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Hi Everyone!

My Padlet that I have created is about the pros and cons of renting and purchasing a house.
I hope this project is educational for anyone reading, and makes the path of difficult decisions clear to choose what best fits your needs when it comes to comfortable living!

Enjoy!

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This website explains whether or not buying or renting is right for you.  It explains the 5% rule, unrecoverable cost breakdowns, advantages of buying and renting, and includes an educational video.  This website is very simple, and to the point which makes it manageable and not overwhelming with all the other information floating around that can get confusing when financing.

I chose this website because it is  organized, and has lots of information in the simplest forms.

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Rent vs buy - it's one of those eternal questions that will be asked and answered by millions of Canadians in every generation. However, it's not a simple question, even if your parents think it is!

You may have heard the conventional wisdom that rent is "dead money", that you're throwing cash down the toilet unless you buy a place. It's not really a fair comparison though. The truth is that even a house that you own, with or without a mortgage, has a certain level of so-called "dead money" associated with it. So from a financial perspective, the rent or buy debate is a lot more complex than "buy a home as soon as you can afford it" (and that's without considering the drop in housing affordability in recent decades).

Here's a little more guidance on the rent vs buy debate in Canada. The short version is that it will depend on your many factors including your lifestyle, finances, and the property market where you live (or where you want to live).

Renting vs buying a home: Pros and Cons

The rent vs buy issue is much more than a financial one. There can be big differences between the lifestyles of renters and homeowners, which you need to consider alongside your finances. Here are some of the advantages of both renting and buying a home that considers both lifestyle and financial issues.

Advantages of renting

Flexibility: Renting doesn't tie you down in any way. If you plan to move soon, or regularly throughout your life, renting lets you move out of a place as soon as your initial lease is over, typically 12 months. With a mortgage, this isn't really possible, as there are financial penalties when you break a mortgage and taxes to pay whenever you sell a property.

Less hassle and maintenance: Owning a home isn't just a drain on your wallet. The daily maintenance and upkeep of a home will demand many hours of your time, as well as a few extra dollars on top. Renting transfers this responsibility to your property manager, freeing up your time for more productive work.

Cheaper: Renting is generally cheaper than a mortgage, at least in the short term. If your household income isn't high enough to afford a mortgage, then renting is typically a more affordable option. Alternatively, if homeownership simply isn't for you, renting can give you more disposable income to spend or invest.

Access to alternative investments: Being a renter doesn't mean you have to forgo investing in your future. The additional cash you can save by renting can be invested in the stock market, a GIC, your own education, or toward starting a business. Some of these could pay off even more than owning a home could, if you work hard and are a bit lucky!

Advantages of buying

Stability: Owning your home means you call all the shots. If you want to paint, replace the floor, renovate, or add an ensuite, you don't need to ask a landlord or property manager*, you just do it! Owning your home also means you won't get suddenly evicted because your landlord's second cousin's 19-year old daughter needs a place to live when they're at university for 6 months each year**.

You retain capital gains: If your home increases in value, being the homeowner means you will pocket the additional home equity, and realize the capital gains if you choose to sell (minus capital gains tax). If were to be renting, the only one to benefit would be your landlord - if you're really unlucky, a price rise could see your landlord sell the home, or increase your rent! Of course, the flip side of this is that if prices fall, it's the homeowner that's on the hook, not the renter.

Building up equity: With a mortgage, every monthly payment is helping you build equity in your home. While some of your mortgage payment goes toward paying the interest on your loan, the rest is paying off your mortgage principal. At the start of your mortgage, interest will make up more of your payment, but it will decrease over the years.

(Sometimes) cheaper: Buying a home will generally see you pay a higher monthly payment than you would pay in rent on the same home, at least in the beginning. However, that isn't always the case, especially when you subtract the amount of your monthly payment that is going toward paying down your principal. You'll need to run the numbers on your prospective home to be sure - our mortgage payment calculator can help with that.

Simple investment: Part of the allure of homeownership is the fact that it makes investing in your future simple. Pay off your home and you'll have a guaranteed asset that can see you through your life - no need to worry about stocks, bonds, or other financial products (unless you want to). It's generally a safe bet, as property prices tend to be fairly stable (until they're not, but that's another story). If you want a simple long-term investment strategy, homeownership literally has one built-in.
*You may need to ask your local council if you're renovating. **This is oddly specific, but it's just a hypothetical, I promise.
Rent vs Buy: The 5% rule

When people talk about renting vs buying a home, they often misunderstand and underestimate the costs of owning a home. The 5% rule is a decent rule of thumb for the rent vs buy issue, but it will also help to clarify the real costs of renting and buying. It is a little complicated, but we'll walk you through it step-by-step.

