To Rent or To Own? Ah, That’s the Question!
Posted by John Draper | Filed under Home Buying, Money Management
I’m not sure when renting got such a bad name, but if I were to hazard a guess I’d say when real estate started zooming through the stratosphere and a “home” became an “investment.” Then renting became “throwing away your money.” Never mind the fact that you were putting a roof over your family’s head. Only slugs rented. Anyone who wanted to be wealthy knew enough to get into a home. As you can see for the sub-prime fiasco in the U.S., that attitude left a lot of people homeless when they found they couldn’t CARRY their homes AND EAT.
When I was in my 20s, I lived in a neighbourhood that was suited to a single girl hell bent on a good time. Back then, renting was the perfect solution: one of limited responsibilities and commitment. If a window broke, I called the landlord. If the fridge stopped working, I called the landlord. Renting is virtually a worry-free existence. (All this is assuming you have a decent landlord).
Home ownership can be a pain in the rump. There’s always something that needs fixing. But home ownership also brings a ton of warm and fuzzy feelings. You have complete control of your environment so, yes, you can paint your living room red. And if you enjoy puttering about, you’ve just secured yourself years of weekend entertainment. Course, when it comes to the rent versus buy question, you can’t just focus on the feel-goods. You’ve also got to get in touch with at the financial facts of life.
People often believe that a home is a good investment. And virtually every rent-versus-own question is a lead into why you HAVE TO buy your own home. It’s funny how none of those arguments present the positives of renting. Maybe it’s because they’re all in the business of financing home purchases.
First there’s the calculation that compares the cost of carrying your own home (your principal and interest payments and property taxes) with the cost of renting. Sometimes that comes out a wash, which immediately brings people to the conclusion that renting sucks. Hang on now, there are some other factors that weigh heavily in the decision making.
Renters aren’t responsible for maintenance. Home-owners are, and generally the older the home, the higher the maintenance. A good rule of thumb is to estimate home maintenance costs to be 3-5% of the home’s value per year. So if you’re home is worth $300,000, you should have room in your budget for about $800 a month for maintenance. Sure, this won’t happen every month. Sometimes you’ll go a year or two with little to do. But eventually there will be windows to be replaced, driveways to be repaved, a roof to be reshingled, a furnace, a water heater, a fridge, a stove… I could go on FOR EVER!
Renters also don’t have to shell out the whack of cash homeowners must. There are “closing costs”: legal fees, land transfer tax, and other miscellaneous expenses that you don’t pay if you are renting. Assume another 5% of the purchase price on the home will go toward these additional costs.
And first-and-last-months’-rent is a lot smaller than the typical downpayment on a home. Of course, all that MONEY YOU’RE SAVING AS A RENTER has to be balanced off against the fact that no matter how small the principal portion of your mortgage is (and it’s miniscule in the early years), as long as the market is stable or rising, home owners are building equity and increasing their net worth with every mortgage payment. And that money is earned tax-free. Thanks to the principal residence exemption, the capital gains on the sale of a home is zip, zero, zilch. The way to offset this downside is to use the money you would have put into things like maintenance and downpayment to building an investment portfolio.
Do you suffer from wonderlust? Are you upwardly mobile and constantly on the move in your career? Stick with renting. People who relocate for work are often better off as renters because they don’t have to worry about the horrendous home acquisition and disposal costs (real estate sales commissions alone are between 4-6%). Unless you get lucky and the value of the home you purchased goes up by at least 10%, you’ll be losing money. Keep in mind, too, that In the first five years of ownership, most of your mortgage payments are applied to interest, with minimal paid to the principal. So you won’t get this money back when you sell, and you’ll have all the hassles and costs of putting your house on the market.
Buying a home in a neighborhood you don’t know well is one of the top mistakes home-buyers make. If you’re new in town, you may be better off renting a house for six months or a year to get a feel for it. If you like living there and you like your neighbors, you’ll feel much more comfortable signing on the dotted line later on.
Your employment prospects should be pretty stable before you consider buying your own home. Home ownership requires a number of regular payments – the mortgage, property taxes, utilities, maintenance, and insurance. Missing any of these payments can trigger dire consequences. And unless you have a steady work history, lenders will be loath to ante up with a mortgage.
It’s clear that while there are a number of financial factors that will weigh in when it comes to the rent versus buy question, the decision involves much more than just running the numbers. You’ve also got to look at the emotional rewards and challenges of each alternative.
