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Why Own Your Home When You Can Rent?

“A good home must be made not bought.” – Joyce Maynard

We live in a society that places a great deal of importance on home ownership. Owning a home is often seen as a hallmark of success; the mark of a “responsible” adult whereas renting is seen as an indicator of immaturity or a lack of financial stability. Buying a first home has become a rite of passage into adulthood and yet, for many people, it causes unnecessary financial stress and economic hardship.

Over the past few weeks I’ve been asked by three people whether their decision to rent rather than own is a bad one and so I thought I’d explore the question in this week’s post.

Renting is a Waste of Money

This is probably the argument that we hear most often when it comes to the rent vs own debate. Why pay someone else for the privilege of living in their house when we could be paying a mortgage on own home? It’s the argument that we hear from the mortgage lenders, from the ‘rent to own’ builders and from pretty much every friend, relative and co-worker who happens to be a homeowner. However, this argument relies on a very simplistic view of what can be a very complicated situation: mortgage = good, rent = bad, and it’s often far from accurate.

Family HomeFar from being a poor financial choice, there are plenty of times when renting makes more sense than buying. For example, I had a conversation recently with a woman I’ll call Jenny who has been renting her home for the past four years. She and her husband are in their mid-fifties and they moved to Calgary in 2012 from Ontario. They had owned a home in Ontario and had about $80,000 in equity from the sale but decided to rent in Calgary in order to get a feel for the city and their new jobs. Four years later, Jenny was starting to feel the pressure from family and friends who wondered when she and her husband would be buying a house of their own. When asked, Jenny said she had no regrets about not having bought a house when they moved to the city and expressed reservations about taking on a mortgage when she and her husband were fairly close to retirement.

It would be easy to argue that, regardless of whether she decides to buy or keep renting, Jenny will be making some form of house payment in retirement. Conventional logic says that it must be better for her to pay a mortgage on an asset rather than throw money away on rent, but it’s not that straightforward. While it’s true that a home can be an asset, it takes time to build equity, and there are significant costs involved in both buying and selling a home that are often overlooked by people doing the rent vs. own comparison. Currently, Jenny lives in a new condo building and her rent covers all her expenses except hydro. The $80,000 that she and her husband received from the sale of their Ontario house is invested and has averaged a decent return over the past four years. Taking out a mortgage on a similar property wouldn’t save them money on a monthly basis and, if they use the money they have invested as a down payment, then they no longer have it available to them if they need to use it. For Jenny and her husband, continuing to rent gives them the flexibility to live where they choose without being tied to a mortgage, ensures that their monthly expenses are controlled and gives them the security of having a sizeable amount of money available if they need it for an emergency, an indulgence or an opportunity. For them, renting makes more sense than owning.

Rent is Not the Same as a Mortgage Payment

The math seems simple: if you’re paying $1,500 a month for rent then you could be paying a $1,500 a month mortgage payment. However, as anyone who has bought a home based on that assumption will tell you, it’s not that simple. Home ownership is a significant financial commitment that goes well beyond the cost of your monthly mortgage payment. As a general rule of thumb, I suggest to people thinking about buying a home that they assume the cost of owning their house is going to be at least double their mortgage payment. Often, this provokes a look of confusion/horror/disbelief but when you break it down, it’s a lot closer to reality than a simple rent to mortgage comparison. Simply put, when you own a home you’re responsible for all the costs. That means after you’ve saved a minimum of 5% for the down-payment (and paid the CMHC fees if you have less than 20% down); paid the closing costs, the legal fees and the moving expenses, you’re responsible for a lot more than just the monthly mortgage payment. You’re also responsible for building fees; property taxes; insurance; utilities; replacing the roof/furnace/windows; repairing anything that goes wrong; upgrading/replacing the flooring; fixtures and appliances; landscaping; maintenance (interior and exterior); grass cutting; snow shoveling etc. etc. etc.

