Case #1: Buy It Or Rent It?

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Canadians love real estate. Let’s face it we’re all infatuated by it, but sometimes we have to question our desires to see if buying is actually better than renting at a financial level.

I’m a true believer that you can’t put a price on emotions. That’s why if your heart and life goal is set on owning a home. You should do it. There is nothing wrong with declaring that your goal in life is to own a house. Many people feel the same way too.

But if we’re going to break down the financials instead and understand what’s better for your bottom line. Let’s break down a comparison. For this I chose a popular and expensive city like Toronto.

Toronto has a hot housing market. The hottest in Canada thanks to the slump in Vancouver. We all saw that coming. Toronto is the center of the universe. It has sports teams in all leagues. Attracts immigrants like no other city in the world. It’s also one of the fastest growing and has a huge technology industry soon to rival San Francisco.

This makes Toronto an ideal city, but does the price to buy actually make sense versus renting? Let’s see.

The Rental

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This is a penthouse suite in the heart of the city. Bay St in Toronto is known for where young professionals and investment bankers like to walk around. If you ever watch the show Suits, then you’ll know what I mean.

At $2,500 a month rent, Toronto isn’t cheap. It can be stated that this is an exorbitant price to pay for just 600 square feet of space, but Toronto doesn’t come cheap and there is a severe lack of supply of homes.

The Purchase

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Buying a unit that is similar to the rental place in the same building yields a cost of $683,000. In most cities this would buy you a mansion in Canada, but in Toronto this will get you a little more than 600 square feet.

Assuming a down payment of 20% on the unit, the mortgaged amount would be $546,000. With ultra low interest rates back now, one can qualify for a 5 year fixed at a really cheap 2.94%. This makes the monthly payment $2,569.02.

The monthly payment is a bit more than renting, but part of that goes back to repaying back your loan. This means every month, you end up saving $1,248.61. That means the interest payment is $1,320.41.

Buying is starting to look really good right now. That’s because only $1,320.41 is being thrown away, but let’s not forget the maintenance fee and property taxes that have to be paid by owning. The maintenance on the unit is $407 a month. The property taxes are $229.84 based on previous assessment. Add those two to the total and the throwaway is now $1,957.25

The last factor we have to consider is the opportunity cost of owning. The 20% down payment amounts to $136,600. This is money that could be invested. For the purposes, of this study, we assume a guaranteed return. That’s because both the condo and investing can have capital gains but we can’t be sure.

What we can be sure of is the guaranteed return we get from high interest savings. If we move the money around we can find some deals where money can get 3.25% in interest (Manual Life HISA). That amounts to $369.95 a month.

The total opportunity cost to own now is $2,327.20 a month.

Buying Is Better

When you compare the numbers straight up. Buying is better. At $2,500 a month to rent versus $2,327.20 a month to buy it makes more sense to buy rather than rent because there is a net savings of $172.80 a month to buy.

This is a case where rental prices are high enough that it justifies buying over owning. Not every market is the same. So it’s important to do your own study before determining whether buying or owning is better from a financial standpoint.

Do Not Buy

When does it not make sense to buy? If you don’t plan on staying in the place for more than 5 years it really doesn’t make sense to buy. Real estate transaction costs have exorbitant fees. This includes lawyer fees, moving costs and also 5% in real estate agent fees. Buying and selling a home is a lot more expensive than buying and selling stocks.

It’s also much harder to sell a home in a blink of an eye. That’s because someone that is looking at the place needs to like it before getting an offer. That’s why homes are less liquid. It can take weeks or months to sell a house, so that is something to consider.

Another reason not to buy is if you will find yourself in a house poor situation. It will actually take more monthly cash to buy than rent because of the maintenance and property taxes. Just be sure that these extra fees don’t restrict your ability to live comfortably.

Always Buy

If you have the means to buy and pay for a home, and you have an emotional attachment to home ownership, you should always buy. No question about it. There is nothing wrong with making owning a home as a life goal. It’s the North American dream! It’s also something than many people can share and be proud of. So if you can comfortably afford the mortgage payments, by all means buy and don’t let the numbers sway you otherwise.

I can’t stress enough that you can’t put a price on emotions. So even if or when you determine a home costs more to own than rent, you should buy. Sometimes the extra gratification you get from home ownership exceeds the few hundred dollars a month you might be missing out.

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