Buy a Home vs. Rent & Invest

July 30, 2014

Buy a Home vs. Rent & Invest

There was an interesting article recently in the Globe and Mail. What is the best financial decision - to buy or rent a home?

It used the following scenario; save up for five years for either a down payment on a home or take the money and invest in stocks and then continue to buy stocks every month as you save money being a tenant. The finer details can be found in the article itself (see link below), but the conclusion was that it is financially more prudent to rent than to buy. Yes. This might surprise quite a few, including us realtors who tend to rave about the financial benefits of owning your own home. So, are we all idiots having bought our home? Well, not so fast. Here’s why:

- Theory vs. reality. The assumption in the rent & invest scenario is that you take the money saved by renting and add that to the stock portfolio. Great in theory, but how many have the opportunity and discipline to do that? The vast majority of renters we come across do not put money aside every month based on theoretical savings compared to “if-I-owned-my-home”. Paying into your home is almost a forced savings plan that continuously builds your equity base and thereby improves your financial situation.

- Leverage. One of the financial advantages of owning your home is that it gives you access to equity and at the same time preserves the asset itself. An example; You buy a car with a line-of-credit on your home as opposed to selling stocks in the same amount (if you were renting). The long term appreciation on your home will continue to be on the full market value, not affected by the line-of-credit, or mortgage for that matter, but had you sold the same amount in stocks, the future dividends would have been negatively affected by the diminished stock portfolio.

- Feel good factor. It just feels better to sit in your own living room. It’s a very subjective and emotional factor, but based on the conversations we have with our clients contemplating to buy a home, its significance cannot be ignored.

Besides that, life as a tenant comes with the uncertainty of not knowing how long you can stay in your rental home. Your landlord is in control and most likely cares more about the profitability of his or her income property than your peace of mind. So, in relation to the comparison of buying vs. renting a home, this might help to explain why people become homeowners despite the financial conclusions in the mentioned article.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/renters-make-for-wealthier-investors/article17834799/