Renting vs. Buying a House
Is buying a home a bad investment? Is renting a home a waste of money? Get in touch with Rob Friesen and Lauri Rose Real Estate Team as we have decades of experience and a vast knowledge of how the process works. We can talk about what's available now and how in six to 12 months, things might change considerably and if you were to wait.
To Rent Or To Buy? That Is The Question
Am I better off renting or buying a house? - This is a very old question. Before you decide, you need to answer the following:
1. How often do you expect to move in the future?
More than once a year
Once every two years
Not for at least 5 years
If you expect to be moving a lot (every couple of years or more) then you probably shouldn't buy your own home. Every time you buy or sell a home you incur significant costs (selling commissions alone average 6 %). Unless you get lucky and the value of the home you purchased goes up by at least 10 %, you'll be losing money.
2. How stable is your employment situation?
Not stable at all
If your employment is not stable, you probably shouldn't be considering buying your own home. Home ownership requires a number of regular payments – the mortgage, property taxes, utilities, maintenance, insurance, etc. Missing any of these payments can trigger dire consequences for a homeowner. Until your employment is stable, your answer to the renting vs. buying a house question should be "renting".
3. How much can you afford to pay for housing?
To answer this question you need to prepare a detailed monthly household budgeting plan. As a guide, most mortgage companies will only allow your housing costs to equal 33% of your gross income. Housing costs may include your rent or mortgage payment, property taxes, utilities, and 50% of condo fees if applicable. In addition, if your total debt servicing costs (housing costs plus all of your other monthly debt payments) exceed 40% of your gross income you won't qualify for a mortgage.
As a guide, how much rent are you paying now? What is the maximum amount you are willing to pay?
4. Are you able to save money every month?
Once again, we need to take a look at your budget. As a renter, are you able to save money every month? How much do you currently have in your savings? If you buy a home it's important to have some money set aside for "emergencies". You may not be able to save as much money as a homeowner as you did when you were renting, but it's important that you leave some room in your budget to save something. If you have to stretch your budget to the point that there is no room for any savings, you are probably stretching your budget too far and you should definitely reconsider your home purchase.
5. Is it important to you to own your home?
Some would argue that this is the first question you should ask yourself. Another way to phrase it might be, "how badly do you want to own your home?" Homeownership, like everything else, is a matter of choice. Only you can decide whether or not homeownership is important to you. People born in the '60s or earlier had homeownership drilled into them – to be a real person you had to own your home. Today, that's not necessarily true.
Take a look at your budget (again). If home ownership is important to you then you may want to re-assess how you spend your money every month. For example, perhaps your budget includes going to the movies once per week. If you really want to buy that home, you may have to change your spending habits and only see one movie a month. Maybe you have to quit that health club or buy fewer trading cards.
The point we're trying to make is that you have the ability to decide what's important and what's not. If buying a home is important to you, you may need to limit some of the other things that you do.
6. Finally - here's the math
Let's compare the rental of a townhouse versus the purchase of the same townhouse. The rental example: 1000 square feet, you pay your own utilities. The rental charge is $850 per month and utilities on average cost another $150. To purchase the same house: selling price $90,000, mortgage at 8%, with a 10% down payment, property taxes of $100 per month, condo fees of $150 per month, utilities are the same as above.
|Cash outlay per month||$1,000.00||$1,190.00|
The cash outlay line is the one that's most important – it represents the payments you will have to budget for every month. In our example, it costs you about 20% more per month to own your home. If the interest rate on our mortgage was higher, say 10% then it would have been 30% more. Similarly, if interest rates were lower, say 6%, it would have been only 10% more.
Let's summarize. From a purely financial standpoint, whether you should rent or buy comes down to your monthly budget and the cost of borrowing. If you have the down payment and interest rates are 5% or lower, it makes very little difference whether you rent or buy. At interest rates above 8%, buying will cost you 20% or more than renting.
Assuming that you can afford the increased costs of owning your home, the question of what's better, renting or buying a house, again becomes one of personal preference. There is a certain satisfaction in owning your own home, but only if it's important to you. Take the time to read our first 5 questions again. This a big decision and it shouldn't be made hastily.
Rob Friesen & Laurie Rose with The Boyes Group Realty Inc. has earned the prestigious designation of CBR specializing in assisting Buyers and Sellers in residential, acreages, farms and commercial real estate in Saskatoon, Martensville, Warman and surrounding cities in Saskatchewan. We would be glad to discuss more of your options.