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.
More on Owning a Home
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.
Thanks for posting the article, if anyone has any comments or feedback I’m happy to discuss them! – Andrew
You neglected to account for several things in your fluffy article:
– maintenance costs are basically non-existant for most renters, but not for owners (a new roof, appliances, water heaters, flooring, etc., all applicable to condos and houses).
– Keep in mind that while a 1% increase/year may be considered “conservative” now, there’s nothing to say Toronto won’t see another drop as per:(http://www.torontorealestateboard.com/market_news/market_watch/historic_stats/pdf/TREB_historic_statistics.pdf)
– In 1989 the average sale price in Toronto was $273,698 it dropped every year until 1996 when it hit a low of $198,150 and it didn’t go back up to 1989 levels until 2002 when it was $275,231. Would you be okay with a dozen years of lowered home value? I point this out because (in my experience) people are more accepting of the ups and downs of investing but are shocked that a home isn’t a constantly appreciating asset..
– Your comparison of rent and monthly ownership expenses doesn’t take into account that a renter could INVEST the money they would otherwise be spending on ownership.
– You also fail to take into account where the down payment money is coming from – it’s probably coming from interest earning investments. So you may be gaining a “conservative” 1% gain/year on your home you’re losing that investment growth.
– You also fail to mention that your down payment will likely be taxed to some degree – if I sell some of my investments to have a downpayment, I’m going to have to pay taxes on that sale (and I believe the $74k is higher than any RRSP withdrawal for first time purchase amount).
– You also don’t make any mention of closing costs, which call tally several thousand more dollars onto your initial outlay
There’s probably more.
Hi SH, all are very valid points which could be taken into account for this discussion and would warrant a follow up post. Running through examples of closing costs, investment options and long term housing trends would certainly provide further valuable information to readers. We could also discuss interest rates and rent increases.
-Andrew
I think there are probably more expenses with owning. Normally every few years there are additional emergencies, the washing machine may blow up, the boiler goes bang etc etc. these add up too and in a rental are not your issue. Plus I’d you took your free $500 per month and put it in a normal savings account of low risk investment you will suddenly end up with a lot of savings. I think you should only ever buy if you really want your own home, never to make cash, that I’d unless you can pay 100% without a mortgage.