When considering renting vs. buying, both short-term and long-term considerations are important.
Owning a home and paying off your mortgage has long been seen as one of the surest ways to building wealth in retirement.
But you can build just as much wealth, or more, by investing in a diversified portfolio through ETFs, mutual funds, or robo-advisors.
And right now, that might be necessary.
You’re almost definitely familiar with the red-hot housing market if you live in Canada.
If you’re not: things are bad.
There’s not enough housing inventory, and there are too many speculators, meaning housing prices have been shooting up for decades — and there’s no end in sight.
If you can afford to get into the market, there’s an excellent chance your house will increase in value over the long term.
So when you decide to sell years down the line, you’ll likely be in for a solid gain.
But if you can’t, not to worry — by sticking to a disciplined, well-thought-out investment plan, you can end up on in a similar spot while renting.
Benefits of Renting
1. No down payment
This is the most significant barrier to buying a home for many people.
Putting down $140,000 – the average down payment in Ontario in the first quarter of last year, according to mortgage firm Edison Financial — in one go can be challenging.
Renting avoids that problem.
2. More money to invest
Putting your money into a diversified ETF portfolio is one of the surest ways to build wealth over time.
Since mortgage payments are usually much more than rent, renting will likely leave you with more cash to invest elsewhere.
3. Move when you want
If you’re not ready to put down permanent roots, you should keep renting.
Buying a home is a significant commitment, and even in this inflated market, selling is a big hassle.
There are realtors to deal with, as well as moving costs and potentially moving out a renter of your own.
That’s not fun.
4. No property taxes, condo fees, or other costs
Of course, these might be baked into your rent.
But you’ll never have to consider whether you want to lock yourself into a 25-year mortgage on a tiny apartment in downtown Toronto.
And you won’t have to deal with closing costs, a down payment, taxes, condo fees, and the myriad of other costs of buying a home.
5. Not your house, not your problem
Repairs aren’t your responsibility when you’re renting, which can save you lots of stress — and money — down the line.
If you know a homeowner, you’ve likely heard a horror story of a surprise roof leak saddling them with a $20,000 bill out of nowhere.
That’s not your problem if you’re renting.
Of course, you might get stuck with a challenging landlord who refuses to do repairs.
However, you also have the freedom to change your living situation with minimal hassle.
All the money you save from avoiding these costly repairs can be better put to use in a well-diversified investment portfolio to generate great returns in the long term.
Drawbacks of Renting
1. It’s not yours
The most apparent drawback is also the biggest.
At the end of the day, you’re living in someone else’s home.
While it’s handy that they have to fix all the repairs that need doing, and you can leave whenever you feel like it, there’s something to be said for knowing that your home is yours and yours alone.
2. You can’t sell it
Obviously, you can’t sell someone else’s house.
So if you’re going to maximize your long-term earnings, you’re going to have to be disciplined.
Set an investing plan and stick to it.
3. You have to deal with a landlord
Many landlords are attentive to repairs, are kind, and understanding.
Many are not.
Which type you’ll get while renting is up to the luck of the draw.
And it’s not a problem when you buy.
4. You could be evicted
There are many legal reasons you could be evicted.
If your landlord or a family member decides to move in, for example, there’s nothing you can do.
Of course, not all landlords play by the rules.
The term “renoviction” has become common because the practice has, too.
A renoviction is when a landlord either pressures or forces tenants to move out to renovate the unit and re-list it for a higher price.
Benefits of Buying
1. You get a house
This one is the most obvious, but it’s also the most significant benefit.
No one can kick you out.
Your castle is yours and yours alone (well, once you finish your mortgage payments).
You can focus on making it a home you’ll want to live in for years to come.
And the appreciation in value is all yours.
2. Rental income
If you’re not living in part of your house — or can remodel it into a separate suite — you can rent it out to help with the mortgage.
Some people can even cover their entire mortgage payments through rental income.
Of course, this comes with the headache of being a landlord.
If you’re prepared to take on the responsibility, it can be a financial boon.
Drawbacks of Buying
1. Down payment
In today’s hot real estate market, not many people can come up with a down payment of more than $100,000 on average.
Nearly 30% of first-time homebuyers got help with their down payment from their parents, according to CIBC.
That’s up from about 20% in 2015.
2. Mortgage payments are often higher than rent
Both rent and mortgages are based on the general real estate market when you buy into it.
While banks set mortgage rates with tons of money invested to maximize their bottom line, individuals often set rents.
Sometimes those individuals undervalue their house — meaning there are deals to be had if you look close enough.
Frequently Asked Questions
- Is renting really worse than buying?
Not if you do it right. Since you won’t be left with a significant, sellable asset after years of mortgage payments, you’ll need to be diligent with your investments. This strategy can make you more money in the long term.
- Is renting in Toronto worth it?
It can be. If you don’t have enough money for a down payment, you can use the extra cash you save each month in a diversified investment portfolio to generate long-term returns.
Of course, many other cities in Canada are cheaper than Toronto. If you don’t have to live in the Toronto, why not try out somewhere else as an adventure?