Should I Rent Or Buy? The Million Dollar Question

rent or buy

Never have so many Canadians today faced such a tough question in “Should I Rent or Buy?” It’s the million dollar question but I’m not going to make it any easier on you because the answer to the question really is – it depends. There are a number of questions we can ask ourselves to determine and narrow down the grey areas here and provide you some clarity for your own situation.

Should I buy a property?

The fact of the matter is that we are just coming off of the greatest housing boom in the history of the world. This is no small statement. Many fortunes have been made over the last decade in the western world by buying property. But what now? First let’s look at the three reasons why you would buy a property:

  1. To use as a primary residence – this is the main reason to purchase property for the majority of Canadians. We occupy the home for our own use and derive value from using it as our family’s shelter.
  2. To gain capital growth – the last 10 years have been a wonderful time to rise with the tide of increasing property values. This is market driven not something you can control personally per se.
  3. To gain income potential – this is where purchasing property to rent it out or to supplement the payment by renting out a portion to another party. With mortgage interest rates at historical lows and up until two years ago having loose mortgage qualification requirements; anyone could qualify to buy a home causing your tenant pool to be quite poor – making this not a popular reason to purchase.

Now what the person who is looking to buy needs to consider is what is changing in today’s property market and how this will affect them. The only reason I would advise a client to buy property today would be if they were looking to hold it for the long-term as their principle residence. The reason here is that your family may be forced to sell at a loss due to a change in the economy.

Capital growth in most regional markets is flat with a high level of uncertainty. This means if you are looking to purchase as a way to play the market appreciation lottery – don’t. Direct investment in income property is only advisable for the full-time investor who has made it their business to know their regional market inside and out and has a strategy in place for the movements of the market.

Should I rent a property?

There are increasingly appealing reasons to rent today. I believe with today’s changing demographics as well as a much more mobile and informed population – it will become even more popular still. Here are the main reasons why someone would rent a property:

  1. Lower cost of living – outside of a very few rental markets (Toronto/Vancouver) where landlords can charge premiums because of a shortage of well located quality rentals – it has been shown that the cost of living is lower when you rent vs. buying.
  2. Ease of movement – with Canada’s economic focus shifting West – it is easier to take advantage of employment opportunities when renting as real estate is a non liquid asset and takes time to move. By the time your home sells – that job opportunity is gone to the next guy.
  3. Opportunities to invest – not owning a property is never an excuse to not invest. Money will be made in real estate in Canada regardless of the overall economy. The money you save from the reduced cost of living can be invested in other asset backed investments that yield healthy returns.
Our Story

I have to interject here a personal story as my family has recently experienced a move like this. We saw the top of the Canadian real estate market coming two years ago and decided to sell our home where we realized a six figure return after expenses. We decided to rent in our new found city of Barrie, Ontario because we did not know where we wanted to settle down as of yet. The more research I did on the change in the property market – the more I was convinced that it was not time to buy.

While we considered our next move – a 2,600 sq. ft. – 30 acre ranch came up for a long-term lease for less than market rent for our area. Now looking back I believe this was one of the best moves we have made as our realized capital gain on the sale of our primary residence is reinvested making great returns as we enjoy a superior quality of life.

The debate over “Should I Buy or Rent” is not going away anytime soon. The considerations are very personal. The consequences of making the choice lightly can be severe. As long as you are purchasing property for the purpose of long-term residency then I believe you will benefit from today’s low mortgage interest rates. If you foresee any changes in your near future (3-5 years) then finding a rental property (and continuing to search for a better one) is the more advantageous option.

Editor’s Note:

Before I moved to Canada I was a single homeowner who was living in the second home that I had bought before the age of 24. I bought my first home at the age of 21 because I didn’t want to pay rent to someone else, but money and me became friends from an early age.

We decided to rent vs buy before we purchased our first home as a married couple for many of the reasons that Mike has pointed out. We became the nosey neighbours  sellers dread but with good intentions.

We went to many open houses in the GTA (Greater Toronto Area) during the short period that we rented an apartment. We did this in order to learn more about the housing market in Canada and what to expect.

During the time that we were renting we saved enough money for a downpayment so we would not have to pay the CHMC fees. There really was no rush for us but we thought we would do it the right way then look back and wished we had made other decisions.

It was one of the best decisions we ever made. It helped us to get a kick-start on paying down our mortgage. In 2013 we will be mortgage free, just 4 years after buying our home. Taking the time to budget our money in order to save, research properties and rates to make informed decisions really did help guide us in the right direction.

