so your living expenses will greatly decrease, whereas rental costs will continue to rise.
The benefits of owning
Forced savings
In an owning scenario, part of your mortgage payment goes toward the principle of the home. This is essentially “forced savings,” meaning you can’t opt out of saving this amount of money.
Sense of pride and stability
It’s engrained in us that home ownership is an accomplishment. Standing within your own four walls brings a sense of pride and success, a psychological feeling you don’t get while renting. It allows you to sprout roots and settle into secure living.
Home increase in value
The average home price in Toronto in 1985 was $109,094. Fast-forward to 2015 and you’re looking at five times that number: $566,696. Even with drops in the market, homes usually increase in value over longer periods of time.
Real estate has permanent value
Simply put, land is a scarce resource. While stocks and investments waver, and the housing market fluctuates, real estate as a long-term investment is a solid idea. Even if the stock market changes, your home or land will still be desired in the future especially if it’s located in a large city.
Homeownership pays off when your home is paid off
Unlike renting, homeownership provides a dramatic drop in living expenses over the long term. Once your home is paid off, you only have minimal utility and tax costs to worry about, whereas rent continues to increase, even into your retirement. Your disposable income may be fixed later in life—based on your pension and retirement funds—so removing a major monthly expense will be appreciated at that stage
Can rent property
When a home is yours, you have the option of renting it over the short- or long-term, to cover your costs. This can give you flexibility, if you need to move for work, or want to rent a different property.
The downside of owning
All costs are your responsibility
Owning a home forces you to have a larger emergency fund than renting. If your appliances break, if your roof is leaking, or if your furnace conks out—all expenses will be covered by you, out-of-pocket.
Loss of flexibility
When renting, you’re free to move as soon as your lease it up, which makes moving quick and relatively painless. When you own, you’re locked in with a mortgage; it’s more work and money to list your home and possibly break your mortgage.
While you do have the option of renting out your home if you want to move, it can also be a huge hassle. Not only do you have to attract and find a perfect tenant, but you will also have to continue to deal with home maintenance, along with rental payment collections and tenant issues.
Transaction fees
If you buy and sell homes on a regular basis, you’ll be paying a lot of transaction fees which could make buying not worth it. These include land-transfer tax, real estate agent fees, closing costs, and lawyer’s fees, to name a few.
Long story short: If you’re someone who moves every 1–3 years, or can’t envision living at a property for a long period of time, owning is likely not the right decision for you in the short-term.
Big debt load
Your mortgage is likely the largest debt you’ll ever take on. Some people don’t deal well knowing they have debt, so buying with a mortgage is not for everyone.
The benefits of renting
Flexibility
When you rent a place, you’re getting exactly what you want when you want it. You can move to fit your life—upgrading to a bigger place or moving closer to work—with relative ease. You can move as often as you want with minimal costs.
Invest in the real estate market without owning
You do have the opportunity to invest in real estate without owning a house you live in. A real estate investment trust (or REIT for short) is a balanced form of investment in the market. You can choose how much or little you invest, and it doesn’t have to be limited to a region and style of home, as it would if you owned.
Invest how you want
If you’re not forced to invest your money in your home, you can invest it anywhere else—if not in a REIT, then in mutual funds, GICs, ETFs, or individual stocks.
The downside of renting
You can be told to leave
When you own, you know you’re in control to make the decision to stay or go. When renting, you give that power to your landlord, who can evict you if he or she decides to move back into the home, or sell it. While you have the ability to move at your own will while renting, you can also be told to move at an extremely inconvenient time.
You don't have control over the aesthetic of contents of your home
A landlord doesn’t have much incentive to upgrade your rental. As long as appliances are working, and the structure is keeping you safe, your landlord can turn a blind eye to an old fridge or peeling paint.
Paying rent forever
If you stick to renting, you’ll be paying rent for the rest of your life; there’s no relief down the line as there is with homeownership. Rental payments also go up over time, so in your later years when most adults have less income, you’ll be paying even more in rent.