Why You Should Rent vs Buy

Rent vs Buy

The renting vs. buying debate is pumped full of anecdotes, opinions, and a lot of noise. Typically, people tend to make blanket statements about how buying is the winner’s game and renting is the loser’s game. With some simple mathematics and analysis, I’ll demonstrate why buying a home isn’t always the correct choice and how we will save $13,000 over 5 years by renting rather than buying.


 

Why We Rent

We rent our home out of choice. We do it because it saves us more money than purchasing our home. That is because we do not plan to live where we are for more than 5 years.

From our research, we know our landlord bought our current unit for $309,000 in 2012. So to keep things simple, I will work with this number. Here is what a buying vs. renting scenario looks like for us:

Rent vs Buy

The chart highlights how much renting vs. buying our home would cost per month. It is a simple look at the expenses. It does not go into every expense associated with either renting or buying.

$1877.09 – $1175 = a difference of $702.09 per month

It would be $702.09 more expensive each month to own our place versus buying it. Now, you may be thinking “but Steve, when you purchase your own home, you build equity and don’t piss away your money to your landlord.” Perhaps. But let’s analyze this a bit further.

Down Payment or Investment?

Let’s say we start with $50,000 built up for either a down payment in a home purchase scenario or to save and invest in a home renting scenario.

In the home purchase scenario, the $50,000 would be used as a down payment and you would end up with $50,000 in equity in your home. Let’s keep it simple and say your home appreciates by 2% annually.

In the home renting scenario, you would take the $50,000 and place it in a savings or investment account. You would also take the $702.09 difference between renting and buying and also place that in your savings or investment account each month. Let’s keep it simple and say your savings or investment account yields 2% annually.

What’s the verdict? We need to do the math to figure that out.

Home Purchase Scenario

These are our assumptions:

a) $50,000 is used as a down payment

b) the home appreciates by 2% annually

c) over the 25 year lifetime of the mortgage, the interest rate will average 5%

d) the mortgage payments consist solely of regular payments for 25 years, no extra payments

Get Rich Slowly has a great little mortgage calculator where you can plug in the numbers to see your mortgage payments. These are the numbers that are pumped out for a $259,000 mortgage at 5% for 25 years:

Rent vs Buy

In 5 years, $29,577.31 in principle payments would have been made. Add that to the $50,000 in equity you already have and you have $79,577.31 built up in in equity after 5 years.

But wait, it has also appreciated by 2% annually over 5 years. Let’s keep it super simple with the math:

Rent vs Buy

$86,542.06 would roughly be the equity built up in the home after 5 years. Now, we need to compare that total with what investing the down payment and difference each month will yield us.

Home Renting Scenario

These are our assumptions:

a) $50,000 placed in a savings or investing account

b) the $50,000 appreciated by 2% annually

c) there will be no fluctuation in the interest earned, it will be 2% annually

d) the $702.09 difference between renting and buying will be placed in the account every month

ING has a great little investment calculator, these are the numbers:

Rent vs Buy

We would have saved $99,586.96 after 5 years of savings at 2% annually.

The Verdict

Renting over 5 years was financially superior to owning for 5 years. Here is the math:

$99,586.96 (home renting scenario) – $86,542.06 (home purchase scenario)

= $13,044.90 Difference

Renting, in our personal situation, will yield us $13,044.90 more over a 5 year period. This is why renting makes sense. This is why it is nonsense when people try to make blanket statements about renting as a loser’s game. That is why we rent. Now.

The Small Print

Of course these are all very rough numbers. And it is an example based on a unique situation: ours. Even if the numbers were a wash between renting and buying, we would still prefer to rent over this time period. There would be no hassle to buy and sell. There would be no real estate agents taking their cut from the purchase and sale. There would be no need for maintenance. There would be no need to pay property taxes or strata fees.

In the end, living in a home, be it renting or buying, comes down to a lifestyle choice. We are not against purchasing a home. On the contrary, we would like to own a home someday.

It’s just that now, we enjoy the lifestyle choice of renting. And in the future, we want the lifestyle choice of owning our own home. You just have to use some common sense and basic math to figure out what may be a better financial situation for you. Yes, for you.

Don’t get sucked into the propaganda that is perpetuated every day about how superior buying your home is over renting. Don’t let societal pressures, a desire to keep up with the Jones’, and emotional marketing manipulate your decision. That should be a choice that you make based on facts, numbers, and your unique situation.

Footnote #1

There is a great excel spreadsheet that provides a great way to calculate complex rent vs. buy scenarios. It is not a spreadsheet I have made. It was made by Gummy over at Gummy Stuff. Gummy has an amazing array of spreadsheets.

Rent vs Buy

This is the rent vs. buy spreadsheet by Gummy:Β Rent VS Buy Gummy Stuff

Footnote #2

Can you tell my academic habits won’t die with these footnotes? Anyways, Mr. Money Mustache had a great article on buying your home so I thought I would include the link.

