Rent vs Buy – Whether for millennials, the Gen X or Baby Boomers, the decision of whether to rent or buy a place to live will be based on your financial situation and your lifestyle needs. The choice you make on Rent vs. Buy is made up of 50% financial decisions and 50% lifestyle choices.
For millennials the main challenge will be on the financial side, in terms of affordability. With prices in Montreal increasing in the past 2 years, along with tightening of the mortgage rules, coming up with a decent down payment and qualifying for the mortgage is difficult for many millennials.
Pro’s and con’s Rent vs Buy
Affordability means that you are spending less than 30% of your after-tax income on housing cost. In 1976 it took 25 to 35-year-olds about 5 years to save for a 20% down payment. And now it could take about 10-11 years for a home in Montreal.
An article appeared in the Montreal Newspaper on July 3rd, warning millennials that it may take them 29 years to save for a home in Canada’s major cities.
The Globe and Mail featured an article about this debate, written by a financial portfolio manager Benjamin Felix. He attempts to offer a “fair” comparison between renting and owning by estimating the unrecoverable costs of each option. His point of view offers the comparison from an investment perspective.
According to a recent study by research and advocacy group Generation Squeeze, it takes the average young Canadian 13 years to save for a 20 per cent down payment on an average priced home. That’s compared to five years for someone of the same age and income bracket in 1976.
I have met baby boomers who also struggle with the debate of renting versus buying, however they usually have a bit more disposable income and will decide based on their lifestyle needs.
Let’s look at both sides of the debate from a financial and lifestyle point of view and not necessarily from an investment point of view as many articles tend to focus on.
The pros and cons of ownership versus renting from a financial and lifestyle perspective
Pros of Ownership:
- – Forces you to save money by building “equity” in your home
- – When you sell the home, there is a sizeable TAX-FREE GAIN
- – Value of homes tend to increase over time.
- – The asset (property) can act as a means of providing lower interest loans (if needed, such as refinancing to pay higher interest debts or a Home Equity Line of Credit for major renovations.)
- – Many feel they need the stability of owning, not being evicted or having to “move” every year.
- – Some feel that building wealth is secondary to the emotional security of owning a home in a nice neighbuorhood near good schools.
- – Many have been raised within their family’s culture to seek out home ownership as a building foundation to their overall success. (Their parents want them to buy a house and may even help them to do so, because it is important in their culture).
- – Once you start a family and have children, owning your own home seems to be easier than finding a 3-bedroom home to rent with a yard.
Cons of Owning Real Estate
- – Out of pocket expenses such as the one-time Transfer Taxes
- – Out of pocket expenses such as closing costs when purchasing
- – Out of pocket expenses for municipal and school taxes (yearly)
- – Out of pocket expenses for cost of maintenance and repairs (about 1-3% of the value of the home yearly).
- – Costs of breaking your mortgage early if selling
- – Added responsibility of managing and maintaining the property over time.
- – Mortgage payments may fluctuate depending on interest rates and market
Pros of Renting Real Estate
- – If you are disciplined enough, you can use after tax income to invest in the stock market, which some say yield higher returns than real estate.
- – You do not have the extra responsibility of maintenance and managing of building repairs.
- – You have a bit more freedom and can travel around more whether for work or pleasure.
- – Monthly costs could be more stable
- – No out of pocket extra expenses such as yearly tax bill
Cons of Renting Real Estate
- – Culturally speaking, it may not offer a very stable type of living situation
- – Rising cost of rents may make it unaffordable at one point
- – A tenant can be evicted and take on the stress and cost of moving more often
- – Many tenants in large cities are evicted to allow for renovations or short- term rentals.
- – Rising cost of RENTS are a valid concern in large cities
- – Shortage of quality affordable units is becoming an issue as less people can afford to buy.
The main things to consider when looking at Real Estate
Financially speaking, can I find a place that is affordable and still have income leftover to save money? There may be some sacrifice and effort in the type of first home you purchase. It may not be your dream home, but with a little sacrifice you can be a homeowner.
Does your lifestyle allow you to be comfortable renting?
What amenities do you need or want? How much would it cost you to rent closer to work and use public transportation with no need of owning a vehicle versus owning a home in the suburbs and commuting everyday. Would you like to live close to your family or have your own garden to grow vegetables? All these lifestyle choices are an important part of the equation.
If you can afford to carry a mortgage and home ownership expenses and do not mind the responsibility, then in the long run, I believe that owning your own home offers more benefits both financially and lifestyle wise. I may be very biased since I was raised in a family that truly valued homeownership and am truly passionate about everyone owning their own home!
Helen Akrivos is a Montreal real estate expert who is passionate about educating and inspiring everyone to succeed in real estate! She holds a Chartered real estate broker license and is President of North East Realties agency in Montreal. As a lecturer in the Residential Real Estate Program at College Lasalle, Co-Host of “The Real Estate Show” on CJAD AM800 radio and contributor to the MTL Times newspaper, Helen shares her stories of real estate success to help as many people as possible! E-mail your comments.
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