To Rent or to Buy

The Problem with Renting

There seems to be lots of shame with renting and I think it's valid. Rent has its place but, there are only a few reasons to rent.

1. Missing Down payment - You don’t have enough money for a down payment

2. Travel - You travel lots for work and renting is not financially reasonable

And that's it. 

Missing Down Payment

If you are still saving up for a down payment on a house, that is totally reasonable. No shame in that. Saving for a downpayment is a lot of work and especially if you are trying to save 20% to avoid mortgage insurance. Being a student or young in the workforce means having extra cash will be quite rare for most. With high living expenses it can be difficult to do anything but break even. This makes budgeting even more important so that your financial future can be secured and you don’t make it to a middle life crisis having saved nothing. 

Living with your Parents

There is actually a third option between renting or owning that can save 35% of your income. Living with your parents is not always an option with certain family dynamics and it can be embarrassing but it is becoming more socially acceptable with rising costs of living. Whatever your rent would have been, $800, $1000, $1200 etc the more you will be able to potentially save. If you are struggling to get by and just breaking even this can be an easy way to start saving towards a downpayment. 

Example:

Down Payment: $20,000 (Typical down payment)

Living at Home, avoiding Rent: $1000 (Typical Rent) 

It would only take you 1 year and 8 months to save this amount. Honestly, not that long to live with your parents, plus you can move out with pride knowing you are moving into your own house that you Own.  

What to Rent

If you are saving for a downpayment then renting makes sense, but that doesn’t mean any rental makes sense. Rental is a spectrum. There is renting a room for $400 a month or renting a villa for $5000 a month. Housing is typically the largest portion of one’s budget so splurging on a nice rental when you are saving for a down payment is like tying an anchor to you while trying to swim. Every dollar not spent on rental housing is a dollar that could be spent on saving. While saving for a downpayment is your goal you should be living in the worst, least expensive rental possible. Old condo unit, basement apartment, single room in a house, whatever is the most affordable given your life situation. Getting a whole house when you just need a small apartment or better yet, just a room is needless overspending. You are literally adding months or years of extra time to wait till a downpayment is saved up for. The goal of renting is to not be renting. 

   

Life Time Renter

Renting is not always financially incorrect. If you rent a modest house and use the extra money saved to invest, it is possible to be better off in the long run. Realistically speaking this is highly unlikely given lifestyle creep and it requires extra discipline over one's entire life to not spend the money saved by renting. Owning a home forces you to save since your housing mortgage payment automatically gets taken out and those payments are building your equity at the same time it provides you with shelter. There is no thought given and no chance to splurge on an extravagant vacation. It takes the need for self discipline out of the equation which is why in most instances owning is financially better than renting. 

Benefits of Owning

When you own a house you have skin in the game. When markets go up, your wealth increases. Even if you only put 5% down and 95% of your house is owned by the bank, when your house appreciates in value, only you, the owner, reap the benefits. Buying a house locks the price and more importantly the debt. Houses have gone up 20% - 50% in the past 5 years so waiting can literally cost you thousands.  

Houses can drop in price just like a stock, but unlike a stock they always have innate value of providing shelter. Houses have gone up 2000% in the last 50 years going from around $30,000 to over $700,000 in 2023. This works out to around 6.5% per year. Ideally it would be best to time the market and buy during a dip, but if you wait too long you may just lose potential appreciation.  

Mortgage Interest vs Appreciation

Some individuals, myself included, fear debt in all its forms as the added interest cost can be disgustingly high after 25 years. A $500,000 house amortized over 25 years at 5% interest will cost a total of $872,407.48 or $372,407.48 in interest. Paying an extra $372,407.48 seems like an obvious bad decision, but unlike most assets, a house appreciates in value. If we assume a value increase of 6.5% a $500,000 house will be worth $2,413,849.55 in 25 years (which is probably on the high end) which illustrate how paying $372,407.48 in interest in order to own 2.4 million dollar house is clearly worth it. This is why in the early 80s people still purchased homes even though the prime rate was up to 21% (also because they believed the interest rate would lower). Fear of debt is valid, but using debt to purchase something that appreciates in value is the best way to utilize debt. 

    Using Debt for things that Appreciate in Value is the Best way to Utilize Debt 

Starting the Clock

Arguably the best part about owning a house is setting the 25 year timer to being mortgage free. The clock is then set and now time is on your side. With a typical 25 year mortgage there is a set timeline (except for variable-rate mortgages with fixed payments - which is just a terrible idea) meaning if payments are made, it will take 25 years at the longest. With accelerated bi-weekly you can chop off approximately 4 years and 10 months from your mortgage term and even more if you make additional payments. 

Housing expenses is the largest bill in a budget (around 35%), so being able to someday be free of this expense can be a significant financial relief, allowing more funds to be allocated towards savings, investments, and other personal goals, ultimately providing greater financial security and freedom. Who wouldn't want to have an extra $2000 a month left in their budget each month. 

Purchasing a house at 30 (average first time buyer) guarantees* fully owning a home at age 55 at the minimum. The sooner you buy, the sooner you can be free from housing expenses   (Mortgage and rent).    

Regular Monthly Payments vs Accelerated Bi-Weekly Payments

Regular Monthly Payments:

    - You make 12 payments per year (once a month).

Accelerated Bi-Weekly Payments:

    - You make half of your monthly payment every two weeks.

    - Since there are 52 weeks in a year, this results in 26 payments (or 13 full payments) per year instead of 12.

Example:

Principal: CAD 500,000

Annual Interest Rate: 4%

Monthly Payment:

    - Regular Monthly Payment: CAD 2,639.18

Accelerated Bi-Weekly Payment:

    - Bi-Weekly Payment: CAD 1,319.59

Impact on Mortgage Term

    - With regular monthly payments, the mortgage would be paid off in 25 years.

    - With accelerated bi-weekly payments, the mortgage term is effectively reduced to approximately 21 years and 46 weeks.

The extra payments are barely felt paying every two weeks versus monthly yet it can have a huge financial payoff after 25 years. It would be financially unwise to sign up for anything other than Accelerated Bi-Weekly Payments.

Travel

If you travel lots, that is fair considering the high costs associated with selling, moving and legal. Just real estate costs alone can range from $10,000 to $30,000. If you plan on moving in every few years that is a lot of costs to absorb.  According to ChatGPT only around 1-3% of people fit this description so it's pretty rare, especially long term. People in their twenties tend to travel quite a bit before settling down.

Some careers require lots of relocations every few years, but many of those same companies also will pay for the sale of your house and all moving expenses which drastically lowers the burden of selling. 

The benefit of renting is flexibility. If you are traveling around the world and enjoy a new view every few years then renting would be the obvious choice. It can be a great way to explore the world being able to have temporary housing, but if you are renting in the same city and house  for multiple years, then it is illogical to not own. 

Owning is an Investment

Like it or not, owning a home is not just for providing shelter, it is an investment and a wealth building tool. The sooner this is realized, the sooner you can begin saving and eventually purchase a home starting the clock to when housing costs are completely minimized. Think of what you would do if you had no rent or mortgage payments. You could afford to take a vacation every 3 months if you wanted to. You could eat out every night. The financial freedom is yours.

Housing is not an investment in some ways as well. If your $400,000 house suddenly appreciates to one million dollars you have not actually gained $600,000, because if you sell the house you still need somewhere to live. Unless you want to switch to renting, you will have to buy another house which will probably cost you around a million dollars as well. It's in owning a house that is paid off where the real payoff begins. That is the real freedom owning provides

If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com