Rent vs. Own – Five Years Later

In case you haven’t noticed

 

I happen to be a financial nerd. When normal people go to Costco to buy some shampoo, they usually pick whatever brand they prefer or whichever smells better. I, on the other hand, start instantly calculating the amount shampoo units that can be acquired per dollar thus finding the best deal. Not really because I want to save money, but I want to compare things in financial terms as opposed to brands. Heck, I’ve calculated how much money I’ve spent on cigarettes back when I used to smoke and how much it cost me overall. I’ve even calculated return on investing into a shaver and shaving my hair as opposed to getting my hair cut every month (13,940%, risk free).

So, with our 5-year mortgage term coming to an end and going through a process of refinancing, I wouldn’t be me if I didn’t calculate what was more beneficial to us – renting for 5 years or putting money down on our own home.

Rent vs. Own is one of those topics people will never get tired of discussing. Just like movie buffs keep arguing whether or not Han Solo shot first and truck enthusiasts keep knocking Ford against Chevy, people interested in personal finance will never get tired of discussing buying your own place vs. renting.

But discussing things in general ain’t no fun. It’s also quite pointless because everything depends on your own situation. So, I’ve actually crunched some real measurable numbers using these five years as an example to figure out whether or not we’ve lost money on our home purchase.

Premise and numbers

 

– We’ve purchased our townhome 5 years ago for $285,000.

– The downpayment was $57,000.

– Similar unit in our building rents out for $1,600/month.

– Mortgage interest – 3.69%.

– We have to account for acquisition and liquidation fees in both scenarios.

– The value of our home increased marginally by $10,000.

– The market returns during the same 5 period reached 90% (S&P500)

 

If we’ve chosen to rent, we’d invest the downpayment on the open market and let it grow. At the same time we’d pay the rent month after month. At the end of 5-year period we’d cash out the investments, and pay appropriate capital appreciation taxes.

In the case of owning, we have to account for mortgage interest paid out, strata fees, municipal taxes, maintenance, and all the fees associated with acquisition and liquidation (cashing out).

 

Capture

 

Capture2

 

As you see, owning our own home cost us almost $57,000 over these five years. This includes all the maintenance costs, lukewarm increase in real estate value, money we’ve put into our home, and debt servicing costs (mortgage interest).

Renting similar unit for five years and investing our down-payment would cost us around $48,000. This includes an outstanding performance of the stock market, taxes we’d have to pay on our gains, and amount of money we’d spend on rent payments. I’m ignoring sales commissions as they’re non-existent in case of index funds. I’m also not bothering with scenarios of investing into TFSA/RRSP accounts to keep it somewhat fair.

Anecdotally, the running monthly cost of owning our home (interest + taxes + strata fees) is lower than renting. But if you add principal payments into the mix, it’s about the same.

 

Technically, we’ve lost money by buying

 

As you see, we’d be better off if we kept renting and invested our money. But I’m not about to sell our home and go invest our money instead. Many other factors are in play, and they make the difference between these two scenarios very blurry:

–  Owning our own home gave us a huge feeling of security. If you’ve ever been told you have to move because the landlord’s niece wants to live here, you know what I’m talking about. Or if you ever wanted to paint your walls yellow and pink but couldn’t because it’s not even your pad.

– The market returns were outstanding as they recovered from the recession. Ninety percent over 5 years is nothing but stellar. But moving forward, the returns will have to come down to their historic average. Personally, I’m getting a feeling that we’re in for a rough ride on the market, and expecting another run like this is rather unrealistic.

– The cost of our mortgage is about to go down drastically as the mortgage rates came down recently and a good chunk of our principal has been paid out (we’re down to $194,000). This will reduce the debt servicing portion of the cost moving forward. Rent payments on the other hand go nowhere but up.

 

 

  • jay

    You forgot the property transfer tax in acquiring costs and your realtor fees to exit would probably be more like double that, over $12,000, so realistically the difference is more like $20,000 between the two scenarios.

    You should also account for investing all of the acquiring costs. e.g. invest your down payment + transfer tax + legal fees + inspection, etc.

    Also maintenance of $350 may be true in your particular scenario, but over 5 years it doesn’t really paint a realistic picture for anyone else considering owning a home. 1-2% of the home’s value is more realistic if you wanted to make this scenario comparable to anything else, including your next 5 years.

    Another factor is that rents go up over time. They were probably less than $1600 5 years ago, but may be more in another 5 years – so the advantage tips towards owning the longer you own your home. It may have been more than $20,000 difference over the last five years, but could tip in favour of owning after another 5-10 years.

    You are right about the lower interest rates and unprecedented gains though. I would be curious to see how your scenario plays out using the new rates, and more conservative estimates of investment gains, like 6-8%.

    • Financial Underdog

      Jay, thanks for commenting.

      PTT wasn’t an issue as we didn’t have to pay it.

      Realtors fees vary, I agree. Full service brokerages charge what you’ve quoted, but there are plenty of services that would sell your home for 2-3% commissions. I’m a cheap guy, so I’d probably end up using them as opposed to Remax. Hence that particular number.

      Maintenance cost is what it was over the last 5 years. It’s not an estimate, it’s exactly what we had to pay. Next five years it can all change, and then numbers will be different. Who knows, we might get one of those special assessments.

      My expectations are the same though – the longer we’re here the more favorable owning gets. Rents go up, mortgage goes down. Market won’t climb as much, they in fact might go down. So, in five years I’ll do up another excel spreadsheet 😀