First of all, here's the 5% rule itself:

The annual unrecoverable cost of owning a home is approximately 5% of the property value (whether you have a mortgage or not). If your rent is lower than that for a comparable home, you should keep renting. If rent is higher than that, you're probably better off buying a comparable home.

Let's unpack this a little.

Total unrecoverable cost

What is the total unrecoverable cost? The total unrecoverable cost is the amount of money you pay for a property that doesn't result in residual value. In the case of paying off a mortgage, the residual value is the home equity that you build up over time, which is a financial asset that you can leverage in the future.

When you're renting, the total unrecoverable cost is simply the amount of rent you pay. You don't own the home, and your rent doesn't go towards purchasing an asset or investment.

When you've bought a home, the total unrecoverable cost is more complicated. It's made up of three different costs that cannot be recovered:

Property Taxes

Maintenance on your home (not including renovations, which can increase the value of your home)

The cost of credit (see below)

The first two of these are simple enough to understand, but the cost of credit is a bit more complex. The cost of credit is either the cost of borrowing money with a mortgage (ie interest on your mortgage) or the opportunity cost of investing your money in a home, rather than more lucrative investments. The former applies to money that you still owe, while the second applies to your home equity. In either case, they are generally around the same amount, depending on factors including your mortgage rate and how much your home increases in price.

The 5% rule

Here's where the 5% comes from. Property taxes are around 1% of your home's value each year, maintenance costs are also around 1%, and the cost of credit generally comes up to 3%. That means that the total unrecoverable cost from a house you own should be around 5% of the total value each year.

So, if you can rent for less than 5% of the value of a comparable home (calculated annually) you should probably keep renting, while investing the difference in an RRSP, TFSA, or the stock market. If you can buy a home where 5% of the property value is less than the rent, buying is probably a good option.

Now, this is a simplification of a rule that is already somewhat simplified, and there's a lot more to it if you want to understand it fully. Check out Ben Felix's video about the 5% rule below - he's a financial planner with PWL Capital in Ottawa, so his explanation is tailor-made for Canadians.

Should you rent or buy?

As with most things, there are no easy answers to whether you should rent or buy - it depends on your lifestyle choices, the market where you live, and your personal finances. However, there are a few general suggestions that might get you thinking one way or another.

When you expect to move regularly over the next few years (or most of your life) you might consider renting.

If you want stability in your home, including the option to renovate, you will probably want to think about buying a home.

When your yearly rent is less than 5% of the cost of a comparable home, you might consider renting and investing the difference.

If you're paying rent that is more than 5% of the price of a comparable home, you might consider buying a home.

The bottom line

The key thing to remember is that there is not necessarily a better or superior alternative to renting or buying. Even a fully paid-off home represents an opportunity cost and has overheads that you will need to pay in perpetuity. Renting can give you the flexibility to make other investments and be more responsive to opportunities that come up in your career, or in other areas of your life.

If you're confused about what the best choice is for you, it's probably a good idea to speak to a financial advisor or mortgage broker about your options.
ALSO READ

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Rent vs Buy: When is a mortgage better than rent in Canada? | Ratehub.ca

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Rent vs buy - it's one of those eternal questions that will be asked and answered by millions of Canadians in every generation. However, it's not a simple question, even if your parents think it is! You may have heard the conventional wisdom that rent is "dead money", that you're throwing cash down the toilet unless you buy a place.

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This website contains a very detailed article about the options of town houses, apartments, and condos, as well as purchasing a home.  It lists resource articles and a quiz to help you get started.  It also explains the 5% rule which can be applied to renting and purchasing homes.  The 5% rule talks about unrecoverable costs, like paying rent, that is money that goes straight to the landlord. Whereas paying a mortgage goes towards paying off your house.  The unrecoverable costs that come with buying a house are all the maintenance it requires to keep the house valueable.  The 5% rule compares the yearly cost of rent, compared to the home value, so if it is over 5%, then renting might be an issue financially, but if it is under 5%, then renting is a great way to save money.

