Rent

The “Buy a Home” debate is a big one…and there isn’t one right answer for everyone. Following are some 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, or the washing machine breaks down, tenants get to call their landlord. It’s not nearly as much fun when it happens in your own home.
  • 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. 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. Then at retirement, hopefully you will no longer have a mortgage.  With renting you are still paying someone else’s mortgage after retirement.
  • If property prices go up, you reap the rewards, not your Landlord. Of course, that works in reverse too.
  • Sometimes it’s cheaper to buy. Toronto’s rental market isn’t easy or cheap. If you have a decent-sized down payment, it could be cheaper to own than to rent.
  • 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 Mexico, buying will be a better long-term financial plan.

Real Life Example:  Rent vs. Buy

Property: 900 Mount Pleasant RD

  • 1 bedroom + den
  • 696 sq.ft.
  • Can rent for $2,100/month (April 2018)
  • Can buy for $550,000 (April 2018)

Costs to Rent

  • Monthly rent: $2,100
  • Monthly hydro: $80
  • Monthly insurance: $40
  • Total Monthly Rental Costs: $2,220

Costs to Own

  • Down payment: $55,000
  • Costs to Buy: $2,400 (land transfer tax after first-time buyer rebates + legal fees)
  • Mortgage: $2,282/month (assuming 10% down payment at 2.69% interest with a 25-year amortization)
  • Condo fees: $420/month (includes heat and air conditioning)
  • Hydro: $80/month
  • Property taxes: $200/month
  • Insurance: $65/month
  • Total Monthly Costs $3,047 

Conclusion: It costs an extra $827 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 $133,200 in rent/hydro (assuming no rent increase – usual rent increase is about 2% per year)
  • They will have increased their landlord’s equity in the property by around $150,000, but will be walking away with nothing

The Owner:

  • The money the tenant paid for the rent will cover the owner’s monthly expenses (mortgage, condo fees, taxes, insurance) and then some.
  • Price appreciation if they sell: $151,955  (based on modest condo price appreciation of 5% x 5 years in Toronto). Prices in 2016-18 have been much higher than 5%.

Net Proceeds from the Sale after 5 years

    • Sold Price: $702,000
    • Costs to Sell: $37,000 (assumes 5% for commission + legal fees)
    • Remaining Mortgage after 5 years: $416,800 (from original $550,000 mortgage)
    • Net Proceeds: $248,200

Conclusion: The Owner walks away with about $250,000 more than they initially invested. 

Of course, it’s never that easy. Other things to consider:

  • The Renter could have chosen to invest the initial $55,000 down payment
  • The condo price appreciation can vary significantly depending on the period and the area
  • 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 down payment.
  • 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. If you might be moving to England 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. About 15 years ago and hadn’t even considered a career in real estate yet, I was living in a great area at Yonge & Eglinton and paying $970 per month for a great 1250 square foot condo. I loved the area and did not want to move.  I decided to invest and bought a condo that was half the living space for $118,000 and it wasn’t quite Yonge & Elginton.  Today (15 years later, I’m back at Yonge & Eglinton and my condo is worth nearly $1 million.  Fifteen years ago 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.

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.