Know When to Rent ‘Em, Know When to Buy ‘Em
We’re told it’s always better to buy than rent. Everyone—from our parents to the banks to the government—encourages us to buy, buy, buy our homes.
But times have changed, and I dare say that these authority figures might be slightly out of touch. The jaw-droppingly high cost of real estate in big cities is encouraging millennials to rent instead of own, causing homeownership rates to drop. At 30 years old, 50.2% of millennials own homes versus 55% of baby boomers at the same age. As a millennial homeowner, I can’t help but wonder if I’m generationally displaced.
There’s an old misconception out there about renting that needs to be addressed. You’re not “throwing away your money” if you’re renting. While that familiar axiom might be true sometimes, there are plenty of circumstances in which it does actually make more sense to rent than buy.
In This Article:
You Might Choose to Rent If…
…You Invest What You Save
Renting tends to come with lower carrying costs than owning. Typically, all you’ll have to worry about paying as a renter is, well, the rent (clearly) and perhaps a share of utilities. This leaves you with extra monthly cash to invest, which can ultimately put you on even financial footing or better with a homeowner.
As always, there’s a familiar caveat here: You need to be financially disciplined for this strategy to pay off. One mistake I see a lot is that those who rent tend to fall prey to something called ‘lifestyle inflation.’ Rather than investing what they save as renters, they just rent nicer apartments, eat at fancier restaurants, and put more money into their wardrobe than their RRSP. But this money vacuum can be easily avoided by:
1. Budgeting to find out how much you have left over to invest each month after factoring out all your expenses, then;
2. Funneling that leftover money directly into your investments. Some robo-advisors, like Wealthsimple, allow you to do this automatically via pre-authorized contributions, which set recurring transfers from your chequing account into your investment portfolio, at whatever amount and interval you choose.
…You Have Rent Control, aka the Urban Holy Grail
Depending on where you live, you might be lucky enough to benefit from the urban miracle known as rent control. That means your landlord can only increase your rent by the rate of inflation, which in turn keeps your cost of living way down and leaves you with more money to invest. In Canada, rent control is now implemented in most big cities like Toronto and Vancouver (although not in Montreal).
…You Have a Mobile Lifestyle
Renting makes it easier to move; if you’d like to relocate it’s usually as simple as giving your landlord 60 days written notice. But when you own a home you’re more tied down, and the obligation to be near your property may prevent you from chasing new adventures in faraway lands. I once turned down a fantastic job opportunity in Dallas, Texas for this very reason.
…You’re on a Tight Budget
Renting tends to be more affordable than buying in big cities like Toronto and Vancouver. I know, I know, renting is still unreasonably pricey in certain neighborhoods. But buying in those same areas can be arm-and-a-leg expensive.
When you rent, all you have to come up with is the first and last month’s rent; no need to scrimp and save to pull together a massive down payment on a house, which, incidentally, will take you two to four times longer to save than it did your parents.
And homeownership leads to a lot of other costs aside from mortgage payments. When you buy real estate, you’ll need to pay closing costs, which typically add up to between 1.5%–4% of the property’s purchase price and can include a home inspection fee, real estate lawyer fee, land transfer taxes, and homeowners insurance (sometimes you’ll have to fork over an entire year’s worth of home insurance as one lump sum).
There’s also the elephant in the room that nobody likes to speak about: repairs and maintenance. Homeowners are responsible for paying the big bucks for costly home repairs, such as a new roof and furnace, and are advised to set aside 3–5% of a home’s value toward home repairs and maintenance each year. Renters, on the other hand, can just call their landlord whenever they need repairs (provided the landlord actually picks up).
Related: How Much Do Home Renovations Really Cost?
The “Don’t Buy. Rent.” Movement
Kristy Shen (or FIRECracker, as she’s known on her site) is one half of the couple behind the popular financial independence website Millennial Revolution. She also happens to be Canada’s youngest retiree, claiming that title at the age of 31.
Back in 2012, Kristy and her now-husband were almost ready to buy a house. “Everyone was telling us to buy—friends, family, co-workers, my parents especially. When you come from an Asian background, it’s sacrilegious to not buy a house,” recalls Kristy.
“We had saved up $500K for a down payment. The turning point was when I saw a dilapidated house, which we nicknamed ‘Devil House,’ in our neighbourhood with a price tag of $400K. I thought, ‘no one in their right mind would want this house,’ but it was sold within a week. Barely two months later, it was flipped by a property developer and put back on the market for $800K. All they did was slap some paint on it, without making any real fixes, and it sold within days.”
Kristy felt like no matter how long and how much she and her husband saved for a down payment, they simply couldn’t keep up with the ever-increasing cost of homes. They also didn’t want to live the next 25 years “house rich, cash poor,” with all their money going toward their mortgage and upkeep of their home, leaving little left to save or have fun with.
