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 percent of millennials own homes versus 55 percent 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 makes more sense to rent.
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 flow that you can invest, which can ultimately put you on even financial footing or better with a homeowner.
As always, there’s a familiar caveat here: you have 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.
…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 to another part of the city – or country – it’s usually as simple as giving your landlord 60 days written notice. When you own a home you’re more tied down. If you get a great job opportunity in another city or country, it’s tougher to relocate. 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. It’s taking Canadians two to four times longer to save a 20 per cent down payment.
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.
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. Closing costs typically add up to between 1.5 percent and 4 percent of the home’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 per cent 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).
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 per cent equities, 40 per cent fixed income). Using a portfolio withdrawal rate of 3 per cent, 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 per cent 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.
And when you buy, you’re able to use what I like to call “other people’s money.” The bank often puts up most of the money when buying. And if the home appreciates in value, you can come out ahead in the future, plus have a paid-off home to show for your efforts. The government also 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.
Then there’s the fact that rent never ends, whereas mortgage payments do. So while you may be able to find your “dream home,” you can’t really find a “dream apartment,” unless you plan to buy it outright. If your landlord decides to sell the property, your dream apartment suddenly becomes someone else’s dream home, and you may be forced to move from a place you otherwise would stay in for years.
Why I Chose ‘Buy’ in the Rent vs Buy Debate
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 buy vs. rent 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 between rent and 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 per cent 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.