Monday, April 29, 2019
Renting Versus Owning: The Real Truth
It’s that time of year again. The real estate market is buzzing amidst dreams of a better life of not paying someone else’s mortgage. Hold up though, not so fast. While no one likes paying for someone else to get rich, maybe it isn’t that simple. Maybe, just maybe we should debunk the whole Renting Versus Owning debate once and for all. Today I will tackle the myths and truths that go along with the Renting Versus Owning Debate and show you that maybe the answer to this question isn’t as straightforward as you thought. Let’s get started.
1) Renting is throwing away money
By that logic, food would be a waste of money as well. You can find food for free growing on the side of the road and you can get water from the local creek or river. Well if you can do that why would you pay for anything? You need to eat, and you need to drink water and you need a roof over your head. How you go about it depends on many factors but don’t ever let your choice to buy a home be predicated on not “throwing away money” on renting. Just so you know there are people who argue that owning a home is throwing away money as well on things like insurance, taxes, excess utilities and maintenance. Both aren’t necessarily right, and it isn’t that simple. One thing is for sure there aren’t only two choices out there: Owning a home or living in a dumpster. Housing costs money and renting is one way of going about it. It is not throwing away money.
2) Owning a home is cheaper than renting
Just a heads up, it isn’t. Not only is it not cheaper, but it is also much more expensive. Now before you send me a DM of your mortgage costs, tax, and insurance bills and your all-in price for owning, read what I have to say. Yes, your mortgage is probably cheaper than a similar person’s rent in the same sort of dwelling. As mentioned in the previous point, the mortgage isn’t the only cost. Not by a long shot. We all know about taxes, insurance, utilities, and maintenance. Do we know how much these things add up? Let’s look at maintenance. First off, if you are not spending money on maintenance every month/year then you are letting your home decay, which hurts its value at resale time. One easy way to measure this factor is the fact that I don’t own a rake, or a shovel, or a hose or even a ladder. I don’t need them and often when you own a home you do. They are not free, and neither are other home owning expenses like a new washer and dryer, water heater or god forbid a new roof. While a renter may never have any equity, they also don’t have to drop 25K on a roof possibly twice in their lifetime. Owning a home IS NOT cheaper, but that doesn’t mean renting is better.
3) Housing is an amazing investment
Not sure who said this is true, but it certainly is not. Let’s start with your principal residence. While you are putting money towards paying off your home every month, with interest I might add, you only can recoup this investment when you sell. So, you must sell your home to get your money back, but then what? You live in that beautiful dumpster I mentioned with 500K in your pocket? No, you need to live somewhere so that money is the transition piece to the next home. Also, there is no other investment I know that has the additional costs that owning a home does. My TFSA doesn’t require me to fork over money to the city every year so they don’t put a lien on it, property tax. If you add the interest of the mortgage and all the other costs you put into home ownership, you will be LUCKY to break even over the lifetime of the home. Home values grow at a pace often less than inflation. That’s one terrible GIC! Let’s look at income properties as well. These are investments, and often decent ones at that. Some other “sucker” is paying your mortgage for you! Here’s the thing, it’s not free either. Besides the copious amounts of money you pump into your rental, there is also the time factor. Again, my TFSA doesn’t require me to unplug a toilet at 4 AM. It also doesn’t require me to patch a wall cause the last tenant was mad and punched a hole in it. Can housing be a decent investment? Yes, but not always and it’s not that simple.
4) Families need a home to live in
This adds to the “Brady Bunch,” white picket fence, suburbia status fest that I personally don’t subscribe to. Families need a place to live. Home is where the heart is and nowhere in that statement does it mention half of a million-dollar home in the north end of the city. For generations, children have grown up in the city without land to roam free or a tree to hang from in the backyard. When I think of the concept of the family home, I think of the concept of the family, not the home. Now that doesn’t mean that having a piece of property is a bad thing, all it means is that raising good people has nothing to do with the place they live in. Neighborhood, education and let’s not forget, YOUR PARENTING are far more important than the actual dwelling they live in.
1) A home is a solid piece of any financial plan
While it seems like I am against home ownership, I truly am not. In my March 6th, 2018 post, “My 6 Point Focus on Wealth,” point 3 focused solely on homeownership. I describe how it provides housing stability which in itself is valuable. It is the transition piece for all the housing you will have in your life including home upgrades, eventual downgrades, and even long-term care. I state how we all need to live somewhere so why not own where you live. I also caution against owning too much home and being house-poor. Overall, however, homeownership can truly be a blessing. Imagine throwing mortgage payment sized deposits into an investment account because your house is now paid off. That is pretty cool in my eyes!
2) Land or property ownership does have value
If you are a landowner, you have created an interesting wealth dynamic in your life. Now I claimed in the myths segment that a home is not an amazing investment. While I stand by that I will also say it can be a good investment. Rental properties can provide a monthly income for you and if used correctly can add large amounts of wealth later in life. A mixed portfolio of investments, cash and land is a very diverse approach and can almost never fail. The secret is to plan on holding your property until you can make a profit from it. This may take years or even decades. The recent housing boom was a prime season for property owners to unload units they had for years and skate away with a hefty check. Patience is key so make sure you are in it with your head on straight.
3) Buying a home is the biggest purchase you’ll make, so be smart about it
Other than saving for retirement, which I hope you are doing, buying a home will be the biggest purchase you ever make in your life. It is not to be taken lightly. Homeownership requires careful planning as there is a whole industry out there trying to separate you from your dollars. A good realtor and broker can help you navigate the tricky waters of the real estate market. A bad one can sink your ship. Look for ones that have experience with many units and a reputation they can stand behind. Also, make sure your financial house is in order before taking the plunge. The banks will have you believe that you can afford a million-dollar home with a Hamburger Helper budget. Don’t fall for it. Work within your comfort zone and never feel pressure to buy above your threshold. It does not matter where you live if you are struggling to make the monthly payment. Remember this, you are not truly a homeowner until your home is paid off. Until then you are simply a debtor to the bank.
4) You don’t have to own to be wealthy
Owning a home is an amazing thing. It is however not necessary to be wealthy. Some of the wealthiest people I know don’t own property. Their reasons are flexibility, convenience and the sheer fact they are almost never home. They don’t have time for upkeep as a home is just a place to keep their stuff. One thing that is for sure is that if you do not own a home, your housing may become an issue later in life. The goal is to have the house paid off by retirement or well before. That is so you can have minimal housing expenses during your later years where more than likely your income will be lower. If you do not own and you rent, you must account for how you will come up with these expenses during retirement. What that means is that you will have to have investments that fill that gap. Long story short, if you are not planning on owning, you better be saving money. That is just a fact. While owning can add your wealth, it isn’t necessary to achieve financial freedom.
So what was accomplished in this post? Did we find an answer to which is better, renting or owning? No, we didn’t. The answer to which is better is unique to each of us. Some people are never meant to be homeowners, it just doesn’t fit their lifestyle. Others fit it quite nicely and it helps them on their path to acquiring wealth. The key is to understand yourself, do your research and above all, PAY OFF THE HOUSE! That is the goal, to be an owner. Your home is not an investment, it is not an equity cow, it is your home. The goal is to live there as cheap as possible and that means owning it. If you can do this, you will be winning, period.
“Be prepared, work hard, and hope for a little luck. Recognize that the harder you work and the better prepared you are, the more luck you might have.” – Ed Bradley
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