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5 Reasons Why it’s Better to Rent than to Buy





This is a guest column by Sean Cooper.

If you’re a renter you’ve probably heard it a million times from family and friends, “paying rent is like throwing away your money” or my favourite, “paying rent is paying someone else’s mortgage.” In certain situations both those statements are partially true, however, as you probably already know, nothing is ever clear cut in finance. Depending on your financial situation it may be make sense to rent instead of buy. Let’s look at 5 reasons when renting your primary residence might makes sense.

1. Short-term housing needs: if you plan stay your primary residence less than 5 years

If you’re working on contract, you’ve got a work visa and plan to only stay a few years, or you’ve just moved to a new city and you’re unsure how long you want to stay, it probably makes more sense to rent. It all depends on how long you and how likely you are to stay in one location – if you plan to stay for 5 years or less it most likely makes sense to rent – it will take at least a couple years to recover your closing costs (land transfer taxes, legal fees, inspection fees, and moving expenses, just to name a few).

The Canadian Mortgage and Housing Corporation (CMHC) recommends budgeting 1.5% to 2.5% of the purchase price for closing costs. For example, if you purchased a $500,000 home, the closing costs could range from $7,500 to $10,000. Also, in the first few years of your mortgage, your monthly payments will mostly go towards interest (unless you make a really big down payment) – it’s only if you’ve lived in a house for a few years that you really start to pay down the principal.

2. To free up your net worth for investing (it’s also risky to invest the majority of your net worth in one thing)

Let’s face it, houses are expensive. Anyone who is paying a mortgage most likely has most of their net worth tied up in their house. That’s fine and dandy if housing prices continue to appreciate like they have for past years (the Canadian real estate market has provided a 6.82% compounded annual growth rate 2000 to 2010).

However, if the real estate market was to slow down or a similar situation to the sub-prime mortgage fiasco was to happen in Canada, your net worth could decline significantly. A lot of people don’t buy their primary residence solely as an investment, but if you were to rent instead, you would free up a lot of your net worth and be able to diversify by investing in ETFs or index funds.

3. You live in a market where housing prices are expensive

If you live in a major city like Toronto, Montreal or Vancouver housing prices are among the highest in the country. Furthermore, if you can’t save enough for at least a 20% down payment, you’ll end up paying CMHC insurance. The average housing price in the Greater Vancouver area in 2010 was $675,853 – you’d have to make at least a $135,171 down payment to avoid paying CMHC insurance. On top of that you’ll probably have to take a mortgage with a longer amortization period of 30 years. Check the classified ads in your local newspaper to see how much rent is and see if renting makes sense.

4. Less responsibility and expenses: no maintenance or major repairs

Living in a house can be very expensive. Not only do you have to pay all sorts of recurring expenses like property tax, heating, hydro and home insurance that usually increases annually, there’s also the major expense of home maintenance and repairs.

Your house may be in relatively good shape, but eventually the roof, windows and furnace will need to be replaced. For an older home, I’ve researched that up to 3% to 5% of the value of the home can be spent on maintenance/upgrades annually. For example, on the same $500,000 home you can expect to spend $15,000 to $25,000 yearly. Homes also require upkeep – some home owners take pride in shoveling show or raking leaves, but if you’re busy or just don’t want to take on the added responsibility, renting can make sense.

5. Rent increases are regulated in some provinces (housing expenses are not)

An advantage to renting is that annual rent increases are regulated (in some provinces) – your landlord can’t just increase your rent overnight by 10%. Housing expenses, such as hydro, gas and cable, meanwhile are increased at the discretion of the service providers. Also, when you go to renew your mortgage there’s no way of knowing what interest rates will be like – your mortgage payment could go up substantially if interest rates jump.

Final Thoughts

Although there are a lot of advantages to buying a house, it doesn’t always make sense in every situation. It’s a good idea to look at why you want to own a house and see if it makes sense to buy or rent.

About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.





