There are a lot of factors to consider when deciding whether to buy or to rent. What kind of a property are you planning to live in? How long will you live there? Are you familiar with the neighbourhood? How much money do you have?
Sure, you could use a rent vs. buy calculator, but that only considers financial factors. There’s more to making this decision than figuring out what the numbers mean.
If you need help deciding whether to buy or sell this year, let’s go through each of these questions so you can decide.
Type of Property
The type of property you are planning to live in likely reflects at what stage you currently are in your life. Are you single and looking to move out of your parents basement? Newly engaged or about to get married? Married and planning to have kids? Have grown kids who are moving out? Retired?
If you’re not certain about how long you plan to live in a certain type of property, renting it for a year might be a good idea. For example, are you transitioning from a condo to a house? I have clients who did this, by renting, and realized there were a few things they really wanted in a house that their rental property didn’t provide, such as a fourth bedroom, a two car garage and a larger backyard. Giving a property a ‘test drive’ by renting it for a year might give you insight on what you really want.
Length of Dwelling Time
How long do you plan to live in your next property? If you’re being relocated because of work, or for any other reason, you might want to hold off on committing to buy until you know you’re settled. Rent first, see if you’re planning to stay around for a bit, and then consider buying.
Nothing’s worse than buying only to realize you’re going to be relocated again, or another opportunity has come requiring you to be in a different location. Unless the real estate market is growing at a fast pace, chances are the cost of selling the property you just purchased will exceed any price gains and equity you’ve built up in the property. You may end up selling at a loss.
So if you’re not certain about how long you’ll be dwelling in a certain location, rent first. If it becomes your new permanent place to call home, buy.
New to the Neighbourhood?
Perhaps you’re moving from one part of the city to a completely new neighbourhood. How confident are you about making your new neighbourhood the place you’re going to stay in for the next three, five or ten or more years? If you’re not sure, and you want to give the neighbourhood a test drive, it might make sense to rent. If you like it, commit to the neighbourhood by buying a home. If not, you can always move on.
Here’s where it gets interesting. There’s been a ongoing debate about whether or not buying or renting makes sense financially. Do you save money renting due to the high costs of home ownership? Does buying a home give you an advantage because of price appreciation and equity gains?
The answer: it depends.
It depends where the real estate market is going. It depends what part of the city (or country) you’re in. It depends on how much money you have as a downpayment and on your monthly payments.
Let’s consider this real life example.
A home is listed for sale at $888,000. The market price for the home is $850,000. Rents in the area are $2,400 for a whole house. Let’s calculate the figures.
If you bought the house at $850,000, with a 20% down payment, your mortgage payment (considering a 3.5% rate, monthly payments, and a 25 year amortization) works out to $3,395.
Wow, that’s already more than what you’d pay for rent!
Add to that property tax of $330 per month and you’ve got a monthly payment of $3,728.
We won’t include property insurance or utilities, because you’ll pay that on top of your mortgage or rent no matter what.
Considering a rent of $2,400, could you be ahead if you bought this home?
To answer that, let’s look at how much equity you accumulate in your first year of home ownership.
On the mortgage payment of $3,395, your first year of principal works out to $17,387. Interest is $23,353.
If you divide the interest by 12, you get a monthly payment of $1,946. Obviously this has been simplified, because interest and principal payments are amortized so it wouldn’t work out to a straight figure per month.
The point is, if you were to rent, your entire $2,400 is pretty much… gone. (Aside from the fact that you have a place to live for that month.) You don’t keep any part of it.
If you’re paying $1,946 in interest, the rest of the payment ($1,448 per month) goes towards your principal.
So — yes, you are paying more when you buy a house, but essentially you’re paying principal. And as long as the price of the home you’ve purchased remains stable, or goes up in value (which is ideal), you’re building up equity by paying down your mortgage and through price appreciation.
Building up your equity through debt pay down and price appreciation equates to building wealth.
If the numbers work out, and if you’re financially prepared and capable to buy a home, BUY IT.
As you make your decision between renting and buying, make sure you do your research. Consult with a professional. Crunch your numbers. Know your intention.
Any Realtor out there would LOVE to sell you property. But it isn’t always the right move. Consider all of your options before making the decision to dive into homeownership.
At the same time, know the value of buying the right home and building your wealth. If homeownership is the right move for you, it will increase your net worth, improve your lifestyle, and help you create a legacy you can pass on to the next generation.