Fred Ryvers - Articles

Renting or Buying - Which Is Better?

In the best of times, we try to save money. In the worst of times, every penny saved becomes vital. What's ultimately best: long-term appreciation or the monthly thrill of paying the landlord? Let's say you're trying to decide between buying a $18 0,000 home, or renting at $1,000 per month - which is better? The short answer is that on a strictly-dollar outlay basis, and over the longer-term, you're further ahead to buy.

Let's take a detailed look at why:

Buying. That $180,000 home you're considering is in the entry level price range. Let's suppose that you've managed to save a 25% down payment of $45,000 and are ready to assume a $135,000 mortgage at 9% amortized over 25 years. The principa l and interest payment is $1,118 a month or $13,416 a year. It's assumed that insurance and incidental expenses are equal for both renters and owners. As a buyer over the 25 years, you'll pay $335,400 in principal and interest. At 6% per year inflation co mpounded annually, you'll also pay $131,675 in taxes and related costs. As well, you've tied up that $45,000 down payment. In all, you'll have invested a total $512,074 in the 25 years to amortization, but will own your home outright. Assuming a conservat ive 5% yearly appreciation, that home will be worth about $609,544 in 25 years. (Note: House prices here in BC have increased an average of 7% annually over the last 40 years.)

Renting. Let's say that you've been renting for $1,000 a month, and rent increases are held to six per cent annually. Meanwhile, the $45,000 you would have used as a down payment is securely invested at six per cent a year. Less income taxe s of 30% on the investment-income portion, the real growth will be 4.2% per annum. After 25 years, you will have paid $658,375 as rent and your $45,000 nest egg will have grown to $125,865. Mapped out on a calculator, how does the bottom line compare with the joy of owning?

The Bottom Line: Renting isn't cheap. In the above scenario, if you bought the home, you would have spent $512,074 in mortgage payments, taxes, and other expenses. Offset against the $609,543 market value of your home, the net gain would be $97,469. If you chose to rent, the $658,375 in rental fees would be offset by your ready-to-hatch $125,865 investment nest egg, leaving you with a net loss of $532,509. Furthermore, for the homeowner an added benefit would come after the m ortgage is paid off. In year 26, your only cost would be $10,918 per annum for energy and taxes, while the luckless renter would still be shoveling out what's now $4,549 a month or $54,592 a year in rent.