Rent or buy your home? That is the question!
Here are 5 things to consider as you weigh the pros and cons of renting versus owning.
Renting vs. owning: the pros and cons
- Build equity in a stable investment
- Potential for rental income tenants
- Can be customized to your liking
- Unrecoverable costs such as property taxes
- Mortgage subject to interest rate fluctuations
- Ongoing repair and maintenance costs
- Lower monthly upfront costs (in most cases)
- Short-term commitment
- Little to no repair costs
- Monthly rent subject to increases
- Uncertainty of lease renewal
- No equity
Can you afford to buy?
Once you’ve weighed the pros and cons and decided you want to buy, you need to find out if you can afford to buy. Are you financially stable enough to take on a monthly mortgage payment – and the property taxes, repair and maintenance costs that go with it? A good rule of thumb is to limit the purchase price of the house to about 3 times your household income, which can be very challenging in a hot market.
Know your monthly housing budget
Ideally, mortgage, property taxes and utilities should add up to 30% or less of your take-home pay. Look at this mortgage affordability calculator to determine how much you can afford. Consider other home ownership costs such as :
- Closing costs : Legal fees, commissions, disbursements and land transfer taxes can end up adding tens of thousands of dollars to your purchase.
- Maintenance costs : Home insurance, maintenance and repairs are necessary expenses that you won’t recoup.
Bottom line? You may be able to afford to buy a house, but if your monthly housing budget doesn't leave a few hundred dollars to spare, it might be safer to rent a comparable property for now. This will free up money for things like vacations, retirement savings and unexpected expenses.
Evaluate your long-term plans
If you buy a property and are planning to move within a few years, you may lose money on a real estate transaction. Land transfer taxes, realtor commissions, legal fees could wipe out any equity gains you’ve made. If you know you’re going to have to sell it soon, buying a home is probably not worth it. If you are new to the real estate market, but want to live in a desirable city, renting for a couple of years will allow you to gain more insight into the local real estate market.
Should you buy as an investment?
In spite of the speculation that occurs in an overheated market, it is best not to view home ownership as an investment opportunity. After you consider the cost of things like repairs and property tax, there are other investments that can produce higher yields than real estate. Renting your home may free up your liquid assets to invest in something less volatile than the housing market.
Rent isn’t always cheaper
Of course, in expensive markets such as Toronto and Vancouver, rent payments in a prime location might cost more than a mortgage payment. For example, if rent is 30% of your gross income, it would require an income of $80,000 per year to make that $2,000 monthly rent in Toronto affordable.
A place to live, first and foremost
Clearly, there are benefits – and drawbacks – to both renting and buying. The decision depends on your unique circumstances. Ultimately, whether you decide to rent or buy, the most important thing is that you must feel good in the home you’ll be choosing.