Buying a Home or Renting: Pros and Cons You Need to Know

When it comes to housing decisions, choosing between Buying a Home or Renting is a crucial consideration. Both options have their own set of advantages and drawbacks that can significantly impact your finances and lifestyle. In this blog post, we will explore the pros and cons of buying a home against renting to help you make an informed decision that aligns with your needs and goals.  However, do note that the final decision to buy a home versus renting is highly dependent on individual circumstances, financial situation, and personal preferences and would warrant a one-one discussion if you would like to investigate further.  Let’s explore the general view.

Arguments for Buying a Home:

1. Equity: When you buy a home, you are building equity over time. There are two drivers for this: a. Mortgage Paydown: With a 30-year mortgage, the owner would be paying down the mortgage balance at an average rate of 3.33% each year. This can be seen as a form of forced savings and can make a significant difference to somebody who otherwise does not have a disciplined approach to savings or investing currently.

   1. The chart below shows a view of how the mortgage balance reduces over time (parabolical line moving towards $0 over time) and how much of the mortgage payments in a year go towards covering interest costs (blue bars) and principal repayment (green bars) over the same period.

b. Appreciation: Historically speaking, real estate prices have appreciated over the long term. In the Greater Toronto Area (GTA), the yearly appreciation in value has averaged about 6% over the last 30 years. If this trend continues, a home purchased for $500,000 might increase your equity by around $130,000 in just 5 years and it also acts as a form of inflation protection. However, this is very much dependent on demand for housing and the trend could change if there is significant shift in supply-demand dynamics from present state.

Given below is a view from one of the recent reports from Toronto Regional Real Estate Board and you can find their monthly reports here.

• Stability and Control: Homeownership provides stability and control over your living situation. You have the freedom to make renovations, decorate as you please, and stay in one place for an extended period without worrying about rent increases or lease terminations. In the GTA, rental expenses have been increasing at an average pace of over 3% each year for the last 35 years, which is about 50% higher than the average inflation over the same period. Above figures have been determined based on data from CMHC and you can find recent reports here.
  

• Potential for Income Generation: Depending on the features of the house, you might be able to generate rental income by renting out a portion of your home (e.g., short-term rental while you are away, secondary suite, garden suite, etc.). Increasingly, this a source of income required to qualify for a mortgage as well as for continued support in covering the mortgage payments.
  

• Tax Benefits: While Canadian homeowners do not benefit from tax deductions such as mortgage interest and property taxes on their principal residence, they do enjoy not having to pay any capital gains when a principal residence is sold. Additionally, if you are generating regular income from a portion of your principal residence (e.g., through business use or rental income), you might be able to claim tax deductions on a portion of your mortgage interest, property tax, utilities, etc.
  

• Sense of Ownership: Many people value the sense of pride and accomplishment that comes with homeownership. Owning a home allows you to establish roots in a community and customize your living space to your preferences.

Arguments for Renting:

1. Flexibility: Renting offers more flexibility compared to homeownership. Renters can easily relocate for job opportunities or personal reasons without the hassle of selling a property. This would make sense if your income has been growing and has the potential to keep growing at a pace higher than the growth in rental expenses. Otherwise, this might not be justifiable.
   

2. Lower Upfront & Ongoing Costs: Renting typically requires lower upfront financial commitment compared to buying a home, as renters are not responsible for saving a down payment, covering closing costs, or being responsible for ongoing maintenance and repairs.
   

3. No Market Risk: Renters are not exposed to the risks associated with fluctuations in the housing market, significant change in mortgage payment due to fluctuation in interest rates or loss of lender credit. These are some high impact risks that homeowners will have to withstand over the long-term ownership of the property, especially if they are carrying a mortgage balance.
   

4. Fixed Costs: Renters have predictable monthly housing costs, as rent payments are typically fixed for the duration of the lease term.  The annual increase in rent payment might also be less than market trend if they are occupying a rent-controlled property and or continuing a month-2-month extension. Within GTA, we have seen on average a 3% increase in rent (higher than corresponding inflation rate) each year for the last 34 years or so.
   

5. No Responsibility for Maintenance: Renters are generally not responsible for maintenance and repairs. Landlords are typically responsible for upkeep and repairs, relieving renters of this financial and time-consuming burden.  However, they might have a tough time getting the landlord to maintain the property if the rents are not keeping up with market rates.

Anyone looking for a more analytical approach to evaluating should read this post (5% rule) by Benjamin Felix from PWL Capital (here).

In conclusion, weighing the pros and cons of buying a home versus renting is essential when making a housing decision. Consider factors such as financial stability, long-term goals, lifestyle preferences and market conditions to determine which option aligns best with your circumstances. Ultimately, the choice between buying and renting boils down to individual needs and priorities. Make an informed decision that suits your current situation and sets you on the path towards achieving your future goals. 

Feel free to book some time with me to review your scenario.