As a good friend of mine put it, “You can either own capital or you can own property.” If you’re making regular investments and have a well-developed portfolio, you may be content to rent while you’re focused on you’re putting your money through its paces in the market. But if you’d rather put your money to work where you live, then home-ownership’s rewards go far beyond the bottom line.
I’ve been a renter and I’ve been an owner and overall I like home-ownership. Course, like the weather and my underwear, that could change. Who knows what the future holds.
August 29, 2008 at 1:42 pm
Thank you, Gail! It`s wonderful to hear an expert`s take on something I could only believe on instinct before. I have always been a renter, and in the last several years I had to hear the `throwing money away on rent` thing again and again. I always thought it was weird. I had a roof over my head, didn`t I? And whenever friends were agonizing and losing sleep over buying and selling property, I grateful not to be in their shoes.
Granted, it would be nice to own something, but I`m not there yet. I feel sorry for the many, many people (families!) who were encouraged by irresponsible lenders to leap too soon and are now in total distress. (Maybe the lenders should be required to let the borrowers sleep in their living room if they default. That would give them pause. . .)
It certainly puts it in perspective, and once again thanks to Gail I`m now stronger in the face of all this temptation, and utterly determined not to buy a house until I can actually afford it! Wow, what a concept.
August 29, 2008 at 2:28 pm
You have no idea how many people I know in their 20’s still living off mommy and daddy because they REFUSE to rent. It’s buy a house or live at home for these people. I don’t get it.
I moved out and rented an apartment for 5 years before buying. I felt like the transition was a good series of steps to prepare me for the next step. When I first moved into an apartment there was the phase of having to learn to do everything for myself – cooking, cleaning, laundry, shopping, etc. Now that I bought a house, it’s another HUGE load of responsibilities to learn. Things like utilities I never dealt with while renting, home maintenance, renovations, having a yard, dealing with contractors and service people, etc.
I don’t think there’s anything wrong with renting – and you’re right, it’s cheaper than buying – well, NOW it is due to the real estate boom.
Not only that, but I question the logic of your house being an investment. Yes, you have equity, but the only way to get at that “money” is to sell your home and cash out. And where are you going to live then? OR you can borrow against your home equity… but doing so to pay for stuff is just ludicrous.
August 29, 2008 at 2:29 pm
I’m so glad, like Jenny, to have someone state that that renting isn’t only for “slugs”. I would love to have a property, but after doing some reading and a little more research, I’m much better off renting. For now, at least. It’s simply unrealistic of me to have a house at this point in my life, no matter the temptation. I don’t have a lot of debt, but I don’t have a permanent job, either, so having someone else to take care of my plugged up sink, broken fridge, etc. is what I can afford right now.
I’m hoping for an opportunity to move to a different part of town later in the fall, which would knock off $100 in gas and almost $400 in expenses, but I can’t guarantee that will happen, so having my current space be affordable is even more important to me right now.
Thank you Gail for the assurances that I think a lot of us “slug” renters need on occasion!!
August 29, 2008 at 3:25 pm
i do not feel that your principle residence is ever an investment. an ‘investment’ puts money in your pocket on regular basis. there are no tax breaks, and it continually sucks money out of me.
also, you ALWAYS need somewhere to live. so when you ‘cash in’ on your investment, being your house, you have a wad of cash and are now homeless? no, you reinvest so really you have nothing more than the renter who changes apartments. you want an investment? buy a rental property, own a business, shelter your money from taxes as best as you legally can, and rent or buy, which ever suits your lifestyle, not the false sense of worth that comes with home owner ship (cuz where does it stop, nice furniture, nicer car, better landscaping… argh!!!).
August 29, 2008 at 6:08 pm
I have been a renter and am now an owner too.
Honestly, renting was WAY more freedom, and owning is more satisfying (except when it’s time to fix something of course.)
We used to move about once a year, for a better yard, to be closer to this or that, or to get away from really annoying neighbours!!! We finally bought for 2 reasons, because our landlord telling us not to touch anything (the shag carpet and dark panelling must have had sentimental value), and we had a decent down payment saved up and were ready for some serious renovating.
I have known friends that have been bumped out of their place because the owner decided to sell (and then found there was nothing decent to rent in the kids’ school area at anywhere comparable rate!), a true horror story for them. I also had a relative on a meager disability pension who was renting and the landlord didn’t want to replace the fridge when it died (because he was a terrible slumlord) so she had to use a camping cooler until she could find a different place that was wheelchair accessable (few and far between around here).
