Saturday, July 05, 2008
Rent or buy: The calculations must include many factors
The notion that, financially, home ownership always trumps renting is somewhat of a misconception.
Julian Smith personifies the great Canadian dream of owning your own home.
Some people plan long and hard for homeownership, but Julian Smith is having it thrust upon him.
The professional photographer has been renting a one-bedroom loft condominium in Toronto's east end for nearly two years. He loves the aerie-like suite, where light streams in through the trees whatever the time of day. But recently, it was put up for sale, forcing him to choose between buying it himself or renting another place.
He chose the former, but is buying the right move for Mr. Smith?
"It's good to be in the property market," he muses. "If prices continue to rise, it might be hard to get in later. I like the idea of a condominium because if, say, the roof leaks, I'm not alone in the responsibility. I envision being able to rent my unit and go to England for the summer. This would make an interesting place for a visitor to stay."
Obviously, if he didn't buy his cherished home, he would lose it. But on the down side, his monthly payments will be more. The unit is selling for $240,000. If he takes out a mortgage of $228,000 at 7 per cent, as he is considering doing, he would pay about $1,600 a month, plus condo fees and hydro. Right now, his monthly rent is $1,200.
If he didn't grab it, he would be forced to leave his cherished loft. Also, the extra amount he might be paying out could be viewed as a kind of forced investment, one that he might not make otherwise. And another plus is that money from the sale of a principal residence is not taxed.
But according to Steve Parker, Ottawa-based managing partner of Parker Prins Seel Chartered Accountants, the notion that, financially, home ownership always trumps renting is somewhat of a misconception. It a renter invests the difference between the rent and what the mortgage payment would have been, it's likely that, over time, there would be very little difference in the result.
He adds, however, that it's questionable whether the renter would actually make that investment.
"Very few people take the money they would save by renting and invest it," Mr. Parker says. "However, if they would do something like maximize their RRSP contributions every year, they would likely end up as well off as with home ownership. Traditionally, the stock market and the housing market have had similar results over time."
He also notes that rents have not risen the way housing prices have, which can make renting somewhat of a bargain right now — at least a relative bargain.
An example in an upscale area of the city is a two-bedroom, two-bathroom unit in a fourplex on St. Clair Avenue near Yonge Street in Toronto, complete with finished basement and parking. It's currently for rent at $2,200 a month, not including hydro. The listing agent, Jack Hill of Harvey Kalles Real Estate Ltd., says a comparable two-bedroom condominium at Yonge and St. Clair might be selling for $500,000, and there could be a fee of up to $800 a month on top of the mortgage.
With 10 per cent down, a mortgage at 7 per cent and a 25-year amortization, and figuring in other factors, the monthly payment on the condo would be about $4,100, according to a Citizens Bank of Canada calculator.
But potential renters of the unit in the fourplex, at $2,200 plus, would be a well-heeled, select few.
People who are transferred to a city such as Toronto by large corporations often rent, Mr. Hill explains, for just the time it takes to get to know the city or for the duration of their stay.
"A lot of people like to rent," he adds. "Some people will invest their money elsewhere, or perhaps they have a cottage up north. Some people just do not want to make the big investment in a home, or you will get a few students going in together on a place. Some people have sold their home and are renting while they assess what do to, on a long-term basis."
In Toronto's Moore Park, renters in one of the area's many duplexes and apartments can enjoy the same parks, ravine trails, tennis courts, shopping venues, restaurants and public transit as those owning million-dollar homes. Their children can attend the outstanding local schools there, too. Nearby Rosedale also has a good stock of rental accommodation in addition to its mansions and lavish estates.
Al and Marlene Parker (no relation to Steve), for example, rent a 700-square-foot, two-bedroom apartment there for $1,700 a month. They own a home in Muskoka but still seek the pleasures of downtown Toronto.
Having just returned from hearings on new taxes at City Hall, a 15-minute trip for him, Mr. Parker says, "There's an energy in the city — my wife and I are enjoying life here.
"We're like tourists. We're both 65 now and retired. Life is stages, and at this stage we are not sure what we want to do. Driving between two homes isn't feasible and we rented our Muskoka place for July and August.
"Meanwhile, do we want to buy something? I'm worried that the bubble may burst in the housing market."
So while renting may not be the great Canadian dream, it can put you in an excellent location for less than the cost of buying a comparable home. And an accommodating landlord will take care of shovelling snow, cutting the grass and unclogging the toilet.
"Raising a family, people do tend to want to buy homes," Steve Parker says. "But a house is a high-maintenance proposition. Even at the end of the mortgage, when the equity and the value will be at their best, the home will probably need a lot of work. Real estate is not a foolproof investment."
For those trying to decide whether to take the plunge into home ownership, there are websites that offer tools to help in making the decision. The federal government offers a "Rent or buy calculator" at strategis.ic.gc.ca. And the Citizens Bank site is www.citizensbank.ca.
Read more about Renting vs. Buying
For more information please contact A. Mark Argentino
A. Mark Argentino, Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc., Brokerage
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1