Real estate is a hot topic in Metro Vancouver and for good reason – it seems like every other day there’s a new report naming Vancouver as one of the most expensive housing markets in the world.
Buying a home has long been held as the ticket to achieving financial success. And home ownership has worked out well for many people – your parents are likely a prime example, or that friend who bought just before the market really took off.
You may even be kicking yourself now, thinking you shoulda-coulda-woulda tried harder to buy if only you knew what you know now. But we can’t go back in time. There’s no DeLorean that will take us back to the future at 88 miles per hour (yet).
So if you’ve been priced out of the current real estate market and buying a home isn’t a realistic option for you, what should you do?
While there’s no magic answer, the good news is: renting can definitely be part of a sound financial strategy.
Renting provides more predictable costs, an opportunity to diversify your investments, more time to enjoy other areas of your life, and more flexibility for movement or change. But you need to have some discipline when it comes to saving.
Here are five things that renters can use to their advantage.
1. Predictable costs
Your rent is a fixed cost that is fairly consistent and predictable, which can make planning and budgeting much easier. There are protections against huge and sudden rent increases, plus landlords are responsible for the cost of home maintenance and repairs. Homeowners, on the other hand, are more vulnerable to unexpected expenses like maintenance and repairs, as well as potential mortgage rate increases. As a result, renting often ends up being much cheaper than your total monthly costs would be as a homeowner.
2. Save some of the difference
Owning a home is like having a forced savings plan. By paying down a mortgage, you are building up equity and working to pay off a mortgage to decrease your costs in retirement. Over time you realize tax-sheltered growth in the value of your home.
As a renter, you don’t have this built-in savings plan, so you need to be more proactive. By saving some of the difference between your costs as a renter and what your total monthly costs would be as a homeowner, you can grow your net worth over time.
Check out the example below that compares the cost of renting versus buying a one-bedroom condo and looks at some possible saving scenarios.
If you rent and save, you are able to invest into a diversified portfolio across multiple assets and regions protecting you from a downturn in any one particular geographical location or industry. By comparison, if you own a home and have no other investments, you essentially have all of your eggs in one basket. If real estate experiences a significant and prolonged correction, your net worth could be affected more than if you were well diversified.
Another advantage for renters with diversified savings: you can dip into your savings in an emergency (such as health issues, job loss or family responsibilities), whereas homeowners may be forced to go into debt by using a home equity line of credit, eroding the equity they’ve built in the process.
4. Time is money
As a renter, you will likely have less household repairs and maintenance responsibilities than a homeowner. With this free time, you could perhaps be working and earning more money. Or you could use the time to do things like rest, travel and exercise, which provide significant value from a lifestyle perspective.
Very simply, when you rent you can move with one month’s notice or when your lease is up. When you own a home and want to move, there are a lot more variables to think about. Considering what stage you are at in life or what you value, you may not want to be tied to a house, mortgage or particular neighborhood.
As a renter, stability is also a very desirable factor. Moving is a huge chore and having an unanticipated eviction or ‘renoviction’ notice placed upon you can cause a lot stress. There are regulations in place to protect renters from unlawful eviction notices, as well as new programs being created to increase the amount of stable and accessible rentals in the region.
Example: renting for 25 years
Let’s compare the cost of renting versus buying a one-bedroom condo and look at some possible saving scenarios.
For this example, I found a one-bedroom condo in downtown Vancouver (600 ft2) that was recently listed both for rent and for sale:
- Rental price: $2,300/month
- Purchase price: $712,800
The following rates are assumptions and not guaranteed.
- 25-year period
- Portfolio growth of 5% per year net of fees, based on a growth portfolio
- Mortgage rate of 3.50%
Rent: $2,300/month, which includes:
- Tenant insurance: $25/month
Buy: $3,915/month, which includes:
- Down payment: $71,280 (10%)
- Mortgage: $3,302/month (includes CMHC fees)
- Maintenance and renovations: $200/month
- Insurance: $50/month
- Property taxes: $100/month
- Strata: $263/month
Difference between monthly costs to buy vs rent: $1,615/month ($3,915 – $2,300)
It may be unrealistic to suggest that you could save this much money every month, but looking at these numbers does give you a sense of how much you’re saving out-of-pocket by renting instead of buying.
Since, as a renter, you don’t have a built-in savings plan, you need to be more proactive in order to grow your net worth over time.
Here are a few savings scenarios to consider (based on 5% portfolio growth listed in the assumptions above):
Savings scenario 1: You’ve saved up $50,000 for a down payment, but still can’t afford to buy into the real estate market. Instead you invest that down payment, plus $500/month for the next 25 years.
If you save and invest the $50,000 down payment plus $500/month over 25 years, you would have $471,819.
Savings scenario 2: You’ve started saving up for a down payment and have $20,000 so far. You decide to invest that down payment, plus $300/month for the next 25 years.
If you save and invest the $20,000 down payment plus $300/month over 25 years, you would have $242,278.
Savings scenario 3: You don’t have a savings nest egg yet, but decide to invest $200/month for the next 25 years.
If you save and invest $200/month over 25 years, you would have $119,102.
As you can see, it is possible to achieve a healthy net worth as a renter. The key is to start early and be a consistent saver.
As always, we recommend that you talk to your financial institution to get more specific advice. You can talk to a financial planner at Vancity about options relating to your specific situation. Not a Vancity member? Join us.