38 Comments, Comment or Ping

  1. 1. NYCer

    Totally agreeance. My family at first told me it was wasting money but all these points pertain to my situation.

    1) I do plan on more short term accomodation until I figure out where I want to live and the type of home.
    2) Def free up net worth to invest and since I am bearish on the housing market now it’s best not to buy.
    3) I wanted to live much closer to work and where I rent now, housing is extremely expensive; affordable to me but still overpriced.
    4) One of the reasons to move was because I was tired of the maintenance work. Spending so much time a week was too much. Maintenance free lifestyle is currently what I am after. Plus not having to buy gardening and yard materials are savings.

  2. 2. Steve

    The government should not be in the business of providing mortgage insurance. Their presence is only there to essentially regulate the price and keep insurance rates low, ultimately to encourage home ownership.

    Without mortgage insurance (where the bank is protected if you default) the bank will not give you a loan without 20% down.

    This should ring some clear alarm bells. If you can’t come up with 20% downpayment, the bank wouldn’t give you a mortgage because you can’t afford the house.

    If we didn’t have mortgage insurance, housing prices would be a lot lower, and more stable because it would follow our actual income, not the cost and availability of credit.

  3. This is perfect! Thank you very much! Renting is an excellent investment of your time and money. So many of us are moving between jobs so often that it seems the days of the career for life are gone. Thus we need to move multiple times in our lifetime. Although owning a home is considered an investment, it can be more trouble than its worth especially for those younger investors, twenty-somethings just out of college. I will be tweeting this later. Thanks again.

  4. 4. mode3sour

    Nice write-up and I agree with Steve. Renting until you have a real downpayment and are ready to settle down should not be considered a waste of money. People watch way too much HGTV

  5. There some good reasons here. I’m in the US and the FHA government agency is now asking for bailout money from taxpayers. This is the same organization that promised low down payment and interest for first time home buyers. I wanted to buy but now i’m hesitant because the market just does not seem stable. So i’m moving towards renting for the next couple of years until something better happens. Also may old folks think than buying a house is a wise investing choice. However, these days there are more investing options than buying a house.

  6. 6. Ian

    Another reason: in many parts of the country house prices are substantially above their real values. If the ownership costs of a home are higher than its potential rental income (extreme example: Vancouver) then you’re overpaying. Putting most/all of your net worth in an overpriced asset, and amplifying your risk with leverage, seems like a poor financial decision.

  7. 7. ssssss

    I rent for $1 per sq ft each month.
    To buy would be around $580 per sq ft.

  8. 8. Ping

    Single and mobile – rent

    Family and rooted – own

    On paper it appears to make sense to rent, but in practice, unless you are Mr. Spock, owning is still a comfort thing. If you are single and have no commitment or just need a place to put your head, renting is probably best scenario.

  9. 9. Gerard

    One more reason: You’ve just moved to a new city. Even if you plan to stay there for a while, how well do you really know the neighbourhoods, or the schools (if that’s relevant to your situation)? How much can you trust a pushy realtor when you have a short period of time to make a decision? Better to rent for a year and spend your time exploring.

  10. 10. Ty Webb

    The maintenance costs as a percentage of home price formula doesn’t really make sense. The same home that costs $150k in New Brunswick would cost $500k in Toronto but the costs would be the same, same amount of roof shingles, same model of furnace, etc.

  11. 11. SST

    I only know from running the numbers on my own personal situation that you pay rent for twice as long as you pay a mortgage. In the end, renting and buying work out to about the same amount of money. But that’s just my experience with my calculation.

    As far as point #2 goes…it’s a bit ridiculous to use a time period for real estate that was considered by all to be a bubble market. I’ve read much research which states the average annual growth in residential real estate (post inflation) is 0.2%.

    And don’t believe for a minute that just because you are renting that you aren’t paying (fractionally) for everything the owner has to pay for.

