Many people I talk to have a profound fear of renting a place to live because it doesn’t provide a sense of security. “You’re paying someone else’s mortgage” or “I don’t want to move every year” are the common phrases that many people come up with when asked about renting and its benefits.
I’ve met many people who have rented before only to purchase a house later on in life because a significant change in their life warranted greater stability. This could include marriage, having a kid or getting a steady full time job in a big city. All of these life events don’t really coincide with any specific reason why renting is bad. Most don’t want to rent because they feel it’s necessary to achieve some kind of social stability and fit into a social mode.
I actually don’t condone renting as a way to provide stability in life. In fact renting can be very advantageous because generally, in an expensive city, renting provides greater cash flow that can be used for investments that can actually turn out to grow faster than owning a house. Renting also gives the flexibility to move to different jobs in different cities if a better opportunity rises. Lastly, renting allows the person to “try out” the neighbourhood before assessing whether owning a place in the same neighbourhood is worthwhile.
I’ve rented and haven’t had to move every year, I haven’t been evicted every time my lease has expired to make way for a family member, nor have I experienced two fold rent increases that many other people have had to deal with. When I first started renting, I also had the fear that I would have to move all the time, but after a a few experiences of my own, I feel I can share some of my experiences that proved to be worthwhile in establishing a stable home.
Know Your Landlord
Unfortunately in popular cities, many buyers of condos and properties treat their purchases as a commodity rather than a home. What does this mean? In a rising housing market, many buyers are just speculators and flippers. This means they have no desire to continue renting their properties, but rather flip them to the next speculating buyer for a bigger profit. However, with Canadian rules to owning, these buyers are trying to declare their homes as primary residences and hold them for 1 year to avoid paying capital gains taxes. Yes, the behaviour of many home owners are just tax cheats. The ones maybe Mr. Trudeau should really be targeting.
Since there are many landlords out there that are just amateur investors and flipping speculators, it’s important to find a place where the landlord is serious about being an investor for the long term. What does this mean? As much as it makes sense for the landlord to interview the tenant, the tenant should also interview the landlord. Does she plan to hold on to the property long term? Who takes care of the maintenance of the unit? How many properties do they own?
A serious landlord is one that actually has a plan. Those that don’t are likely just trying to make a quick gain. A proper investor has made a plan to rent out the unit for the long run because the rent is a way for them to make interest on their principle that they’ve invested on the house. If a speculator bought the house, most likely they have a short term mortgage and know nothing of taking care of their property. If this is the case, it’s a red flag.
Sign A Longer Lease
This one blows away most people I talk to. Whenever I talk about signing a multi-year lease, people give me this blank stare like “WTF are you talking about?” Yes, it’s true. In most places where you rent it’s possible to negotiate a longer lease term. Most people don’t know this or don’t try to do it, but a longer lease with the landlord usually works in favour to both parties.
A longer lease means that, as a renter, you no longer have to worry about moving every year. With a binding lease, the renter has all the power because the lease needs to be honoured for the entire duration. What does this mean? This means that even if the owner wants to sell the property, the new owner must honour the lease. Yes, that’s right! Even the new owner who wants to live in their newly purchased home needs to wait until the lease expires.
A longer lease will help provide much more security. It’s even possible to sign 5 year leases, though rare, to ensure that kids’ lives don’t get disrupted if that is what you are looking for. Longer lease terms can also have rent increases spelled out and provisioned so that there are no surprises, though with recent legislation, cities in Ontario like Toronto are now completely protected from exorbitant rent increases.
Not only do long term leases have the benefit of not moving, but it allows the renter to manage their monthly budget better. There are no additional moving costs, there are fixed rent increases that can be planned for. The renter can get all that plus the extra cash flow that renting will usually provide. If a long term rental agreement isn’t what you could be looking for, you’d have to ask the question, do you really want to live on your own at all?
