Renting vs Buying a Home: Is House or Apartment Ownership Worth It?
How to Make Your Decision in Canada
by Kevin Sun
Renting vs buying your home in Canada – which is the better choice? You’ve probably heard that it’s always better to buy when you can (at least, that’s what I often heard growing up), but the truth is that it depends. There are times when renting is in fact the better option, even when you have a down payment ready and costs for home ownership budgeted. It all comes down to what your priorities are. Here are important points to consider for settling your personal rent vs buy decision:
Pros & Cons of Buying an Apartment, House, Condo, or Townhouse
Becoming your own landlord by buying a home might sound great, but has its pro & cons. For many people, a big plus is not having to deal with another landlord who might find a reason to evict you or cause other kinds of stress. However, that also means you have to help yourself when, say, your hot water tank bursts in the middle of the night. Sudden maintenance costs often come as an expensive surprise to new homeowners. If you’re part of a strata, they cover some maintenance costs, but you’d then be paying strata fees that – like your mortgage – must be paid to continue living there. And then, of course, there are utilities, property taxes, and home insurance costs to consider. Read on for more pros and cons to consider.
Buying a Home Makes Renovations & Customizations Easier
Do you dream of making your home just the way you want it? Then buying makes that much easier. When you rent, your tenancy arrangement typically restricts what customizations you can make to your living area – assuming you get to make any at all. If you have a good relationship with your landlord, they might give special permission for renos that normally wouldn’t be allowed. However, it can also feel like a waste of time and money to make those renos on someone else’s property. If you buy a house without a strata, you’ll have more freedom to make your home truly your own. However, strata housing units like an apartment, condo, townhouse, or duplex may still have strict restrictions for what alterations or improvements you can or can’t do.
How to Keep Renovations from Breaking Your Budget
Buying a Home Creates Stability
When it comes to buying a home, the cliché of putting down roots is true. Owning your residence creates a level of stability that’s hard to achieve through renting. This helps bring peace of mind when you want to stay in the same place for a long time. However, it also isn’t compatible with everyone’s lifestyles. If your job or other circumstances require you to move often, then the flexibility of a lease agreement can be preferable to a mortgage contract. Some people just like to change where they live often, and that’s perfectly fine too. When buying a home, choosing to live there or rent it out for at least a few years helps avoid losing out on your unrecoverable purchasing and selling costs (you could even end up losing money). Before committing to a mortgage, it’s also often a good idea to try living in an area first to make sure that you really want to put your roots down there.
Building Home Equity
Building home equity is often the biggest reason people buy a home. With every mortgage payment, you’ll own a bit more of your home. If you manage to completely pay it off, then that home will be yours to live in “rent free.” But realistically speaking, this is a process that can take decades, and a lot can happen in that time. Some Canadians instead look towards their home as a shorter term investment, hoping to take advantage of rising property prices to sell the residence at a profit. However, there’s no guarantee that you’ll be able to sell at the price you want when you want to.
This can be a big problem for those who buy homes they can’t afford in the long run. It can lead to tremendous losses or even an underwater mortgage where more is owed on the house than the house is actually worth. Canadians can be vulnerable to this during times of low interest rates. Low rates make getting a mortgage seem cheap, and even though you had to pass a stress test, you get used to making your payments based on a lower rate. Then when rates inevitably rise, many homeowners who borrowed to their limits find themselves suddenly shackled to higher payments than they can handle.
All this isn’t to say that building home equity is bad. In fact, it’s one of the best investments you can make for your future. But it isn’t foolproof either. Rather than risk getting burned by relying on making a quick profit, it’s much safer to buy a home that’s completely within your budget and that you could live in for a long time – even if you don’t actually plan on doing so. Whether it’s an apartment, house, or whatever else, your principal residence should be a place you can afford.
Why Renting Isn’t a Waste of Money
Renting doesn’t have to be something you just tolerate before buying a home. Contrary to popular opinion, it isn’t a “waste of money” either. Having a roof over your head costs money whether you rent or buy. Especially in the beginning, there are a lot more costs to home ownership than there are for renting. This includes the down payment, property taxes, strata fees, utilities, maintenance costs, and of course, mortgage payments. By renting instead, you free up more money to use for other productive things like education, business, investments, and getting out of debt. This can bring you just as much or more value than buying a home, even into retirement.
