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If you are considering moving into a home of your own, your search for the perfect property may start with a single, deceptively straightforward question: “Do I rent or buy?” To make an informed decision you need to do a lot of research into what is involved financially with each option and to be brutally honest about what you can afford. Keep in mind, however, that crunching the numbers is just the first step to making this big decision.
Your finances
Your finances are the first issue to address when making the “rent or buy” decision. Your finances consist of the money you have saved, your income, your credit rating, your pre-approved mortgage potential and any loans you can obtain from family and friends. In both renting and buying, your finances need to cover all kinds of expenses.
Upfront costs
These are the costs that you pay before moving into the property.
The upfront costs when renting may include a non-refundable application fee and returnable (full or in part) deposits for general damage during your tenancy, move-in and pet damages. In addition, you may be required to pay the first and last months’ rent in advance.
If you are buying a home, you will have different and more expensive upfront costs. These include, but may not be limited to, the down payment of traditionally up to 20% of the selling price; a deposit when you make the Offer to Purchase; the home inspection fee; legal and administrative closing costs of less than 1% of the purchase price; land transfer tax which is a tax bracket system that ranges from 1% – 2.5% of property purchase price; and reimbursement to the seller for prepayment of property taxes or utility bills.
An additional cost in Canada is the CMHC insurance of 2.8% – 4% if you put down less than 20% of the purchase price as a down payment.
And whether you are renting or buying, do not forget the moving costs.
Recurring costs
Whether you are renting or buying, the main monthly outlay is the rent or the mortgage payment. With a mortgage payment, you have the stability of the payment amount remaining the same for the mortgage term; when renting the property owner can raise the rent if legally allowed.
Many renters will have utilities and cable costs included in their rent, while homeowners have to pay for these themselves, along with property taxes, property insurance and condo fees (if it is not a freehold). Both renters and owners will want to obtain home contents insurance.
Tax benefits
Homeowners have various tax breaks depending on where they live. In Canada, the mortgage interest on a primary residence is not directly tax deductible but all capital gains upon selling the home used as a primary residence are tax exempt. In the United States, if you own a home you can take the mortgage interest as a tax deduction.
Renters do not (generally) get tax breaks for the rent they pay for their home unless it is being used for work purposes.
Maintaining a home’s value
If you intend to stay in the same place for the next five or more years, buying may be a better option, financially, than renting. If you buy a home, you have purchased equity in the property – that is your share of the property (as opposed to the bank’s share) over time. This increases your net worth as you pay off more of the mortgage principle or if the value of your home rises. In the long term, home appreciation beats inflation, especially for freeholds because of limited land availability.
It is in your interest to keep your home’s value as high as possible, and that is where home maintenance comes in. It is all up to you. And it comes down to your skills vs. money – DIY or hiring an expert – and even doing-it-yourself requires you to purchase tools and materials. You can plan for ongoing and seasonal maintenance and even for large renovation projects, but it is the surprise problems, small or large, that may tap into your savings.
If you are renting, you have no equity in your home and if anything goes wrong, you just call the property owner who has the responsibility and cost of fixing the problem.
Making the decision
You have crunched the numbers and know whether you can afford to buy a home or if you should rent. But hold on, even if you can afford a home, it may not be your best option at this moment in time.
If you think that you may need to move around in the next few years, then buying a home may not be the best choice. The upfront costs are significant and will soon mount up if you move and buy more than once.
The decision to rent or buy may be taken out of your hands depending on the state of the rental and real estate markets in your desired neighbourhood. There may not be many houses for sale or they may be out of your price range. Conversely, there may not be many affordable rental units.
Along with this, you may only be able to afford to buy a home in a neighbourhood that has a long commute from your workplace. Renting a home close to your workplace will give you more free (non-travelling) time in place of owning your own home.
For both buying and renting, it is still recommended to work with local real estate agents who are experts in their geographic areas and can answer any questions you may have about renting or buying
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