24 thoughts on “Why You Should Rent vs Buy

  1. That is amazing that you pay so much less to rent compared to if you were paying a mortgage (even without counting property tax and “strata fee”). That apartment is a keeper for now! In the neighborhood where I live, renting is typically more expensive than the monthly mortgage+property tax on houses/apartments, especially if a 20% down payment is made and no private mortgage insurance (PMI) is necessary.

    1. Vancouver (and the surrounding areas) is among the most expensive places to live in the world! Real estate prices never collapsed during 2007-2008. They just stayed constant and apparently life is coming back to the RE market here! It’s generally not a buyers market unless you have the income to buy. I have a friend who lives in a chic downtown Vancouver area and his 560 square feet condo costs $1600 a month to rent!

      Buying definitely would make sense if the math worked in favor of buying, but definitely not in our situation! For now!

  2. This was a really great post!!! Good job.
    I own my home, but your decision to rent makes perfect sense. I think it comes down to the timeframe you are wanting to stay there. The longer the time frame, the more of your payment goes towards the principle of course.

    1. Yes time frame is definitely an important factor, along with the lifestyle one wants! If we envisioned living here permanently, buying definitely would make more sense!

      I think it’s just so important for people to understand these sort of things, and the ability to do some math and crunch some numbers, instead of doing things mindlessly!

  3. Great article, thanks for putting your efforts into it! I always wanted to own in the past but recently I realized my way (at least for a while) is renting. Why? I work in banking as a contractor. Not a stable profession nowadays with all the outsourcing – so who knows when I need to move to another city? Most importantly, on my salary I can afford to live in a good part of the city in a tenement house which was always my dream. But I couldn’t afford to buy such a flat without taking out a huge loan which I don’t want to. If money tightens I can still “downgrade” to a cheaper flat/another part of town with a month notice period. Plus I have a reliable letting agency and a great landlady- I could go on holiday and they took care the broken washing machine so when I came back after two weeks, I could put my loads in! (and I didn’t have to pay a single penny for it)

    1. Thanks dudahangulena! Glad you enjoyed the analysis πŸ™‚

      I think you’re definitely spot on about your choice to rent in your situation. It’s great that you have a good understanding of why renting makes sense for you and not heedlessly running to the bank for a huge loan that you would not be comfortable with!

  4. Reblogged this on Exitstratagem and commented:
    Cost analysis is very important in our lives. Unfortunately, most consider the terms ‘cost analysis’ best left to professionals, which they don’t consult. So what happens is no cost analysis takes place. No cost analysis in your life. No financial control or regulation. Budget is nowhere.

  5. Very good points and indeed at one point i was advocate of renting over buying and used same logic above for explaining to people. I must add though there are two critical assumptions that you should mention to your reader that greatly distorts your analysis. The first is assuming that your rent never changes over the five years. this is extremely unlikely of course. Rent increases are mandated by law in some cities, but typically its 3% to 5% increase annually globally. Rent increase has to beat inflation. so if you run the numbers with this increase, the savings spread will decrease.
    The second assumption made here is inflation is 0%. that is unrealistic. If inflation runs 2% to 2.5%, then your ING savings at 2% amounts to $0 in 5 years actually (or negative if inflation is over 2% which it is historically). Now you can see that your only benefit is having owned the property. This is why savings accounts are not recommended for hoarding anything more than 2-3 month of emergency funds. One way of getting around this analysis is using index funds that generate returns greater than inflation. But index fund returns (or any fund) returns are not guaranteed.
    after years of using this renting logic, i finally came to realization that its pointless. because with math, rent or buying can be easily shown to be beneficial over the other. and there are far too many other variables that cannot be accurately measured in the Rent vs. buy scenario to provide an accurate analysis.

    1. Thanks for the reply! I agree that doing such analysis can only be done to a certain point because there are too many variables and uncertainties that need to be included with a much more thorough analysis. I admit I did forget rent inflation in my calculations. However, bringing in more and more variables would have made this a never ending analysis!

      Thanks for pointing out inflation, a variable I forgot to add into my calculations. When it came to inflation and 2% growth in the ING account, of course there would have been zero earnings if inflation was 2%. However, it would go both ways with your house appreciation: if your house appreciated by 2% in a year and inflation was 2%, the house technically didn’t appreciate by anything either.

      There is a bit of a flaw with the appreciation of the buying scenario as well, as a good friend in mathematics pointed out. But again, appreciation really depends on so many unique factors that it is hard to really make a general assumption for an individual.

      I really appreciate that you pointed out the flaws in my analysis, because I knew I couldn’t/didn’t cover all factors and variables. It’s far too complex and must be done for each unique, individual case.

      The take away I hope people got from this is that it is important to do some analysis and bring some logical thinking into making their decisions rather than relying purely on opinion or anecdotes.

      If you wanted to run some more thorough analysis, I highly suggest downloading the spreadsheet by Gummy!

    2. Also, I would politely disagree with you on the savings account being purely for a few months worth of emergency funds.

      In a scenario where one is saving up for a downpayment for a home, that should – for most people – be held in an account that is 1) very safe and 2) highly liquid.