As owners, we have had the freedom to decorate and renovate (as much as budget will allow), but when the house next door was rented to unsavoury characters that decided to install a grow-op we wanted to MOVE our kids AWAY from that ugliness!!!! And it just wasn’t that easy.
Realtors/inspections/decluttering/painting to ready for the sale/blah-diddy-blah… it was going to cost over $15G just to get away and we simply didn’t have enough equity yet to swing it. Eventually, the criminals left and nice people bought it. Later the vacant lot on the other side was developed, by a slap-shod construction company and it was a truly hideous house…. again we wanted to move. The equity had built up terrifically by then, but now we couldn’t find any place we wanted to move to in our price range especially unappealling with starting from scratch with the equity.
Between being tied to the home, and the entire neighbourhood,we have been tied to the maintenance too. We MAY have taken a chance to move to a different town to up our careers a few years back, but the house kept us here. Maybe that’s good maybe not.
The value of our current home since buying it 9 years ago has nearly tripled…. the taxes have doubled, but the mortgage payments have held steady. And the longer we stay here, the less we owe the bank! I am not sure renting would be this reasonably priced, and the discipline of investing any difference between owning and renting would have been much harder than improving the home as it needs it. That I know about myself.
So I guess, it really is a matter of lifestyle choice and personal preference. You need a roof over your head, how much of a roof and whether you want to be tied to a huge debt for the next 20 years or so is the question.
August 29, 2008 at 7:05 pm
One thing that doesn’t seem to be mentioned is that once you pay off your mortgage, you don’t have to pay anything more.
With rent, that never ends and after that 25 years, you will continue to need to pay someone else instead of being payment free.
I currently rent, and that’s the main point of importance I see with renting versus owning. The equity part means nothing to me, since it’s not really usable. Clearly it’s not the only difference, but for me, that is the biggest thing. I’d like to buy a house eventually, but only when I’m ready to settle down. Currently, I’m getting tired of my current place and thinking about moving. I definitely won’t have that option if I buy though!
August 29, 2008 at 7:23 pm
You have stated the pros and cons very well—except for one thing!Once you’ve paid off the mortgage , you have that money to invest or travel or whatever. Where else could we live for $220 a month for 1900 sq ft?? ( our property taxes) yes, we have to pay utilities, but in many rental properties you have to pay for them as well.
If you chose wisely when you buy a house( we started with a condo, then a duplex ( semi detached back East) then a single family home} fix problems before they become too big for a handy husband to handle, and budget for the larger expenditures such as a new roof, you eventually can live quite cheaply !!Meanwhile our house has quadrupled in price( hmm maybe not quite as we’ve put in an extra bathroom, hardwood floors etc over the years. However every little bit of work that we’ve done, we’ve enjoyed the benefits)
It’s not a ’show home’ but it is ours, all ours! And now we get to increase our savings and investing!! All good !!
August 30, 2008 at 12:58 am
I liked the freedom of renting but I think that owning my house will be cheaper for me in the long run. While my mortgage payment is just over 100 bucks + utils/taxes per month more than my rental was, the rental was a 1 bedroom basement vs a 3 bedroom semi.
I’m treating my mortgage like consumer debt. Significant down payment (saved while renting), mortgage will be gone in 5-6 years from start (3 years to go). My bank lets me double every payment and pay 10% of the original principal every year. I can’t quite afford to do the second, but I do what I can. It really helps!
While my income is about the same as the lower end families on the show (around 55k), I do have the following advantages:
I’m single, no dependants, life insurance.
I can sacrifice vacations (work through them instead of travelling)
I don’t need expensive furnishings/renos.
My hobby is cooking – whatever’s on sale, as ‘unpackaged’ as possible.
I can walk to work.
So hopefully, this debt won’t be hanging around my neck for much longer! Gail’s techniques can work on mortgage debt as well as consumer debt… hopefully aggressively paying down the mortgage will reduce some of the ‘cons’ of owning.
August 30, 2008 at 11:48 am
I don’t mind renting my apartment, however, I know I need to save up for a house. For me owning would just give me a better peace of mind. I know there are definitely aggravations to owning a home, but apartments can be just as bad at times.
Take for instance that last year a man on a another floor brought bed bugs into our building. He let them go for so long without seeking treatment that they started spilling into other units. My unit. I couldn’t move away for fear of taking them with us to a new apartment. Financially we had to fork over more than $200 out of pocket on laundry, plastic mattress covers, and the Raid that kills the little buggers (landlord took care of paying the exterminator). It took months, but finally we’re bed bug free.
