The Loonie Bin: Renting Versus Home Ownership Part Two

The Loonie Bin: Renting Versus Home Ownership Part Two

Renting Versus Home Ownership Part Two

Part Two

In my last post I reviewed the pros and cons of renting a dwelling. Although you may have bad neighbors or a lazy landlord, the amount of money saved by only paying rent with no maintenance and no expensive mortgage could offset the bad with more money left for personal spending or investing for early retirement.

Home ownership on the other hand might seem to be the ideal choice to the majority, but it too has negative points that might not be apparent until they sneak up on a would-be home owner. In my opinion the number one problem with home ownership is that 99% of new home owners don’t have enough money to buy a home. The only way to afford a house, especially in this day and age, is to get a mortgage from a lender. Depending on mortgage rate and amortization, you could pay two to three times the amount of what you paid for your home in the first place. Bi-weekly payments and putting down extra money will help a lot with the added interest, but it’s still alarming what you end up paying in the end. Having a mortgage means you can’t just up and move. You have to sell your house first, and possibly pay a fee for breaking your mortgage. If interest rates rise up quickly, you can have a nasty surprise when you go to renew your mortgage; just ask any homeowner from the 80’s what that’s like. Along with hefty mortgage payments, there is the lovely bonus of paying property taxes, sewer, water, heating bills, electricity and an ugly word called maintenance. Now depending on where a person is renting, they may never see utility bills because they are included in the rent but I can guarantee the rent is adjusted to cover the costs to the landlord.

Maintaining a house is a lot of work, and over the years wear and tear can end up costing a lot of money unless problems are fixed as they happen. An ignored leaky roof can end up costing thousands of dollars in unseen damage rather than spending a few hundred to have it fixed by a professional when it’s first noticed. That’s why it’s important to have a separate saving account and sock away $100 to $300 each month depending on how old your house is to pay for ongoing maintenance. Houses not only cost money to maintain, but also time. Grass needs to be mowed in the summer, snow shoveled in the winter. Rich people pay others to do that work, but what’s the fun in that? There’s nothing like drinking a cold beer on your freshly cut lawn in the summer time. Shoveling snow in the winter on the other hand just plain sucks, period.

The perks of home ownership vary depending on who you ask, but for me I’ve always aspired to have a house to call my own. Having a mortgage is a major drag, but I imagine once my house is paid off there will be a great feeling of freedom that no renter could ever imagine. With each mortgage payment a home owner builds equity in their property which can be unlocked with a home equity line of credit (HELOC). Using your house as a secure asset, you can get a lower interest line of credit that can be used instead of applying for personal loans. If you have credit card debt, you can pay 3-5% instead of paying 19% on the balance. If you were looking to buy a new car, you could cut a cheque from your line of credit and possibly pay the cash price instead of the bloated finance price. You can also renovate your home using your line of credit and increase your home’s value if you decide to sell.

My personal favorite is using a Heloc as an investing tool. In Canada if you borrow money to invest, you can claim the interest you pay at tax time as long as you keep track of the loan with your statements. You could spend $10,000 on a dividend stock, claim the interest you pay and use your return AND the dividends to pay pay back your loan. Eventually your loan will be paid off and your investment will keep paying you dividends that could pay down your mortgage or any other expenses. This type of investing does have its risk and I don’t advise anyone to try it (if you default you lose your home), but it shows that you can use the equity in your house to invest just as much as a renter can.

Home ownership allows more than non-monetary benefits. You have the freedom to paint and renovate whatever and whenever you want without the landlord’s approval. Renovating helps increase the value of your investment while you create a kitchen you love or build a garage that will be envied by your neighbors. As a home owner you can buy nice, upgraded appliances for your house which sure beats using the avocado green coil top stove and funky banana yellow fridge that some landlords include for renters to use. A home allows you to have a yard for gardens, kids or pets instead of being stuck in an apartment with only a balcony. I’m sure there are many other positives to home ownership that depend on the person, but you get the idea.

There are many pros and cons for renting and home ownership but I keep hearing renters say they pay less money overall. Renters may think they pay less money in the end, but if you consider how long you will have to pay rent for a dwelling it might not seem like such a sweet deal. If a couple who are both 25 buy a house, and they pay it off in 25 years, when they are 50 they will be mortgage free and have lots of disposable income until they move into an old folks home at age 85. If that same couple rented instead, they would have to pay rent for 60 years! As an example, imagine paying $1200 a month for an apartment:

$1200 x 12 months = $14400 x 60 years = $864,000
That’s not even including rent increases during that time period, because if the rent increased 2% each year, you would end up paying over $1.6 million in that 60 year period. If you think that’s out to lunch, inflation averages 4% a year and if the landlords bills increase that much, you better believe your rent will too.
If you bought a house for $400,000 with a $25,000 down payment and a rate of 5% over 25 years, you would end up paying $674,972.56 for the house and all the interest (That’s a ridiculous amount of money to pay in interest but for this example I didn’t put any extra money down on the principle which isn’t very smart and you should aim for a 20% down payment). Property Taxes go hand in hand with home ownership so if you paid $2500 a year for 60 year with an increase of 4% a year, you would pay an additional $594,976.71. I must also include upkeep which I will put at $300 a month average over 60 years and will work out to be $216,000 which includes lawn care, new shingles, siding, and minor home improvements. The rough grand total for owning a home would be:
$674,972.56
+$594,976.71
+$216,000
————–
$1,485,949.27
In this rough example, it seems that renting would probably cost the same as home ownership over time depending on the rental market. The only thing that’s guaranteed for both renter and owner is the cost of living increasing. In my opinion, the renter would end up with a rich landlord, and the homeowner’s family would end up with a fat inheritance. I would easily imagine that $400,000 house over the course of 60 years would be worth close to a million dollars. In the end it all comes down to what works for you and your lifestyle but for me, I’ll take the equity any day.
Have a good weekend!

