Should You Rent or Buy?

For many of us, one of our biggest life goals is to be able to own our own home. Home Ownership does not only give you a sense of pride and feeling of independence, but it is celebrated by family, friends and the media as almost a right of passage to adulthood. Most think that this is the surest path to growing their nest egg just as it worked for their parents not long ago.

Although home ownership brings with it some advantages, it also comes with its own set of challenges that may be alleviated by renting. In such an over-inflated housing market, particularly in Toronto and the GTA, renting your home can offer some unique advantages without compromising your long term financial well-being.

Renting where you live seems like something that is done only until people save up the necessary funds to use it as a down payment to secure their own property. But what if we told you it is possible to get the same financial benefits by renting over buying so long as your disciplined enough.

Let’s go over some of the pros and cons of renting your home over buying in order to see if renting for the long term is right for you.

Benefits of Renting

You are able to Move consistently: A big advantage

Unlike home ownership where there many constraints to moving, renting gives you the flexibility to move on a regular basis. Typical rental terms will have you locked in for a period of one year but some landlords give you the ability to stay on a month to month basis meaning you can easily pick up and go whenever you please without a penalty. Moving as a homeowner is usually much more stressful and costly as it comes with selling costs that usually costs tens of thousands (real estate commissions, lawyer fees, early mortgage payment fees, etc) which makes it hard to pick up and go. Renting allows entrepreneurs and those with wanderlust the benefit of being able to consistently move locations that will suit their current and/or business needs. 

Money is Available

Real Estate ownership can be a great investment when done right, but can come with significant cash needs as typical down payments are 20% or more of the purchase price. On a very typical Five Hundred-Thousand-dollar condo this means that you would have to come up with One Hundred Thousand dollars plus of your own hard-earned money. This is money that can be used to start or invest in your business, used to travel or simply invest in a well diversified investment portfolio where money is always available. Renting gives you the ability to have access to your savings and allow you to invest in other things that might suit your unique goals.

Home Ownership is not always the Best Investment

For the millennials among us it would seem like Toronto real estate is the best investment in the world. For nearly our entire lives, Real Estate has been pretty stable and has produced double digit returns (10% plus) on a yearly basis. But this is not the reality of real estate over the long term. If you look back over time, real estate has generated just over the rate of inflation. (For the finance nerds reading this, real estate should produce around the same return as a long-term bond as there is a small risk premium over inflation). What this means is although real estate has been very hot, there is no evidence that this will continue and when you take into account property taxes and maintenance, these returns look even less attractive. On the other hand, investments in the equity/stock market has strongly outperformed real estate over the long run so investing your money into a well diversified portfolio makes sense.

No Headaches

Most Real Estate properties won’t pose any major repairs that need attention for the first 10 years, but things do come up. Plumbing, electrical, structural problems can arise among other things that can require significant attention and money for landlords. These are things that renters don’t need to worry about and usually will pass on any problems with a call to the owner.

Cons of Renting

Helping Pay Someone Else’s Mortgage

Real Estate Investments are attractive because you are forced to save by making your mortgage payment where over time as you pay down the mortgage you get to build equity in your home. This payment can be similar to a lease payment but the difference is you are not building your own equity, but rather, helping someone else with theirs. If you are leasing without saving and investing your money you can be setting yourself up for financial problems in the future.

Saving may not be a priority

Rent payments can free up some money as payments may be less then if you had a mortgage, but not having a forced savings by a means of paying down the mortgage may cause people to not make it their top priority. Also, the cash savings that would typically be used as a down payment on a home should be invested into a well diversified portfolio and should not sit in cash where the money would be eaten by inflation.

Having a closer look at these Pros and Cons of renting, it doesn’t seem that home ownership is the surest and best bet for everyone. For the Entrepreneurs and freedom lovers among us, having the ability to invest or move frequently, renting might be right for you. On the other hand, those that are more pragmatic and want a safe way to build wealth home ownership might be a good idea with the mortgage acting as a forced savings.

Hope this helps you on your way to financial success.

Yours truly,

The Wise Investor