Renting vs Buying a Home: Pros and Cons

Both renting and buying a home have their pros and cons, but depending on your financial goals, personal circumstances, and geographical location, one might make more sense than the other. You need to be aware of the things to consider before deciding whether renting or buying a home is right for you.

RENTING VS BUYING A HOME RATIO

Before we get into the pros and cons of between renting vs. buying a home, I want to touch on how gurus determine if it’s more economical to buy than rent, and vice versa.

A quick Google search will show you plenty of different rent vs. buy calculators, but most compare annual rents to asking prices to find out if it’s a good or bad time to buy. For example, there is the “rent vs. buy rule of 15,” which says to multiply the annual rent of a comparable property by 15.

So if rent is $2,300 a month, it’s $27,600 annually. Multiple that number by 15 and you’ve got a suitable purchase price of $414,000.

That might seem a little unrealistic for Vancouver at first glance, but remember, purchasing real estate isn’t always just about the money. You can’t rely on a blanket rule to make your home buying decision. You need to factor in the true cost by using real-time mortgage rates, expected home price appreciation, maintenance, the desire to own vs. rent, and much more.

The best thing is to use a mortgage calculator as opposed to going with a rent vs. buy rule of thumb if you want a truly accurate picture.

RENTING VS BUYING A HOME – THE BREAKDOWN

PROS OF RENTING A PROPERTY

Let’s start with the beauty of renting an apartment or a home. When you rent, you pay a landlord a certain dollar amount each month. Simply put, this dollar amount is typically less than the going cost of a mortgage, assuming you factor in the insurance and taxes, and the ongoing maintenance.

• The freedom to move whenever you want
• The lack of responsibility and maintenance
• Fewer expenses that might be paid by the landlord (including utilities)
• The ability to put your money into other investments that may yield better returns

There’s also a huge psychological freedom to renting. You aren’t locked in for 30 years. At most, you probably have a 12-month lease agreement. And there’s even a good chance you’ve got a month-to-month deal in place. In short, you won’t feel trapped, and you can freely move on if you want/need to for any reason, such as job relocation, downsizing, upsizing, etc. Renting gives you all of that flexibility.

CONS OF RENTING A PROPERTY

On the other side of the coin, renting is synonymous with temporary. If you want to establish a household or start a family, renting might not be the best way of going about it.

• You walk away with nothing after paying tons of money in rent
• You’re often still stuck in a lease for 12 months or longer
• Could be forced to move on fairly short notice if the owner wants to sell
• Might be lots of restrictions in place like no pets, no remodeling, and so on

You might also be limited to what you can do to the unit, like having pets, painting, renovations, etc. And those rent payments never stop – a 30 year amortization period is a long, long time, but your lifetime might be longer. There won’t be any relief in retirement when you rent, and you won’t have anything to say for it; no home equity or ownership, despite all those payments. Nothing to hand off to your dependents or to sell for cash proceeds.

Additionally, your rent can and will most likely rise. BC landlords can increase your rent each year up to the amount governed by the Provincial Government. This is currently limited to 1.5% for 2022, but with inflation on the rise, we can safely assume this will increase again in 2023. Bookmark this link to check Rent Increases in BC.

Speaking of interest rates, as a renter you might be paying less than your neighbour with the mortgage today, but if your neighbour’s mortgage is fixed, they’ll still be paying the same amount in the future while your rent shoots higher year over year. 

And if rising interest rates has you considering to stay in the rent pool for a little longer, just remember the interest rate on rent is 100%.

PROS OF BUYING A HOME

We’ve discussed some pros and cons of renting, but what about buying? The obvious advantage is that you actually gain home equity, or ownership in your home.

• A place of your own with few if any rules to follow from your landlord or housing association
• You are in charge and can do what you want cosmetically
• You can build a ton of wealth in the process without lifting a finger
• Might actually be cheaper than renting and tax deductible

In other words, over time the home or condo becomes your property, as opposed to renting, where you never own anything aside from your personal contents. 

In many cases homeownership comes with tax benefits. Of course, the future of the mortgage interest deduction always hangs in the balance, but real estate taxes are still fully deductible. Factor in the tax savings and your mortgage payment gets even cheaper compared to a rental payment.

An owner of property also has fewer restrictions, and can add or modify to their heart’s content, less any city by laws or strata rules. This means you can make your property worth even more over the years, or simply make it more useful/attractive for you and your family.

CONS OF BUYING A HOME

Owning a property does also have some drawbacks:

• Lots of hidden costs you never realize until you become a homeowner
• Greater responsibility and potential liability
• Might be more expensive than renting (and you might need to come up with a large down payment)
• Harder to pick up and go if you want to move for whatever reason

First off, you must come up with a sizable amount of money, either for down payment or to buy outright with cash. With rent, typically you just need the first and last month’s payment. When buying, you’ll need at least 5%. The benchmark listing price for a condo in Vancouver for May 2022 was just shy of $800,000, which would require a $40K down payment.

There’s also a good chance your mortgage payment will exceed the rents in your area. This can certainly vary, but don’t be surprised if it comes at a premium.  You also have to pay property taxes and homeowners insurance, which don’t stop even once the mortgage is paid off. 

You also become the landlord when you own. Remember that helpful handyman at your old apartment complex that fixed your leaky faucet with a smile? That’s your responsibility now. Oh, and you better believe that every little thing that’s wrong with YOUR property will give you stress, each and every day.

You can’t just pack up and move along with ease. It takes time (and money) to unload a property once you factor in real estate commissions, closing costs, moving costs, and taxes.

So it’s certainly not a foregone conclusion that buying is better than renting, though most wealthy people will be owners of real estate…

IN SUMMARY

When it comes to renting vs buying a home there are countless good/bad arguments for both, and no single answer to satisfy everyone all of the time. It’s about what makes the most sense for YOU.

When you rent, you pretty much know what you’re getting into. You’re not going to make any money, but you’re not going to explicitly lose any either. It’s mostly a hands-off type of deal and therefore pretty low risk.

With a home purchase, you’re making a big commitment for your future, and the future of the economy. Policy and the economy matter a lot more to you now. After all, you need to put a certain amount down, and you need to ensure you keep making money so you can keep up with your mortgage payments.

But there’s no doubt you will be rewarded for making that first step on the homeownership ladder.

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