It can make sense to rent – Why the market for #TorontoRentals will continue to be good

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Home ownership continues to be the North American dream. That said, it doesn’t always make economic sense. I recently attended a political debate where one of the candidates said that people have a choice of “paying rent” or “paying interest”. Is it always better to pay interest?

The following two tweets reference interesting articles on this topic.

Rob Carrick – What you need to know before, and after, buying a condo

 

Standard guidance for someone in Neil’s position would be to put his $20,000 toward a home down payment. This would be based on the usual reasoning about homes being an investment, a forced savings plan and a much better use of money than paying rent.

All of this was true five years ago, when houses were more affordable. Now, it’s time to stop foisting this advice on young people like Neil. He’s better off renting.

For one thing, he’s in a great rental situation. He pays $1,000 per month for a spacious one-bedroom apartment, including parking. The apartment is located above street-level retail in midtown Toronto. Neil has checked out condos in his neighbourhood and he thinks he could get a one-bedroom unit smaller than his apartment for about $350,000.

A 5-per-cent down payment on that condo would be $17,500, which would leave some of his $20,000 to help cover closing costs and moving. With a five-year mortgage at 3.5 per cent, his monthly payments would be $1,724. Add a few hundred dollars per month in condo fees and you end up at double the fixed monthly costs of renting.

Let’s assume Neil would qualify for a mortgage. If he went ahead and bought, he’d be giving up both financial flexibility and mobility. In a tight job market, being able to relocate to another city without the hassle of selling a house is a huge advantage.

It’s settled, then. Neil’s $20,000 shouldn’t be his ticket into the condo market. But what should he do with the money? Readers are invited to offer their ideas on my Facebook personal finance page. My suggestion: Invest the money conservatively in a tax-free savings account and review things five years from now (read here about why I prefer TFSAs over RRSPs as a way to save for a house down payment).

Why five years? That’s a good span of time for Neil to assess where he’s at in his life. If his income has soared, or if he’s married or co-habiting, he may be able to carry a mortgage comfortably. Having kids may also influence his thinking. Some parents will always prefer a house, but it’s not hard to imagine a lot more kids being raised in high-rise condos and apartments in expensive real estate markets like Toronto.

Neil may also decide that the renter’s life suits him fine. By investing his $20,000 and adding to it regularly, he’ll be building wealth in a similar way to the homeowner who gradually pays off his mortgage.

Don’t pity the young adults like Neil who can’t or won’t be able to afford a house. Fact is, they may be the most rational players in our never-say-die housing market right now.

 

From The Condo Bible for Canadians, Everything you must know before and after buying a Condo, by Dan S. Barnabic.

 

Investing vs. Renting: “In Principal”
For many people, it is more advantageous to own rather than rent property. Over time, the value of property appreciates, and equity in the property increases as monthly mortgage payments gradually reduce the principal amount of the mortgage. Renters, in contrast, pay a set monthly amount to the owner for use of the space. Instead of building their own equity in the rented property, they are helping the apartment building owner build equity.

But on the other side of the coin, the renter remains worry free with regard to mortgage payments, maintenance costs, taxes, assessments, and fluctuating interest rates. The privilege of peacefully enjoying the rented premises at a set monthly rate may be more advantageous to some than tying themselves to often considerable and unpredictable financial obligations.

It all comes down to a matter of principal and affordability. While most people buy property to build equity or wealth, others choose to build their wealth by saving or investing in business opportunities other than real estate.

To those who think that, over time, real estate is a better asset than the stock market, consider this: $100,000 invested in Coca-Cola stock in 1990 was worth $1-million by the year 2000. Of course, it would have taken one hell of a fortuneteller to convince an investor to put that kind of money into the stock market and all on one stock, to begin with.

This is perhaps an extreme example, and I am by no means suggesting that investing in the stock market is always better than real estate. The fact of the matter is that any investment carries risk.

 

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