I chose this website because of how well detailed and informational it is to help scope out the correct decision of renting vs. buying a home for you and your family.

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Renting vs Buying a Home in Canada - Tips for Decision

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Do you dream of making your home just the way you want it? Then buying makes that much easier. When you rent, your tenancy arrangement typically restricts what customizations you can make to your living area - assuming you get to make any at all.

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This website provides a great format to calculate the suitable choice of renting or purchasing a home.  For renting, it provides a province, city, apartment type, monthly rent, and tenant insurance cost to provide you with the information needed to know whether renting is suitable for you.  It then provides listings of houses and apartments for rent with the information provided.  For the purchasing section, it provides sections for you to input the Home Purchase Price, Down Payment, Mortgage Interest Rate, Length of Mortgage and all the Utilities and Tax Amounts. With all these sections filled in, this calculator will present to you your monthly payments, assumptions, and disclaimers.

I chose this website because it is a highly rated calculator for not only renting, but purchasing too with detailed calculations that provide you with all the information you need to consider when renting or purchasing a home. Overall, I found this website to be a great resource.

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Monthly Payment Details

Assumptions

This calculator compares your initial monthly rent payment to your initial monthly housing payment and does not factor in future changes to these payments. The calculator adds a mortgage insurance premium to the mortgage amount for mortgages with a down payment between 5% and 19.99% using CMHC rates.

The minimum down payment is 5% on homes up to $500,000, 10% on the amount between $500,000 and $999,999 and 20% on homes priced at $1 million and over. Monthly rent figures using the Province, City and Apartment Type drop down menus are average rent prices as of Fall 2015 (Source: CHMC-SCHL, RentSeeker.ca).

Disclaimer

The calculator is for illustrative purposes only and may not reflect the actual numbers for your mortgage or rental lease agreement. You should not rely on the results as an indication of your financial needs and we recommend that you seek out your own financial, investment, tax, legal or accounting advice nor shall the information herein be considered as investment advice or as a recommendation to enter into any transaction.

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Monthly Payment Details Assumptions This calculator compares your initial monthly rent payment to your initial monthly housing payment and does not factor in future changes to these payments. The calculator adds a mortgage insurance premium to the mortgage amount for mortgages with a down payment between 5% and 19.99% using CMHC rates.

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This website is a fantastic resource, especially locally.  This website is a great advertisement for a brokerage in Toronto, Ontario.  This gives very accurate renting and buying prices of houses and the breakdown of costs to consider when choosing the right living environment for yourself.  This website lists great examples of pros and cons for both choices of renting and purchasing with realistic expectations.  This website has captions such as "You Should Buy If..." and "So Who Should Keeping Renting?" which lists reasons it would be a good reason to buy if you qualify and reasons to keep renting if you do not.

I chose this website because I loved the real life examples it provided, that were easily readable and mapped out for my convenience.

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Tired of renting? Thinking it might be a better idea to buy a home? The Rent vs. Buy debate is a big one...and there isn't one right answer for everyone. Read on for our thoughts on renting in Toronto vs buying in Toronto.

The Advantages of Renting a Home

Minimal Maintenance Hassles and Expenses - when the toilet gets plugged, tenants get to call their landlord. It's not nearly as much fun when it happens in your own home (trust me).

One Easy and Predictable Payment - owning a home involves more than just paying your mortgage. You need to factor in property taxes, maintenance, condo fees, water and sewage bills for houses, utilities, home insurance, etc.

Not happy with your neighbourhood? You can move every year. Tenants have the ability to easily and affordably move every year if they want to; the real financial benefits of owning happen over time. If your time horizon is short or you're a commitment-phobe, consider renting instead of buying.

It's cheaper to move when you're renting. Buyers have to pay land transfer taxes when buying, commissions when selling and legal expenses for both.

Sometimes it's cheaper to rent. On a monthly basis, your overall expenses will often be cheaper when renting instead of buying. That's especially true if you don't have much of a down payment. But of course...when you rent, you're paying down someone else's mortgage instead of your own.

The Advantages of Owning a Home

You're paying your own mortgage instead of someone else's. While part of every mortgage payment is interest paid to the bank, part of every mortgage payment goes towards building equity. Think of it as a forced savings program.