Make decisions that fit in your budget but research your options before jumping in. Answering all of life’s million dollar questions takes patience so don’t rush to keep up with your friends and neighbours. Buying a home vs renting is a big step, make the right step that works for you.

Thanks Mike for Sharing your rent or buy story with us today!

Contribution Post By: I am a passionate educator about mortgage and finance. I also am an investor in asset backed and real estate based investments. My wife and three boys live with me on a 30 acre horse farm up in Barrie, Ontario where we enjoy all four seasons. Find me at Mortgage Truth.

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Mr. CBB
Mr. CBB was born and raised in the United Kingdom who then moved to Canada where he is a permanent resident. He recently became a father to a very busy toddler who allows him to be a kid at heart. He bought his first house at the age of 21 after University and his second at the age of 24. Both Mr.CBB and his wife are Debt and Mortgage Free and they did it all in under 5 years using a Budget. Canadian Budget Binder is a place where he shares their financial experiences with his readers and hopes to learn about theirs. Welcome to CBB!
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Mr. CBB

Comments

  1. This translates pretty well to America as well. I was in the position where I didn’t want to pay rent to someone else and I wanted to build equity. It’s not a necessity, but it worked out well and we are already looking for an investment property. I feel like if we didn’t take advantage of the historically low rates we’d basically be losing money.

  2. We decided to buy because the market was good for buyers when we bought. Our house and everything with it (taxes, insurance, etc.) is the same as what it would cost to rent.

  3. We currently rent but I will be looking to buy again at some point in the future. As much as I’ve enjoyed the freedom of renting, I’m not sure I like the idea of having to pay rent in my retirement years. It’d be nice to have a mortgage paid up by then. Good post.

    • Hey MB – like I mentioned in my post – as long as you have an investment plan then renting can be part of your retirement plan. Not that purchasing at another time will not be the most advantageous avenue. I believe having the means to be able to pay off your mortgage at any time is a key component in truly enjoying today’s low interest rates. Thanks for the comment

  4. Where I live (LA) it would be impossible to buy because of the price and what I make. But if I lived somewhere much cheaper i’d consider it.

  5. Excellent post. A study done by Harvard showed that over 50% of people who decided to buy were financially better off renting. The concept of “building equity” is grossly overrated by the vast majority of people who don’t understand the entire argument either way.

    • Hey Joe, agree completely here. And the most unfortunate part is that the industry adds fire to an already out of control situation. Real estate agents and bank mortgage representatives too often put their commissions ahead of what is best for the client. The mantra that I have always followed in real estate investing is you make your money when you buy. It has paid well!

  6. AverageJoe says:

    Excellent post. A study done by Harvard showed that over 50% of people who decided to buy were financially better off renting. The concept of “building equity” is grossly overrated by the vast majority of people who don’t understand the entire argument either way.

  7. Debt RoundUp says:

    When we first started looking, we wanted to buy. Unfortunately, that was at the height of the market in 2006. Luckily, we took out a mortgage that we could easily afford, so we didn’t struggle to pay it during the down years. We will probably buy again when we want to move next year.

  8. Good post! I think it really does come down to your personal situation at the end of the day and where you live and so forth. We rented for a number of years before we bought and the thing I never liked was the feeling that we were helping someone else pay their mortgage. The overarching thing I did not like was communal living, there always seemed to be much less privacy when we rented.

  9. Love this post. Often times money experts insist that buying is always the best option, but that’s not necessarily true, as you have proven, Mike. Thanks for the great post!

  10. Totally get the renting vs buying thing….here in California prices for purchasing a home are still pretty high. Many people rent here, because the prices are so steep.

  11. It all just depends on your job and living situation. I like having a house and land, and it works well for my family. But if I were single and worked in a metropolis type area and didn’t need space to sprawl out, I would consider renting.

  12. I bought my last house because I don’t plan on going anywhere in the near future, but before I moved a lot and was renting. I still had a rental property though, so people paid me rent and I passed that rent forward to another landlord, technically it was like being a homeowner. The cost of renting may be lower, although you have to consider what your downpayment money would give you if it sit cash at the bank and that every month part of the mortgage payment goes to capital, which is an easy way to save money, and shouldn’t be included when comparing to a rental. You need to add maintenance and repairs though.

  13. Thanks for the comments and kudos everyone. My intent is to bring light to a very grey area of Canadian personal financial decisions. Like Laurie mentioned – it is not always about buying as most mortgage experts will advise (pst – might be because they get paid when you buy). Cheers

  14. We do own our home, but living in LA – it’s about 50/50. Rent is expense and buying a home is expensive. 🙂 I agree buying a home as a long-term investment is generally good (assuming you buy what you can afford!) but renting isn’t necessarily bad – as you point out. So many people have that mindset that renting is throwing away money. I get it, but sometimes it truly is the better choice!