If you’re still not convinced, think of it this way: people don’t waste money by renting, but they can waste the money they free up by renting (in cases where the cost of renting is lower than the cost of buying). On the other hand, buying a home “forces” Canadians to at least save some money as home equity. The challenge of renting is that you have to really strategize how you use your leftover funds effectively, which requires matching your actions to your priorities. Creating S.M.A.R.T goals can help guide you as a renter or homeowner.
Calculating Your Rent vs. Buy Decision: Is the 5% Rule Accurate?
Unfortunately, there’s no magic rent versus buy calculator that will give you all the answers you need. There is however a good rule of thumb, and that’s the 5% rule. One mistake Canadians make when calculating whether to buy or rent is to equate their mortgage payments with rent payments. But part of each mortgage payment turns into equity (i.e. money in the home) whereas rent payments are unrecoverable, making this an apples to oranges comparison. However, there are still unrecoverable costs to home ownership.
Put simply, these unrecoverable costs equate to approximately 5% of the home’s total value every year. So to make an apples to apples comparison of renting versus buying a home, you need to compare that 5% of home value to the yearly cost of rent. This means that if your yearly rent is higher than 5% of the home’s value, then that can be one more reason to buy a home. On the other hand, if your yearly rent is lower than 5% of the home’s value, then that can be one more reason to keep renting. For details and further reasoning behind this rule, watch this explanation by Ben Felix.
As Ben Felix states, the 5% rule is an oversimplification. It’s also a purely numbers argument that doesn’t consider other differences between a home you might buy and a home you might rent. This means that you should never use the 5% rule to force yourself into making a decision that you’d otherwise be uncomfortable with. But if you’re on the fence, then this oversimplified rule of thumb can be useful for helping nudge you one way or the other.
Whether Buying or Renting a Home, You Need a Budget
At the heart of the rent vs buy debate is the need to have a financially stable lifestyle – one that will take care of your family now and in the future. But neither buying nor renting guarantees financial stability. It’s only when you let your budget guide your decisions that you give yourself the best chances of prosperity. A budget is just a plan for how you use your money to meet your needs and achieve your goals. When making the decision to buy or rent a home, make sure that the costs of your choice fit the money plan you’ve made for yourself. This can be harder to figure out than it seems for housing expenses.
Just as mortgage payments are not all you have to worry about as a homeowner, rent payments are not all you have to worry about as a renter. For example, renting a small apartment might mean you have to also pay for a storage locker to keep other things you need but don’t have space for in your home. Buying a house in the suburbs might mean that you have to start spending more on gas to commute to your workplace.
The hardest part of budgeting is accounting for everything, but that’s also the most important part. One key expense that people often forget to account for is an emergency fund. This is especially important for renters because if do you have to move, it’s likely that you’ll have to pay higher rent elsewhere. Finding a place on short notice is stressful enough in a tight market, but not having enough cash on hand will make things much worse. That said, it’s not like homeowners never run into emergencies either. Just like with having a budget, having an emergency fund is necessary for renters and homeowners alike.
How to Get More Help with Making Your Renting Versus Buying Decision
If you’re currenting renting and are unsure if your budget can handle buying a home, one great exercise is to “try on” a mortgage. After calculating the difference between what you’re paying now to rent and the total monthly cost of home ownership, force yourself to save that difference in a separate account for 6 months. You’ll gain a much better idea of whether your budget can handle the extra cost or not (and accumulate a bigger down payment to boot). If you’re not sure how to do this or need help with making a strong budget, our non-profit credit counsellors would be happy to provide support in a free and confidential meeting. One of the biggest obstacles to home ownership for many is their debt, and our counsellors have helped over 800,000 Canadians manage their money and debt better. That has allowed those who want to be homeowners pursue their goal with a solid plan. Call us at 1-888-527-8999, send us an email, or chat with us anonymously online today.