Instead, Kristy rents and invests what she saves in low-cost index ETFs, using a 60/40 allocation (60% equities, 40% fixed income). Using a portfolio withdrawal rate of 3%, she has been able to preserve her portfolio and actually see it grow over time. She’s a strong believer that you don’t need a home to achieve financial security.
“The misconception many people have is that not buying a home means you are throwing away money on rent, while losing your savings to inflation. What they don’t realize is that the alternative to buying a home is actually renting AND investing. When you rent, your price is fixed, which makes financial planning easy and predictable,” Kristy told me. “By renting and investing in low-cost index funds, on average, you will be wealthier than homeowners, because, over the long term, the stock market always beats the housing market.”
What About “Forced Savings,” Side-Hustles, and Other People’s Money?
Despite Kristy’s convincing evangelism for renting/investing, many millennials are still driven to own homes. According to a Royal LePage survey, 86% of those between the ages of 25 and 30 still view real estate as a good investment. And for good reason.
When you buy your home, it’s forced savings. (If you don’t pay your mortgage, you’ll find yourself out on the streets pretty quickly.) You’re far less likely to splurge on avocado toast three times a week with that hanging over your head. The forced savings of homeownership help you build up equity and long-term wealth over the years.
Buying can also be a source of income, as I can say from personal experience. When you’re a landlord, you can rent your property out to tenants (short-term or long-term) while you live frugally. This “subsidizes” the high cost of homeownership in big cities and can shave years off your journey to being mortgage-free. I had the plan of renting out my house in mind when I was looking for homes. Since the cost of living is so high in Toronto, I looked for a house where I could live in the basement and rent out the upstairs to bring in additional income.
Finally, when you buy, you’re able to capitalize on what I like to call “other people’s money.” The bank initially fronts most of the cash when you take out a mortgage, but if the property appreciates in value, you’re the one that comes out ahead financially. And today’s technology can help you minimize your risk of overpaying in interest; online mortgage brokers like Breezeful give you a glimpse of your borrowing options beyond your usual bank, allowing you to search for and compare dozens of potential mortgage lenders and the rates they’re willing to offer. Opportunities to cut costs abound in the public sector as well, since the government offers tax credits and deductions to encourage homeownership. In many cases, you won’t have to pay any tax when you sell your principal residence.
Another option that some people consider is a rent-to-own mortgage, where a landlord and tenant will enter an agreement that rent payments will go towards payment on a property. This option isn’t for everyone but is ideal for some people who might be debating between renting and buying.
Why I Chose “Buy”
My decision to buy a home has a lot to do with how I was raised. Growing up my parents were always homeowners. This encouraged me to start saving toward the down payment for a home early on. Once I graduated from university and landed my first full-time job, I decided the timing was right to go house hunting.
Buying a home made sense for me financially, mentally, and life stage-wise. I have a steady job, I’m committed to staying in Toronto for the foreseeable future, and I’m prepared for the extra responsibilities (and costs) that come along with homeownership. So I purchased a home that will suit me (and a possible wife and kids) for years to come.
But there are convincing arguments on both sides of the renting vs buying debate, and whichever you gravitate toward should ultimately depend on your personal circumstance rather than the views and decisions of your peers.
If you’re debating whether to rent or buy, consider the following rules of thumb when making your decision:
When to Rent
- You aren’t ready to settle down and don’t know what your long-term plans are (e.g. you might go back to school, take a job promotion in another country, your job situation isn’t stable, etc.).
- You can’t afford the monthly carrying costs of homeownership. Renting is more affordable and makes more sense in the short term.
- You’re carrying high-interest debt. Focus on paying that off first before buying a home. It makes little sense to borrow money for a mortgage when you’re paying 19% interest on your credit card.
When to Buy
- You’re ready to put down roots and are committed to staying in the same place for five years or longer.
- You’re ready for the responsibilities of being a homeowner. Homeownership comes with a lot more responsibility than renting.
- You’re ready to make financial sacrifices. You may not be able to afford to go on multiple trips a year when you’re a homeowner versus when you were a renter. If travel is highly important to you, you might be better off renting.
Great read! This is a very informative discussion about whether one should rent or buy a property. I also read an article about the same topic here but this one’s more geared towards Toronto. It still talked about the pros and cons of owning and renting a property in general though that’s also very informative for those who are torn on whether or not they should buy a property or continue renting.
This really helps add to the diaspora on this topic and I’m sure interested readers of our article will appreciate expanding their knowledge and reading more from other sources.
What do you think will happen to the housing market now? I am trying to decide whether to list my townhome now, or wait 3 years. I owe about $800,000 and I think I could sell now for $1.1M. In 3 years, I may not be able to sell for that much. I have lived here for 4 years. Thanks.
