Gails Blog

I’m not sure when renting got such a bad name, but if I were to hazard a guess I’d say when real estate started zooming through the stratosphere and a “home” became an “investment.” Then renting  became “throwing away your money.” Never mind the fact that you were putting a roof over your family’s head. Only slugs rented. Anyone who wanted to be wealthy knew enough to get into a home. As you can see for the sub-prime fiasco in the U.S., that attitude left a lot of people homeless when they found they couldn’t CARRY their homes AND EAT.

When I was in my 20s, I lived in a neighbourhood that was suited to a single girl hell bent on a good time. Back then, renting was the perfect solution: one of limited responsibilities and commitment. If a window broke, I called the landlord. If the fridge stopped working, I called the landlord. Renting is virtually a worry-free existence. (All this is assuming you have a decent landlord). 

Home ownership can be a pain in the rump. There’s always something that needs fixing. But home ownership also brings a ton of warm and fuzzy feelings. You have complete control of your environment so, yes, you can paint your living room red. And if you enjoy puttering about, you’ve just secured yourself years of weekend entertainment. Course, when it comes to the rent versus buy question, you can’t just focus on the feel-goods. You’ve also got to get in touch with at the financial facts of life. 

People often believe that a home is a good investment. And virtually every rent-versus-own question is a lead into why you HAVE TO buy your own home. It’s funny how none of those arguments present the positives of renting. Maybe it’s because they’re all in the business of financing home purchases.

First there’s the calculation that compares the cost of carrying your own home (your principal and interest payments and property taxes) with the cost of renting. Sometimes that comes out a wash, which immediately brings people to the conclusion that renting sucks. Hang on now, there are some other factors that weigh heavily in the decision making.

Renters aren’t responsible for maintenance. Home-owners are, and generally the older the home, the higher the maintenance. A good rule of thumb is to estimate home maintenance costs to be 3-5% of the home’s value per year.  So if you’re home is worth $300,000, you should have room in your budget for about $800 a month for maintenance. Sure, this won’t happen every month. Sometimes you’ll go a year or two with little to do. But eventually there will be windows to be replaced, driveways to be repaved, a roof to be reshingled, a furnace, a water heater, a fridge, a stove… I could go on FOR EVER!

Renters also don’t have to shell out the whack of cash homeowners must. There are  “closing costs”:  legal fees, land transfer tax, and other miscellaneous expenses that you don’t pay if you are renting. Assume another 5% of the purchase price on the home will go toward these additional costs.

And first-and-last-months’-rent is a lot smaller than the typical downpayment on a home. Of course, all that MONEY YOU’RE SAVING AS A RENTER has to be balanced off against the fact that no matter how small the principal portion of your mortgage is (and it’s miniscule in the early years), as long as the market is stable or rising, home owners are building equity and increasing their net worth with every mortgage payment.  And that money is earned tax-free. Thanks to the principal residence exemption, the capital gains on the sale of a home is zip, zero, zilch.   The way to offset this downside is to use the money you would have put into things like maintenance and downpayment to building an investment portfolio.

Do you suffer from wonderlust? Are you upwardly mobile and constantly on the move in your career? Stick with renting. People who relocate for work are often better off as renters because they don’t have to worry about the horrendous home acquisition and disposal costs (real estate sales commissions alone are between 4-6%). Unless you get lucky and the value of the home you purchased goes up by at least 10%, you’ll be losing money.  Keep in mind, too, that In the first five years of ownership, most of your mortgage payments are applied to interest, with minimal paid to the principal. So you won’t get this money back when you sell, and you’ll have all the hassles and costs of putting your house on the market.

Buying a home in a neighborhood you don’t know well is one of the top mistakes home-buyers make. If you’re new in town, you may be better off renting a house for six months or a year to get a feel for it. If you like living there and you like your neighbors, you’ll feel much more comfortable signing on the dotted line later on.

Your employment prospects should be pretty stable before you consider buying your own home. Home ownership requires a number of regular payments - the mortgage, property taxes, utilities, maintenance, and insurance. Missing any of these payments can trigger dire consequences. And unless you have a steady work history, lenders will be loath to ante up with a mortgage. 

It’s clear that while there are a number of financial factors that will weigh in when it comes to the rent versus buy question, the decision involves much more than just running the numbers. You’ve also got to look at the emotional rewards and challenges of each alternative.

As a good friend of mine put it, “You can either own capital or you can own property.” If you’re making regular investments and have a well-developed portfolio, you may be content to rent while you’re focused on you’re putting your money through its paces in the market. But if you’d rather put your money to work where you live, then home-ownership’s rewards go far beyond the bottom line.

I’ve been a renter and I’ve been an owner and overall I like home-ownership. Course, like the weather and my underwear, that could change. Who knows what the future holds.