    As well, in regards to #2…isn’t that what the Smith Manoeuvre is for? ;)

  12. 12. InsureCan

    My house isn’t an investment. It’s a home. If my wife wants new kitchen flooring because she hates what’s there now, how does that figure into the ‘calculations’ :)?

    Of course it doesn’t calculate. There are strong emotional reasons for owning vs. renting.

  13. 13. trevor

    Interesting points, and I can see the logic in most, but I do have a differing view on some of them:

    #2. If you have the discipline to do it, and even then you’re still taking on risk.

    #3. If housing is expensive, odds are renting is too.

    But my biggest problem is with #4 and #5.

    There are savings to be seen of course, since there is only 1 roof, 1 heating system and one exterior. However there are still maintenance costs and utility costs and taxes. It’s built into the rent. As is profit for the owner. Add in all replacement costs for appliances. and snow removal and garbage and recycling.

    And adding the mortgage rate is a red herring. For 5 years in an apartment, you know that rent is going up 3% a year.
    If you go fixed on a rate, you know for 5 years, your mortgage payment won’t change.

  14. 14. SarahT

    If I were to buy right now, I’d be looking at a $250 000 mortgage. For the first couple of years, about $350 of a $1200 payment would go to the principle. So, I’m renting for $800/mo and investing/saving a minimum of $400/mo. I’m losing out on potential real estate market gains, but I don’t have to worry about so many things! And I get to live in (part of) a house, with a yard… something I’d never get in a $280K condo. (Yes – I live in an expensive part of the country!)

  15. Totally agree on this, especially if you do not have any plan of staying in one place for a longer term. Furthermore, owning a house never occurred to my mind when I was single. I never saw any reason why I should.

  16. 16. Ian

    Agree with SarahT. If I were to buy my current rental I would need to put down $150k (10% of 1.5M) and pay about $7500/month for mortgage. Plus taxes, maintenance and insurance and the opportunity cost of the down payment. Instead I have paid $2300/month in rent for the last four years ($100 increase for the coming year), not a 3%/year increase like trevor suggests.

    So, my options:

    1) I could spend all my savings and essentially all of my monthly income on the exact same house I live in now for 1/3 the price. This involves faith that interest rates never rise or that my income will rise with rates. It also means that when house prices drop by >10% I will be underwater.

    2) I could purchase a house far away from where I currently live for a more affordable price. This would mean I would be in a less-desirable neighborhood and I would have a long commute to work, but I would still be paying approximately the same in mortgage (interest, taxes, maintenance) as my current rent.

    3) Continue to rent. I can save money into diversified assets, instead of putting everything into a single overpriced asset. I have enough left over to live a comfortable and fun life and I never have to go to bed worried about money. I can walk to work and send my kids to a good school. To respond to “ping” above: I get comfort an security from this option, not buying.

    If the rental income from a house can support the financing and upkeep then it’s worthwhile. If it can’t then you have probably overpaid and you’re a speculator, even if you’re living in it. The intangibles of owning your own home I understand, but you have to consider how much you’re paying for them. For me it’s not worth the current price.

  17. Thank you for all the positive feedback. With housing prices as crazy as they are right now, it’s never a bad idea to evaluate your options and consider renting.

  18. 19. David

    I am a landlord and a homeowner, but when I was renting I remember my landlord lived in a small apartment in Scarborough while he rented out the large downtown multiunit house he had bought and for which I, and other tenants, were paying. I remember thinking how smart this guy was: living within his means, but recognizing that real estate can be a great investment. If you are diligent, and thrifty, owning or renting can both make sense – trouble is, most tenants will never bank the money they save by renting while the owner is always increasing his stake each month until all that remains are taxes and utilities to be paid, not to mention a tax-free capital gain. It’s just human nature: I too need the forced savings of a mortgage. I would never be able to save otherwise. There’s just too much fun to be had in Toronto!
    The trouble with Canadians is that we have a built in belief that “everyone should be able to afford a house” therefore, since houses are expensive, and out of reach for many, then by the Great Canadian natural law of Equality, house prices must be overvalued. This is typically the opinion expressed by people who travel overseas very little. Look at London England. All the Greek and Italian money is flowing there as we speak because it has to go somewhere stable. Toronto is not overpriced, and there is a lot more money out there than people understand, and it will go to stable countries and cities. Life may not be fair, but if you recognize trends you can work with them. If you fail to see them, they work against you. At the end of the day, everyone needs a roof. Real estate is not like other commodities. It’s uniqueness is often lost on people. Just my 5 cents worth (sorry, inflation).

