No, buying isn't always better than renting and here's why

Chances are you’ve heard some version of “buying is much better than renting” at some point in your life.

And although it’s true that real estate can be a great investment, buying your home instead of renting one isn’t necessarily the best choice.

Cynthia Kett, co-founder of Toronto-based Stewart & Kett Financial Advisors Inc., shared with Daily Hive all of the important things any Torontonian needs to consider before deciding whether buying or renting is the right financial decision for them.

Kett explains that buying isn’t the right choice for everyone, and says that the decision to do so will depend on each person’s individual situation.

“The short answer is no, buying isn’t always better than renting,” Kett said. “I feel the choice should be based on your short-term and long-term lifestyle objectives.”

Weigh the pros and cons

When it comes to deciding between buying or renting, there are pros and cons to each, but one of the most important to consider, Kett says, is whether you plan to stay in the space long-term.

“Anyone who intends to sell a property within five years probably shouldn’t buy,” Kett said. “The costs of buying — time to find the right property and arrange financing, home inspections, land transfer taxes, legal fees, moving — and selling — 5% sales commissions, property ‘facelifts.’ legal fees, moving costs — can quickly erase any capital gains and/or increase losses on a property’s value.”

Kett further breaks down all of the pros and cons to consider:

Pros of renting

Cons of renting

Upfront costs limited to first and last months’ rent Often a one-year lease commitment and can generally go month-to-month after that May be able to rent in a more desirable location than you could afford to own If you travel, you may be able to sublet the place to help cover costs Limited responsibility for repairs and maintenance of the property Cash expenditures for rent and utilities are fairly fixed month-to-month Excess cash flow can be invested in other assets

Amount that you’re paying for rent could have been used towards building ownership equity in a property that you own You have to rely on property management/owners to maintain the property and respond to your concerns You may have to share the use of premises with other tenants

 

Pros of owning

Cons of owning

It’s a forced savings plan You can choose a property and neighbourhood that you will enjoy for some time to come Your home equity can be used as collateral for future debt financing, such as access to a homeowner’s line of credit Investing in home improvements will benefit you and your property, rather than benefit a rental property owner The increase in home equity can be used as tax-free savings for retirement or other long-term financial goals Homeownership may create a sense of permanence and belonging for you and your family

Accumulating a sufficient down payment can be a challenge especially in a rising real estate market Property values can go down as well as up Additional costs for property taxes, utilities, repairs and maintenance, capital improvements, and insurance Homeownership can sometimes feel like taking a vacuum to your bank account. You can always find something home-related to spend money on; hence the term, house rich, cash poor.

Keep in mind the 5% rule

There’s one very important calculation anyone deciding between renting and owning will need to make, and it’s known as the 5% rule.

A rule of thumb for homeowners is that there will be yearly unrecoverable costs from owning your home because of things like property tax, maintenance costs, and mortgage interest. All of these together usually equal about 5% of your home’s total value.

If you’re renting somewhere where the total annual rent is the same or cheaper than 5% of the property you’d want to buy, there’s a good chance you’d actually be saving money by renting.

• See also:
  • Here’s how much money you need to buy a $500,000 condo in Toronto
  • Can Toronto landlords really say “no pets allowed”?

Try to have a sizeable downpayment

In Toronto, homebuyers have the option of putting down just 5% on their home, but if you don’t have at least a 20% downpayment in the bank, Kett recommends, waiting until you can put down the larger down payment.

“Generally, I would say if you can’t afford more than 5% down, I’d think twice about buying a home. Ninety-five percent mortgage interest payments plus mortgage insurance are costly expenses that don’t benefit you, the homeowner,” Kett said, adding, “On the other hand, waiting until you can pay 20%, while ideal, might not be practical in a particular individual’s situation.”

Ultimately, Kett says, the decision to rent versus buy is a lifestyle decision and will come down to what you want your future lifestyle to look like and how homeownership will impact that vision.