I’m not saying that home ownership is a bad thing but I do think it’s important for people to sit down and really do the math before they buy a home… too often, the home someone buys is influenced more by the size of the mortgage they’ve been approved for than the size of mortgage they can actually afford and that can be a recipe for disaster. If you don't have a decent down-payment (that doesn't require you draining your RRSP) as well as a decent contingency fund; if you're making minimum payments on your debts and don't have a reasonable amount of money left at the end of the month after all your bills are paid then adding the costs of home-ownership to the mix might drag you down financially rather than move you ahead.

If you're not sure if you're financially ready then why not commit to a year of “renting like you own”? Calculate what your monthly expenses will be as a homeowner and then save the difference between that amount and what you're currently paying. This has two key benefits: firstly it gives you a sense of whether you can truly afford to buy and secondly, it lets you save more before you commit to a mortgage which puts you in a stronger financial position.

The Emotions of Home Ownership

As human beings we seem to have an in-built desire to find a place we can call our own. That might sound sappy but there’s a reason we aspire to home ownership rather than house ownership. While owning a house might not always make financial sense, it often makes emotional sense and that may not be a bad thing. If owning your own home gives you a sense of stability and security that renting doesn’t, then I’m the last person to suggest that it’s a bad idea. However, if you’re beating yourself up because you’re renting and home ownership isn’t anywhere in your foreseeable future or, if your peers are questioning your decision to rent even though you can afford to buy, then take comfort in the fact there are plenty of positives to renting. Especially if you take advantage of the lower monthly expenses and use them as an opportunity to save!

In case you haven’t already guessed, I’m not sold on home ownership as a means to achieve financial security or build wealth. Having experienced first hand what happens when you buy a house and things go sideways, after I sold my house in 2013, I swore I would never buy another one unless it was one I intended to “flip”. However, three years later, here I am making a monthly mortgage payment, not because I’ve changed my perspective, but because the forever property my husband dreamed of just wasn’t available as a rental opportunity. He believes wholeheartedly in home ownership so, for him, the decision to buy was a no-brainer. For me, I knew the purchase made emotional sense and because the mortgage is small enough that we can pay it off in ten years and the land has the ability to generate income that helped it make financial sense too.

The question “buy or rent?” is as individual as the people that ask it. There is no ‘one size fits all’ response and the answer you give today may be totally different than the answer you give five, ten or twenty years down the road. It’s not a question that can be answered solely by math, or by logic or by emotion; it’s the juxtaposition of all those elements that gives you the big picture answer that’s right for you.

Written by Sarah Milton

Sarah Milton is currently stretching her professional wings in Edmonton, Alberta in a role that allows her to combine her talent for writing and speaking with her training in the financial services industry. She is passionate about inspiring people to get excited about their money and empowering them to take control of their financial future. You can follow Sarah on Twitter @5arahMilton

23 Responses to Why Own Your Home When You Can Rent?

  1. Great article – I often think about the buy/rent comparison for myself. We bought and have accumulated a good amount of equity, but renting tends to be easier and like you mentioned, allows you to put extra money toward investments.

    It’s possible that when we reach financial independence, we may move out of the country and shift to renting instead.

    — Jim

  2. We are looking at moving to a larger city and are strongly considering renting. It is hard to justify buying a $500K home with these high prices when one can just rent for $1,500 a month. Decisions, decisions!

  3. @Sarah,

    You raise some sounds points. However, there’s one possibility that needs consideration. As a renter you can be evicted from your apartment. In some cities like Vancouver, apartment owners are evicting tenants so the suites can be converted into condos. For elderly tenants, such an eviction can be devastatingly stressful–even causing illness or death.

    @Jim

    In case you didn’t know, moving out of the country triggers another set of challenges, such as taxation that may make this option unattractive to some.

  4. You need to compare apples to apples. $1,500 a month will not get you the same home as a $1,500 a month mortgage. Certainly not in Derek’s example: You can’t rent a $500K home for $1,500 a month, no matter where you live.

