How renting for life could pay off in the long run

“If you don't have family support or a dual income, it's very difficult to get into (the real estate market),” says Toronto realtor Tom Storey.

And because home ownership has been so lucrative for past generations, there's an expectation that “everyone should do it” and “you'd be crazy if you didn't,” says a personal finance expert. Preet Banerjee.

But in today's market, it's not so clear which approach is best, he says.

It's true that generations of Canadians have found success by investing in real estate or preparing for retirement by owning their own home, but that's changing. The question arises: rent or own?

Renting and owning have their pros and cons, but some experts say a lifetime lease can pay off in the long run.

Storey notes that home prices are high and “based on the information we have right now,” they are unlikely to rise at the same rate as they have in the past few years.

There are several reasons for this, he explains: interest rates have risen from historic lows, and population growth has slowed due to stricter immigration policies. ban on foreign buyersall this reduces demand and leads to lower housing prices.

This means that people hoping to make a profit from buying and selling real estate may be disappointed.

Additionally, due to higher interest rates, some landlords may be unable to charge high enough rent to cover increased mortgage costs.

For Francine Dick, financial advisor and author of Enjoy Your Latte, a home is, first and foremost, a home.

“People who buy a home as an investment can take a big hit, as we're seeing now,” she says.

“An important reason why someone might choose to own a home, even if they don't see it as an investment, is the security and stability it brings,” Dick says.

Renting comes with the risk of eviction, even if you as a tenant have done nothing wrong. For example, someone who rents an apartment may be forced to leave if the owner wants to move into it. (However, someone living in a purpose-built rental apartment won't have to worry about this, notes Dick).

Storey adds that tenants, especially those whose landlords are large corporations, will likely see annual rent increases, and since anything built after November 2018 is not rent controlled in Ontario, increases could be high.

“They won’t forget that they can raise your rent in a year,” he says.

On the other hand, Dick says, someone might prefer the “freedom of renting” if they like to travel and don't want to worry about maintaining the property, or if they want to be able to “grab and go” to work.

That's certainly the case for Banerjee, a lifelong tenant who recently moved to the UK after living in Toronto for about 10 years.

Renting allows for greater job mobility while homeowners are less likely to move, he said.

Plus, given Banerjee's busy schedule and his dislike of home maintenance, “the idea of ​​having just one payment and not having to worry about anything else is fantastic,” he says.

There are several costs associated with owning a home: down payment, monthly payments, property taxes, home insurance, repairs and maintenance fees if you live in an apartment.

“One of the many reasons why people like to buy, regardless of the asset's growth, is that it is essentially a forced savings plan,” says Storey.

Your mortgage payment is split into two categories—principal and interest—and as you pay it off, “a certain percentage essentially goes into your own pocket or into your net worth or wealth,” he says.

Meanwhile, when it comes to rent, none of the money comes back to you; “It just goes to your landlord,” he says.

Banerjee, however, notes that “when it comes to owning a home, you are renting money, so you are still a renter even if you are a homeowner until you actually pay off the house.”

A couple of years ago, some people had interest rates so high that “their mortgage payments didn't even cover the principal—they just covered the interest,” Banerjee says, and “it was a much higher liability than they expected.”

Dick adds that paying off a mortgage “frees up a lot of cash flow,” but there are still other expenses such as property taxes, utility bills and maintenance fees.

Homeowners can also spend money on repairs, “both necessary and wanted,” which can come with hefty, sometimes unexpected bills, she said.

Additionally, Dick says she sees many people retiring with a large mortgage, in which case, “you have to look at your mortgage as a rent payment.”

On average, given the many costs associated with owning a home, owning a home costs more per month than renting, Storey says.

To determine whether renting or owning is best for you, Banerjee suggests using a diagram he attributes to personal finance blogger John Robertson, in which you imagine two identical houses next to each other, but one is for sale and the other is rented.

A house for sale costs $1 million, and a house for rent costs one dollar a month. In this scenario, “it's clear to everyone that renting makes sense.”

However, if the house was worth $1 million to rent, “obviously” you would buy the house next door for $1 million.

“If you agree with these two scenarios, then you implicitly agree that there is some crossover point where the price-to-rent ratio makes renting more attractive or homeownership more attractive,” Banerjee says.

In some markets, homeownership is the obvious answer, but in others, like Toronto, it's not so clear-cut, he says.

While some view rentals in which all the money goes to the landlord as a “sunk cost,” Dick says she disagrees with that statement because “people have to live somewhere” and renters have more freedom than owners.

Mortgage payments are typically higher than the cost of renting, and someone who has the “financial discipline” to invest regularly while renting can find themselves in a good financial position, says Storey.

For example, someone who can afford to buy but prefers to rent may be “further ahead” if they invest the difference between the cost of renting and the cost of owning, he says.

“For most Canadians, it has become clear over the last 30 years that buying has put them in a good position for the growth of the asset,” Storey says. But “if the price of the asset does not rise,” perhaps this money will bring greater profits in the stock market.

Dick adds that if a renter puts money a homeowner might spend on renovations—say, $50,000 on a bathroom—in an RRSP or TFSA, “you can build on that and save that money to support yourself in retirement.”

Banerjee says that when he moved into his Toronto apartment a few years ago, the difference between rent and mortgage on the apartment was so large that it was “not difficult” for him to rent an apartment by investing in the stock market.

“I'm an example of how this can work even in a market like Toronto, where homebuilding was booming at the time,” he says. “Stock markets also performed well.”

For a lifetime lease to pay off, it's important to invest “sensibly over a long period of time,” says Banerjee.