Renting VS Buying.

The Great Debate.

Legal Suite vs Illegal Suite

Renting vs Buying. Can we equate apples and oranges?

I love the viewpoints on this topic. And have always found it so interesting that people think comparing apples to oranges is ever going to work. It shows there is no silver bullet in this world to make smart financial decisions. Yet, what should we factor into renting vs buying the place we call home?

This article is not an exhaustive list of pros and cons.  But rather there key elements that we must define ourselves in making the decision.

  • Marketability (Location)
  • Peoples definition of “investing”.
  • Lifestyle

I stumbled across an interesting social post this week with someone claiming the math to own a house actually cost them over $161k in the long run, rather than generating equity, or profit; to be more clear. Thus, rather than argue with the numbers presented in the image below. I am going to work with the numbers to attempt an unbiased viewpoint on the cost, and investment of home ownership. (Don’t forget I am a Mortgage Broker, take that with a grain of salt.)

Renting VS Buying Kelowna Mortgage Broker cost

Renting VS Buying Skewed numbers to favour the renter. | Kelowna Mortgage Broker

Location and Marketability factor in Renting Vs Buying.

First of all, I am curious where these figures came from (Town? City? Country? ). Is this a house comparable in Beaverdell British Columbia where no one wants to live, or is it on the corner of Grandview and Nainamo downtown Vancouver?  Marketability and location is crucial in determining if you can A) Afford to own. and B) It makes sense to own.  A market could be so overpriced, it is difficult to even qualify for a mortgage.  Or, the market could be so small, it would tough to sell the asset.  Thus, owning the home you live in within a region of growth is key to is being a better choice. 

Renting VS Buying Kelowna BC Example.

A close person I know purchased a house in Rutland area in the late 90’s for $165,900. (People thought they were insane!) In 2008 before the recession, they sold it for $480,000. The value of that property dropped to $375,000 overnight in 2009. It didn’t rebound until 2014. Even then, let’s pretend he kept that property for the entire 25 year mortgage he original planned to pay off (selling it today in 2021.. 21 years later). BC Assessment shows that property currently assessed at $545,000: Click here to see the property. True sellable value in todays market is likely 590-620k. Maybe even more, the neighbouring property directly across the street I just assisted the homeowner in refinancing to do renovations and the appraisal came out at $650,000. Thus, my estimates are beyond conservative.

But let’s pretend it’s only worth 545k (let’s give these renters a competitive edge here so they feel like they are winning). A few factors I could argue in some of numbers show in the social post above:

Assuming they lived in it for the entire 25 years. Using this math on this post. In the Kelowna area the 158$ a month property taxes are a low estimate, but let’s go with it given the 25 year spread on inflation, and add $25,000 of taxes for Kelowna area just to make home ownership look even worse.

Total Spent = $439,695 + $25,000 + $65,900 (original price difference compared to example above) = $530,595 – 545,000 = $14,405 “profit” according to this post comparison of expenses to own a home.

Sounds pathetic, but what have we forgotten in this Renting vs Buying comparison?

Their mortgage payment at 95% value of the property in 1990 was $156k ($8295 cash down). Interest rates in the 90’s were 7%. Renewing their mortgage every 5 years, rates only went down since, currently at 1.4% today. Lets assume an average here of 4.2% on each 5 year renewal: Click here to see the calculations.

The calculator above shows an initial investment of $8,295. And the long term investment of $96,224.90 in principle paid. With an interest cost of $156,000. Interestingly very close to your $222,361 “total mortgage payments” in the comparable social post.

But what are we forgetting here?

  • Their initial investment was $8295. Using “other peoples A.K.A. the bank’s” money to grow that investment. Arguably the investment didn’t grow much if he only came out with $14,505 profit when selling at the end.
  • They didn’t lose his $96,224.90 in principle he paid down over 25 years. He got that back when he sold. Something renters will never see.
  • Rental history cost.  I can not speak for the Kootenays, Beaverdell. Alberta now the entire planet for that matter. But I can speak for the Okanagan when I say: People want to live where they want to live. And when the marketability is strong…. Rental costs are high. I have also yet to meet more than a handful of people in my life who have lived in one property for longer than 5 years. (Including home owners, but I’ll come back to that shortly). Many home owners in Kelowna buy and sell frequently because of spikes in investment value.  Sadly forcing tenants to find a new place to live, paying todays new current market rents instead of the 1.4% increase mandated by the province. Can a renter truly equate their 25 year cost of living the same way a home owner could? Thus, you have a homeowner here who:

A) Lived in a house they owned for the entire 25 years (we all know that doesn’t happen). With a monthly mortgage payment on average of $840.75 a month.

OR

B) He moved out of the property after 5 years, but HELD the property for 25 years as a rental property. To rent this property out in todays market is $1400 for the basement suite, and $2000 for the upstairs 3 bedroom unit. Minimum.

