- Real Estate
Buying Versus Renting a Home
The Numbers Game
Get ready, this information can actually change the direction and quality of your life from this point forward! Believe it or not, you are about to hear an argument focused on why you should be renting instead of buying your next place. I know what you're thinking; "Why are you wasting my time and contradicting the most basic of conventional wisdoms?!" Well, the answer is that I truly believe that there are very strong arguments for renting that rarely get much attention, and I intend to lay them all out before you to help you make an informed decision the next time you are looking at getting into the real estate market.
Now, to be clear, I will be discussing the advantages of renting versus buying your primary residence (single family dwelling). When it comes to revenue property that's a whole different ball game, and in fact, I've written an article about all the merits of investing in revenue property. Personally, I have experience on both sides of the fence. I do own revenue properties, and I have always rented my primary residences...So I think that I have been fortunate to have a somewhat unique point of view that helped me to learn the advantages and disadvantages of both worlds.
When comparing any two things, we always have to be careful to ensure that we are in fact comparing "apples with apples". Now the fact of the matter is that renting and buying are, by their very nature, not exactly the same "fruit". However, I will do my best to keep the comparison as fair as possible and stick to the facts. The problem most people have when they are blindly promoting the idea of owning your own home, versus "throwing away" your money renting, is that they are not really making a fair comparison, they are just regurgitating something they have heard others say. Due to this phenomenon, far too many people take this as fact, and believe that buying is always preferable to renting.
I have rented in a few different cities across North America, therefore I will try to use a general example that represents the average value of the properties I've lived in and the rents I have paid to the owners. We will start by working out how much money is being "thrown away" in each case. So let's just begin with looking at the numbers. I promise this will be quick and simple!
For example, I have lived in a small 2 bedroom townhouse in the center of a large North American city, that was valued at approximately $600,000. I paid a rent of $2300 per month instead of opting to buy it (it happened to be for sale). Based on the other cities I have lived in, this ratio seems to be quite reasonable, but of course this cannot possibly cover every possible scenario, in every market. Anyway, to keep it simple, let's just look at the standard 25 year mortgage period. If you put down 10% when buying this property, that will leave you with a $540,000 mortgage. It's hard to predict interest rates over the next 25 years, however let's use 5% as a conservative average. The cost of the interest alone for borrowing that money will be $402,171.00 over 25 years. That works out to $1340 a month lost to interest. We can all agree that interest is money that is "thrown away". So right off the bat, without getting very deep yet, we can see the $2300 I was paying out in rent was saving me $1340 in interest per month that I did not have to pay. And let's not forget about the $60,000 down payment I would have had to come up with and tie up in my home for a long, long time. There's a huge hidden cost there that people tend not to think about. OK, so you may be thinking, "so what?" $2300 - $1340 = $960 that the renter is still "burning" every month. But wait, there's more!
This property was part of a condo complex, so let's not overlook the always enjoyable condo fees of approximately $400 per month, that I did not have to worry about as a renter. So let's see, where were we?... $960 - $400 = $560 per month that I was still losing. Hold on, don't forget about property/school/water/garbage taxes. These are so often ignored when promoting home ownership, however taxes are very important to factor in. They are included in most rents but need to be paid out by a home owner... approximately $360 per month in this case. Alright, so that's $560 - $360 = $200 remaining, in rent that I have not accounted for. Can you see where this headed?
Finally, we have to remember that there are other costs the owner must incur when buying a property, such as notary costs, home inspection fees, and welcome taxes in some cases. Also, let's not forget that it is the owner who is responsible for maintaining/updating the property and appliances in terms of all normal wear and tear. Not something a renter has to worry about. So we have probably taken a considerable chunk out of that remaining $200 per month. Amazing how that works, don't you think?! And just to add a little bonus to all this, the property was in such a central location that I did not need a car, so I rented out the parking space that was included in my rent for $100 per month (now I realize that this is not always possible but just thought it was an interesting point for those who have the option). More to come on sticking to the city core when possible...
