Here are some pros and cons of both owning and renting so that you can decide for yourself what is best for your housing needs. So let's start by discussing some of the advantages of renting over buying. First is renting is cheaper in the short term. You don't need to invest a down payment of several thousands of dollars and you won't need any closing costs.
Well, those are things like lawyer fees, inspection fees, and, so on; which are normally a few thousand dollars. Usually to rent all you need is the first month's rent and a security deposit of no more than one month's rent so it is much much cheaper to rent than own, at least initially. Now even if you do have these funds available you could invest them elsewhere maybe an RRSP or a TFSA or maybe your own business. Now you would have to weigh the return of those investments versus investing in your own home to see which is financially better.
Now also when you're renting your maintenance costs will be lower so everything from an appliance repair to major repairs like roofing, furnace replacement, well those are the responsibility of the landlord not you so you won't have any unexpected financial surprises.
Number two is there is more flexibility to move when you are renting. Now, this can depend on your lease of course, but if you are on a month-to-month lease you can just give your landlord one month's notice and then move. If you own it's much more complicated and depending on the market it will usually take you longer and cost more in selling fees.
Now, if you are new to a city and you don't know what part of the city you want to be then renting is probably a better option, at least until you get to know where you want to settle or if your work causes you to relocate a lot, renting also may be a better option. Well, these are two pretty convincing arguments for renting over buying and you may wonder why would anyone buy? Well, let's look at some of the downsides of renting as well.
First, your landlord could decide to sell anytime for several reasons and you have to move out and look for a new place perhaps that's just a minor inconvenience but if it happens multiple times it will be more than a minor inconvenience. Now you could mitigate this by signing a longer-term lease but remember one of the advantages to renting is more flexibility for you to move so if you sign a long-term lease well you lose that advantage.
The second disadvantage to renting is that you are relying on your landlord to make necessary repairs Now some landlords are great but others don't want to spend the money so you could be in a situation where you are constantly fighting with them to get things repaired.
Another downside to renting is that you cannot make any improvements to the property without the landlord's permission so even if you want to paint a room you'll need permission. Now, this probably isn't a big deal because as a tenant you don't want to be spending your money to improve your landlord's property anyway.
Another disadvantage to renting is that you are always subject to rent increases. In a stable market, these may be small but if the market is booming you can expect large increases yearly. In a poor market, the rents may go down but my experience is they go down slowly not in leaps and bounds but they certainly can go up much quicker. Lastly, many landlords will not allow pets so if you do have a pet you are limited with your options as far as properties to choose from.
So let's shift gears now and talk about some of the pros and cons of owning a home. Let's start with the pros. Well, number one is you build equity every month and with every payment. You see every time you make your payment a portion of that payment goes to paying off the mortgage. It's kind of like a savings plan, when you rent 100% of your monthly payment goes to the landlord.
Number two is owning a home helps you build long-term wealth. It's one of the few investments you can make where the gain is tax-free. Even an RRSP is not tax-free because you're only deferring the taxes until retirement but with your home, any gain in value is tax-free. Yes, gains in a TFSA are tax-free as well but there is a limit as to how much you can invest.
Now, over a long period of time, the actual value of your property is likely to increase so let's say you buy a home for $300,000 and over time it appreciates by let's say 2% a year over 20 years well your $300,000 home is now worth $445,000. If you chose to pay it off in 20 years, you would now have $445,000 of equity in your home but if you rent a home over those 20 years, you would have $0 in equity. Your landlord, however, will have made up pretty well.
Number three is that homeownership acts as a hedge against inflation. When you rent your rent payment is sure likely to go up over time. Over a few years, this may not be a big difference but if your rent goes up two to three percent a year over 20 years well, you're going to be paying a lot more in rent down the road. However, if you own your mortgage payment does not change with inflation it may go up or down depending on interest rates but if you lock into a longer-term mortgage; five years, for example, you won't have any changes to your monthly payment for at least five years.
Number four is owning will likely give you more options to own a home you truly love. Normally.\you will find there are more homes available for sale than for rent and especially nicer homes with better finishings and more upgrades. Now, I'm certainly not saying you cannot find nice rental homes, only that you will likely have more selection when buying versus renting. Also when you're buying, you might be okay with a property that requires a little bit of cosmetic upgrading; things like painting or flooring but with a rental, you're certainly not going to want to invest your money in upgrading a property you don't even own.
Number five is you can make changes to your property as you see fit. You don't need your landlord's permission so go ahead and paint and decorate as you wish and of course if you want you can get a pet or pets without your landlord's permission.
Number six is the pride you may feel from owning your own home. Now, this is certainly intangible and the summit may not be important at all but others will feel more of a sense of pride in their home if they own it.
Number seven is long-term security. Eventually, your home will be paid off and you won't have any more payments and that will be especially nice in retirement years. Instead of continuing to have to make rent payments month after month after month. So as you can see there are a lot of pros to owning but there are some downsides as well.
For example, owning will require more discipline as you will need to save up for your down payment and closing costs. There are some options out there that will allow you to use your RRSP for your down payment. You could also finance your down payment, although you will pay a higher interest rate on your mortgage. You may also qualify for an interest-free loan from the federal government to use towards your down payment but there are some conditions attached to that.
Another downside to owning is, it is easier to get into financial trouble by overextending yourself. Many buyers buy the maximum the bank will lend them but what happens if you get laid off or if interest rates go up? If you're too highly leveraged you could find yourself in foreclosure and you will likely lose any equity you may have had and it will also destroy your credit rating for several years.
Another downside to owning is that prices could go down, Now this is not a big deal if you don't have to sell because you can always wait it out. You're still paying down your mortgage every month and eventually, the prices will go back up again. But what if you have to sell when prices are down? You could very well end up losing money. Now, I've heard some people and even some agents say that prices always go up but they haven't been around as long as I have. I've been through several markets where prices have gone down. In the long term, they always go up but over shorter terms, they can certainly go down.
The question is what will they be doing when you want to sell? Well, as you can see there are a lot of factors you should consider when choosing whether to buy or rent a home. Homeownership may be the best choice for many but it's not for everyone.
If you are renting and wondering if homeownership could be right for you, call us! Let's talk! We will walk you through each step of the process! Call us at 780-462-5002 or Dwight@dwightstreu.com and set up a free consultation.
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