I hear renters all the time talk about how it’s cheaper to rent in other parts of the world. Perhaps it is. Yet I find these social posts similar to above also do not accurately factoring in true costs a renter has.

  • They assume extremely low rental cost, with zero risk of rate hikes. The true cost of renting when getting kicked out every few years never seems to be a factor. It’s easy to know what something costs now, and turn a blind eye to what costs will be later when you are thinking monthly.
  • The money renters put into decorating their rental.  Or God forbid, renovating it with their own money!  (I see this all the time, why would you do that?) It would be interesting to see what the maintenance expense of $315 monthly  in the above example truly equated too when you factor in items renters will also pay for based on lifestyle and creature comforts.
  • The cost of contents insurance, ($60 a month).

Maybe these are not an issue in the Kootenay’s, or other parts of Canada (Maybe being a strong word). But if people are still paying $840 a month in rent for a 5 bedroom house in Rutland area in Kelowna in 2021. I waive the white flag.

Renting VS Buying | Should owning a home be considered “investing”.

Note also, my sale value was almost $80,000 less than true market value on this property today. One could argue we are in an overpriced bubble again similar to 2008. But this begs the question. Why does that matter? In 10 years from now, the correction will continue. Taking that initial investment of $8300 (cash down), plus 96,224.90 principle paid over 21 years, plus $14,405 profit when selling, minus shelter costs (which were clearly flawed not including the real costs of renting beyond just the rental payment) plus the $80,000 difference in todays true value = $198929.9 in total equity growth using $8300 21 year ago. According this calculator, that is a 5% annual return on cash down and principle spread payments over that 21 years: Click here to view the return data.

Nothing to sniff at, but what ones who will continue to forget to add in this equation is the true cost of Renting, the inflation of those rental payments, and the cost associated with having to move frequently and pay exorbitantly higher rental costs when relocating frequently.

Lifestyle plays a role in your decision.

My 2 cents: I find it interesting that ones who are so dead set against owning a home, try to spell out mythical magical equations to not own their home and invest all that money into the stock market or some other investment vehicle. But my question is simple for these folks: Why would you not do both? If you can lock in the cost of living early in life through home ownership, combined with the fact the data proves having a mortgage payment is less than renting once the initial investment occurs and you view this purchase as long term. I will say it again; why would you not do both? People need to stop looking at their HOME as an investment opportunity. We need to look at home ownership as a SAVINGS VEHICLE. With the potential for long term growth, and FUTURE rental investment potential.  Owning a home will never hurt you.

People will continue to argue what is “cheaper”; renting vs buying. But it’s not even a debate that should exist. What people need to ask themselves is: Does my specific lifestyle and my long term goals make sense to own a property that I call home, which would potentially be a smart investment for the long term?

I would love for home owners to knock on my door 25 years from now and tell me I was wrong.  Saying “we should have just rented”, but the majority will not do this because

1). They bought a house which locked in their cost of living 25 years earlier and

2). There will be 1..2.. maybe even 3 recessions between now and then.  Yet, they sat patiently, waiting for the correction to occur. And made the decision based on what made sense at that time.

This reasoning also doesn’t change with the stock market, or any sort of investment for that matter. If it is not your full time job or business working that market, it is foolish to play the game of short term day trading/or quick turn around investing.  This is simply a coincidental profit, which real estate transactions will also fall prey too. History shows us that investments should never be viewed as a short term profit, unless you really know what you are doing, or the timing was simply great.

Another argument I hear frequently is “But owning a house ties me down! I don’t want to live in it for 25 years, I want to be mobile and free!?” However, if someone can help me understand the difference between locking in their money in open markets (not accessible unless they liquidate IE. “cash out”), versus renting out a property when they don’t want to live in it. If long term home ownership is actually LESS than renting, again I will say it. Why couldn’t you do both?

Renting VS Buying. What makes sense for you?

  • Marketability. Where you live right now, is it cheaper renting vs buying? Or in the foreseeable future, Where you live right now if you decided to buy, would it save you money long term by locking in those lower costs today? Answer this question based on your understand of where you live. It is the only question you need to ask yourself. Don’t let anyone else convince you otherwise.  You know what’s is going on locally better than the world of social networks would.
  • What is investing? People think investing is putting money away and watching compound interest magically grow it. That’s part of it, but investing in yourself and reducing your cost to live is also investing! Meaning; what decisions can I make today that will lock in saving me money for the future? And now?
  • Lifestyle, do you care if you get kicked out of your rental property every 3 years? No? Great! Rent. Do you have a family and you feel a consistent routine with a comfort of locking in affordable payments while your little family grows in the area you call home? Or the thought of moving every 3 years makes you scream? Buy a house. And close your eyes and stop watching what the world is doing.  Because in 25 years from now. It wont matter, and you wont regret it.

The best part is we are all right, and we all wrong. It just depends when you decided to buy it, and then sell it, and what makes sense for you. Cool topic though, but what do I know, I just put people into debt for a living.