After years of being a home owner, I’ve recently became a renter.
It went something like this. My lady and I spent nearly a year abroad and then came back to a new city. We ventured out to buy a house, saw nothing we liked for under $300,000 (this is a small city with cheap real estate, for those of you who just scoffed at our tiny budget), and were then left with a decision to make. Should we find a place to rent, or buy a place that was out of our price range.
A few days later we toured an apartment that was brand new, plenty big enough for us, and was a reasonable price. We signed the papers and it was done.
It’s now a few months later, and I’m loving renting life. While I do plan on eventually buying a house, here’s why I’m in no hurry to saddle myself with an expensive mortgage.
Each month I cut a cheque to my landlord and I don’t have to worry about any other bills since my apartment includes power, heat, water, and internet. The only other monthly bill I have is my cell phone.
Compare that to a home owner. I’d have separate bills for power, heat, water, phone, internet, cable, insurance, taxes, the mortgage, and probably other things I’m missing. There’s a price I’ll gladly pay for simplicity.
Lower monthly cost
Let’s compare the monthly cost of my apartment to a $250,000 house.
If I put down 5% on the house, I’m looking at a monthly payment of approximately $1,135 per month for a 25-year mortgage at a 3% interest rate. Even though I’m 100% sure I’ll have to renew at a higher rate at some point in the future, let’s assume the payment will stay steady throughout the 25-year loan.
But it isn’t just interest that a homeowner has to pay. There’s property taxes and house insurance in there, which I’m going to assume cost a very reasonable $300 per month. There’s also maintenance, which I’ll be conservative and assume only costs 1% of the value of the house each year, or about $200 per month.
Suddenly, the $1,135 mortgage payment balloons to $1,635 per month. Add in other costs like increased utilities and the time I’d spend shoveling snow and cutting grass, and the comparison isn’t even close. My $1,500 in rent ends up being a far better deal.
While Canadian real estate has been a terrific investment over the last ten years, over the last century it’s only beaten inflation by about 1% per year. While that’s not a bad return for owning something you get to use, it pales in comparison to the return on other assets like stocks.
Because renting is often cheaper than buying — just look at my example if you don’t believe me — that leaves me with more capital I can stash into stocks, bonds, and other assets that are likely to return more than residential real estate in Canada over the next few decades.
One of the issues with buying a house is your total net worth becomes hugely exposed to just one asset. What happens if you’re unlucky enough to buy a place right before the largest employer leaves town?
If you really want to overload your portfolio with real estate, Canada has dozens of real estate investment trusts (REITs) which own everything from apartments to office buildings. Plus, they tend to pay generous dividends while owning a house generates no cash flow.
Should you ever own?
At some point I’ll buy a house again. It’s only a matter of time.
While I’ve spent a bunch of time focusing on the negatives, there are positives to owning. As time goes on, a mortgage payment gets smaller in inflation-adjusted dollars, while rent tends to creep up. Having a yard is nice, especially when you have kids. And not having to deal with a landlord is a nice bonus, especially if you get one that’s a little cheap on making repairs.
But notice how those a lot of those are non-monetary reasons? In fact, if you look at the arguments for owning a house, they mostly end up to be more qualitative in nature, rather than quantitative. Essentially, the numbers tend to favor renting but the emotional aspect favors buying.
This isn’t to say that folks should avoid buying a house, because emotions are powerful things. But remember, when it comes to making an investment, a place to live probably won’t do as well as a diversified basket of stocks. Buying a house is more like a purchase, not an investment. There’s nothing wrong with buying a place to live, just treat it accordingly. But ultimately, both renting and buying is really just exchanging money for a place to live.