Buying a home is the biggest purchase you'll ever make — but who says you have to make it? Welcome to New Lease, a series that examines our long-held beliefs about home ownership and renting in Canada.
You should be paying your own mortgage, not your landlord’s. Rent is like throwing money away. Buying a home is the best investment you’ll ever make. Chances are, you’ve heard these pearls of wisdom a few (thousand) times before — whether from your parents, your know-it-all uncle, or that condo-owning friend who lived at home rent-free for nearly a decade after graduation.
But in light of the pandemic, with almost 64% of millennials and 70% of Gen Z feeling the financial crunch, a struggling job market, and many Canadians owing an average of $1.77 for every dollar they earn, saving up enough for a downpayment on a home might be as realistic as telling yourself you’ll change out of your yoga pants some time soon. The good news: Home ownership, though great for some, isn’t necessarily the best or the most-attainable investment for everyone, which is why we need to stop vilifying renters — paying a landlord isn’t a waste of money! You can still be financially smart, even if that means never owning your own place. And with rents softening (more on that below), housing prices climbing, and work, school, and life remote for many of us, now might be the best time financially to be a renter. Here's what you need to know first.
Start with a budget
Ideally, housing costs shouldn’t be more than 25% to 30% of your monthly household income. It might be easier to hit this target when renting because, month after month, it’s a fixed, predictable cost. Think about it. When you own, you're not just making your mortgage and interest payments. There’s the utility bills (often higher than those of renters), home insurance (often more expensive than renter’s insurance), and property taxes, as well as general upkeep.
For example, when the upstairs neighbour’s dishwasher water starts endlessly spewing out of my kitchen sink (true story), I curse a little (a lot), call the super, and move on with my life. They call the plumber, fix the drainage, and most importantly, they foot the bill. If I owned the place, that’d be a whole different — and more expensive — story. Condos cover some maintenance, sure, but for a price: Owners should expect separate, additional condo fees, which are an average of $628.02 a month in Toronto, for example.
BTW, when you're renting, that plumbing bill can’t be randomly added to your rent, either, nor can your rent be increased more than 2.2% every year, which means zero surprises for your bank account.
Yes, you can negotiate your rent
With so many people now working from home, major cities with historically high rents are left with a huge inventory of vacant apartments and condos since people don’t necessarily have to live within or close to the city anymore. If you’re month to month on your rent now, or if your lease is up soon, this is a chance to score a bit of a deal on a great rental. (Then, take the money you saved on your lease and top up that emergency fund or pay down that student loan or credit-card balance.)
If you find an amazing place, but it’s just out of your budget percentage range, don’t be afraid to negotiate a lower rate, or work out a deal with your landlord. Maybe they include hydro and internet in the rate? Or, they can offer flexibility with the terms of the lease? While supply is high, and demand has lowered, as a potential tenant, you have a lot more bargaining power now.
There are other investments than real estate
Who decided that homeownership was the only sound investment? The truth is, there are many other ways to grow your money. Let’s take a quick look at the numbers: Since the late '40s, the housing market has increased in value by an average of 5% every year, while the average stock market returns have been around 7.96%. Adjusted for inflation, management, and trading fees, those figures really aren’t that far off from each other. Meaning that if you can keep your rental costs low, invest approximately 20% of your gross income consistently, then you can benefit from growing wealth at a similar rate as a homeowner, while avoiding the interest charges that come with having a mortgage.
Knowing exactly how much money is coming out of your bank account for rent each month also means you can be a lot more aggressive with contributing to your Registered Retirement Savings Plan (RRSP), and growing your Tax-Free Savings Account (TFSA). Or, if you have a balance on your credit card, a line of credit, or a student loan, prioritize paying that down before you focus on investing.
For so many people right now, simply covering our regular living costs is a struggle, let alone thinking about saving. And, that’s totally fine. Renting allows you to control your costs a bit more than being a homeowner would. It’s a lot harder to sell a home if you’re unable to make mortgage payments, than moving to a more affordable rental unit. Or, you can bring on roommates, or move to a less-expensive area. That way, you can still invest some money, even if that’s just $50 per month. Over 40 years, even at a low rate of return of 4%, that amount would grow to nearly $60,000 in an investment account. That’s a solid chunk of change!
Investing in life is just as important
Renting gives you a lot more than just financial wiggle room to invest more, it also gives you wiggle room with your life. Tired of the hustle and bustle of the city? Give your notice and head to the country. Need some extra space for a home office? Upgrade from a one-bedroom place to one-bedroom plus a den.
It also gives you the margin you need for life beyond the roof over your head. Investing in your personal and professional growth and well-being matter, too. Are you considering going back to school? A career change? Renting is a flexible option that offers financial liquidity — it gives you easier access to your money, rather than having it tied up in a fixed asset that you’d have to sell to access those funds. Say you save really hard and you’re able to max out your annual contribution limit of $6,000 per year in your TFSA. Not only is the money invested in your account growing, it’s also still accessible for you if and when you need it. (Just remember that any money that you withdraw from your TFSA within the year can’t be re-deposited back into your account until the next calendar year.)
If you’ve worked hard over the years, saved up, and now have the privilege of buying a condo in the city, or a house in the suburbs, that’s amazing! If you’re happily renting, that’s amazing, too! Neither person is wasting money, or investing poorly. Both owning and renting are financially savvy decisions, as long as they suit the lifestyle you want. Take that, know-it-all uncle.
Octavia Ramirez is a personal finance writer based in Toronto, and the founder/CEO of Paper & Coin, a financial literacy and entrepreneurship platform for Canadian millennials.