Rent or Buy: Which Option Makes More Sense in 2022?

                                           By Arthur Dubois

For previous generations, the concept of owning their own home was a natural fit for most adults. In turn, the notion of renting long-term was almost out of the question if you had resources to afford the purchase of a home. Times are different now. If you aren’t sure whether you should rent or buy in 2022, you need to do a deep dive into what makes the most sense for you.

With changes in the lifestyles of millennials and the astounding costs of homeownership in major cities, renting is very much a sound – and more importantly, profitable – strategy to build long-term wealth in line with your unique financial objectives.

While each individual’s set of circumstances is different, it is worth evaluating whether you have a worthy case of giving up the appeal of equity to continue renting your home.

Benefits and Considerations of Homeownership

There are several upsides to being your own landlord. However, before we dive into why it may be worth renting as opposed to owning your own home, it is worthwhile to look into these advantages:

What are the Benefits of Homeownership?

1  Equity: The primary benefit of owning a home is building equity in the        home. Once the mortgage is paid off, the home is now a personal                property of the buyer. To that end, that makes it a ‘safer’ option than      renting, as no one can kick you out of your own home (provided you            make timely mortgage payments).

2  Investment growth: Over time, the real estate markets have trended up      in most major cities worldwide. Appreciation in the home price means          more wealth in homeowners’ pockets.

3  Consistency: If you have a mortgage with a fixed rate, you will end up        paying the same amount each month in principal plus interest                      payments.  This makes budgeting significantly easier than renting,                where  landlords can change your rent year over year with adequate            notice.

4  Convenience: In the comfort of your own home, you can enjoy absolute      privacy versus a rented property where you have obligations to your            landlord.

What are the Considerations of Homeownership?
1  Repairs and maintenance: One of the hidden costs of homeownership        is  repairs and maintenance. If a boiler breaks or your door comes                unhinged, the owner must bear those costs.

2 ‘House rich, cash poor’: Owning a house is a significant financial             commitment. People often save for years to afford the down payment         on their homes. Once the deal is closed, buyers lock up a considerable         sum of cash in the property, which is not accessible to them for other           purposes such as children’s education, vacations, etc.

3  Lower investment amounts: All things equal, homeownership generally      costs more than renting due to additional monthly bills like waste and          property tax and regular home maintenance. As a result, not all                    homeowners can prioritize their RRSP or TFSA or invest in other                    securities which generate compounding returns.

Benefits and Considerations of Renting

Despite popular opinion, there are several advantages to renting that can set you up for financial success in many ways.

What Are the Benefits of Renting?

1  Cost-effective: Renting a home involves only a few sets of costs. The            rent has to be paid to the landlord each month. Besides that, the renter        may incur WiFi, utilities, and tenant insurance expenses. This makes it          cheaper to rent a property than own the same property wherein the            landlord would be on the hook for the mortgage, maintenance, and            other fees.

2  Flexible: Renting allows the renter the flexibility of leaving once the              Iease  comes to an end to find another place that suits them better.              Unlike a homeowner, they are not tied down to a single location.

3  Financial opportunities: Because a renter will likely have more                    disposable income than a homeowner on the same property, they can          channel this excess cash into investments that generate compounding          returns over time.
    With the above-listed benefits, it may be tempting to rent. But there are      also some downsides to keep in mind before pulling the trigger one way      or another.

What Are the Considerations of Renting?

1  No equity: Each cheque the renter provides to the landlord is                      technically  an ‘expense.’ Making mortgage payments is an   ‘investment’ for the homeowner. Still, the renter does not have or build      any equity at any point in the home they choose.

2  At the landlord’s mercy: The landlord makes the final decision in most      cases on the home. That means that if the landlord decides to evict you        (within reasonable notice periods), you have no choice but to comply          and look for a new home.
3  Progressive rent increases: Even if you live in an area with rent                    controls,  landlords can increase the rent each year by the maximum            allowable amount. For tenants, this raises uncertainty regarding the cost       of their living.