If property prices go up, you reap the rewards, not your landlord. Of course, that works in reverse too - if prices go down, the hit is to your pocketbook if you decide to sell.

Sometimes it's cheaper to buy. Toronto's rental market isn't easy or cheap, especially if you're looking to live downtown. If you have a decent-sized downpayment, it could be cheaper to own than to rent (on a monthlly cash flow basis).

Freedom! When you own your home, you don't have to ask permission to paint the walls or upgrade the floors - do as you wish! Buy new appliances, replace that carpet, paint that wall red and make your home your own.

Where else will you put your money? One of the reasons that so many investors make real estate a large part of their portfolio is that historically, Toronto real estate has been more predictable and yielded better returns than many of the investment alternatives. Of course, there aren't any guarantees, but if you're renting and blowing the rest of your money on lattes and trips to Cuba, buying will be a better long-term financial plan (sorry Starbucks).

Real Life Example: Rent vs. Buy
Property: 36 Lisgar Street

1 bedroom

660 sqft

Can rent for $1,650/month (July 2017)

Can buy for $345,000 (July 2017)

Costs to Rent

Monthly rent: $1,650

Monthly hydro: $50

Monthly insurance: $30

Total Monthly Rental Costs: $1,730

Costs to Own

Downpayment: $34,500

Costs to Buy: $2,192 (land transfer tax after first-time buyer rebates + legal fees)

Mortgage: $1,465/month (assuming 10% downpayment at 2.69% interest with a 25-year amortization)

Condo fees: $422 (includes heat and air conditioning)

Hydro: $50/month

Property taxes: $1,965/year

Insurance: $1,500/year

Total Monthly Costs $2,225

Conclusion: It costs an extra $495 per month to own. But of course, it's not that simple.
Let's assume that the Tenant and the Owner live in the condo for 5 years. At the end of that time period....
The Tenant:

Will have paid $102,000 in rent/hydro (assuming no rent increase - usual rent increase is 2% per year)

They will have increased their landlord's equity in the property by almost $40,000, but will be walking away with nothing

The Owner:

Will have paid $130,500 (mortgage, condo fees, taxes, insurance, hydro)

Increases their equity by $39,108 by contributing to paying off their mortgage (the rest of their monthly payment goes towards interest)

Price appreciation if they sell: $176,650 (based on actual average condo price appreciation of 51.2% in Toronto from June 2012 to June 2017)

Net Proceeds from the Sale after 5 years

Sold Price: $521,650

Costs to Sell: $26,082 (assumes 5% for commission + legal fees)

Remaining Mortgage after 5 years: $271,293 (from original $310,500 mortgage)

Net Proceeds: $224,275

Conclusion: The Owner walks away with over $187,000 more than they initially invested.
Of course, it's never that easy. Other things to consider:

The Owner paid an additional $28,500 in carrying costs.

The Renter could have chosen to invest the initial $34,500 downpayment + $495 per month saved in lower monthly costs and earned a return on that $$

The condo price appreciation can vary significantly depending on the period

rents generally edge slowly up, as do owner expenses, including potential maintenance costs (e.g. a broken fridge)

So Who Should Keep Renting?

If you fall into any of these categories, it might be a better idea to rent instead of buy:

You don't have a down payment. Critical to the math is having a downpayment- click here to read about Saving for a Downpayment.

You like zero risk. With risk comes return, but there are never any guarantees that prices will go up.

You don't know where you'll be in 3 or 5 years. Generally, the longer you live in the property, the easier it is to break even or make money. If the market declines and you have to sell because you're moving out of the city, you could be taking a loss on your investment. If you might be moving to Paris next year, it probably makes more sense to keep on renting.

You can't afford something you want to live in. Most first time home buyers gravitate to condos for affordability reasons....but if you MUST live in a house, you need to consider the significantly higher purchase prices and the inevitable maintenance and renovation costs.

You Should Buy if...

You can afford to buy a property in a location you are happy with, that will appreciate over time, and still have enough money to live. Never borrow as much as the bank is willing to lend you, you'll have no wiggle room.

You want to pay your own mortgage instead of someone else's. Investing in yourself is not just empowering, it's often the best financial move you can make.

You see real estate as more than investment - it's a place to lay your hat and live your life. That it can increase your net worth? Just a bonus.

