“To be, or not to be, that is the question.
While the above quote is from Prince Hamlet, right out of the play Hamlet by William Shakespeare, a similar age old question confronts Canadians of all ages and stripes when it comes to buying a house: “To rent, or to buy?” The answer to this question is not an easy one. In fact, I don’t believe there is any straight-cut solution to the problem that this question presents.
Okay, let us break it down.
Pros for Renting
1. Lower Monthly Costs: Monthly costs of renting are usually lower than the combination of a monthly mortgage, property taxes, utilities, insurance and home maintenance costs that are associated with home ownership. Additionally, while a renter can easily budget for fixed monthly/annual costs of housing, the same cannot be said for the home owner – unexpected expenses can show up anytime.
2. Flexibility: A renter can change their house/apartment once their lease is over (or even before at a small cost). It can be as easy as packing your bags and moving out. This flexibility can come in handy if for example, you have to change jobs, or you do not like the neighbourhood, or your landlord, or any other reason.
3. Little or no Responsibility: The renter has little or no responsibility for maintaining the property and doing repair work If the toilet or air conditioner breaks, a call to the landlord or caretaker usually solves the problem.
4. Savings and Investment: Extra savings from not having to pay property taxes, home insurance, mortgage interest, down payment, etc. can be invested and put to work earning returns from day 1.
5. Income Potential: Even though you do not own the house or apartment, you can still earn some income by renting out a room or subletting.
Pros for Buying
1. Pride of Ownership: You own your own home. Yay! You are no longer “giving away money to the landlord”. You can do whatever you want with your house (paint, decorate, renovate, keep pets). It is yours! Home ownership can foster a sense of belonging, community and helps you to put down roots.
2. Return Potential: Historically, house prices rise over time, and if you live in your house long enough (> 5 to 7 years), it is “expected” that the price of the house will appreciate and depending on when you sell, you may earn a significant return on your investment. However, note that you can also incur significant losses if for example you have to sell in less than 5 years, or if the housing market crashes, or if the economy is generally depressed.
3. Build Equity: As you pay off your mortgage, you will build equity in your home. This equity can be borrowed against later to put into other investments.
4. Rental Income Potential: You can decide to rent out your basement or a room in your house to earn additional income and to offset part of your mortgage. Other avenues for short-term renting include via Airbnb or VRBO.
5. Tax Advantages: In the United States, homeowners can deduct some of their mortgage interests and property taxes on their federal income tax return. This is not applicable in Canada, where mortgage interest for a principal private residence is not tax deductible.
6. Forced Savings/Investing: Buying a home may force you to invest in the long run. A renter may decide to spend the extra cash on hand on unnecessary luxuries while the obligation of paying down a mortgage may constrain the home owner.
I will not bother going into the cons of renting vs buying as I consider the pros for one to be the cons for the other.
Decision Time (Renting vs Buying)
So, it is decision time and we are back to the question: “To rent, or to buy?” These are some of the factors I considered before deciding on whether to buy a house or not:
1. Am I ready to put down roots? Would I like to settle down in this province, city, neighbourhood? This question gives rise to several other questions such as – Is my work situation long term/permanent? Would I love to live here for the next 10 years or more? Is there a likelihood I may need to move soon?
2. What type of house do I need or want? Two sides of the same coin. What type of house would meet your current family needs? What type of house would you like to have? The answers to these two questions may diverge.
3. How much can I afford? What you can afford may not meet your needs or satisfy your wants. How much mortgage (plus other costs of home ownership) can I afford without backing myself into a corner? What if mortgage rates rise by 1 or 2 or 3 points? There are numerous affordability calculators online (such as this one by Ratehub) that crunch the math to calculate how much you can afford.
4. Disparities in Renting vs Buying costs: Compare the costs of renting vs. buying. What is the opportunity cost of losing savings (if any) from renting by buying a home? Does the extra costs of home ownership make financial sense? These superb calculators from The New York Times and Rentseeker can help put things in perspective.
5. Your specific circumstances: The points made earlier all have a financial bent to them. However, home ownership trumps just finance, it also has its non-financial considerations. What will give you emotional satisfaction and a sense of fulfillment? What makes you happier? What are your dreams? What works best for your lifestyle?
So, at the end of the day, the decision is yours to make.[bctt tweet=”To rent, or to buy? It depends!” username=”SavvyCanadians”]