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National Bank of Canada
A Certified Financial Planner compares the cost and long-term investment potential—and, just as importantly, the emotional motivations behind renting or buying.
Photo by Vlada Karpovich from Pexels
With the price of real estate continuing to rise all around me, I’ve been wondering about the viability of being a long-term renter. I understand that there are strong financial benefits to owning a home—my family keeps bringing them up!—but I’m not sure that will ever be in the cards for me. I don’t have a down payment saved, and it seems like the amount I would need to save just keeps going up and up. I’m also not sure that home ownership is the right choice for me in any case: I’m single and I’m not 100% sure I’m going to want to live in the same place for a long time. Is being a renter really such a bad financial choice?
You’re not alone in questioning the viability of long-term renting.
The decision to buy or rent a home is a big one—and the first step in making any big financial decision, including home ownership, is evaluating your own situation on its own merits—that is, based on the facts, rather than opinions and emotions.
With home ownership, the facts you need to take into consideration include your income, your ability to save up a down payment, and your plans for where you’ll live.
Real estate is similar to many other assets: Over the short term, it can fluctuate in value considerably, but over the long term, it tends to increase in value. If you purchase with a short-term time horizon, you will significantly increase your chances of sustaining a loss due to closing costs you have to cover with each transaction (such as land transfer taxes on a purchase, and especially a real estate commission on a sale) and market swings. On the other hand, if you have plans to hold it long-term, you’re more likely to realize the benefits of appreciation in the asset. Based on your current uncertainty about staying in one place, I would suggest renting over home ownership, regardless of the affordability of the housing market.
The second part of your question is about the wisdom of being a long-term renter. This question is becoming much more salient as housing prices rise across the country. Renting can be a highly prudent choice and—from a financial perspective—depending on your circumstances, renting can make more sense than buying, even over the long term. Here’s why:
Many people decide to buy homes based simply on the amount of the monthly mortgage payment, assuming that if the mortgage payment “costs the same as rent,” then buying makes sense.
This way of thinking often grossly underestimates the true cost of home ownership, however; for one, it doesn’t factor in the opportunity cost of growth on the initial down payment and upfront costs if that money were instead invested or left invested. Equity-based market investments like stocks or equity funds have historically outperformed real estate.
There are also lots of unrecoverable transaction costs when you’re buying or selling a home, such as real estate commissions and land transfer taxes.
And then there are the ongoing costs of home ownership, such as maintenance and repairs, property taxes and the higher insurance costs you’ll face as a home owner compared to renting. These expenses together might add 1% to 3% of the home’s value to your annual costs.
Additionally, if you’re in an area with high housing costs, like Vancouver or Toronto, you may be able to rent a space in a highly walkable, transit-friendly neighbourhood in the city itself, whereas purchasing may mean moving into an adjacent community, thus significantly increasing your transportation costs.
Compared to an owner, a prudent renter could potentially save some of the money they might otherwise put towards home ownership. Depending on your tax bracket, if you’re saving in an RRSP, those savings may be amplified by the benefit of tax deferral on your saved contributions.
Here’s an example of how this could play out in real life, based on a home in B.C., with a few big assumptions. First, I’ve assumed the renter is investing the difference in cash flow between renting and owning in a well-diversified, primarily equity-based, non-registered portfolio. Secondly, I’ve assumed the interest rate on the mortgage will stay level throughout the course of the mortgage, assuming a 4% mortgage and 30-year amortization. With those assumptions in place, I’ve modelled how a homeowner and a renter might fare after 30 years.
| Rent | Own | |
| Initial investment | $186,000 in tax-efficient non-registered portfolio | $186,000 down payment of 20% ($170,000) + B.C. property transfer tax ($15,000) + closing costs ($1,000) |
| Inflation | 2% | 2% |
| Rate of return on portfolio (for renter) and property (for home owner) |
6% (after taxes) annually | 3% annually |
| Insurance | $360/year or $30/month tenant insurance | $3,060/year or $255/month home owner’s insurance (0.36% of property value) |
| Monthly mortgage payment or rent | $2,500 | $2,511 |
| Property tax | – | 0.5% to 1% of property value ($4,250/year or $354/month in this example) |
| Maintenance | – | 1% of property value ($8,500/year or $708/month in this example) |
| Total average monthly costs in Month 1 |
$2,530 | $3,573 |
| Total net worth after selling costs in 30 years, based on growth in invested funds (both down payment and increased monthly cash flow for renter) and growth of the owned home (for home owner, assuming 5% real estate commission to sell) | $2,255,142 | $1,960,014 |
For a detailed exploration of the numbers, I recommend reading this white paper from Ben Felix of PWL Capital, as well as using this calculator (also created by Felix) that will allow you to input your own numbers and assumptions. Creating your own calculations lets you see the outcomes if you use different assumptions about investment portfolio growth or housing equity growth, for example.