      If you need access to the cash for a downpayment in 1-5 years, you don’t want your money tied up in the markets, even with index funds. What if there is a market downturn and the value of your portfolio is down X-XX%? That would really suck. You’d be stuck with either accessing your downpayment at a much lower value than you put in or leaving the money in the account to recover and let a buying opportunity slide away. Of course on the flip side, one could argue that the investments could have appreciate by X-XX% and you would have even more money than you originally put in.

      But for most people, your average person, it would be much wiser and more prudent to avoid uncertainty, volatility, and potential illiquidity for safer, predictable, lower returns when it comes to saving for a downpayment πŸ™‚

      1. yes correct. actually my preferred approach is GIC. infact, i had my down payment saved in the ING Direct GIC after moving it out of the savings. unfortunately all banks offer such low rates below inflation, that in the long run its eating up the money. not that GICs are that much better. but anything over inflation rate is good enough for me.

        1. Yes I agree with GICs as an option for stashing away mortgage payments.

          We have most of ours in Peoples Trust’s TFSA that has a 3% yield. Of course the small print says rates can change anytime, but the 3% has been steady for awhile now and we will just switch it to somewhere else if the rate drops too significantly.

      2. I take the opposite point of view: of course you invest it.

        When you decide to rent because of insanity in the market (as in Vancouver now) that takes years to resolve itself. Lots of time to invest — and maybe it’ll be 3 years like you plan, but it could just as easily end up being 10. And in the worst case scenario that there is a crash you can wait for a recovery and continue to rent and save (and rent a larger place if there’s an external factor necessitating a move, such as reproducing). Very rarely do you have to sell your investments to buy a place. Though it’s not desirable you also have the option of just eating the loss on your investments and buying a house anyway — maybe your 20% downpayment turns into 10%, or you buy a slightly cheaper place. Either way the downside risk is not nearly the same as when you’re approaching retirement and need the money to eat — and in Vancouver the price:rent is so far off that even if you lost half your investment as a renter you’d still come out ahead buying after a correction.

        Oh, and I’ll just leave a link to my spreadsheet here, much less eyeball damage than the gummi one, and tuned for Canadians (though the LTT default is for Toronto).

        1. It definitely is an interesting topic this rent vs buy. And of course it’s impossible to extrapolate our personal situation to others and say one is better than the other, always.

          We’ve structured our investments so that a good chunk of our current assets sit in a HISA, specifically the People’s Trust 3% TFSA HISA. We’re not “fully” invested in the market because we do know that we will eventually have to buy a place when we decide to start a family.

          It also doesn’t help that in the first 5 years of mortgage payments, essentially half of your monthly mortgage payments goto interest. Hmm I think I’ll do another analysis on rent vs buy very soon!

  6. I don’t think I saw it anywhere in post or comments, but where does one get 2% these days & even if it is found, please remember that it is fully taxed at your highest marginal rate. Increases in property value of primary residences are exempt from tax. The tax implication alone really changes the numbers. It used to be a hobby to hammer out the numbers every time I thought of a new consideration. For me buying won out by the proverbial nose if I planned on staying somewhere for the long term. Over many years, it’s also a great inflation hedge.

    1. Perhaps it’s a difference between US and Canada for rates? 2% can be gotten in some of our Tax Free Savings Accounts in HISAs. We have a TFSA HISA at 3%. In a TFSA, the interest earned is tax free.

      For us, we aren’t planning to stay at our place long term, and with the price difference between rent and buy, it just makes all too much sense to rent! We definitely will plan on buying a home when we are ready and have found a place to live for a very long time!

  7. Hi Steve,

    If you take a look at my blog you know I take the opposite approach to renting vs. owning, but for me a large portion of the argument is the emotional one–I like owning land. Not to mention the fact that rents it my area have ballooned 60% in the last 5 years πŸ˜‰

    One thing to note, though–you show 2% appreciation on the house being $1,100 on your $55,000 in equity, which is incorrect. The 2% appreciation would be on the FULL $310,000 value of the house, or $6,000 per year–the beauty of leverage when buying with only 20% down. Your numbers for owning after five years are about $30,000 shy of what they should be in that chart, unless I missed something.

    1. *Note:

      That said, I completely agree with your assertion that buying is NOT always the answer–rather, I think it is sometimes the right answer, largely based on market conditions. We managed to get in RIGHT after the bottom in our market, so the $300,000-$350,000 range of houses we were looking at were $600,000+ during the boom years.

      Those would have been COMPLETELY out of our price range, and I couldn’t see a mortgage that size EVER being a good deal when compared to rents in our area.

      1. I must have been dozing when I placed the appreciation only on the equity rather than on the full market value of the home! I’ve got another rent vs buy scenario post coming so I’ll make sure not to forget that point – thanks for pointing it out!

        Holy S*** if houses fell by half their price around the Vancouver area, I would swoop in to buy like it was no one’s business – it’s just that boom times continue here and the disparity between rent and buy is largely skewed most times in the renter’s favour.

        You’re entirely correct that there is no superior blanket choice: people need to think critically and do the math before deciding what is better in their circumstances.

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