I still remember the day I decided to get into the real estate market and stop renting. I was 27 years old and hadn't even considered a career in real estate yet. I was living in a dumpy apartment at Queens Quay and Spadina and paying $1,300 a month in rent. At the time, one bedroom condos at King/Niagara were selling for - wait for it - $150,000-$200,000. When my friend Lisa suggested I might be better off buying, I was surprised. I was single and scared, but I went for it. Getting into Toronto's real estate market early was one of the best financial decisions I've ever made (and I never missed that dumpy apartment).

If you want to discuss whether you should buy or rent, give us a call or send us an email. There is no one answer to the question, but we'd be happy to help you evaluate your options.

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Renting vs. Buying in Toronto: What's Right for You?

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Tired of renting? Thinking it might be a better idea to buy a home? The Rent vs. Buy debate is a big one...and there isn't one right answer for everyone. Read on for our thoughts on renting in Toronto vs buying in Toronto.

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This video explains how comparing the cost of renting and purchasing a home is not an apples to apples comparison.  To convert the apples to oranges comparison to apples to apples, you need to use the 5% rule.  The 5% rule compares the cost of unrecoverable costs of renting and owning.  Owning has a lot of benefits, but it far more expensive in the long run.  Renting frees of you of maintenance costs, but you'll never own the home.

I chose this video because it provides graphics, easy understanding and friendly tone of discussion.  It gives a excellent understanding of the 5% rule which is an important part of comparing pricing.

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This video shows clips of real families deciding what is their next best option when it comes to their living situation.  The first gentlemen is going over his budget and comes to the realization that he is better off renting and investing compared to owning a home.  The other family is currently renting their home, and are focusing on the possibility of owning a home for the investment purposes to provide for their son.

I chose this video because it shows real life families and a finance professor viewing their options of what suits their lifestyles best.

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This video demonstrates a wonderful visual of the comparison of renting and owning from monthly to annual costs.  It shows that renting is much easier, costs much less and is appropriate for the renter's situation in the story.  The narrator goes over the owner's costs including all the expenses that go into monthly maintenance, property tax fees, insurance, and all the mortgage details.

I chose this video because of how well it is drawn out on paper. This video makes it much more clear of what kind of expenses and responsibilities come along with owning a house.

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Drawing Conclusions: Is renting really a waste of money?

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This video is a great and steady paced explanation of the 5% rule, and why renting should be in favour of owning.  As owning a home was much more reasonable decades ago, but is increasingly more difficult for the new generations reaching adulthood.  This video shows humourous skits that compare the benefits of renting over owning a home.  Not that there are not benefits to owning a home, but the realistic aspect is that renting is far more attainable.

I chose this video because it was interesting and was easy to keep my attention focused on the content which is important when discussing financial topics such as this.

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How I grow my money by Renting vs. Buying a home (The 5% Rule)

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In this photo, it shows two collumns comparing the lifestyle that is required when renting or purchasing a house.  If you wish to rent, it is best that you do not plan to stay there long, and live a flexible life.  Renting is beneficial when saving for down payments on houses or cars, and correcting credit scores.  Purchasing a home is a good idea when you plan to find a home that you wish to live in for many years, fix up and sell, or when you wish for the freedom of stability.

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In this photo, it presents the pros and cons of renting a house, and the pros and cons of buying a house. Of course there are downsides to both, but there are upsides when you make the right choice for your lifestyle. Buying a house is a great way to build equity, and have a sense of pride knowing you worked hard to purchase the largest investment in your life. Renting is great for young adults, travellers, and when you have sporadic job sites for work.

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1.  What surprised me the most about this topic is how inaccessible purchasing a house is in the economic state of 2021.  People in their 20s will never be able to qualify to buy their own house, because the cost of housing is unbelievable.  Even renting is quite expensive for the rate of wages this year.

2.  This topic is relative and interesting to me because I am currently living in my first apartment that I started renting when I was 18 for my daughter and I.  The cost of starting out on your own and collecting all the furniture, utensils, and tools was difficult to acquire on top of working out moving costs, first and last month's rent, and bills.  It is anxiety riddling to know that buying a house is so much more expensive than that and such a huge responsibility for many decades of our lives.

3. I think the most important thing to pass on is to know how to play your cards right, especially if you are purchasing a house. You need to know every specification on the contracts you sign, and have a financial advisor with you because the expenses stack up incredibly high and can be tricky to keep up with all of them.