“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.
Far 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.