Renting versus Buying | Am I throwing away my money?
Being in Real Estate, I often get asked different things about the market by people from all walks of life but when it came to my kids, both in their mid-twenties, and their friends, I found myself getting asked the same question: “Am I throwing away my money by renting?”
If the answer was simple, well, I wouldn’t be writing this blog post! But I hope to shed some light on the pros, and cons, of renting vs. buying and vice versa. I want to start off by saying by no means does this article take into account all the factors that play into whether or not someone can, or should, buy and acknowledges that for many, renting is a viable option given certain circumstances. This blog post is meant to break things down so they’re easier to digest – so to speak.
With the price of homes in the GTA reaching an average of $784,558 (as per TREB March 2018), it’s no wonder many are switching gears to renting. I find the biggest challenge lies with the younger generation; those in their mid-twenties, to be able to afford the minimum 20% down payment required in order to qualify for the stringent stress-test that took effect earlier this year. Now more than ever, young adults are entering the workforce with tens of thousands of dollars’ worth of student loans in tow making it even harder to set money aside for a down payment. As a result, we are seeing a surge in the rental market in the shape of bidding wars. With the average rent set at $2500/mo for a 2 bedroom in Toronto, it’s difficult to imagine paying off student debt and car loans on top of that – let alone putting money aside for a future down payment.
However, for many, renting works – and really well at that. For those that can split the rent two or three ways, the prospect of putting money aside for a future home of their own isn’t so daunting and it can work out to be cheaper than the cost of owning a home. If home ownership isn’t on your radar now or maybe ever, renting offers its own set of benefits. For starters, you’re not paying off a mortgage for 25 years and avoid the bills and costs associated with home ownership (such as a new roof or furnace to name a few). It also offers jetsetters a bit more freedom. If you’re someone that can see themselves travelling for 3-6 months at a time, you may find that renting works better given your unique lifestyle. Or, for those that haven’t quite settled on their career path, you might find renting gives you the freedom to move closer to your work. Another important tidbit to keep in mind, especially for those living in Toronto, is that renting might allow you to live in a better neighbourhood than what you’d be looking at if you were to buy.
As I mentioned, there are a lot of factors that play a part in the decision to rent of buy and age is definitely one of them! I’ve touched on the younger generation but it’s also important to address what many of my senior clients are doing – and why! More and more I find my senior clients are selling their homes in favour of renting a condo or small home away from the hustle and bustle of the city. Their main reason? The maintenance is too much, and they like the sense of freedom that comes along with renting, especially for the snow birds that find themselves in Florida 6 months of the year. Having the equity from the sale of their home and a fixed income also play a part in this growing trend.
So, what about those in the younger generations that have help from family to come up with the down payment? Is it worth taking on another debt to join the home ownership club? For some, the idea of carrying debt is as scary as the thought of paying it back – if this sounds familiar, this may not be a viable option. But, for those who can sleep comfortably with debt and are ready to own a home – it may be worth your while. As great of an option as this is, I know firsthand that it just simply isn’t possible for some families to offer this kind of assistance and want to be clear that I recognize this is not the reality for many hardworking families. If you are working toward saving up for a down payment on your own – keep working. The road to homeownership is as long as it is hard but don’t lose sight of your goal. I had a client a few years ago in his mid-twenties who came to me for help in purchasing his first home. He worked multiple jobs and stuck it out at home to save up enough money for a down payment all on his own. Though the market has changed since then, I think we can all take something away from the level of commitment and determination he displayed!
Now onto the other side of owning a home!
While home ownership is an investment, keep in mind the return can be as quick as overnight, or it can take years! In the meantime, there are a lot of housekeeping items that will inevitably come up – windows, shingles, furnace and air conditioning are some of your big-ticket items but luckily have a long shelf life once repaired or replaced. There’s also home insurance, utility costs and the general upkeep of a home to keep in mind as well. The best part though? Pride of homeownership! Sure, there will be a lot of trials and tribulations but for many, it’s worth it.
In a nutshell I don’t feel one way is better than another. If renting sounds like the better option, or maybe it’s the only option, find somewhere you love and make it your home. If you’re in a position to buy, then you are wise to do so if the time is right and you’re prepared for everything that comes with home ownership. For those that so badly want to own a home but don’t have the means to right now, my advice to you is this:
- Be realistic with your goals. Maybe you rent in a beautiful neighbourhood in Toronto and want buy a house there someday? That might be possible, but sometimes moving 20 minutes outside of the downtown core, or just beyond the more coveted areas of Toronto, you’ll find that you can own a home sooner than you thought in a lower price bracket and still be within the city limits.
- Start saving bit by bit. $100 here, $50 there can make a big difference. Set aside money whenever you can or, have your bank automatically withdraw an set amount weekly or bi-weekly and deposit it into a savings account. You’d be surprised how much you can save and this way, you almost forget you have the money – making it easier to not spend it!
- Have the conversation with your parents or guardians about your goals. I’ve had quite a few of my friends say in passing that they’ve started to put money aside to help their child with the purchase of their first home when the time is right. Your parents might be open to doing the same, or might already have some money set aside – it’s a good idea to check with them. Also – don’t hesitate to ask them for some advice! I know my kids dread it when we blab about “back in my day” but most baby boomers grew up in a time where we had to save a lot of money to get by – they might be able to shed some light on what worked and what didn’t.
- Don’t give up. It can feel like coming up with $50,000 towards a down payment is near impossible but it’s not. It’s been done and can be done – keep your sights set on your goal but remember to live your life too!
So, to answer the question “Am I throwing away my money by renting?”. Not really! Sure, you aren’t going to necessarily ‘make money’ or get a return on your investment, but in exchange for your rent, you have somewhere to live and call home. The rent versus buy debate could go on forever if you take into account everything that goes into the decision to rent or the decision to buy but at the end of the day, you have to do what’s right for you. Talk to the professionals and do what makes the most sense – not what makes the most money.