  5. Great article! I owned a house for 19 years until I divorced. My ex bought me out after the house tripled in value (on paper). I used the money to buy him out of my Defined Benefit Pension plan so I think I got the better deal. This was in 2008 and I could see house prices were falling. I also wasn’t paying what I felt was overvalued Real Estate! I’ve been renting ever since, and most people think I’m crazy as I earn a 6 figure income! But I believe Canada is going through a housing bubble and I’m not participating!

  6. It’s not that simple. The financial math is simple but when you start considering location, schools and access transits, renting can sometimes make everything difficult because you may be told to move an any point in time.

    As you said, a home is made and often it’s based on the surroundings and not just a meal on the table.

    Imagine a family of four, should you live in an apartment or a house with a bit of a backyard? Should you rent a house and then be told to move 2 years later and move the kids to another school? At some point, kids may have had the ability to walk to school and now you have to drive them. It even gets to the point where families are cheating on where they live to get in specific schools.

    It’s actually a really complex decisions and the different life stages have different requirements.
    – Young adults want the excitement of the city (they have so much time on their hand and little money)
    – Young couples are looking for something different
    – Young families start to think about schools and where to raise a kid
    and so on …

    The requirements and goals are ever changing and while renting supports the changes, renting options become minimal. Storage requirements for stuff you accumulate are not cheap. Where do you store a camping trailer or even a boat?

    In the end, the financial math is only a small fraction of the overall approach. I am also going to venture that rarely would a renter double their savings to cover for the rent 25 years later. All the retirement models assume you have a house paid for.

    A renter needs to save the difference from a buyer and if they don’t they are looking for interesting solutions down the line. If a renter pays as much as an owner, the savings must be even greater for retirement at age 60 to work out unless you have the luxury of a teacher or government pension.

  7. So at the current mortgage rates paying about $1,500 a month mortgage payments over 5 years you are contributing about $54,000.00 towards principle and $35,400 in interest.
    So in rental comparison, you are paying $90,000 in rent over 5 years and $35,400 in interest towards a mortgage.
    In additional expenses most rentals if a house, require the tenants to pay utilities.

  8. Enjoyed the read, as I followed the rental path for many yrs. Have lived in the same basement suite in North Van. for over 25 yrs. Three different owners of the house over that time span. My rent remains $700/mo. Not being tied up in a hefty mortgage situation allowed me to enjoy intl. vacations; invest wisely, and eventually build a retirement home in Thailand from scratch at a fraction of the cost here with no mortgage.

    Individual decision, but I have no regrets.

    • Wow! That’s awesome for Vancouver. Not the usual story for sure! Good job! Edmonton Alberta has tons of rentals, and prices are dropping alot! People are having problems selling their homes. Definitely a renters market!

  9. Again, Sarah, a great article on a polarizing topic.

    I have many relatives who own their own homes, all detached, and I think it’s a genetic/cultural desire to own a home because their parents owned single detached homes.

    I once felt that need to own my own residence, and I did for a few years when detached homes were affordable.

    I’ve lived and worked in 5 cities in 3 provinces. Renting became the chosen type of residence after having difficulty selling a house when I needed to move.

    I don’t think owning a home is a good retirement investment; it’s very expensive to maintain and when retiring it’s either very expensive to maintain (taxes and repairs constantly increase) and when selling it, it’s value is determined by uncontrollable factors like the state of the neighbourhood and economic conditions.

    Sarah, you mentioned that owning is roughly double the cost of renting. If one were to invest the difference ($1,500 a month for 25 years), learn to maximize the returns on that investment (zero cost), you’d have an astronomical retirement fund.

  10. We sold in Calgary three years ago. Then we travelled for seven months. We intended to buy again in Calgary when we returned-perhaps a condo. We rescued our container and moved int what we thought was a temporary rental for six months until we found a place to buy. We had been homeowners for 35 plus years. We are still renting.

