Should I buy or rent my place? It’s an age-old dilemma faced by Canadians young and old. While I wish there was a simple answer for everyone, it largely depends on your financial situation and lifestyle. Homeownership can be a great long-term investment in a lot of cases, but it’s not without its drawbacks. Sometimes it can make sense to rent. That being said, renting has gotten a bad reputation over the years. When you rent your home, you’re told you’re settling for second best. Why would you rent (yuck!), when you could own? When you rent, you’re constantly told you’re “throwing away your money” and “paying the landlord’s mortgage.” While I don’t disagree with those points, there’s more to the whole renting versus buying debate than meets the eye.
In some cases, there’s nothing wrong with renting. Don’t forget, everyone is a renter at one time in time. There’s nothing wrong with paying rent as long as it’s reasonable. Sharing a basement apartment for $600 a month is a good way to supercharge your savings. You can save your down payment that much faster. On the other hand, spending $2,000 a month for a trendy downtown condo may be good for your social life, but it’s not for your bank account. With rent rates like these, chances are you’ll be a lifelong renter. It’s all comes down to setting financial priorities.
Are you still on the fence? Here are the most important things to consider when deciding to rent or buy.
- Forced savings: A home is a forced savings vehicle. When you’re paying a mortgage, it makes you save. Most people put their mortgage ahead of all other debts and with good reason – if you stop paying your mortgage, you’ll no longer have a roof over your head.
- Good debt (most of the time): When you buy a home, you’re investing in something that (hopefully) goes up in value (in the world of finance, we call that an appreciating asset). One day you’ll burn your mortgage and live mortgage-free.
- Make extra money: A home isn’t just a place to live, it can be used to make extra money. If your home has a basement apartment or is a duplex, you can rent it out and pay down your mortgage even faster (that’s what I did).
- Coming out ahead in the long-run: I’ll spare you the details, but most of the time you’ll come out ahead by buying instead of renting. Renting is often less expensive than owning. When you rent you don’t pay for things like property tax or home insurance. You can do ok when you rent and invest the money you’re saving from not owning. The funny thing is, something gets in the way called human behaviour. Most of us don’t have the financial fortitude to do that. We would rather buy fancier cars, enjoy fine dining or go on five-star vacations. Again, there’s nothing wrong with that as long as you balance financial priorities.
- Leveraging: When you make a down payment, you’re only paying part of the home’s value upfront. Leveraging means you’re borrowing someone else’s money (the bank’s) to buy an asset (a home). While your bank may be nervous let you borrow money to invest in the stock market, it’s more than happy to loan up to 96.5 percent (95 in Canada) of your home’s value because it sees real estate as a safe long-term investment. Who’s to argue with the bank? If all goes according to plan, you’ll pay off your mortgage and your home will be worth a lot more. What’s not to love?
- Freedom and privacy: Owning a home comes with a lot more freedom. You don’t have to ask the landlord for permission to paint your place. You also enjoy a lot more privacy. You don’t have to worry about making too much noise and disturbing your neighbours (within reason).
- Tax credits and deductions: There are many tax benefits and deductions homeowners can take advantage of.
- Tax-sheltered: When you sell your principal residence, in most cases you won’t have to pay a dime in taxes. On top of that, you can tap into your home’s value and borrow at a super cheap rate.
- Closing costs: Unless you’re planning to stay put five years or longer, you’re generally better off renting. Closing costs can easily wipe out any money you made by buying instead of renting.
- Carrying Costs: On top of your mortgage payments, you’ll have to fork over money for utilities, property taxes and home insurance. The funny thing is, carrying costs have a habit of rising a lot faster than your paycheck. Thanks to extreme weather, home insurance premiums have seen double-digit increases.
- Maintenance and repairs: Over the years you’ll have to spend megabucks on a new roof, furnace, windows, and the list goes on (hopefully not all at once). Budget three to five percent of your home’s value towards these costs.
- Fewer carrying costs: When you’re a renter, you don’t have as many carrying costs to worry about. If you’re lucky, your rent already includes utilities.
- Live like a nomad: Renting gives you more choices. If you decide to move, in most cases, all you need to do is give your landlord 60 days’ written notice. If you notice your neighbourhood is going downhill, you can easily pack up and move somewhere else. When you own a home it’s not that easy.
- Less stress: Home repairs are often an area of stress for homeowners. My mother sold her house and moved to a condo because she was worried about home repairs. When you’re a renter, you have less to worry about. If there’s a leaky roof or the furnace breaks down, all you have to do is pick up the phone to call your landlord.
- Big cities: Renting can be the more affordable option in big cities like New York, Miami, Toronto and Vancouver. Homeownership may be so expensive that you may have no choice, but to rent for until you can come up with the down payment.
- Your rent never goes away: When you take out a mortgage, you’re renting money from the bank and building equity. When you’re paying rent, you’re renting space. If you rent for the next 30 years, you won’t have anything to show (homeowners meanwhile own a paid-off home).
- Lifestyle inflation: Most of the time it’s less expensive to rent than own. This can be a blessing and a curse. What you do with these extra savings can determine your financial success. This may be a stereotype, I’ve seen far too many renters live paycheck to paycheck (if you’re the exception to the rule and you invest the money you’re saving, kudos to you). If you’re hoping to grow your personal wealth, you’re probably better off owning a home.
- Rent increases: When you sign up for a fixed rate mortgage, you don’t have to worry about your mortgage payments going up when you choose a fixed-rate mortgage. When you’re a renter, your landlord can increase your rent once a year.
- Pets: Many landlords aren’t a fan of pets. If you have a cat or dog, you may have a tough time finding a place to rent.
The bottom line
Weigh the pros and cons of renting versus owning a home. If you have a stable job and you’re ready to stay put for 5 years or longer, then purchasing real estate makes a lot of sense. Just make sure you’re ready before taking deciding to become a homeowner.