  19. The Number One reason it’s better to rent than to buy is to avoid getting killed when the Housing Bubble collapses.

    Canada, China and Australia have huge Housing Bubbles.

    Read:

    http://www.newworldparty.org/2011/11/bubbles-extreme-maker-and-breaker-of.html

  20. 21. Raging Ranter

    I am currently in a beautiful 1800 sq. ft. 3 BR condo townhome in Ottawa (Orleans). I pay $1450 a month rent. To buy this place, it would cost about $300,000. On a 25 year mortgage at 4%, that works out to about $1600 per month. That’s $150 more per month already. Now add in home insurance for $200 per month. Condo fees at $225 per month. Interior maintenance at $150 per month. Property taxes at $250 per month. CMHC fees of $45 per month. It would cost me an extra $1015 per month to live in the exact same house I’m living in now.

    Round that down to $1000, and we’re looking at $12,000 per year. Nope, I don’t care how much the house appreciates over that time, it is not going to return $12,000 per year plus interest. “Oh, but you’re building equity.” Yah right. Nobody builds equity by blowing an extra $1000 each month. And I would need to put down $15,000 up front, plus perhaps $10,000 more in closing costs. Not to mention the lost potential return on that $25,0000 up front. What equity?

    I wish I would have bought a house 15 years ago. But no way would I do so now. Regardless of what happens to housing prices over the next decade, I can’t justify buying at these prices.

  21. 22. David

    Ranter, your comment misses some important points.
    Ask yourself what the numbers look like when you take into
    account the principal paydown on the mortgage. It’s not $1600
    a month apples to apples with your rent, it’s $1600 of which an
    ever increasing portion is savings.
    You have a good deal on your rent, no question, but you also have
    no stability since your landlord can sell at any time and then you pay
    market rates which will reflect the cost of housing stock. So you certainly
    should care what happens to housing prices since these will affect your
    rent down the road. For those with a good time horizon, buying almost always works.
    But you need patience and discipline. I am a mortgage broker
    And former financial planner, so I see clients blow their
    brains out with lines of credit but I also see people who I know will, in 25 years, live rent free
    In a house they own, and be able to will that home to their kids.
    If you think you can beat the odds in the stock market good luck to you, but
    Just remember companies come and go, but people always need a place to live.
    P.s. $12,000 per year return on a $300,000 house is only a 4% return. This is historically quite reasonable for real estate.
    People get emotional about this stuff. It’s primal.

  22. 23. Ian

    David – I think you’re missing some points. Rents aren’t a function of housing prices, they’re a function of income. You can’t finance rent payments so they have to set at what people can afford. Also, if interest rates rise the mortgage payment is going to go up while the rent likely won’t. And once the 25year mortgage is done you don’t have to pay the condo fees, maintenance, taxes and insurance? I think you do. Those are a big fraction of the rent and they’re just as “out the window”.

  23. 24. Marius Z

    Yes, how about #6: It’s cheaper.

