Rent vs. Buy: Which One Is Right For You?
Tired of renting? Thinking it might be a better idea to buy a home? The Rent vs. Buy debate is a big one…and there isn’t one right answer for everyone. Read on for our thoughts on renting in Toronto vs buying in Toronto.
The Advantages of Renting a Home
- Minimal Maintenance Hassles and Expenses – when the toilet gets plugged, tenants get to call their landlord. It’s not nearly as much fun when it happens in your own home (trust me).
- One Easy and Predictable Payment – owning a home involves more than just paying your mortgage. You need to factor in property taxes, maintenance, condo fees, water and sewage bills for houses, utilities, home insurance, etc.
- Not happy with your neighbourhood? You can move every year. Tenants have the ability to easily and affordably move every year if they want to; the real financial benefits of owning happen over time. If your time horizon is short or you’re a commitment-phobe, consider renting instead of buying.
- It’s cheaper to move when you’re renting. Buyers have to pay land transfer taxes when buying, commissions when selling and legal expenses for both.
- Sometimes it’s cheaper to rent. On a monthly basis, your overall expenses will often be cheaper when renting instead of buying. That’s especially true if you don’t have much of a down payment. But of course…when you rent, you’re paying down someone else’s mortgage instead of your own.
The Advantages of Owning a Home
- You’re paying your own mortgage instead of someone else’s. While part of every mortgage payment is interest paid to the bank, part of every mortgage payment goes towards building equity. Think of it as a forced savings program.
- If property prices go up, you reap the rewards, not your landlord. Of course, that works in reverse too – if prices go down, the hit is to your pocketbook if you decide to sell.
- Sometimes it’s cheaper to buy. Toronto’s rental market isn’t easy or cheap, especially if you’re looking to live downtown. If you have a decent-sized downpayment, it could be cheaper to own than to rent (on a monthlly cash flow basis).
- Freedom! When you own your home, you don’t have to ask permission to paint the walls or upgrade the floors – do as you wish! Buy new appliances, replace that carpet, paint that wall red and make your home your own.
- Where else will you put your money? One of the reasons that so many investors make real estate a large part of their portfolio is that historically, Toronto real estate has been more predictable and yielded better returns than many of the investment alternatives. Of course, there aren’t any guarantees, but if you’re renting and blowing the rest of your money on lattes and trips to Cuba, buying will be a better long-term financial plan (sorry Starbucks).
Real Life Example: Rent vs. Buy
- 1 bedroom
- 660 sqft
- Can rent for $1,650/month (July 2017)
- Can buy for $345,000 (July 2017)
Costs to Rent
- Monthly rent: $1,650
- Monthly hydro: $50
- Monthly insurance: $30
- Total Monthly Rental Costs: $1,730
Costs to Own
- Downpayment: $34,500
- Costs to Buy: $2,192 (land transfer tax after first-time buyer rebates + legal fees)
- Mortgage: $1,465/month (assuming 10% downpayment at 2.69% interest with a 25-year amortization)
- Condo fees: $422 (includes heat and air conditioning)
- Hydro: $50/month
- Property taxes: $1,965/year
- Insurance: $1,500/year
- Total Monthly Costs $2,225
Conclusion: It costs an extra $495 per month to own. But of course, it’s not that simple.
Let’s assume that the Tenant and the Owner live in the condo for 5 years. At the end of that time period….
- Will have paid $102,000 in rent/hydro (assuming no rent increase – usual rent increase is 2% per year)
- They will have increased their landlord’s equity in the property by almost $40,000, but will be walking away with nothing
- Will have paid $130,500 (mortgage, condo fees, taxes, insurance, hydro)
- Increases their equity by $39,108 by contributing to paying off their mortgage (the rest of their monthly payment goes towards interest)
- Price appreciation if they sell: $176,650 (based on actual average condo price appreciation of 51.2% in Toronto from June 2012 to June 2017
- Net Proceeds from the Sale after 5 years
- Sold Price: $521,650
- Costs to Sell: $26,082 (assumes 5% for commission + legal fees)
- Remaining Mortgage after 5 years: $271,293 (from original $310,500 mortgage)
- Net Proceeds: $224,275
Conclusion: The Owner walks away with over $187,000 more than they initially invested.
Of course, it’s never that easy. Other things to consider:
- The Owner paid an additional $28,500 in carrying costs.
- The Renter could have chosen to invest the initial $34,500 downpayment + $495 per month saved in lower monthly costs and earned a return on that $$
- The condo price appreciation can vary significantly depending on the period
- rents generally edge slowly up, as do owner expenses, including potential maintenance costs (e.g. a broken fridge)
So Who Should Keep Renting?
If you fall into any of these categories, it might be a better idea to rent instead of buy:
- You don’t have a down payment. Critical to the math is having a downpayment.
- You like zero risk. With risk comes return, but there are never any guarantees that prices will go up.
- You don’t know where you’ll be in 3 or 5 years. Generally, the longer you live in the property, the easier it is to break even or make money. If the market declines and you have to sell because you’re moving out of the city, you could be taking a loss on your investment. If you might be moving to Paris next year, it probably makes more sense to keep on renting.
- You can’t afford something you want to live in. Most first time home buyers gravitate to condos for affordability reasons….but if you MUST live in a house, you need to consider the significantly higher purchase prices and the inevitable maintenance and renovation costs.
You Should Buy if…
- You can afford to buy a property in a location you are happy with, that will appreciate over time, and still have enough money to live. Never borrow as much as the bank is willing to lend you, you’ll have no wiggle room.
- You want to pay your own mortgage instead of someone else’s. Investing in yourself is not just empowering, it’s often the best financial move you can make.
- You see real estate as more than investment – it’s a place to lay your hat and live your life. That it can increase your net worth? Just a bonus.