Is it better to buy a property or to remain a tenant?
Buying a home is often touted as an important life goal for young adults to achieve, but is it really always the right choice? Finance experts explain who investing in real estate is a good idea for, and who it isn't.
“The deciding factor [in buying a home] is going to be the a person's interest in being a homeowner”, starts off with Marc-Olivier Desmarais, financial planner.
Here he is talking about the excitement of owning a home in oneself and to be able to do with it what one wants. “A tenant cannot put the accommodation in his image, move the walls, redo the kitchen if he does not like it… »
He believes that the question must therefore be asked: does the satisfaction that one derives from being an owner justify the additional cost associated with it?
A house: not necessarily the best investment
From a purely economic point of view, Marc-Olivier Desmarais does not believe that buying a property is necessarily the best choice, since it forces you to go into debt.
“Through monthly mortgage payments, you have to repay capital, but you pay a lot of interest. There is a discourse that says that by paying rent, you throw money away, but you also throw money away by paying a lot of interest to the bank,” he explains.
Still from an economic point of view, the expert believes that buying a house is a very concentrated investment. “If I have all my assets in my house and something happens to my house, all my assets are affected. Putting “all your eggs in one basket” means exposing yourself to more unpredictability, according to him.
On the other hand, by placing your money in the market financial, Marc-Olivier Desmarais believes that we can diversify the risk. If someone invests the same amount in the financial market as they would in a house for a long period of time, it will make them “a bloody good pension fund”.
Read also: How to obtain the necessary funds to buy a property?
Who shouldn't buy?
Anyone who wants to have more cash in the short term would do better to stay in an apartment, believes Gabryel Laflèche, a personal finance specialist. “Renting a home is definitely cheaper than buying a house”… even if the rents increase enormously these days. He reminds us that there are mortgage payments to consider, but also maintenance costs, municipal taxes, school taxes, repairs, snow removal, etc.
And any savings made by agreeing to remain a tenant can be placed in RRSPs, TFSAs or other non-registered accounts, adds Marc-Olivier Desmarais.
Staying a tenant is also ideal for people who don't like a sedentary lifestyle, says Gabryel Laflèche. “Renting offers the very big advantage of being able to decide not to renew your lease, and to move at very little cost. An owner must incur significant costs to sell his property and move. »
It is also beneficial for those who need peace of mind. “When renting, you have no responsibility for accommodation. If a problem arises, it’s not up to you to take care of it,” emphasizes Marc-Olivier Desmarais.
Simulations to give an idea
For comparison purposes, Hardbacon, a Metro partner, simulated buying and renting in two Montreal neighborhoods: St-Michel and Sud-Ouest. The price of the properties comes from the Centris site.
Buy or rent in St-Michel
Scenario 1: Buying a house in St-Michel in 2023
In 2022, the average cost of a single-family home was $600,000 in Villeray, St-Michel and Parc Extension. This is the amount used for the calculator. We anticipate a down payment of 5.83%, or $31,000, an amortization of 25 years and an interest rate of 5%. The monthly payment is $3,332. All start-up costs are added. We are talking about $5,000 to $10,000. At that price, we can't afford renovations.
The annual increase in home value is set at 3%, which is about average. With the cost of insurance and other monthly fees, the total per month comes to around $3,800. After 25 years, you have total assets of around $1 million.
How much income do you need to buy a house in St-Michel?
To simulate this situation, Hardbacon used a mortgage eligibility calculator. One would need a gross income of $104,000 to get a mortgage. In this simulation, the person has no other debt.
Scenario 2: renting an apartment in St-Michel and investing the difference
Suppose we live in the same 4-room apartment that we pay $950 per month for five years. Since our salary is $104,000, we can afford to save about $2,850 per month. Indeed, if we take the difference between the monthly cost of $3,800 for the house and the rent of $950, we arrive at this figure. By projecting a return of 5% per year, we will have accumulated more than $1,500,000 in 25 years.
The difficulty of this approach – which, yes, is more advantageous in this scenario – is to save and invest this huge sum every month. We bet that few human beings will manage not to be tempted and use it to consume: travel, restaurant, car, the temptations are numerous!
Buy or rent in the South-West
Scenario 1: buy a condo in the Southwest in 2023
In the Sud-Ouest borough, the median price of a condo is $455,000. This time, at a comparable rate, the monthly payment would be $2,626. Add condo fees of $150 per month, insurance and taxes for a total of nearly $3,000. After 25 years, assets should approach $900,000.
How much income do you need to buy a condo in the Southwest? < /p>
To meet this expense, one must earn at least $72,000 per year. Considering that one might want to buy a car or get a loan for something else in the future, you should err on the side of caution and aim for a less expensive property. Being in maximum debt is stressful!
Scenario 2: rent an apartment in the South-West and invest the difference
Apartments in this area are more expensive than in St-Michel. The rent costs $1,100 per month. If we manage to save the difference, the rental remains advantageous, but the difference decreases in comparison to St-Michel. After 25 years, the asset should cross the 1 million dollar mark.
If you choose to stay in an apartment, it will not be too late to change your mind and use this impressive savings for a down payment! A larger down payment reduces the loan and may save mandatory CMHC insurance. The purchase will thus become more profitable.
In short, to answer the question buy or rent, a panoply of variables come into play. In the end, the important thing is not only to think to their bank account, but also to their personality and the kind of life they want to live.
In collaboration with Hardbacon.