  24. 25. David

    I guess we’ll all have to meet up in 10-25 years and see how things are faring. I guess I just come from the owner/landlord school rather than the renter school because for all people talk, when I make my last mortgage payment and it’s $1590 of principal and $10 of interest my tenants will not be investing their money as the ‘theories’ say they must to keep up with the wealth-building nature of home ownership. I know where my future is: 0$ mortgage payments and a few paid off houses…yeah yeah: taxes, maintenance. We all have bills to pay. I guess my perspective is just that of an older person who has seen a bit of the world and has seen that in great cities, land goes up in value, house prices and rents follow.I could be wrong, but then I think this whole ‘roof’ product I offer my tenants will not go out of style or go bankrupt any time soon. Try picking stocks with that degree of certainty. Real estate isn’t everything, it’s part of my portfolio, and it seems to be working pretty well for me and my landlord friends. :)

  25. 26. Raging Ranter

    David, I’m sure you’ll do very well. And I’m sure my landlords feel the same way. And you know what? You and they are both right. They bought this house back when it was reasonably priced. Presumably you bought yours at reasonable prices as well. Why wouldn’t you? If I could buy this house right now for a price where I could rent it out and reasonably expect to cover PIT + maintenance & condo fees, I’d buy it in a flash, and I’d buy another one or two just like it as soon as I could.

    My initial post was not as a repudiation of home ownership by any means. My point is that beyond a certain price point, home ownership becomes less affordable long term than renting. I believe we are in such a period right now. I can’t predict the future, but assuming RE will just keep rising is not a prudent assumption to be making right now. We see where that kind of thing lead in the US.

    Finally, mortgage free does not mean cost free. Maintenance on a 25 year old home can be huge.

  26. 27. Sonnet

    Beyond the home rent/buy discussion, don’t forget the alternative lifestyle options: Living in a van, car, or rv. Exchanging some kind of live-in support for room and board. Housesitting. Staying in hostels and out of doors. Combinations of these. The entire buy/rent drama is side-stepped by millions, actually, including myself for over ten years now.

  27. David,

    It absolutely makes sense to buy if you can buy before the onset of a bubble. If you did, you would make a killing. However, if you buy at the peak of a bubble, you can get killed.

    Canada’s housing bubble has now surpassed the American housing bubble that peaked in 2007.

    Americans’ household debt to income ratio peaked at approx. 124% in 2007, coinciding with the peak of their housing bubble and fake economy. They have deleveraged down to ~105% since then.

    Canadians’ household debt to income ratio continued soaring to 150%, coinciding with Canada’s housing bubble and fake economy.

    How many Americans, who bought in 2007, wished they rented? Every one of them.

    50% of American mortgage holders are now underwater. Millions of them are in financial ruin.

    However, the above is misleading. For young couples who have to pay bubble prices, Canada’s household debt to income ratio is much higher. In the example below, it’s 349%.

    Example of 29 and 30 year old Canadian teachers
    http://www.theglobeandmail.com/globe-investor/personal-finance/financial-facelift/when-dreams-need-a-renovation/article2241692/

    Household Income: $136,000 (average in Canada is approx. $80,000)

    Assets:
    House: $426,000 (Bought in 2010. House prices are higher now.)
    Cash: $1,300
    TFSA: $300
    RRSP: $1,800
    Total: $429,400

    Debts:
    Mortage: $410,380
    Line of Credit: $64,130
    Total: $474,510

    Negative Net-worth: -$45,110

    Household Debt to Income Ratio: 349%

    Mortgage amortization is 35 years. If they have a $410,360 mortgage, that means that their down payment was 3.5 percent. This is Canada’s version of the American subprime, ARM or Option-A mortgage. This couple has 96.5% leverage. Many companies, with positive net worth and significant profits, try but cannot get leveraged anywhere near this. If house prices come down, this couple will be crushed into financial ruin.

    As public sector workers, they get a pension at age 55, which the majority of Canadians do not. This means that the majority of Canadians are worst off.

  28. Great post Sean!

    As a first time home owner, I sometimes wonder if it’s better to rent :) But this is primarily because I’m lazy to do the maintenance around the home.

    Out of curiosity, do you regret your foray into first time home ownership?

  29. As a homeowner, I believe it is wasteful to rent but everyones situation is different. If you cannot say if you will still be living in a city for at least 5-7 years the benefits renting has outweights the costs.

