What’s better Rent vs. Own Your Home?

michaelFinancial PlanningLeave a Comment

Rent vs. Buy Calculation

In this article, I’d like to go through the benefits of renting versus buying your home. Buying a home is often the dream of many people, and while it can mean more financial stability, it isn’t always the case. The real answer will depend on factors such as, your situation, the economic conditions of where you live, interest rates, real estate market trends, just to name a few.

Instead of listing every single pro and con, I’ve decided to focus only on the benefits of each and list what I feel is a selling point for each. Consider if these factors are inline with your status. And remember, just because you’re currently stock in a yearlong lease or a 5-year mortgage term, doesn’t mean you can’t plan for your future.

Benefits of Renting:

Renting a place is generally cheaper as you don’t have to worry about the added costs of home ownership. When you rent, you only need to think about rent and renter’s insurance. You obviously have to think about hydro, cable costs and so on, however this applies to both renting and buying so I have omitted this from the calculation.

If you buy, on top of the mortgage you’ll have to pay for repairs, maintenance costs, homeowner’s insurance, property taxes and more which will likely end up being more expensive on a monthly basis if we look strictly at how much is coming out of your pocket.

For the same amount of money you’ll likely have more amenities. Many condos will have all sorts of amenities from a gym, pool, concierge, party/theater room, billiard room, and much more. The location of your place could be better with all sorts of restaurants and entertainment nearby which you might not get for the same price if you were buying.
This is a big one. When you rent the maintenance and repairs is your landlord’s responsibility. All you do is pay your rent and you’re done, which means a higher cost for your landlord.
Homeowners have to pay land transfer taxes when they purchase the property and annual property taxes and other taxes depending on where you live. As a renter, you don’t have to worry about any of this.
Down payments make home ownership very difficult. In Canada, for example, if you don’t have a 20% down payment then you have to purchase additional default insurance which can get pretty expensive. 20% of a $400,000 place is $80,000, which is a sizeable amount.
If you have a job that requires you to move, renting makes sense as you can move a lot easier than when you own a home. Financially this is the case too as you won’t have a big commitment. Purchasing a home might be your biggest lifetime purchase and will therefore lock you in for 25-30 years. Yes you can always sell or rent your place out, but that takes a lot more work compared to giving your landlord a month’s notice to move out.
As we saw with the subprime crises, property values fell hard. And this means that if you were a homeowner your home value drops significantly. When you buy a home and get a mortgage, part of the mortgage amount is based on the value of your home, which means when you want to refinance your home, you won’t be able to borrow as much. This could lead to a default or having to find other options to somehow keep your home.

When you rent, you won’t have to deal with such problems. You pay your rent and won’t have to worry about a rise or fall of property values.

This will depend on the building you live in but I’ve had friends that have had nightmare experiences with their strata council. If you rent, you won’t have to deal with any of this.

Benefits of Owning:

This is by far the biggest benefit of owning your home. I’m sure you’ve heard “I’m paying someone else’s mortgage when I rent,” before. And it’s true. If your landlord has a mortgage for the place the rent you are renting, every rent check that you give to your landlord, you are helping them pay their mortgage.

Over the long run, as you pay down your mortgage real estate prices have proven to rise. Even when there are downturns if you hold your home long enough you’ll likely come out on top.

With airbnb.com (https://www.airbnb.com/) and other sites making it easier to rent a room in home out, renting a portion or your entire home out is much easier nowadays. This can be a huge mortgage helper and can significantly reduce the amount of interest you pay on your mortgage as you will be paying down your mortgage much quicker. This could also mean that you will pay your mortgage off years quicker than without renting a room out. If you don’t mine having a tenant, this is definitely something to consider.
Once you pay off your mortgage that means you have no mortgage payments something you will never be able to experience as a renter. That doesn’t mean you’ll be free from payments as you’ll still have to worry about maintenance and repairs, property taxes, insurance, and other bills but the thought of not having a mortgage payment is nice.
Another great benefit of owning is that you can do whatever you like to your home, for the most part. If you want pink walls and four kitchens, it’s ok as long as your can get a permit. Just be careful not to go overboard if you plan on selling your home eventually.
There are many tax advantages of owning a home. Depending on where you live, your mortgage interest may be tax deductible. If you have a home office, the portion of your home that you use as an office may give you a tax advantage. If you rent a portion of your home out there will also be tax advantages. Be sure to check out what’s available to you in your area as every country will be different.
If you own a home, your mortgage payments are like a form of forced savings. You have to put money away every month and while you are paying interest for each payment, you’re also building equity as I’ve already mentioned. This will give you a sense of financial stability as you know you’re building on something and in time it will pay off, something you won’t be able to experience if you are renting.

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Rent vs. Buy Calculation

Now that we’ve talked about some of the benefits for each side, let’s do a mock example so that you’re able to determine if renting or buying makes more sense for your personal situation. If you’re considering buying you I’m assuming in this example that you have money saved up for your down payment.

Strata fees can vary depending on where you live. The best way to figure this out is to find comparable properties and it will tell you. You can also do a market average per square foot/meter to see if the place you are looking at is expensive. The obvious thing to note is that the more amenities a building includes and the older the building, the higher the strata fee.

Loan Calculator

And the number should come out to $1,511.13. This number includes both property taxes and insurance. It doesn’t include maintenance and repairs or strata fees. So if we pretend that strata fees are $200 then your monthly payment will be $1,711.13, $211.13 more than renting for a comparable property. However, you will be building equity in your home with each monthly payment.

Every mortgage payment that you make, the principal amount will eat into your overall mortgage amount outstanding, which means that the more you pay the less you will owe to your mortgage lender.

Tools:

NY Times Buy vs. Rent Calculator: This is a great tool that NY Times published and let’s you easily compare renting and buying from a variety of angles.

RBC Mortgage Calculator: Another mortgage calculator that I like to use, I find RBC’s (a Canadian bank) mortgage calculator the easiest to use. I have no affiliation with this bank whatsoever.

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