Know Your Rights
The tenant acts for many provinces and cities cover many aspects of renting that are all in favour to renters. As a renter, it’s important to know your rights. Study all the rules of the act and make sure the landlord doesn’t take advantage. Most landlords want to do the minimum necessary possible, some don’t even know what it means to be a landlord so it’s more important as a renter to know.
A landlord needs to keep the rental in a reasonable condition. This means the heat must be working, the water must be running and there shouldn’t be any infestation of rodents or insects running around. If the landlord refuses to comply with fixing these issues, the renter can apply to have rental costs refunded. The key for a renter is to continue paying rent rather than holding the landlord hostage. Document all the violations and notify the landlord of the things that need to be corrected.
A serious landlord will know that they will have to fix these issues or be hit with a penalty. A renter should make sure they don’t get bullied just because they don’t own the property because the renter is also not responsible for the maintenance of the property. If the renter is just living and doing day to day things, things that break down over time are solely for the landlord to replace. That’s the kind of piece of mind that a renter gets. She doesn’t need to worry about saving to replace appliances or fixing leaky roofs. All those savings can go into investments that can eventually make the renter financially independent.
The scariest part for a renter is that at the end of the lease, they haven’t accomplished anything for themselves. The feeling is that during the whole time she has stayed in someone else’s place, they are just paying someone else’s mortgage rather than their own. While that statement is true, it doesn’t mean the renter is worse off.
The most important lesson to achieving financial independence regardless of being a home owner or a renter is to pay yourself first. This means saving money should be the first priority. As a renter, this means that it is important to save the money that would have went to buying a home.
For instance, buying a home incurs large sunken costs that no one will ever tell you about. Most people pay their mortgage and just know that after 25 years or so the house will be paid off and they will no longer mortgage payments. That’s great, but home owners don’t know the final cost of their house because maintenance fees, property taxes and interest payments will vary over the 25 years.
A renter in a rent controlled environment with a long term lease can achieve greater stability over a 5 year period than a home owner because the only cost is the rental itself. This means that a renter should be able to save the difference they are saving between buying a home and renting a home. For instance, buying a new home with a $500,000 mortgage will incur $2385.22 a month with a 2.8% five year mortgage. Add $200 in maintenance and a $300.00 property tax bill and the fixed cost of owning the house would be closer to $2800.00.
Now say that a similar home in that price range can be rented for $1900. With a single fixed cost, it easy to determine how much extra money that a renter would have in their pocket at the end of the month, $900.00. The real discipline for the renter is to not to spend that money. That $900.00 should be saved and invested in a diversified balanced portfolio. Not Bitcoin or Tesla, but a balance diversified portfolio.
This extra $900.00 saved per month will go a long way to establishing a growing dividend paying portfolio that could easily outpace 7% annual growth in the long term. That’s how a renter can achieve financial independence. But that’s not it, considering that a homeowner should also be saving as well, the renter can actually save more! How much more? Well if as a homeowner paying more she can save an extra $500.00 per month after paying the mortgage and fixed costs, then the renter should be able to do the same without lowering her standard of living. This makes the monthly savings closer to $1400.00 per month for the renter.
If the savings of $1400.00 per month for a renter is compounded over 5 years with 7% annual average gain while adding the same $1400.00 every month for 60 months, the renter will come up with an investment portfolio valued at over $96,000 versus just over $34,000 for the home owner. That’s an additional $60,000 over 5 years of increased cash flow, flexibility and decreased risk of not having to deal with rising interest rates and broken dishwashers.
If someone were to make the argument that home ownership is much more stable than renting, that’s because they’ve already made up their mind that home ownership is what they want. The argument is presented to justify their decision and the response that home owner is looking for is just assurance. That’s perfectly fine, because everyone has their right to opinion and how they want to live their life.
As a renter, there shouldn’t be any shame because a renter can also find stability if done the right way. Just don’t go chasing the latest and greatest housing fads. Turn off HGTV, go out and enjoy great weather or the culture of the city you rent in. Let the home owners worry about the granite counters and waterfall sinks, that’s just not what a renter cares about.