    Selling a house and the eventual move and land transfer taxes costs a lot of time and money.

    It is also a major benefit to being established when you have a family. It is very difficult on young kids when you have to move every 3 years.

  30. 31. Ivan

    screw it, there is one big reason for buying — you can do whatever you want with it!

  31. Ivan,

    You’re right, as long as bubble prices don’t drop and cause you to be underwater and foreclose.

  32. 33. Ronnie

    I just bought a studio condo 400sq ft,,market value is $180,000.Company is Option for Homes.They give you a 13% interest free loan so it drops the morgage down to $155.000.Only thing If i sell the i have to pay back the 13%..

    Carrying costs are 900/mo including taxes amd fess.I paying 860/mo rent now with all included.i think thisis a great deal.

  33. 34. Patrick

    I think it is more profitable to purchase a house if one can afford at least 40-70% of the house value.

    Anything that will bring monthly repayments to less than $700.

    Although, situations are different. I have a house already in SA worth $300,000 – no mortgage or debts tied to it, apart from a few renovations I will like to do before selling it off, before I relocate to Canada where I plan to purchase two house – one for me and my family and the other for rental income (investment)…

  34. 35. Ed Rempel

    Sean,

    The real answer for those interested in wealth building is surprising, but clear. It is worth owning only if you have a large mortgage. However, if you have little or no mortgage, you are better off selling and renting so that you can invest the money for a higher return.

    The reason is that other investments, specifically the stock market, grow many times faster in the long run. Here in Toronto, the last 30 years have been the best ever for real estate, but the Toronto stock market has grown at 6 times the amount Toronto real estate has grown.

    Real estate is an effective wealth builder, however, if you leverage it – meaning you have a large mortgage so that you only have a small amount invested. Then the rate of return on the amount you have invested is high.

    Once the mortgage is paid off, the return is low. In the last 30 years, Toronto real estate has grown slower than GICs.

    Bottom line – if you are interested in wealth building, own your home while you have a large mortgage. Then sell when the mortgage is nearly paid off to rent, so you can invest the money. If living in your home is more important to you and you don’t care that your return is low, keep owning your home after the mortgage is paid off.

    I realize this is the opposite of what most people believe, but is fully supported by history.

    Ed

  35. 36. SST

    Red Alert! Red Alert! Rempel and SST agree! ;)

    This is the reason why true wealth accounting never takes principal residence onto the balance sheet — you cannot access the capital (at least not without taking on a liability).

    Since the 1950′s, the ‘homeownership’ meme has been pushed so hard by both the financial industry and the government that it has become culturally ingrained, but, as Ed demonstrates, at the cost of actual wealth.

    Long-term RE returns — global, national, regional et al — are well below 10% per year, and most likely below 5%. Merely keeping up with inflation will not grow your wealth.

    The emotional component of residential real estate still trumps almost every other factor, to the point that buyers will do whatever it takes to reinforce the societal belief system; ignoring math is usually the first victim.

  36. 37. Evan

    Ed,

    You said “However, if you have little or no mortgage, you are better off selling and renting so that you can invest the money for a higher return.”

    That’s one option. Why not take out a LOC, keep the house, and invest with the LOC? Is this not the same thing?

  37. 38. SST

    @Evan — no it’s not the same thing. For starters, as I mentioned, accessing the capital tied up in your house via a line of credit — or more aptly, line of debt — required you to assume a liability, eg. LOC @3% interest. Secondly, you cannot access 100% of your capital; what is the current limit, 80%? Thus you are stuck with 20% of your capital appreciating (hopefully) at ~5% long term vs. ~10% (maybe) in the stock market.

    If you sell you instantly gain access to 100% of your capital (minus all fees).

    Of course, case by case, one would have to sit down with a calculator to figure out an all-costs comparison of the two to see what option comes out on top.

    Much better to think of your principal residence as your home/asset only while using other people’s money; once it’s all your money, think of it as a liability.

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