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.
If you rent, you could come out ahead financially over the long term
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.
Comparing the costs of renting versus owning: example in British Columbia $850,000 purchase price
|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)
|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
|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.
Exploring your beliefs about renting and buying
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.