Rent Vs. Buy?

Rent vs. Buy? A common debate for many at some point in their lives. Sometimes the answer is obvious, due to your current financial situation or stage of life. For some though, it’s not as clear as to which direction is the better way to go. There are pros and cons to each:

Top 3 Reasons to Rent

1. Lower Maintenance Costs – If the fridge or furnace breaks down, a phone call to your landlord will initiate the repair or replacement and not on your tab. 
2. Less Commitment – If you don’t love your location, you have the option to move every year until you find the neighbourhood that best suits you. Financially, you don’t need to cough up your life savings to afford the downpayment when buying, and you don’t need to cover costs like Land Transfer Taxes, legal expenses, appraisals/home inspection costs, or real estate commissions to sell. Also, if you are living with someone in a relationship, there are less complications with potential division of assets if you are renting.
3. Rental Costs – sometimes it is cheaper to rent than it is to buy. You typically enjoy the stability of knowing exactly what your month rental cost is, however this is increasingly changing with condo renters as utilities start to factor into the expenses that tenants have to cover. So while your Landlord has to cover their mortgage payments, property taxes, insurance, maintenance fees (if condo), cost of maintenance/repairs, vacancy costs, costs to find a suitable tenant, applicable utilities, property management, and potential other costs like rental items, landscaping, etc., sometimes the tenant’s rent is less than all of these expenses combined, especially if the tenant has been in the property for a long time. 

Top 3 Reasons to Buy

1. Paying Your Own Mortgage – Part of every mortgage payment goes towards building equity, so you are contributing towards your own asset or paying yourself instead of paying off someone else’s mortgage.
2. Investment Potential – Historically, Toronto real estate has outperformed many other investment vehicles or asset classes, so most investors include buying real estate in their portfolios. If the market continues the way it has historically in Toronto, then as prices increase, owners (not tenants) get to benefit from that appreciation with an increase to their net worth.
3. Flexibility – Complete freedom to renovate and decorate as you wish (with restrictions based on by-laws or condo rules of course)! Change the floors, paint the walls, replace the appliances etc. As the owner, you have the ability to create the home that you love.

So what if you are risk averse, don’t know where you see yourself 3-5 years from now, or thinking about living with someone you’re in a relationship – while renting is likely the better option for you right now, why not buy something anyway? While it might not suit your needs in terms of size and location, it could certainly still allow you to participate in the appreciation potential AND a tenant would be paying off YOUR mortgage. Plus even if market prices were flat between the time you purchased and when you had to sell, as a landlord, you receive a 4% return every year, if your tenant simply pays the rent. 

This is exactly what Elaine did when she was just starting out…..she bought something smaller in an up-and-coming neighbourhood (for a whopping $161,000!) and rented a larger unit in another part of the City. Anything that needed maintenance in the unit she was renting as a tenant, her landlord took care of. If something needed maintenance in the unit that she was renting out as a landlord, she would have to pay for, but was able to deduct as an expense for tax purposes. Eventually she was able to take the equity out of the property that she owned, and purchased her own home, while keeping the rental as well, something that would not have been possible with just simply saving a portion of her income towards a downpayment. 

If you don’t have the downpayment to purchase a smaller property even in a different area or market, but have goals of owning real estate someday, make sure you do take a look at your monthly rental costs – while there is such thing as being house-poor, this can also apply to renters. After taxes, are you able to afford your rent, other bills AND savings? If your ability to save for a downpayment is not looking good once you’ve factored in your rental costs, consider any of these following temporary solutions:  a roommate to split costs with, moving to a building or property with fewer amenities especially if you don’t use them, or moving further out with a longer commute. And of course, create a budget and stick to it….whether this may mean limiting your spending on nights out with friends, daily coffee habits, online shopping or grooming/beauty services….short term sacrifices can contribute significantly to longer term financial goals. 

One final note:  for those of you who want to purchase real estate but have been dragging their feet on transitioning from renting to buying, 5 years ago, the average price of a condo in the GTA was $417,869. Most recently in August 2021, the average price was $688,568. You would need approx. $50,000 more now for your downpayment than you did back then, on top of what the 20% downpayment would have been back in 2016. What are prices going to be like 5 years from now? The best “deal” is to buy something soon, so that your “savings” is injected into the equity of the property and not towards a downpayment as an owner, or so that your tenant can start paying down your mortgage for you. 5 years from now, you can take out that equity and apply it towards the purchase of another property which is likely to be more than what you would’ve saved from just diverting a portion of your income into a savings vehicle.

For a more detailed analysis on your personal situation, please feel free to reach out to us for a chat!