So there you have the numbers side of things, which I think shows that renters and buyers truly do "throw away" roughly the same amount of money every month as an unavoidable cost of living. I am sure all of this has your mind racing and thinking of several counter arguments that you may be shouting at the screen by now. "What if interest rates turn out to be lower than in the example? What about the landlord increasing the rent? What if I own a house rather than a condo, without any condo fees? What if I head out to the suburbs and get a great deal for my house?" All of these are valid points and I invite you to run the numbers wherever your particular situation takes you. In my experience, if you consider everything carefully it always works out pretty close. Interest rates may fluctuate, but lower interest rates tend to keep rents lower anyway, as owners have to be wary to not drive their potential tenants towards taking advantage of the cheap cost of borrowing, and buying their own place. Landlords can increase the rent, however in my experience, if you are a responsible tenant who they wish to keep, they will often be hesitant to hike up the rent... so it pays to be a good tenant (also, to offset this, property taxes tend to rise as well, so both owners and renters may see their costs going up as years go by). If you are buying a home instead of a condo, please do recall that insuring it will be more than the cost of renters insurance, and the maintenance will be considerably higher as you will now probably have a yard, structure, roof, mechanical components and other items that require constant attention (that's a big part of what the condo fees are for!). Please do some research and talk to friends and family who are owners, if you haven't owned your own home already. Finally, if you are thinking of heading out to the suburbs be particularly careful, especially if your job takes you into the city everyday. You will need to factor in a huge increase in the cost of transportation. Families in the suburbs often require two cars or more, and research shows that most people in the suburbs spend more on transportation than they do on housing! So I hope you are convinced by now that living in a home that does not bring in revenue, (whether renting or buying) will always have you incur considerable losses.
Now up until this point, I have ignored the fact that a home does force you to save some of your money in terms of the equity you put in beyond the interest payments. This can be good for someone who does not trust themselves to save and invest otherwise. Also, homes tend to appreciate in the long term, so you should see some return on your money. I believe that this is the primary reason that most people buy a home, a kind of automatic saving plan. You should consider this if it is the only "investment" you ever see yourself putting money towards. While, it will never compare to a revenue property that can actually put money in your pocket every month, it's better than nothing.
That being said, I would like to get to the other, often ignored, benefit of renting that I feel really helps offset any variations on the numbers side of things. That is to say, that we are buying something with each rent payment that is highly valuable to certain people, that is hard to put a price on: freedom!
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You will be amazed at the difference in quality of life, and the extra time and freedom that is available to you when you rent versus owning. This is not just my opinion, as I have had discussions with many homeowners who switched over to renting later in their lives, and who were completely amazed at how dramatic an impact it had on their day to day living. As a renter, almost all issues normally fall under the landlord's jurisdiction (aside from changing the occasional light bulb), so you have in effect just bought yourself a lifetime guarantee on almost all the components of your home. Service is just a phone call away, at no charge. As a side note, I do recommend "interviewing" your potential landlord just as much as they are interviewing you, to ensure they are responsible and take care of the property well. This is usually pretty obvious during the very first visit of the property anyway. So if you have a hectic lifestyle, and need a lot of time to devote to your job, business, family, etc. there may be some huge benefits to renting that you may have never considered. Also, if you tend to move around a fair bit, renting obviously offers far more flexibility than being tied down to a mortgage and a home. Finally, if you shop around well, you will notice that many landlords charge less for rent than the going rate, for various reasons. In my opinion, it is easier to find a good deal in the rental world than it is in the buying world. Probably because selling a home is such a big event, that sellers tend to do more research and often seek professional guidance.
So there you have it! I really hope this was informative and somewhat eye opening. No matter which route you choose, I hope that this has given you some things to consider and factor in to your "calculations". While I'm sure you will be able to find tons of opinions out there of why you should definitely buy your home, no questions asked, I'm glad I was able to offer a counterpoint. Good luck!