Making long-term renting the best financial choice will hinge on your savings discipline to invest the difference between theoretical ownership costs and the actual lower renting costs. To harness the advantages of your lower costs, first determine how much you need to be saving to meet your goals and, next, ensure that you set up automatic savings to get there.
For many people, however, the math of the “rent versus buy” decision is only part of the equation. Home ownership is a decision that people make based on what home ownership means to them. If you find that renting makes the most financial sense for you, but you’re still uneasy about renting long-term, you might wish to explore some of your beliefs around home ownership and renting.
Here’s an exercise that you can try with old-fashioned pen and paper. Finish these statements with the first answer that pops into your head, trying not to censor yourself or think about your responses for too long.
Once you’ve completed this exercise, take a moment to consider what you’ve written. For each of your answers, ask yourself:
Completing this exercise can help you uncover the emotions that might be underneath your thinking about renting versus buying, even if you’re not consciously aware of them.
Hopefully this column has given you some ideas about how to approach making this decision for yourself, by digging into both the numbers and your emotional motivations. The goal in completing these exercises is to help bring you closer to understanding what the right solution is for you, based on your unique circumstances.
Then, once you’re confident and at peace with your decision, addressing well-intentioned comments from your family will be so much easier. Chances are, their remarks are spurred by a basic desire to know that you are financially secure and doing well.
As a society, we are undergoing a collective unlearning of what was once widely accepted as good common sense for all—namely, home ownership. Your family is likely commenting from a belief that what worked for them is what will also work best for you.
If you are routinely investing and you know you’re doing enough to secure your financial future, you may wish to acknowledge the love in their sentiments, and then let them know about the plan you’ve put in place that makes sense in today’s real estate climate and for your situation, and that it will secure your financial future.
This response was provided by FPAC member Natasha Knox, CFP, FBS, the principal of Alaphia Financial Wellness. She works with mid- to late-career, purpose-driven professionals to create emotional harmony among her clients’ life purpose, their relationships and their money.
Qualified Advice is written by members of FPAC (the Financial Planning Association of Canada), a MoneySense content partner. Working closely with governments, regulators, financial planners, academia, vendors and the general public, FPAC’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession which ultimately commands the credibility, public awareness and respect afforded to other advisory professions.
If you have financial planning questions, FPAC members can help—consult our directory of members to find the right fit for you.
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The rent vs buy is a big debate, however, the numbers shown here are for a pricey home in Vancouver and more importantly assumes the renter has the down payment. That normally isn’t the case. In many cases, owning a solid home in the long term will come out ahead. Ask what happens when you are 70 years old and trying to find money for rent.
To Theresa:
If you did nothing and spent everything without saving and investing, then sure you got nothing to pay for living expenses and will be at the mercy of government welfare.
But for many in communities outside of Vancouver/Toronto, if the real estate does not appreciate or worse, depreciates, plus the costs of taxes and maintenance, a person is indeed better off if they invested stocks/mutual funds/ETFs, taking advantage of TFSA, non-reg, RRSP accounts.
The proven returns over long periods in the stock market beats real estate every time.
Although, if one can manage to own a property in Vancouver/Toronto, then sure, that’s a solid investment.
As they say, real estate is all about location, location, location.
If you rent, choose a non-profit development. The speculation on real estate due to federally imposed low interest and the need to debt finance its deficit has created a real estate bubble and the stressed private landlord will try to squeeze extra rent to cover their speculative purchase.
If you remove speculation on real estate then the rent even in Toronto for a 3 bedroom non-profit townhouse is still about $1,500 per month all in versus 3 to 4 times that monthly on a mortgage/housing costs or opportunity cost buying (i.e. a million dollar property).
A couple on OAS and CPP combined with a small pension or income investments can likely live there for the rest of their life with no financial issues and zero maintenance or repair bills by living in a rent controlled, non-profit coop or community housing.
3 grand for house insurance?
.36% of our 1.5m home in Peel region is
$5400.00.
We pay $3336.00 for our insurance which includes 2 cars, and a motorhome.
Maybe we’re under insured…..
It is way more uncertain than the analysis shows. As surging house values continue, goverment is looking into skimming off the benefits. As rents rise, goverments love rent controls. In short interference in the housing market makes everything uncertain. Long range rent controls destroy availability of rental units and encourage even more interference.
