Should you rent or buy?

Living in Vancouver, we are privileged to enjoy everything that mother nature has to offer. From the oceans and beaches, to mountains and forests. From water skiing to downhill skiing, most winters you can even play a round of golf during the day, and hit the slopes in the evening for some great night skiing.

Because of the natural beauty of the City of Vancouver and the surrounding area, as well as the lifestyle it provides, it's no wonder that Vancouver typically ranks among the most expensive cities in the world in terms of cost of property and affordability (Meiszner, Peter. "Vancouver's Housing Prices 2nd Most Unaffordable in the World". www.globalnews.ca. Global BC, January 21, 2014. Web. October 31, 2014). As a financial security advisor, it should come to no surprise to most that a question I get asked frequently is: "Should I rent or buy a home?"

First, some perspective on housing costs when compared to income for those who are reading this and don't live in Vancouver: A typical three bedroom, two bathroom, detached family home will run $800,000 at the low end, but generally closer to $1,000,000 or more. This would be a price range for older homes, perhaps 40 years or more old and will need some work. A newer home will cost well over $1,000,000. A shoebox sized, 500 or 600 square foot condo can range anywhere from $200,000-$400,000 depending on location and age. By comparison, the median income for those working in Vancouver was only $41,981 in 2011, and hasn't changed much, if at all. (McMartin, Pete. "Vancouver - Lotus Land or Lowest Land?". www.VancouverSun.com. The Vancouver Sun, October 1, 2014. Web. October 31, 2014).

Let me start off by stating that there is no perfect right or wrong answer here. Both renting and owning are perfectly acceptable ways of living; it really comes down to the reasons for renting or buying, and the planning around either choice. Below are some ideas and thoughts that will hopefully help you determine the correct path for you and your family. We'll first look at some reasons as to why you might buy or rent, and then discuss financial and non-financial considerations that may influence one's decision.

Top reasons that people will buy or rent property: 

Provided below is a great summary from an article by Mr. CBB on CanadianBudgetBinder.com that I came across as to the reasons why people will buy or rent property. Why is this important? Use of property can heavily influence the buy/rent decision making process (Mr. CBB. "Should I rent or Buy? The Million Dollar Question". www.canadianbudgetbinder.com. Mr.CBB and Canadianbudgetbinder, April 8, 2013. Web. October 31, 2014):

Should I buy a property?

First let’s look at the three reasons why you would buy a property:

• To use as a primary residence – this is the main reason to purchase property for the majority of Canadians. We occupy the home for our own use and derive value from using it as our family’s shelter.
• To gain capital growth – the last 10 years have been a wonderful time to rise with the tide of increasing property values. This is market driven not something you can control personally per se.
• To gain income potential – this is where purchasing property to rent it out or to supplement the payment by renting out a portion to another party.

Should I rent a property?

There are increasingly appealing reasons to rent today. Here are the main reasons why someone would rent a property:

• Lower cost of living – outside of a very few rental markets (Toronto/Vancouver) where landlords can charge premiums because of a shortage of well located quality rentals – it has been shown that the cost of living is lower when you rent vs. buying.
• Ease of movement – with Canada’s economic focus shifting West – it is easier to take advantage of employment opportunities when renting as real estate is a non liquid asset and takes time to move. By the time your home sells – that job opportunity is gone to the next guy.
• Opportunities to invest – not owning a property is never an excuse to not invest. Money will be made in real estate in Canada regardless of the overall economy. The money you save from the reduced cost of living can be invested in other asset backed investments that yield healthy returns

Financial Considerations:

The first financial point of consideration of whether to rent or buy in my opinion, is affordability. Not how much mortgage you can afford, but how much of a payment you could sustainably commit towards housing costs, while still maintaining a comprehensive plan that will allow you to continue to save for and achieve other goals. This cost shouldn't impede your ability to adequately save for retirement for example. A good test of sustainability is to put the  monthly cost of owning the place you desire into a budget - do the numbers work or does this payment drain your ability to sustain other costs? Another consideration is that interest rates are at all time lows; what influence on your payment would a long-term average interest rate of six per cent have on your overall ability to afford housing payments? Does this stretch you too thin or take away from an ability to reach other goals? If the answer is yes, than perhaps buying isn't in the cards at this time.

Talking to some of the points in the previous section in regards to buying, what is the purpose of buying? If this is meant to be your principal residence, there is great value in home ownership as a place for you and your family to live. If the purpose is purely for capital growth, be prepared for the long haul. Like most other investments,  those who spend the most time in the market generally come out on top - think long term. If the goal is capital growth and this is your primary residence, keep in mind you will only ever realize the value of the equity (in the true value, not just as borrowed money) in your home after a long period of time and you sell you home and either then choose to rent, move to a market where housing costs less, or downsize in the true sense of the word to a place that actually cost less, rather than just less square footage.

Another great point from the section above relates to the lower cost of renting; not only does this generally cost less than buying, but ideally also frees up cash flow to allocate to other planning and investing. If the main goal of renting is to save on costs, than those dollars saved from not buying should be allocated efficiently towards other goals.

Lastly, a big factor on whether many will buy or rent (especially in Vancouver) is the down payment. There is no perfect answer to this, but I personally believe that you must have some skin in the game, so to speak. A 20 per cent down payment in Canada allows for buyers to avoid Canada Mortgage and Housing Corporation (CMHC) fees, potential lower rates, and have a little more flexibility with amortization. A down payment under 20 per cent will require CMHC insurance and a 25-year amortization, but may allow you to get into the market sooner. For example, a 20 per cent down payment for a two bedroom condo in Vancouver may be $100,000, where 10 per cent would only be $50,000 in this situation. Is it worth the additional years of saving to get to 20 per cent or is your money better utilized to purchase the condo with 10 per cent, using the dollars you would have continued to save to pay down your mortgage? Coming back to what I stated initially, there is no perfect answer; I believe that the best answer relates back to affordability discussed above. If a 10 per cent down payment works with your cash flow and budget and still allows you to continue to work towards your other savings goals, then go for it. If you already have 20 per cent or you are just more comfortable with this, then there is your answer.

Non-financial considerations

Although cost and affordability are likely the main reasons that contribute to the decision making process of whether to buy or rent property, there are a few non-financial considerations too.

Some factors include: Is the type of housing that is suitable for your particular situation readily available in the area in which you are looking for the cost you are willing to pay? Do you currently hold a position/job that you feel is stable? Are you emotionally and responsibly ready for home ownership or does the thought of this make you stressed or keep you up at night? Lastly, timeframe is a big consideration; if you only picture yourself in one area or dwelling for the short-term, is it realistic to buy?

Summary:

Ultimately, whether you rent or buy long term is an important financial decision that requires a lot of attention. This is, for most people, the largest single purchase over their lifetime if they decide to buy. Equally, the decision to rent is just as important as it requires just as much preparation to create a plan for the cash flow you are likely to save by not buying. First and foremost, it has to be a personal choice; there are a lot of different voices and opinions out there, including mine, which may or may not be relevant to your particular situation. As a professional, I would always recommend discussing decisions of this magnitude with the advisors that you trust, whether they by your financial security advisor, accountant, realtor, mortgage planning specialist, lawyer, or all of the above.

Until next time, keep on saving!

N.