Though I am not a real estate agent, I know someone who is. So I asked my friend Imraz Ramani of Ramani Real Estate in Toronto to answer your question. Here’s what he said: “It’s hard to say because no one knows when this will end. If we can’t contain this virus in the next few months then an economic recession turns to economic depression and prices will go down even further before up. Look at all the lay-offs already occurring, many buyers aren’t taking the risk to buy unless they get a good deal and don’t forget they still have to get financing approved.
many individuals rely on summer seasonal jobs to earn for the year, so we haven’t seen the bad yet, in terms of loss of income yet, and the worst is still coming.
No one has a crystal ball but based on her wording it seems like she’s feels in 3 years the market will be down, at least for her specific type of product, and if that’s how she feels then she needs to find an agent that can manoeuvre in this new field and still create demand and traffic to meet her expectations. I’ve listed 4 properties in the last 3 weeks and two home inspections with two different buyers, it’s very different regarding foot traffic, processes and procedures when working with sellers and buyers now days.
Where will the market be in 3 years? I can’t answer that and pretend i know but one thing we’ve seen is, the government will do what they can to prevent a crash, though eventually it will come, but who knows when?”
What do you think about a situation where rent is 1800$ per month for a 1BR and Estimated mortgage for 2 BR is 1900$ in same building. Down Payment involved is 90,000$ which is currently lying in savings account and not invested.
I assume – Buy!
But will it still make sense if you tentatively plan to sell this property 5 years later (possibly to move back to home country).
Interesting situation you’ve got there. It might hurt to pay $1,800 per month for a smaller place, especially if you know that for another $100 per month (and the down payment) you could be building equity in a home. Rent is essentially money burned with not return on investment, but this assumption operates only in a world where real estate prices continue to climb. If this is what you think is going to happen, and you have a use for the extra bedroom, then going for the mortgage aligns with your beliefs very well. Even if you move back home, the property can be rented out and managed at an expected profit, under this model.
However, there are good reasons to rent too, and ones that are also largely subjective. If you feel the real estate market is plateauing, renting may end up the cheaper option as any home loan you take out in the apex of a market bubble will quickly be underwater. If you’d also rather not manage a property or deal with renting it out from abroad, continuing to rent would be smart. Good luck!
Great information! My husband and I will be building a home on inherited land in about 5 years. The estimated cost is 400k. We could delay the build if needed. Prior to that, in the coming months we have the option of buying a starter home for 300k with 50k down payment or renting for $1000 a month. Income is 100k yearly pre-tax. We are trying to determine if it is more financially sound to rent and save more money for the build (and other life costs- starting a family in a few months) or if we should build equity with a mortgage now. Do you have any pointers on how to make this decision? Hope that is enough info! Thanks!
Thanks for the comment! If you want to rent for 5 years until you begin construction, at $1,000 per month that’s $60k you’ve spent that you aren’t getting back, whereas a $50k down payment and mortgage payments go into equity in the starter home. That’s the positive. The negative is that this will represent a higher cost over the same time period versus renting, but it’s worthwhile if you can handle the responsibility of a remaining mortgage/maintaining/selling the other home while building your new one.
On the other hand: Why build equity in a home if you plan on leaving within 5-6 years? Unless you want to have a second home in addition the one you plan on building, it’s best to save all the closing costs, inspections and agency fees that a mortgage will require and save up more cash (and peace of mind) by continuing to rent in the meantime. A financial advisor will help you get the specific numbers, but if you can estimate monthly costs in both scenarios, an answer will present itself.
I’ve decided to rent after reading this amazing article. THANK YOU !
What if you live in an area where mortgages are actually less expensive then renting but you’ll only be living here two years?
It sounds like renting is the decision to make here. If you’re truly only going to live there for two years, signing a mortgage doesn’t make the most sense. While some might take out a mortgage on a reasonable property, live there for two years, and then rent-to-own while subsidizing your meantime rental costs elsewhere, that’s complicated and predicated on the idea that you want to own property there. We’ll assume you won’t fall in love with the area, move up the ladder at your job and stay put, have kids suddenly, or encounter any of the other reasons people find themselves settling down in a new area. It’s easier and less complex to simply rent, even if it is slightly more expensive over the two-year window!
Having owned two houses in the past, and now renting, I’m not inclined to buy again. The predictable and hassle-free nature of renting has me sold.
Great commentary on the article. We happen to agree: the high price of home ownership means that as an investment, it comes with a higher opportunity cost a whole lot more work. Those who rent are able to use their capital more flexibly, as they can anticipate the expense more easily and budget for investment in other areas as opposed to the already-bubble-like housing market. In the end, the absurd market these days just makes it so that house-rich, cash-poor lifestyles are more common. That’s fine for some, but for others who don’t want to put the majority of their eggs in one basket, renting is preferable.
This is totally true for most of us. Reasons may vary for the decision of renting or buying a property. Thanks to this helpful article which may help our fellow decide better.