Rent or buy?
Whether to rent or to buy is an age-old question and the answer is not simple. Put rent vs buy in any search engine and you will find a myriad of arguments for both sides. Although there are positive points on both side of the argument, what is not true is that one solution, to buy or to rent, is right for everyone. This blog is not about arguing about renting vs buying, but rather a look at why I believe buying a home is the right choice for families with children who can afford to buy and for people who do not have a pension plan that will allow them to live at the same standard of living when they retire. I don’t claim to know all, but I do have experience helping many families move and an understanding of their needs.
Not everyone is in a position, nor can everyone afford to buy a home so buying is not always an option. Affordability is changing, but if you are fortunate enough to be able to purchase a home and you have children, home ownership can make a difference for your family. Most families want to know their children will be able to stay in the same school throughout their primary school years. Owning a home can provide that stability. Children get to know other children in the neighbourhood and establish lifelong friendships. According to CDC and their study on Essentials for Children, children thrive both physically and emotionally in a stable environment.
A renter with a growing family typically wants to live in a single-family home where they have a back yard and space for all family members. One of the down sides to renting a house is that the renter can get into a situation where they can be forced out of their rental property. It could be that their landlord decides to sell the home or it’s the end of a lease and they have a better tenant. There is a myriad of other reasons as the landlord is in control of who, how and why they rent a property. What ever the reason, a renter can be forced to move and if they want to remain in the same community, they need to find similar accommodations at a similar rental rate near by to keep their children in the same school. This is rarely an easy feat. If the renter is OK with the transiency that renting can cause and the children don’t care if they stay in the same school or neighbourhood, renting may be the right choice, but when children stay in the same school and live, play and establish longer friendships with ties to a community it creates a healthier emotional environment .
Whether someone chooses to rent or buy will also have a substantial affect on the big “R”… Retirement. Yes, money can be saved through renting vs paying a mortgage in Calgary at this moment in time, but this may not be true in the future nor is it true in many other cities across Canada. If the difference between buying and renting is invested, it will create a larger nest egg to retire. This is often an argument on the pro side to renting.
So, what about retirement? How will a renter finance monthly rental payments once they retire? Most home owners have their mortgage paid by retirement and many have it paid long before that. Retirees who are home owners with a fixed income can support themselves comfortably on a pension and or RIF funds. If you are renting when you retire, the rent money will have come from your pension or the interest earned on the funds you put away for your retirement.
Let’s look at a likely scenario for the finances of a renter who wishes to retire. Instead of making a purchase, the renter takes the initial investment of $50,000.00 that would be used as the down payment on a home and adds a monthly investment of $1,000.00 saved by not carrying a mortgage and invests that at an annualized interest rate of 3% compounded monthly. According to Waki Saeed, mortgage specialist at BMO, that investment will be worth $705,579.00 after 30 years.
Buy the time our subject has $50,000 in ready cash they would, most likely, be in their early thirties and have about 30 years of employment left until they wish to retire. Based on groupbenefits.ca pension plan calculations, if our subject has a $100,000 /yr income the annual pension benefit in an “excellent” retirement plan would be around $60,000. Thus, the monthly retirement plan income would be $5000 and after tax it would be closer to $4000.
The total retirement income for our subject becomes the sum of investment income combined with pension funds. The investment will continue to earn 3% compounded monthly at an annual return of $21,460.86, or $1,788.40 per month before tax and @$1200 - $1300 after tax. The combined income upon retirement will be @$5300. The question becomes, how much rent will this individual have to continue to pay after retirement. Will the $1300 per month from the investment be enough to cover the rent so they would be on equal footing with a home owner in the same situation. According to CMHC, average rent increases vary from province to province, but a safe estimate on rental increases over time would be 1.5% annually. If our subject renter was paying just $1000 in rent when they started saving, their rent would be at least $1500 per month in 30 years. Given that a home owner has other monthly expenses, a retired renter would, at best, be on equal footing with the retired home owner because they must continue paying rent throughout their lifetime, where the homeowner would not. The home owner would also have the benefit of their home appreciating in value over time, while the renter would have to use the earning from the investment to maintain the rent.
Is it better to be a renter or a property owner? Can either be in a better situation at retirement by renting or buying? Financially, I think the outcome in the two scenarios are similar, but the emotional benefits of ownership outweigh those of rental for most families with children and in the renter’s retirement scenarios there must be consideration for how the rent will be paid. The real question comes down to quality of life in both of these situations.
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Jim Perks is a REALTOR in Calgary, Alberta, Canada. He uses his expertise in Internet marketing and real estate experience to service both his buyers and sellers throughout the city of Calgary. He can be reached at RE/MAX Real Estate (Mountain View) 403-247-5178 or by email at email@example.com. His website is www.calgaryrealestateagent.ca
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Jim Perks is a Calgary REALTOR who divides his time working with both sellers of houses and buyers of homes. He has been an agent since 2010