It is a fascinating discussion. As an older homeowner , who bought progessively more expensive real estate over time, one would expect that my point of view would support home ownership. The answer to deciding whether home ownership, or renting, as an alternative, is the answer is complex indeed in today’s world.
If I was faced with current conditions, and was financially literate, I may, indeed settle for renting accomodation, rather than stretching for home ownership , in a very high cost ownership environment.
It would be wise to remember that the decision to own , rather than rent is much more than an economic decision. It is , in fact an emotional, cultural, and social decision, based on the needs and expectations of a family situation.
In other words this is a complex , difficult decision requiring full family participation, before a final decision is reached.
The down payment implies the house price is $850,000, but for some reason Knox doesn’t give the key number of the house value after 30 years! I checked a couple of random addresses in Vancouver & North Vancouver on the RBC Home Value Estimator & I got present values of four and five times the 1991 value. So the value of this $850,000 property after 30 years might be $4 million. That’s the value of leverage, starting with $186,000. The notes on the calculator link say explicitly that the homeowner falls behind the renter after the mortgage is paid off — but most people never pay off a 25-year amortization, they sell long before 25 years and buy another, more valuable property & they tap their equity through a line of credit, so they never lose the advantage of leverage.
Did you factor in how much of a mortgage payment is interest on the mortgage loan over a 25 or so time period? I’ve heard estimates that the real cost of a home is about 2 1/2 times the purchase price when interest is factored in.
The down payment implies the house price is $850,000, but for some reason Knox doesn’t give the key number of the house value after 30 years! I checked a couple of random addresses in Vancouver & North Vancouver on the RBC Home Value Estimator & I got present values of four and five times the 1991 value. So the value of this $850,000 property after 30 years might be $4 million. That’s the value of leverage, starting with $186,000. The notes on the calculator link say explicitly that the homeowner falls behind the renter after the mortgage is paid off — but most people never pay off a 25-year amortization. They sell long before 25 years and buy another, more valuable property & they tap their equity through a line of credit (often using the LOC for a rental-property down payment), so they never lose the advantage of leverage.
Interesting article. I think what answers the question is really, timing. If you buy in an up market and sell in a down market, you lose. Vice versa if you buy in a down market.
Assuming you are right with your assumptions, I do not see in your numbers how the paying off of the principle has any affect. At about $2,500/month payments, renting gives all of that money to the owner of the property, while buying at least allows you to theoretically save the paid off principle. In other words, with a mortgage payment, part of my monthly cost is returned back to me in the form of less debt, more home equity. Over the 30 year time frame, that is a considerable sum of money, far exceeding many of your savings with renting. Renting over 30 years gives you nothing but memories.
In addition, when holding a mortgage, you can get security by tying in your mortgage rate, while renting, you are at the whim of the landlord or the provincial government with rent controls, that will eventually catch up to you.
I heard one time that the best time to buy property is always now, because you never will know what happens later but the real advantage is once you own your home, there is not much anyone can do about raising your monthly payments, while renting, you are at the mercy of the landlord and you can’t control who that is, as your current landlord may sell to someone who will raise your monthly payments or want their kids to move in, or live there themselves.
In my opinion, if you can afford it, you are always better off buying than renting over the long term except if you know you will only live there for a couple of years, then rent is likely your best option.
You mention emotional motivations but having to pay rent forever doesn’t do as much for your motivation as having a home that has no mortgage.
When my daughter was accepted to university (Montreal) she checked out the rental and condo market. In her case it was actually less expensive to buy the condo (not new) than rent.
Now having a house built and she has put the condo up for sale at a good profit.
RICARDO
Another cost that is usually not mentioned is that when you own you are more likely to be in a “homeowner” mindset that includes upgrades, renovations, redecorating, landscaping, furnishings, and other “improvements” that you will have marketed to you and that social pressures will suggest you should be doing. These could be much more than the (low) 1% maintenance amount included, and most do not add significant value to the home.
I just have a question for you: When are you going to consider inheritance in your analysis?
In the past generations savings and home ownership were a key foundation of a frugal lifestyle. After the death of their grandparents, our son-in-law received enough money to pay in cash for a house of 1.3 million. I have some friends that at the death of their parents both husband and wife received money from both sides that now they don’t know what to do with it! And probably the same will happen with our children given that now we are taking more medications than a pharmacy, and can not fulfill our plans of traveling around the world! Just rent and have patience. All will come in due time.