Building Your Wealth: Is it Better to Rent or Buy a Home?
When building your wealth, is it better to rent or buy a home? Contrary to popular perception, renting doesn’t necessarily mean that you are throwing money away every month and buying doesn’t necessarily mean that you are building more wealth in the long-run. It all depends on what you do with your money—subject to current interest rates, the state of the housing market, and the state of the economy. Here are some monetary considerations connected with the “rent vs. buy” decision.
Buying a Home
Supporters of home purchase may be of the belief that when you rent a home, you pay your landlord rent and that money is gone. On the other hand, when you buy a home, both your down payment and a portion of your mortgage payments go towards paying down the principal portion of the loan, building equity in your home.
Home equity is the part of your home’s current market value that you possess at any given point in time—in other words, the current market value of your home minus the principal amount owed on your mortgage minus any other loans secured against your home. From this perspective then, some would say that the principal payments you make are not really a “true cost” to you but rather a “saving” you chose to force upon yourself.
- Real estate has traditionally been considered a sound investment; however, there is no such thing as a risk-free investment. It is important to remember that the value of your home is not fixed—property values fluctuate depending on the housing market. Additionally, there are hidden costs beyond your mortgage payments—including, but not limited to, interest rate increases on variable-rate mortgages (which increase your monthly mortgage payments), general home maintenance costs, homeowner’s association fees (paid by those who own property in certain communities), and property tax (as well as increases in property tax). These all detract from the eventual gain when you sell your property.
- If the home purchase is for you to live in, you will never see money coming in (while it is a substantial investment, it is an income-generating asset only if you rent out a portion of it), and you can reap its capital appreciation only if and when you sell it at a profit. The good news is that in Canada, if your property was your principal residence for every year you owned it, any capital gain on its sale is tax free.
- Buying a home is a rather illiquid investment. Home equity cannot be quickly converted into cash because your equity value is based on a current market value appraisal of your property, and there is no guarantee that your property will be sold at the appraised price. And of course, you have to find a buyer. With that said, if you own a home and need money, you can leverage your home equity to secure a home equity loan (a secured term loan that allows you to borrow money against your home equity) or a home equity line of credit or HELOC (a form of revolving credit that allows you to borrow money when you need it up to a credit limit that is predefined). Be aware that if you can’t make your payments and your loan goes into default, you may lose your home to foreclosure.
Renting a Home
On the other side of the coin, supporters of rental living may believe that renting provides you freedom from the financial responsibilities associated with homeownership—a long-term commitment that ties up your cash—in addition to the flexibility to relocate, upsize and downsize.
- Advantages of renting a home include: having no maintenance costs or repair bills as your landlord assumes full responsibility; having access to amenities such as a pool or a gym that would otherwise be an additional expense; having no substantial down payment or property tax bills; not worrying about decreasing property value; having lower insurance costs (renter’s insurance policy vs. homeowners insurance policy); having lower utility costs; and knowing that the amount you pay for your rent is fixed for the span of your lease agreement (though this also applies to homeowners with fixed-rate mortgages in which the monthly mortgage payment amounts are fixed).
- It is important to note that while your rent payment is fixed for the span of your lease agreement, rent prices do fluctuate and your rent may increase when you renew your lease.
- If homeownership isn’t for you, renting can provide you disposable income that could also be invested with the opportunity to protect, preserve and build your wealth.
The Bottom Line
This article is not meant to conclude whether renting or buying a home is the best for building wealth. Rather it has provided different perspectives that you should contemplate in conjunction with your choice of lifestyle and intangible considerations, such as having a physical space where memories are made and an increased sense of stability. Both buying and renting provide you a place to live and both require regular cash flow to maintain—it is advisable to consult a professional on your unique financial situation.
If you are considering purchasing real estate as a means to investing and not as your primary residence, our article 3 Common Ways for Anyone to Invest in Real Estate provides several real estate investing methods, including some newer investment vehicles enabling anyone to invest in real estate, as well as investment alternatives to real estate which can also provide you with income.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.