7 comments:

Invest It Wisely said…

$2500 is a very low rate of property tax for a $400,000 home. In the city… try doubling or even tripling that.😉

To make the comparison more fair, you should subtract the future equity of the home out of the total amount paid; I might have missed it and maybe you mentioned this in the post, but you should also include the invested total of the difference in payments, otherwise you are not comparing an equivalent amount of spending.

If you are spending $2500 total on a home for example, you are probably only spending $1500 to rent and that is $1000 extra you can invest (or spend on other goods). You can’t treat that money as if it doesn’t exist; it must be part of the comparison.

Personally, I think that once you add in the opportunity cost of the spending difference between a home and renting, there really isn’t much difference. There are, however, plenty of psychological benefits associated with home ownership that you don’t get with renting, as there are psychological benefits with renting for certain people, such as not having to worry about the roof leaking or about having to sell before moving!

I think in the end it is a pretty personal decision, and there isn’t too much merit to saying that one style is better or worse than another, since a lot of it depends on your values and what you’re looking for out of a home.

Addicted2dividends said…

What city do you live in, yeesh! I wouldn’t want to live in any city where the property taxes are that high. My house is over 400k and my property taxes are $2600, in a city.

I’m not sure what’s not fair in the comparison.
I was comparing the costs involved with renting and homeownership. I said in the end you end up spending roughly the same. Renters pay money for shelter, peace of mind and mobility while paying the landlord’s mortgage and property taxes. Homeowners pay out the nose in upkeep and property taxes and end up with a paid for property and the satisfaction that home ownership gives you.

Are you sure you read my post?

Potato said…

IIW’s right, you’re not accounting for a lot of factors here. You can’t ignore the lower monthly costs of renting — your homeowner may have a million dollar home to pass on, but your renter will have a multi-million dollar investment portfolio (or will have had nearly $10k extra per year to blow on quality of life things like round-the-world vacations). Also, insurance will be a significant cost for the owner.

There are a lot of rent vs buy calculators out there that can show you the factors you’re forgetting, or you can just use my favourite rule-of-thumb, the ratio of monthly rent to purchase price. At 333X here, renting absolutely blows owning out of the water, financially speaking (the break-even would be closer to 150X). If that’s not the answer your math is giving you, then you’re forgetting some important factors. Now, part of why I think you’ve got such a high multiple is that you may not be comparing apples-to-apples (an apartment vs a house, perhaps?).

Addicted2dividends said…

I recall mentioning in PART ONE of my post,

“As a renter you don’t have to worry about any upkeep or maintenance that a homeowner has to deal with and budget for. The money you save on maintenance can be invested for an earlier retirement or allow for more luxurious personal spending.”

How many people who rent spend all their extra money on investing anyways? Majority of people who do rent choose so because they have no choice. You both might be financially able to rent and invest the extra income, but you are only among 10% of the entire population of Canada.

In my ROUGH comparison between renting and home ownership, I compared the basic elements that the average Canadian has to deal with, not someone who hopes to leave millions behind when they die.

I’m sorry if you can only rent and took offense, but I was merely trying to show how much people COULD pay for rent and how much you COULD be paying to own a home. In the end I stated it depends on personal choice which one is better.

SPBrunner said…

Personally, I think that you also have to put a price on lifestyle. What are you willing to pay to live the way or in the place you want to live. I think this is important, although it is hard to price.

I have only rented. I live downtown in a city and I love where I live. However, there are inconveniences with renting.

I had a cottage, so a know a bit about homeownership. There was always something to fix for which I had to call in a handyman. However, the cottage was great while I had a young child.

My parents loved the house they had in the suburbs. They moved from the city to have a very large lot and a bigger house. I hated it. I lived there as a teenager and moved back to the city as soon as I could.

Financial Cents said…

At these low mortgage rates, I would prefer home ownership versus renting. Renting simply builds no equity, like leasing a car; although there are good reasons (and times) when one should rent as you have mentioned.

Putting lump sum payments down on your house makes a huge difference, even $100 or $200 extra per month. Even still, your point about how much you could pay in interest over lifetime home ownership is quite scary; I try not to think about it.

I figure my wife and I always need a place to live, so might as well own the place in the long run🙂

I enjoyed the article and the discussion.

Cheers,
FC

Addicted2dividends said…

To SPBrunner: I agree with you fully, but each person is different and taking in account for everyone’s lifestyle and income level would take many posts, possibly even a book to cover it effectively.

I on the other hand dislike the big city life. Although I grew up in a small town, I think I need a place that might be in between; like a smaller city with 50-75,000 people rather then over a million. Thanks for the comment, I enjoy reading your blog.

To FC: Welcome back from your trip. We are moving into our new house next month and I’m going from a smaller condo mortgage to a huge new house, nice neighborhood mortgage. I’ll be putting as much money down as I can in the first 5 years to minimize the interest as much as possible. Trying to sell my condo has taken a lot of my time the last few weeks, so my blog has been a little neglected. Looking forward to part 2 of your trip.

About EdR

Tant que les lions n’auront pas leurs propres historiens, les histoires de chasse continueront de glorifier le chasseur. (proverbe africain)

Posted on February 7, 2011, in training tips. Bookmark the permalink. Leave a comment.

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