Should you buy a home, or are you financially better off to rent?
This is a question that has intrigued many people. Those who believe you are better off renting suggest that if you invest the amount you would need to buy a home, and then also continue to invest the difference between renting and buying, you will be financially better off.
On the other hand those who support buying as the better option believe that you build equity by paying off your mortgage, plus you get an additional benefit from increasing property values.
While there are many sound reasons for choosing not to buy and rent instead, my conclusion is that anyone with the financial means to buy, and remain in the home for up to ten years with modest appreciation, you are better off to buy.
The following key factors have to be taken into consideration:
- The properties to be bought or rented have to be comparable; I used a single family home as the basis for comparison.
- The funds needed for the down payment and closing costs will either be used to buy a home, or will be soundly invested.
- The difference between the cost of ownership and that of renting (with rental presumed to be lower) will also be invested.
Different down payment options were considered, ranging from the 5% minimum required to 20% of cost, at which level mortgage insurance is not required. Similarly, three investing options were looked at, from Guaranteed Investment Certificates (GIC), to exchange traded funds (ETF) for Canadian corporate bonds, and a fund covering the broader Canadian stock market.
When all factors such as down payment, mortgage interest rates, property taxes, insurance, and rental were considered, here is what I found:
At the end of 5 years – Renter financially better off!
At the end of 10 years – Buyer is better off!
For the first five-year period, except for the 5% down payment option, the renter is ahead because the amount of down payment is spread equally over only 60 months of occupancy for the buyer, while the renter’s investment starts earning right off the bat.
At the end of ten years, however, the average monthly cost of owning was at least 20% less than the rental cost. The combination of paying down the mortgage, together with house price escalation, far outweighed the investment gains made by the renter. While the renter would have accumulated a sizeable investment, the owner’s equity would be twice as large.
Providing you have the funds to buy your own home and intend to keep it for at least eight years or more, you are significantly better off financially than to rent and invest your initial money, as well as the difference between owning and renting.
Given comparable homes, and having the funds to either buy, or rent and invest a similar amount, who will be better off in five or ten years?
Such a comparison has been done – you may find it instructive to review the approach taken to reach the conclusions.
Read the abbreviated summary and/or the full article at www.grandriverrei.ca
Those of you who had the foresight to become home owners should consider increasing their financial benefit by perhaps thinking about using some of your equity to invest in real estate.
Renters, on the other hand, might give some thought to levelling the financial playing field by also looking at real estate investing.
The author is a retired business executive, consultant and investor, but is not a qualified financial or investment advisor. He is a principal and the CEO of Grand River Real Estate Investments Inc., who also invests in its projects.