Renting vs. Owning Your Home

When it comes to housing, renters tend to be as undecided as Hamlet: to buy or not to buy, that is the question. And there are no simple answers. It all depends on where you live, how you live, the current state of the housing market, and how disciplined you are as an investor.

Financial advisors usually begin by asking would-be buyers a few general questions about their long-term plans. Do you plan to live in the home at least three, and preferably five years? How large is your down payment? Low interest rates and less than 10 per cent down may look attractive, but it’s no bargain over the long run.

In weighing the cost of renting against owning, buyers need to consider hidden costs of ownership – everything from realtors’ fees to property taxes and maintenance costs. Then there are some costs that are hard to assign a dollar value, such as the amount of sweat equity that goes into home ownership. Renters enjoy the convenience of someone else taking care of the pipes that burst during a cold snap.

The decision gets even more complicated in a turbulent economy. A home is an investment and as Canadian finance guru Moshe Milevsky points out: renting avoids the risk of having most of your wealth in one basket.

"Buying a house for an investment has strong similarities to someone being convinced stocks are a good investment for the long run but they decide to buy only one stock for their portfolio. I don’t care how reliable that one stock is, or how large are the dividends, that stock portfolio is not diversified. The same goes for housing,” says Milevsky.

In light of the 2009 mortgage crisis in the U.S., we know bad things can happen if you begin to owe more on your mortgage than your home is suddenly worth. Still, there’s no question that home ownership is attractive. There’s a lot to be said for having the freedom to renovate and customize your home, for instance.

So how can you figure out whether renting is a better value than buying in your particular market? Most experts say the best metric to look at is your area's price-to-rent ratio. Our rent or buy calculator can help [Customization: insert website link]—or to figure it out yourself, divide the price of a home you'd like to buy by the annual rent you'd pay on a comparable home. If the ratio for your market is far above the historical average of 15, renting may be a better deal.

The longer the price-to-rent ratio stays in your favor, the more benefit you'll gain from renting. To get a sense of where your local market is headed, look at trends in home prices and foreclosure rates.

Say you pay $1,250 per month in rent and the monthly mortgage payment on a detached house in your area is about $2,200. After you add in property tax, repairs, maintenance and utilities, the total monthly payment is at least $2,700. By renting, you could save and invest at least $1,450 per month.

But that’s the key—investing the savings wisely. If you use the savings to fund your latte habit or other lifestyle choices, you might be further ahead to buy for the simple reason that a mortgage is an enforced savings plan.

The bottom line? Do your homework. Research housing costs in your specific market and be realistic about your tolerance for risk, your lifestyle needs and your saving/investing habits.

Need an expert to discuss the options with you? Contact us at 306-842-6641 or visit your local branch.