Managing Agents

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There are few, if any, topics in the world of personal finance that are more hotly debated than the question of whether it is financially healthier to rent or to buy a home.

The reason for this? For the vast majority of us housing represents the largest expenditure we will face over the course of our lives. The amount of money on the line is what engenders such passion in those in both camps. Another reason the argument continues to rage is because there is really no clear answer. As in everything in the financial world, the numbers tell the story, and depending what the numbers are in your location, in your situation, at the time of your decision, the story can be quite different.

The moral of this? Don’t listen to either side! So many factors go into the numbers - from location, to family size, to long-term goals - that no one you ask will be in exactly the same situation as you are.

The solution to this is quite simple: Run your own numbers. Decide on the quality of housing, size and location you require and begin your investigation. Start by finding out what the average rent cost is for your target residence. This should be an easy calculation. Once you’ve got this number worked out start looking at real estate prices for the same caliber of home in the same area. MLS can quickly provide you with a very quick and easy overview of pricing for homes in your target neighborhood. Getting the average price will be simple, but calculating an ongoing monthly cost will be much more complex.

The biggest piece of the pie will obviously be the mortgage. Investigate the current rates and decide whether you would want a fixed or a variable rate mortgage. Once you’ve got a ballpark on the mortgage rate, then you can use a mortgage calculator to determine what your monthly payment will be.

Next, you need to calculate what the approximate property taxes are for houses in your neighborhood. Divide this number by 12 and add to your monthly costs.

The next major category will be maintenance, and this is a gray area because no hard fast number applies. A widely used rule of thumb is maintenance will run you 1% annually of the assessed value of the home. You can take this number and again divide by 12 to get a ballpark figure of the ongoing maintenance costs you will face.

Two other categories that will cross over between both bought and rented properties will be utilities and insurance. In most cases these costs will be cheaper in a rental situation, but again investigate the specific costs on the particular properties you are targeting, and you should be able to get a ballpark figure of what the differential would be between the two strategies.

So, now you are armed with your numbers, sculpted to your personal situation. You’ve got your approximate monthly costs laid out in black and white for each strategy. I would suspect, given the recent run-up in real estate prices in most major centers in Canada, that you will find that your monthly cost basis by renting will be considerably cheaper (at the date of this posting). If this is the case, then it can be argued that the potential for greater financial return lies in choosing the rental option.

This is where discipline becomes the all-important factor. One reason purchasing a house has been a successful financial strategy for so many in the past is because it acts as a forced savings plan. You have to make your monthly mortgage payment or you default on your loan. Without any flexibility in this regard you will steadily accumulate equity in your home as it continues to rise in value at a long term rate somewhere between 1-3% greater than inflation depending on the city you live in.

However, if you are renting instead you can still build wealth, potentially at a greater rate. However, you are not forced to do so. The money you would have spent on a down payment on your house, and the ongoing monthly savings in the cost of renting versus buying give you increased cash flow that can be used to invest in a mixture of equities and fixed income vehicles that will likely outperform real estate appreciation over a long term horizon. The catch? You must have the discipline to invest that extra cash flow, rather than blow it on other things. The sad truth? Most of us don’t have that discipline, which is why buying a house has traditionally been the better option for most.

So there are really two important steps in the whole process:

1) Run the numbers. Remember, these are ballpark figures, but they will arm you with the information you need to proceed to step 2.
2) Evaluate yourself, and be honest! In your life so far have you had the kind of discipline it will take to make the most of the money you could potentially save by renting?

Once you have the answers to these two questions you have the information you need to make your decision. The anecdotal evidence of others, while often interesting, has no bearing on your own situation. Tune out the noise and decide what works for you.

In the end, no matter which avenue you choose, remember that no decision is carved in stone. Continue to run the numbers on a yearly basis, and reevaluate yourself as well. What makes sense right now might not ten years from now.