Essential Knowledge Series
Ever wondered if you should purchase a home or rent? Below I'll be giving you three tips for figuring out if renting or owning a home is the right decision for you. One important piece of information before proceeding is that no two people are the same and so there isn't a one-size-fits-all solution. For some people, renting makes sense and for others, purchasing a home is the right decision. The best advice I can give before our three tips is to be open to all possibilities and try to make the most rational and best financial decision for you.
What you can afford each month and is your budget flexible?
What future plans do you have to stay in your current area and how is the real estate in your current area compared to rent?
What is the cost to rent vs being a homeowner (after answering the first two questions)
1. What you can afford each month and is your budget flexible?
Before you can begin to look at your housing options, you have to first know how much you can afford. It doesn't matter if you make 5 figures, 6 figures or 7 figures, figuring out your living budget is too important to skip. In order to do this, a general budget should be created for yourself to see how much money is remaining to spend on a home or larger rent payment.
A great tool to figure out your budget and accurately determine your income and expenses is the Scotiabank Money Finder Tool. This tool gives you all of the possible costs for your budget and will make sure you think about every aspect of your finances. If you don't complete this, there is no way to accurately determine how much you will be able to afford when it comes to a new home or apartment.
In this case, you can see that this person isn't able to increase their living expenses because they are currently maxed out on their cash flow. Of course, there are ways to change these numbers depending on if you rent or purchase but it isn't always easy. For example, generally speaking, your rental cost will encompass all costs excluding utilities. However, if you are purchasing a property, you will have your mortgage cost, utilities, property taxes plus the upkeep costs in the property. You might be thinking, "Alex, the landlord will just include these other costs in the rental cost". Sometimes, this is true. Most times, it isn't. The reason is that on average, inflation and the cost of owning a property will increase faster than your landlord can increase rent.
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For example, in Ontario, landlords can only increase rent by 1.2% after 12 months in 2022. If we compare this to the current inflation of 7.7%, the renter is winning in this case. This is why your budget should also project in the future using inflation and the rental increase numbers I mentioned.
If you do this, you'll have a good baseline to know how much you can afford. In a lot of cases, people will either realize they have to reduce their expectations or they might realize they have room to increase how much they are looking for.
2. What future plans do you have to stay in your current area and how is the real estate in your current area compared to rent?
Everyone will be different, but if you're someone who moves around a lot for work or other reasons, renting is likely for you. It can get expensive to complete a real estate transaction in a short time frame if you plan on staying in a location for only 6 months to a year. Sure, the real estate might increase in value, but if it doesn't, you'll be paying legal and other fees for a loss.
The second part of this section is where you live or want to live. Let's look at Hamilton, Ontario for example. Hamilton has a median house price of $830,000 according to HouseSigma. If you had a $664,000 variable rate mortgage (3.7%) after putting 20% down on a house at this price, you'd be paying $3,386 per month. That's quite a bit and doesn't even include property taxes, utilities and insurance. Let's say all in, your monthly living cost would be around $4,300.
Now let's compare this to the median rental price in Hamilton. You'd be paying $2,450 according to House sigma. Again, we'd have to add in utilities and tenant insurance, so let's call it $3,000 per month. The difference between purchasing and renting in Hamilton in this scenario is $1,300. That's a lot of money and could otherwise be used for food, gas and even vacations. This is why it's so important to look at your individual scenario and find out how and if it makes sense to purchase or rent.
3. What are the financial implications of owning versus renting (after answering the first two questions)?
I have completed a financial analysis of renting versus owning below. There are pros and cons to both. In this scenario, the difference in renting versus owning was used as the investment payment.
As you can see, owning a home in this scenario has its benefits. At the end of a fictional 10-year period, you would have $955,746.77 of equity in your home. In the same time period, if you invested the difference from the savings on your monthly payment, you'd have $525,565.80. That is a difference of $430,180.97.
I think it goes without saying that you always want to end up with the most money possible from your investment. However, you can't always predict future returns and where you will be for living purposes. If you change these numbers, you can determine multiple scenarios where it is more advantageous to rent.
It is very important to determine how much it will cost to own a home versus renting as we did in the second section. Your work, family and other variables will determine where you live. Be sure to read the first two sections again before trying to do any math on what is financially more favourable. The future isn't always the most important factor when deciding.
If you're concerned about your current situation and can't figure out what is best for you, don't hesitate to give us a call or email. We're always available to chat!
I like to go back to a quote from Robert Kiyosaki when looking at real estate and determining whether to rent. “The problem with real estate is that it’s local. You have to understand the local market.”
Questions/Comments?
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So educational!