“Understand that the right to choose your own path is a sacred privilege. Use it. Dwell in possibility” – Oprah Winfrey
It seems to me, that every time life doesn’t go quite according to plan there is an opportunity to learn from the detour. Over the past couple of weeks I’ve written about the lessons I’ve learned from buying my first home and this week, as I’m re-working my money management plan, I’ve been thinking a lot about the advantages and disadvantages of renting vs owning.
There is plenty of research and anecdotal evidence to suggest that people who rent tend to have a lower net worth than those who own their homes and this leads many people to assume that owning a home will lead to a higher net worth and greater financial success. However, an article in the Globe and Mail featuring research by McMaster University students suggests that disciplined renters could actually finish ahead of homeowners over the 25 years that it takes to pay off a mortgage.
Renting vs Owning a home
Every year Frank Tristani assigns his McMaster finance students the task of showing whether investing $100,000 at 6% and renting for 25 years at $1500/month (indexed at 1.5%) or buying a $400,000 home with a $100,000 (25%) down payment and a mortgage rate of 3.99% makes you wealthier. Although the majority of students expect that the home ownership option will come out on top, Tristani says that, surprisingly, “over six years, no-one has been able to substantiate buying as creating more wealth over the long term.”
Renting and investing requires discipline
Now, while there is definitely room to argue with Tristani’s numbers (as there is with any hypothetical scenario) his students’ research also raises some interesting points. It makes perfect sense to me, based on the calculations I’ve done over the past few months, that renting combined with a solid investment strategy could leave you further ahead than buying a home over 25 years. However, the challenge with this theory lies in the fact that sticking to the investment plan that will make it a reality 25 years down the road (and resisting the temptation along the way to divert some of those hard-earned funds towards more enjoyable things) requires a much greater amount of discipline than it does to simply make your mortgage payments every month.
As human beings, we are hard-wired for pleasure and delayed gratification doesn’t usually rank too highly on our scale of pleasurable things. We like the instant reward of a splurge or the day to day pleasure of living in a beautiful house surrounded by lovely things. We like “stuff” and we also like the certainty and status that goes along with home-ownership. Home ownership is often a goal that we’re encouraged to aspire to from an early age and it can take a certain amount of confidence to stand behind your decision to rent in the face of all the “you’re wasting your money” arguments that come flying your way from homeowners, many of whom seem to take your choice as a criticism of their own decision to buy.
The good of home ownership
It’s not that I think home ownership is a bad choice. There are plenty of examples of homeowners who have seen the value of their homes increase at a rate that dramatically exceeds the returns seen in the stock market over the same period of time. There is also something to be said for the stability and security that comes from owning your own home. As a home-owner you are in control of how long you stay in the house, how well it is maintained and you have the ability to make changes to the layout and the décor whenever you choose to. As a renter, your monthly living expenses are lower but you are also at the mercy of your landlord when it comes to the amount of rent you pay, how well your home is maintained and how long you are able to continue living there.
For me, right now, the benefits of renting outweigh the benefits of home ownership. I like the idea of being in a situation where I can limit unexpected expenses and my plan when it comes to renting is to keep my living expenses as low as possible in order to invest as much as I possibly can each month. I’ve mentioned before that I have some really big financial goals that I’m committed to achieving by the end of 2014 and I’m confident that my decision to start over as a renter will have a significant impact on my ability to hit those goals. I'll keep you updated on my progress but in the meantime I'd love to hear your experiences and what you think of renting vs owning.