Just about everyone dreams of owning their own home and enjoying life in a house or condominium that is suited to their own tastes. Want to tear down a wall? No problem. How about put up a swingset in your backyard? Sure! While owning your own home allows you to build equity and take advantage of tax free capital gains when you sell it, ownership comes at a cost. There is a mortgage to pay, property taxes and either maintenance fees for a condo or general upkeep on a home.

Financially, renting a property is simple. Find one you like and write a bunch of rent checks for each month. Your costs are rent and perhaps some additional utilities if they are not already included. To understand the difference between renting vs buying a home and the impact on your finances we are going to take a look in detail at this scenario. We’ll focus on condominiums as they are popular with first time buyers.

For this example I found two virtually identical condo units in the same building in downtown Toronto, one is for sale the other is a rental unit. Why Toronto? It’s a market that I know with a huge number of condos both for sale and rent.

Condo Description: 733 square foot 1 bedroom plus den with a 35 square foot balcony, 1 parking spot and 1 locker

Mortgage Details: 3.29% 5 year fixed, 25 year amortization

$370,000 1 Bedroom Plus Den Condo Buy 5% Down Buy 10% Down Buy 20% Down Rental
Down Payment $18,500 $37,000 $74,000 N/A
Mortgage Insurance (CMHC) $9,666.25 $6,660 NA N/A
Monthly Mortgage Payment $1,763.39 $1,658.39 $1,445.22 N/A
Monthly Maintenance Fees $437 $437 $437 N/A
Monthly Property Tax* $212 $212 $212 N/A
Total Per Month $2,412.39 $2,307.39 $2,094.22 $1,850

*I estimated $330,000 as the assessed value for the property as property assessments typically lag the actual market value. This is an estimate and may be higher or lower in reality.

As you can see from the table, your monthly expenses for owning your own home are much higher than renting. With 5% down you will pay $562.39 more per month which is a substantial drain on your cash flow!

At the end of 5 years, how do the rent vs buy scenarios I discussed above play out?

$370,000 1 Bedroom Plus Den Condo Buy 5% Down Buy 10% Down Buy 20% Down Rental
5 years of expenses $144,743.40 $138,443.40 $125,653.20 $111,000
Total Return** $87,759.90 $103,237.35 $134,101.18 Nothing!

**Total return is the sum of the down payment + principal repayment + estimated capital gain of 1% per year (this is very conservative)

While the rental unit is cheaper on a month to month cash flow basis, owning your own home will make you more money in the long run. Considering we all need to live somewhere, it’s better to live somewhere that will make you money. Keep in mind that I estimated a 1% capital gain each year which is extremely conservative.

There are three major considerations when comparing rent vs buy scenarios..

#1 – Cash flow

Do you have enough money coming in to be able to handle the additional expenditures that come with owning your own property? The less you put down on the home the higher your mortgage payments will be.

#2 – Lifestyle

If you spend a significant portion of your income on your lifestyle such as entertainment, clothes, club memberships, aesthetics, etc you will have difficulty affording your own home. Learn how to cut costs without killing your lifestyle.

#3 – Flexibility

An often overlooked consideration in the rent vs buy discussion is flexibility. If you don’t want the headache of owning a home, are living in a city for a short period of time or just want the ability to get up and change neighborhoods, renting is a better option.

So what is the answer, should you rent or buy? If you are looking to live somewhere long term, the answer is to buy. In order to help get your down payment together, consider looking at smaller homes and more affordable neighbourhoods. You could also cut back on discretionary spending or live with your parents for another year. Remember, short term pain equals long term gain. There are a lot of ways you can save more money without drastically changing your lifestyle, alternatively find ways to make more money small amounts can add up, a home based business can also help improve your cashflow and ultimately buy that house you want.

Owning real estate is a great long term investment as it is essentially forced savings with built in tax free capital gains. Better yet, you actually own a physical asset that you can see and touch!

Andrew Martin is a personal finance and investing blogger from Toronto, Ontario with a background in technology and a passion for travel.  His blog, She Thinks I’m Cheap aims to help Canadians make more money by sharing facts, stories and advice.