Rent vs Buy- Which is right for you?

Rent or buy – it’s an eternal question that will be asked by millions of Canadians, generation after generation. But the answer isn’t as obvious as your parents make it out to be!

The decision to rent or buy is not a simple one, and it's something that many people struggle with. You may have heard that renting your home is a waste of money, but it's not really a fair comparison. It will depend on many factors, such as the type of lifestyle you lead, your financial situation, and the property market in your area. Here are some of the pros and cons of both renting and buying.

Pros of Renting

1.Renting gives you flexibility. When renting a home, you’re able to move out as soon as your initial lease is over (usually one year). Because it doesn't tie you down, you’re free to move around whenever life throws something new at you. In a mortgage, this isn’t actually possible, as selling your property is a difficult task. Not only are there financial penalties when you break a mortgage, but taxes need to be paid as well.

2. Renting is less responsibility. Renting your home frees up your time (and wallet) for more productive activities while leaving the responsibility of maintenance and upkeep to your property manager.

3. Typically, renting a home will be cheaper than paying a mortgage (at least for the short term). When a household income isn't large enough to pay a mortgage, renting is very likely a more affordable choice. Learn why renting is a great option for those who don't want to own property and how it can give you more disposable income to spend or invest.

Pros of Buying

1.Buying gives you independence. Owning your home means you can make all the decisions. If you decide to paint, renovate, or even just hang some paintings, you won't have to get permission from a property manager or landlord, you just do it! Not to mention, you’ll never have to worry about suddenly being evicted from your home.

2. You retain the capital gains. Owning a home means that you'll be the one to pocket the increased value of your home as well as any capital gains if you choose to sell (minus capital gains tax). Renting, on the other hand, only benefits your landlord.

3. It’s a simple investment. The appeal of homeownership is that it's an investment in your future, a guaranteed asset that will see you through life. Homeownership is a fantastic long-term investment strategy that’s generally stable and, frankly, pretty hard to beat.

When people compare the costs of renting versus buying a home, they frequently misunderstand and undervalue the costs of homeownership. For the rent vs. buy debate, the 5% rule is a good starting point.

What is the 5% rule? Whether or not you have a mortgage, the annual unrecoverable cost of owning a house is approximately 5% of your property value. The unrecoverable cost refers to the amount of money you pay for a property that doesn't leave you with anything in return. When you rent, the total unrecoverable cost is simply the amount of money you pay in rent. But when you own a home, the total unrecoverable cost is comprised of three costs: property taxes (1%), home maintenance (1%), and the cost of credit (3%). If rent is higher than the total unrecoverable cost of a comparable home, you will be better off financially buying a home.