    • Hey Shannon, thanks for the comment here. I believe statistics can be skewed to prove that either way is more beneficial. The bottom line for any family is do you have a plan for achieving your financial goals and are you taking the action steps necessary to get there. Buyers and renters can become wealthy if they have a plan and stick to it.

  15. Houses are pretty cheap where we live and rents aren’t necessarily much less than a mortgage payment. I’ve never regretted buying any of our real estate, but I can see where renting would make senses if you aren’t sure if you are staying in the area or if it is very expensive to own.

    • Hey Kim – to add to your comment – people should also never settle once they have found a rental property. I believe the best opportunities arise if we remain diligent after finding what initially meets our needs. When we found the farm we currently lease – we were renting a home in a subdivision not far away and if I was satisfied with where we were – we would have missed out on saving thousands in rent as well as double the quality of life IMHO.

  16. I would buy before I rent any day. The real problem is can you afford the cost where you live. I have a friend in Seattle who told me that my house that I paid $72,000 here in Ohio would be worth 4 to 5 times that in Seattle. That’s crazy.

    • Hey Chris – you are bang on here. Affordability is a key factor (among many). If you are in Canada – you can check out RBC’s recent housing affordability index for a broad view of your area. http://ow.ly/jT0uU

  17. Rent is not cheap where I live but it’s still way cheaper than buying.

    Buying a house is in my five year plan, however.

  18. Great post.
    I personally like having my house and land, but I know that for some people renting will always be the better option.

  19. I love owning real estate. Love it. I used to be firmly on the side of buy. However, my views have evolved. I think the answer to the question is different depending on everybody’s situation. If you are very mobile, expecting a move, or don’t have the money, renting is a great option. Otherwise, buying would still be my preferred choice.

    • Ah! A fellow real estate enthusiast – CT I am with you 100%. I love real estate – I love the returns, I love the predictability, I love the leverage of other people’s money (aka the bank) that you can use to your advantage. Just has to make sense for your goals. Cheers

  20. There truly are pros and cons to both sides of this argument. We purchased our house from foreclosure and it ended up being a money pit. It’s a nice feeling to own (well believe to own) your house, but renting can free other things up.

  21. SumoCoupon says:

    The flexibility of renting is extremely nice. I also like the fact that any repairs or maintenance costs are owed by the landlord/property manager.

  22. Alan@escapingmydebt says:

    I have only rented once in my life and that was for 3 months. The reason for this was that the house I was living in sold in 7 days in a slightly down market but we did not have a house selected to move in to. I definitely prefer buying over renting. You do of course have more responsibilities, but the financial benefit in the end is worth it.

    • Hey Alan, I believe it goes without saying – taking responsibility will always get you further in the long run. If you are renting for the reason that someone else takes care of things for you – I can guarantee you will not get very far financially. But a renter that takes care of their landlord’s home as if it were their own will find not too long after they will be owning one themselves. Thanks for the comment

  23. Should you buy a home? Or should you rent? The answer is….it depends on what do you manage. You need more than just a basic comparison between monthly mortgage and monthly rent to show you which would be best financially planning for you. Plus there are other causes you might be better off renting than buying and vice versa.

  24. It all depends on your personal situation and area. You have to educate yourself to notice trends and accurately value properties. Additionally I do not believe you should purchase a home if you do not plan on staying in the area for less than 5 years.

  25. Actually, a good friend of mine is in the market to buy a second property. He already owns a two-family home that he rents the other half of for a fair percentage of his mortgage. Now he is looking at a place near the shore to use as a vacation property, but he thinks he can rent it out as well to pay for the on-going expenses.

    Every market is different, but here, if I had the money, I would absolutely buy over rent. Average rents have gone up by more than a quarter in the last 3 years even though housing prices have been relatively steady. If the same size house in the same neighborhood is renting for $1500/month or selling for $190,000, the choice seems pretty obvious if you can afford the down payment.

    • Hey Edward – thanks for the comment here and a real life story to boot! Love to hear how your friend is making his way using investment real estate to further his financial well being. It is good that you have followed the historic rents for your area. This is important to note. Just ensure you are completing your due dilligence and when the time comes to pull the trigger and buy it will be a no brainer.

  26. I think it always comes down to what you want to do and where you are at in life. If you’re in a good financial situation right now, the rates are ripe for the picking. Finding a good deal and holding on to it for a couple years may show some real appreciation. The low rates will make sure your monthly payments are low so you could see a decent profit.

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