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\u2019s important to consider the long-term implications of renting versus owning. Let\u2019s break down the numbers so you can understand the trade-offs.
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You\u2019ll notice that there are more out-of-pocket expense when owning, but it\u2019s important to understand the benefits of homeownership. Ask yourself a few questions :<\/p>\n
1. If I rent, will I actually save money in another way, like in an RRSP or TFSA? Notice in the example above that $300 is going directly to the principal of your mortgage, meaning you\u2019re investing that amount. Be realistic with your own savings habits. If you\u2019re not forced to put money against the principal of your home, will you regularly transfer money into your savings?<\/p>\n
2. Am I comparing equal properties when comparing costs? Am I moving from a 1-bedroom rental to a 3-bedroom house? Be sure costs are comparable in your renting and owning scenarios.<\/p>\n
3. 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. Remember that you will, at some point, pay off your mortgage, so your living expenses will greatly decrease, whereas rental costs may continue to rise.<\/p>\n
The Benefits of Owning<\/strong><\/p>\n 1. Forced savings 2. Sense of pride and stability 3. Increased home value 4. Real estate has permanent value 5. Homeownership pays off when your home is paid off 6. Option for rental income The Downside of Owning<\/strong><\/p>\n 1. All costs are your responsibility 2. Loss of flexibility 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.<\/p>\n 3. Transaction fees 4. Big debt load The Benefits of Renting<\/strong><\/p>\n 1. Flexibility 2. Invest in the real estate market without owning 3. Invest how you want The Downside of Renting<\/strong><\/p>\n 1. You can be told to leave 2. You don\u2019t have control over the aesthetic of your home 3. Paying rent forever
\nIn an owning scenario, part of your mortgage payment goes toward the principle of the home. This is essentially \u201cforced savings,\u201d meaning you can\u2019t opt out of saving this money.<\/p>\n
\nIt\u2019s ingrained in us that homeownership is an accomplishment. Standing within your own four walls brings a sense of pride and success, a psychological feeling you don\u2019t get while renting. It allows you to sprout roots and settle into secure living \u2013 your home is yours to use as you wish!<\/p>\n
\nFor example, the average home price in Toronto in 1985 was $109,094. Fast-forward to 2021 and you\u2019re looking at almost 10 times that number: $1,045,488. Even with drops in the market, homes usually increase in value over longer periods of time.<\/p>\n
\nSimply 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 \u2013 especially if it\u2019s located in a large city.<\/p>\n
\nUnlike 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\u2014based on your pension and retirement funds\u2014so removing a major monthly expense will be appreciated at that stage.<\/p>\n
\nWhen 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.<\/p>\n
\nOwning 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\u2014all expenses will be covered by you, out-of-pocket.<\/p>\n
\nWhen renting, you\u2019re free to move as soon as your lease is up, which makes moving quick and relatively painless. When you own, you\u2019re locked in with a mortgage; it\u2019s more work and money to list your home and possibly break your mortgage.<\/p>\n
\nIf you buy and sell homes on a regular basis, you\u2019ll be paying a lot of transaction fees which could reduce the benefits of buying. These include land-transfer tax, real estate agent fees, closing costs, and lawyer\u2019s fees, to name a few. If you\u2019re someone who moves every 1\u20133 years, or can\u2019t envision living at a property for a long period of time, owning is likely not the right decision for you in the short-term.<\/p>\n
\nYour mortgage is likely the largest debt you\u2019ll ever take on. Some people don\u2019t deal well knowing they have debt, so buying with a mortgage is not for everyone.<\/p>\n
\nWhen you rent a place, you\u2019re getting exactly what you want, when you want it. You can move to fit your life\u2014upgrading to a bigger place or moving closer to work\u2014with relative ease. You can move as often as you want with minimal costs.<\/p>\n
\nYou 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\u2019t have to be limited to a region and style of home, as it would if you owned.<\/p>\n
\nIf you\u2019re not forced to invest your money in your home, you can invest it anywhere else\u2014if not in a REIT, then in mutual funds, GICs, ETFs, or individual stocks.<\/p>\n
\nWhen you own, you know you\u2019re 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.<\/p>\n
\nA landlord doesn\u2019t 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.<\/p>\n
\nIf you stick to renting, you\u2019ll be paying rent for the rest of your life; there\u2019s 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\u2019ll be paying even more in rent.<\/p>\n