How to Decide Whether to Rent or Buy

Decoded   |   November 30, 2017

Chew on this story: The Myers family have been happy homeowners for 12 years. Last spring, however, they decided to put their Mississauga, Ontario home on the market and try an “experiment” of renting in the same area.

“There were a lot of considerations that went into our decision,” says Edward Myers. Considerations that we can all understand, like skepticism when it comes to the housing market’s future, wanting to downsize and the desire to invest the money made from selling a home. Long story short, their family of four—plus a dog—decided to return to the renter’s market.

For a lot of us, today’s rising home prices mean that the old standby of get a job, then buy a home is being redefined. While home ownership still makes sense for a lot of people, there are more and more choices available. In a market where “cozy” lofts regularly sell for north of a million dollars, buying a home isn’t for everyone.

Here’s how to decide if home ownership is really for you.

 

Do you have the money, honey?

“Before you even start looking at home ownership you need to clearly define what you can afford,” says Limor Markman, a real estate investor and financial expert.

It’s getting increasingly difficult to qualify for a mortgage. You need a steady, full-time income, good credit, and you can’t be holding onto too much debt, which can be, well, a lot to ask.

Then, there are the start-up costs. You also need to have a significant amount for a down payment—at least five per cent; 20 percent if you don’t want to pay added Canadian Mortgage and Housing Corporation (CMHC) fees. As well as extra money for closing costs such as land transfer fees, appraisal fees, legal and realtor fees. In other words, the down payment is only the tip of the proverbial iceberg.

 

Can you live the life you want and own a home?

Once you’ve established that you can financially afford to buy, you need to see if your lifestyle can afford a home. “If you’re not going to live there for at least three to five years it doesn’t make sense to buy,” says Markman. You won’t make your money back when you factor in all the expenses.

Renting can give you a lot more flexibility if you think you may have a job transfer in your future or you like to travel. It’s also great for people who get restless and like to change things up.

 

Will you have any money left to play?

Now’s the time when you look at how much money you’ll have left after your mortgage and see if it’s enough for day-to-day lifestyle. “People don’t know the true cost of home ownership once insurance, interest, taxes and home improvements are taken into account,” says Myers. Disposable income is worth saving.

 

What kind of saver are you?

The Myers family is fiscally savvy and has researched investing their capital from their home, however that is not typically the case. “Not everyone is so sophisticated when it comes to investing,” says Markman. “The truth is that the average family will need the capital from a home to fall back on in retirement.  If you don’t own a home you need a strong financial savings plan as an alternative.”

 

Try a hybrid solution

If you like the idea of investing in real estate, but it doesn’t fit with your flexible lifestyle or you can’t afford the start-up costs, consider a hybrid option. Increasingly millennials are buying their first home on the outskirts of major cities and renting it out. “Then, they rent in the city,” says Markman. With this strategy, you get the benefits of growing equity and can get into the real estate market in a more affordable way. It’s also a great way to generate passive income from tenants, and it forces you to save.

The important thing to know is that there are more options than buying an expensive home in a large city center. It’s just a matter of finding the housing plan that best suits you and your life.

 

—Nancy Ripton


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