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  • Peter Leveille

Is it better to rent or buy a house?

The question of whether it is better to rent or purchase a home is one that is often debated among friends and family.


In this post I will examine the main elements that should factor into the decision to rent or buy. I break the elements into two categories: lifestyle and finances. While these two categories do overlap to some degree, they offer unique perspectives to consider beyond just dollars and cents. I also offer a real world example to show the potential financial implications of renting vs. buying.


If you are considering renting or buying I would be happy to run a similar report for you to show how the numbers add up for your personal situation.


Lifestyle:


1. Where do you see yourself in 2-5 years?


Trying to sell ones home after only 5 years of purchasing can prove to be extremely difficult in today's market. While there are instances beyond people's control that force them to sell unexpectedly, it is usually not practical after less than 5 years. The main reason is that the asset has not had enough time to appreciate and the costs associated with moving will outweigh any financial gains. In addition, there could be payout penalties incurred for ending your mortgage term early. When considering if you should rent or buy, ask yourself, "Where do I see myself in 2-5 years?" If the answer is not in this home then maybe its best to stick to renting.


2. Are you new to the city?


If you are new to the city and not familiar with neighborhoods it might make more sense to rent for a year or two, giving time to familiarize yourself with your new town. Take time to explore and discover what areas you prefer and what locations best suite your lifestyle. This will give you time to make an informed decision and buy in a community that will be best for the long term. The other benefit of this is it will provide you with a chance to get a feel for the local market and prices.


3. Is stability important for you or your family?


One downside to renting is there is no guarantee the landlord will renew the lease at the end of the term. If they want to sell the property or move into it themselves you could be stuck looking for a new place to live no matter how amazing a tenant you have been. This can be stressful for families with children in schools and day cares, etc. Home ownership offers some comfort in the form of stability.


4. Is your work situation secure?


One of the biggest advantages to renting is you are not tied down for the long term. You can usually sign a lease for 1 year or even go on a periodic month to month tenancy. This provides you with more freedom in the event your work situation changes or you need to move suddenly. When renting you can downsize and move much more quickly and cost effectively.


5. Do you like to do home renovations?


If you are the type that gets satisfaction from working on your house and doing renovations then home ownership might provide you with a better chance to do this. When renting there are usually limitations on the changes you can make the to exterior and interior of the house. Most landlords are on board with some painting and landscaping but few will be okay with you knocking down walls and gutting a kitchen. Besides, would you really want to invest all the time and money renovating something that isn't truly your own?


Financials:


1. Not just the mortgage payment to consider.


Owning a home is more than just a monthly mortgage payment. Property taxes, home insurance (more costly than tenants insurance) and maintenance/repairs all add up over time. When budgeting one needs to factor all these in before deciding to take the plunge into home ownership.


2. Down payment $$


With the increase in home prices and days of $0 down payment long gone, one needs to factor in the down payment and if it is the best use of their money. If the markets are doing well and interest rates are high, it might make more sense to hold off on that big down payment and invest that money instead for a higher return. These things are extremely difficult to time but its worth a consideration even if its just a short term investment to increase your down payment amount for when rates drop again.


3. Equity is nice to have


When renting you are essentially exchanging money for a place to reside. Similar to booking a hotel for the night. With mortgage payments a portion of the payment you make goes towards the principal which shows up in the form of equity on your personal balance sheet. As long as your home price stays the same or increases so will the equity and potential profit when you go to sell. This is by far the biggest financial advantage of home ownership over renting as you have the chance to put money back into your pocket with each mortgage payment.


4. Real estate is a long term investment


Some people are shocked to find that their home hasn't increased in value after 2, 5, or sometimes even 10 years. It can be a really discouraging conversation to have with my clients. Unfortunately, some of these people purchased at the peak period in a hot seller's market (especially around 2007) and it could take some time to see those prices again. Like so many things in business and life, it is all about timing. You can get lucky and make money over the short term (like if you bought in 2005 and sold in 2007) but to truly see gains in real estate you have to be willing to hold on for what could be 10+ years depending on when you purchased and current economic factors.


Real World Example:


To put the numbers in perspective lets look at the costs associated with purchasing or renting an average home in Edmonton.


This projection assumes the following factors:


Average Price of single family detached home at end of 2019 Year: $425,068

Average rent price of house (no condos) in Edmonton: $1,900 (as per Rent Faster Edmonton data)

Interest Rate: 2.75%

Amortization: 30 Years

Average rate of inflation: 1.70% - based on Consumer price Index inflation rate for last 10 years, averaged

Expected annual price increase of home: 0.933% - based on price changes over last 9 years, some years increased some decreased, averaged out to 0.933% per year increase since 2010


Down payment : 10% = $42,506

Legal Fees: $1,500

Monthly Maintenance for Home: $100 avg. costs to maintain home per month on average (not utilities)

Property Tax: $330/month


Assumptions: Mortgage interest rate does not change.

Alternatively, you can invest the down payment amount for an annual return of 3.5% after taxes

Due to only 10% down payment mortgage insurance premium of $14,729 applies and is added into your mortgage total

Home increases at a rate of 0.933% per year (based on average over last 9 years)


If you cannot remain in your home for at least 4.3 years you should consider continuing to rent.


Your home purchase breaks even in approximately 4.3 years.


The graph below demonstrates how long it will take for the benefits of purchasing a home (net sales price) to surpass the opportunity cost of investing the down payment amount instead and continuing to rent. The black Investment Total line is your down payment amount $42,500 if you invested it instead of purchasing a home (assuming a net annual return of 3.5%). The green Net Sales Price line depicts the equity retained in the home purchase minus the closing costs and payouts incurred during buying/selling your home. As you can see - it will take about 4.3 years for your net sales price to meet and then exceed the money if you had invested it. The light blue Equity in Home line simply shows the total equity (home value minus remaining mortgage) accrued in the home.

Analysis of Future Payments


In the chart below it shows that equity (Net sale proceeds from green line in chart above) matches and then exceeds the investment (down payment invested instead of put into home purchase) between years 4 and 5.


Monthly payment consists of : mortgage, taxes and maintenance


Both rent, taxes and maintenance increase with inflation,1.7% annually, in this example


Purchasing a property and renting both have their pros and cons. Home ownership can be a truly rewarding experience and an investment in your future. It is prudent to be aware of the costs associated and the commitment needed when investing in real estate.


If you are interested in me running a similar report for you to assist in your decision to buy or rent please contact me.



About the author: Peter M Leveille is a licensed real estate agent in Edmonton, Alberta, Canada. He has been selling real estate for 15 years and is the Broker and Owner of AB Realty LTD.

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