    First of all the real estate market was at it’s height. We did not want to buy when everyone else was and prices/selection were at a premium. Secondly, the math equation for buying a condo vs. renting made no sense. In the subsequent down market in Calgary IIt made much more financial sense to rent and invest our home equity. Looking back, it was definitely the righ decision for us. Maybe not for someone else.

    The other changes….we are happy renting. We are not putting any pressure on ourselves to buy In the current market. Plus, we have rid ourselves of the habit of accumulating things. We feel much better for it. As early retirees our focus has changed from accumulating ‘things’ to experiences. So now that we are travelling four to five months a year home ownership, in any form, is loosing it’s attraction. We never thought that this would be the case. We may even pick up sticks and move to the Okanogan for a year to try it out. Renting has made all sorts of options much easier for us select.

  11. I live in Victoria and rental properties are difficult to find. Most of the rental places i see in my neighbourHood (Oak Bay) have no vacancy signs posted, waiting lists being taken.

  12. Ok, so othere is extra experience by owning a home. So, when we changed from a rdted house in Calgary paying $1600 a month to a house we bought and paying $1670 a month morgage and taxes included is the wrong way to go. Right? Can someone explain it for me ferther please?

    • In that $1670….are the municipal and school taxes included? Have you laid out some money for the eventual roof repair that you will need? Sure as shooting, you are going to have plumbing/electrical problems that YOU will have to pay for. Oh, I forgot, the insurance on the value of the house is another monthly expense. need I explain fUrther?

  13. Financially speaking, renting beats owning long-term hands down (compare the long term appreciation of real estate vs. a diversified portfolio of Canadian/international stocks and bonds). However, as the author and others have pointed out, buying a house is oftentimes an emotional decision, not strictly a numbers game.
    I very happily rent in North Vancouver and cannot see me putting a significant chunk of money into one illiquid asset anytime soon.

  14. Sure, none of the responsibilities BUT none of the advantages of ownership. I have never owned a home, as an adult have always rented. Let me tell you that it is really bad out there for renters. I’ve had to move 6 times in 3 years due to various reasons: landlords wanting to double my rent; building is changing to a condo; landlord wants to sell the property; unacceptable conditions in the rental. Those who have long term rentals should consider themselves extremely lucky!

    • Joanne, there are bad landlords and bad builders.

      In the first 9 years of their marriage, my parents moved 13 times: bad landlords, less than ½% vacancy rate, no tenant protection.

      In Vancouver, we all remember the “leaky condos” where repairs sometimes cost more than the purchase price.

      Most of us know someone who had renovation nightmares or unfortunately met a near-criminal home inspector.

      But overall, the choice of home ownership versus renting as a retirement plan component is a polarizing issue that is more emotional than rational. Either choice has risks and advantages.

      • That is true, Claude. Do we need better regulations for the building trade? Just think of all the shows we see about people who got taken for a ride by contractors, home inspectors, etc.

  15. Time for renters to “interview” possible landlords! If you want a long term rental then say so! Screen landlords like they do renters. Don’t rent from ones that don’t seem up to par!

  16. There are many factors besides financial. When our family was young we had very different priorities and goals than we do now. As retirees the rent vs buy decision is very different, and different yet again by personal preferences and lifestyle goals.

    Home ownership was right for us and it proved to be financially advantageous for us. Where you live and where the market is are key factors. Three years ago we almost purchased a unit in the condo complex where we rent. Fast forward to now. Prices are down as much as $90/100K, there has been a condo assessment of $35K, with more potential issues in the offing. We may still buy at some point however we have come to the realization that for us ownership ifor the sake of ownership is not what we ascribe to.

    • Marcus,

      Congrats on being mortgage free, but what do you want to discuss? I know people in your situation who pay more in property taxes than I pay in rent: they seem content with that.

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