Until I move into my own house, I think every time I have some form of bite, I’ll always be worried I’ll have to go through that again, or that a cache of them could be hiding in someone else’s apartment.
August 30, 2008 at 1:13 pm
We do something slightly different.
We have a Manulife One account and only pay the interest. Our interest payment is just over $1,000 per month. I consider this rent. We pay about $200 per month for prop tax and 500 per month for Utilities amd Maintenance. So in a way we pay the “rent”.
Best of all we “own” a 3 year old, 5 bedroom home with 3400 square feet of fully developed space in a large city(over million population) where the drive to downtown takes only 15 minutes.
We have no other debt or credit cards.
Because we “rent”, we invest the difference, a substantial sum in RRSP’s and non registered investments.
We plan to test a theory over the next 30 years that we live in this house. Past experence shows that inflation will help to pay down the “mortgage” For example, people who bought home 40 years ago paid 20,000 for their homes which are worth a lot more now.
I think the same thing will happen in 30 years. So we will have a small mortgage, a great property increasing in value and a large investment protfolio as well. Anyway. That’s the plan.
August 30, 2008 at 4:39 pm
This blog has just made me even more convinced that renting is the life for me.
August 30, 2008 at 7:34 pm
careful with regards to your interest rates BL. if you have a floating rate this could cuz your ‘rent’ to go up significantly.
and invest is slow growing and very secure things, so at least you can build solid equity somewhere if your plan goes to pot.
good luck!
September 1, 2008 at 12:24 am
I just bought a house, but it has been a long time coming. I rented for 5 years while I was in college (I now have a serious dislike for apartment white) and while I for the most part had great property management companies I alway wanted to own. After college I crashed with my parents (paid them for living with them) and put tons of money into a high yeild savings account. My mortgage payment (P&I) + taxes + insurance is less than what I was saving and paying my parents. I also plan on paying extra towards my principle every month. I had to reevaluated my price range after I sat down and looked at the numbers about a year ago. You have the money and the lifestyle owning a house is great but you shouldn’t buy one just because everyone else is or tells you to.
September 1, 2008 at 3:15 pm
Long-term, owning is always better than renting. However, on a cash flow basis, renting is cheaper than owning because it is easier to save (assuming you are disciplined) versus the non-equity costs of owning (interest, property taxes, closing costs and condo fees).
I would love to own, but currently rent. I sometimes wonder how people in their mid-twenties can own a condominium. We all graduated two years ago, but I find myself wondering if I am just throwing my money away and justifying renting to make myself ‘feel’ better.
The down payment part is tough.
September 11, 2008 at 2:08 pm
I’m late to this thread… but I wanted to reply to the Manulife One person if only for posterity.
I have a similar mortgage loan, so I’ve given a fair bit of thought to how to handle it. While I understand the theory that paying interest-only, in the long run your outstanding balance should be dwarfed by your equity, I can see a number of reasons to pay down the principal anyway.
- it’s a convenient way of saving for maintenance costs and house-related emergencies with no worries about paying tax on savings-account interest or capital gains from an investment account
- principal you’ve repaid on this type of mortgage loan is readily accessible. Let’s say the money you’ve been diverting to investments instead of principal is in the TSE. There’s a good chance your investments have taken a dip recently. Would you rather sell some of those assets at a loss to cover an emergency, or simply write a cheque on your M-One?
- and finally, paying down that loan and reducing those monthly interest payments is a form of investment with a measurable return. I hope you’re really double-sure that you can do better by building your portfolio instead of paying down principal. As another poster suggested, if interest rates spike, you’ll probably find that paying down the mortgage is a very attractive, hard-to-beat investment. If rates were to drop substantially, I would probably shift at least partly to your side.
A point about the original post:
We endured a crappy, fairly inexpensive apartment for several years while saving for our downpayment. Now we’re paying quite a bit more every month, and closing costs, minor renos and land transfer tax certainly made it an expensive year. But the fact is that for what we now pay every month we’d have a very hard time finding a comparable space in our market at a reasonable rent, not to mention the risk of being booted for the landlord’s sister. Even if we could, our capacity to save would take a considerable hit. Another year in the crappy apartment was not an option.
So even though homeownership is crazy expensive at first, it comes with some pretty compelling benefits. Renting is not necessarily throwing money away, but for some of us it can be a real impediment to saving and have stresses of its own.