Renting vs Buying
Ahh the age old dilemma; what’s better, renting or buying? If you’d asked this question 20 years ago, most would have resoundingly agreed that buying is a far better option. Why pay down someone else’s mortgage when you can pay down your own, all the while building equity and securing your retirement? Unfortunately, it’s really not that simple anymore, and the age old thought process that “buying is better”, is starting to be looked at in a different light. The reality is this: one is not necessarily better than the other; it’s relative to circumstance. So what are the factors? There are really no easy answers to this question, and the fact still remains that buying a home should be a very sound investment. With that said, you’ll need to pound out the numbers and understand what you can and can’t afford. It’s all about circumstance.
What’s the Market Doing?
This is of course one of the biggest questions you should ask yourself. In Canada, the market has been out of control for years now. Home pricing has been increasing at a rate greater than inflation, which is extremely abnormal. Canada just implemented new mortgage rules meant to tame the market, and it is expected that things should even out shortly. With that said, it’s important to look at real estate trends when deciding to make the leap from renting to buying. The last thing you want is to buy at the height of the market. Buying a one million dollar home at the height of the market may mean that by the time you want to sell, you’re property has actually depreciated in value. This brings me to my next point:
How Long Do You Plan to Live in the Space?
Buying should be looked at as a long term investment, unless you are a seasoned investor. Even if buying at the height of the market, if you are in it for the long term, things should work out for the better. The market might take a dip, but that’s OK; just wait it out as you’re in no rush to sell in any case. Renting, on the other hand, allows you freedom to be nomadic. Are you single? Is your employment status unsecure? Then you’d better rent. Do you have a family? Is your career secured? Do you want a steady living arrangement for your family? Then buying is a great move.
How Much Can You Afford Monthly?
In 99% of the cases, a mortgage will cost you more monthly than rent. Will getting that mortgage stretch your finances too thin? If so, you’d better wait it out until your financial status is slightly more secured. If you can easily afford the cost of the mortgage, great! But you also have to factor in maintenance costs and uptake. By renting, your landlord assumes responsibility for all maintenance and repairs. When you’re a home owner, there is no landlord covering your maintenance and repairs. It’s all on you. General rule of thumb, you can expect to pay 2-4% annually of your homes worth on repairs. This is another big expense. Ideally, when you’re ready to sell you’ll make it all back and then some, but this depends on many factors.
Do You Want to Rent out a Room?
Hypothetically, you could and probably would have a roommate when renting. The roommate will help cover your rental costs, which is great. But when you own your home, you can rent out a portion of the home and have that tenant help to pay down your mortgage. That’s a very different scenario and it takes your home investment to a whole other level. Moreover, you can create income by borrowing against your home. The big question here is if you’re prepared and willing to be a landlord.
Equity vs Inflation
Here’s a big issue: despite the recent trends we’ve seen, equity typically increases directly in line with inflation. This means that the big take home you’ll get when you sell won’t be nearly as large as you thought. The prospect of buying a home at $500, 000 and selling it a few years later at $600, 000 is a great thought, but remember that the $100, 000 in equity won’t mean the same thing years from now that it currently means. $100, 000 20 years ago was a lot more money than it is now. And more importantly, you’ll have closing costs, land transfer tax, moving expenses etc. So that $100, 000 will actually be a much lower number once it’s all said and done.
Do You Plan to Invest Anywhere Else?
I would argue that this is possibly one of the biggest factors. For most home owners, their home is their big investment, and they don’t invest elsewhere. However, there are many other avenues of investment, stocks being a major player. With some research and guidance, renting a space and investing elsewhere can actually yield just as strong a return, if not stronger. But with that comes research and resources needed. If this isn’t your forte, then investing in your home may be the best investment for you.
Freedom from Responsibility vs Pride in Ownership
Perhaps the biggest thing to think about is your lifestyle choice. When renting, you are free from responsibilities. You pay a set monthly fee and that’s it. If a pipe bursts, call the landlord. If a window breaks, call the landlord etc. It’s very low in terms of responsibility. Home ownership on the other hand, is a massive responsibility. This is your property, and without proper maintenance, you can forget about any profit on resale. You need to maintain the property and take pride in it. But isn’t that half the fun? If you feel this way, then home ownership can be an incredible experience. You want to paint the living room red? Go for it! You want to tear a wall down and free up space? Get it done! Home ownership can be fun, albeit a great responsibility.
So the truth is there are no easy answers. Financially speaking, both options can actually make sense. It depends on a variety of factors, and you’re best bet is to keep an eye on the market to determine when to buy and sell, and to thoroughly analyze your current financial status, your goals and your strengths.