The Financial Angle of Rent or Buy

The above counterpoints offer a strategic view of the advantages and disadvantages of owning vs. renting. However, there is also a financial decision to be made. If you are in the market for a new home or are still debating between both options, here is a way to determine which options will help you grow your wealth over an extended period.

Step 1: Determine your monthly costs as a renter and check how much you have leftover to invest

To start with, figure out what your total monthly costs look like when you rent a home. The expenses that will likely be involved here include:

1  Monthly rent paid to the landlord

2  Any other costs you are responsible for as a renter such as the Internet,        hydro or tenant insurance

3  Groceries, food, entertainment, vehicle costs and other expenses

Deduct these total costs from your income to determine how much you have leftover each month which you can use to invest into compounding assets such as stocks. Then, use a compound interest calculator to calculate your net worth at the end of the number of years you want to plan.

Step 2: Determine your monthly costs as a homeowner and check how much you have leftover to invest

Next, you need to determine the monthly costs of owning a home. Six inputs go into this calculation.

1   Mortgage: Depending on your selected property and the interest rate        you can obtain, your monthly mortgage payments can vary. Use a                mortgage calculator to understand the total monthly payments you will      be accountable for pursuing homeownership.

2   Repairs and maintenance: Again, there is no single solution for annual       repairs and maintenance costs. However, a good practice is to budget for     2% to 3% of the home’s value each year.

3   Property taxes: Property taxes are dependent on the value of the home.

4   Insurance: Home insurance generally costs between $100 – $200 each         month

5   Day-to-day expenses: These include Internet, utilities, hydro, and all             other operational costs involved with homeownership.

6   Groceries, food, entertainment, vehicle costs and other expenses

Deduct these total costs from your income to determine how much you have leftover each month which you can use to invest into compounding assets such as stocks.

Note that the above doesn’t include the upfront costs of owning a home, namely:

.  Down payment: Your minimum down payment on a home is likely to be       between 5% to 20%. For a purchase price of $500,000 or less, your               minimum down payment is 5% of the purchase price. For prices between     $500,000 to $999,999, the minimum down payment is 5% of the first           $500,000 and 10% of the remainder price above $500,000. Lastly, for $1       million or more, the minimum down payment is 20% of the total cost.

.  Closing costs: While there is no official guideline on closing costs, you         should generally budget between 2% to 5% of your home’s price.

A good practice is to estimate the number of months or years you will take to save up the down payment and closing costs and deduct the number of years you enter in the Compound Interest Calculator. For example, if you decide that it will take you 24 months to save up for your down payment and closing costs, these are 24 months that you cannot invest in the market. As such, you can remove two years from the number of years you enter in the calculator.

Step 3: Add your property value to your net worth under the homeownership option

The most significant benefit of owning your own home is building equity. As such, you should add the estimated value of your property at the end of your projected period to your total net worth that you get from your investments in step two above.

If you are unsure, look at the average annual growth rate of properties in the same area as you to develop a proxy for what your house will be worth.

Step 4: Compare the two options

Compare the numbers you calculated in Step 1 and Step 3 above to determine which one makes the most financial sense for you as a borrower.

Final Thoughts

If you have followed the above steps and realized that you are better off renting, note that the most significant caveat is the assumption that you stay disciplined enough to invest your residual income each month into the markets. However, even if there is a financial rationale to rent vs. buy, there are strategic advantages to owning a home, as discussed above.

The final decision of rent vs. buy lies in you and your preferences. Generally, people who choose to own a home are those who:

.  Are committed to remaining in one place for an extended period
.  Have a stable, steady income with which they can service mortgage             payments
.  Are fully or close to debt-free

If your financial profile fits the above, use a mortgage rates comparison tool to find the mortgage that fits your needs. Suppose you are curious about what rates you can get for mortgages of varying types. In that case, the Bank of Canada also publishes a valuable tool that illustrates rates on select products offered by the major chartered banks in Canada.