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Now that we have a kid, naturally the next step is to buy a house, right?
I mean, that’s what people tell us, anyway. Of all our friends and family members, the number of parents we know who chose to rent are next to nil.
This is because not only is owning viewed by North Americans as the ultimate status symbol, renting carries a stigma. I’ve heard the phrase “renting is throwing your money away” and “home ownership is the key to wealth” so many times I can no longer roll my eyes because they’re permanent stuck at the back of my skull.
This isn’t the case in Europe, where the Germans and French prefer to rent and “there is no social disgrace to being a tenant in Paris or Lyon.” They don’t seem to have a meltdown if you tell them ownership is not for you and don’t need to wax poetic about their kitchen islands or pot lights.
I must’ve been European in my past life because even though our portfolio is now big enough to afford a house in cash (even in outrageously expensive Toronto) and still be financially independent, buying property still makes no sense to me. And whenever I bring this up, I get all sorts of flack for traipsing around the world and ruining our son’s childhood by not providing him with a “forever home”.
I don’t know about you, but that phrase makes me gag. Not only is it unlikely that your child will go to the exact same school, have the exact same friends for the rest of their lives, the idea of only ever living in one house until you die makes me sad. I’m not a homebody by any means, so while that might be the dream for some people, it’s not for me.
It’s also interesting that this now ubiquitous term “forever home” didn’t even show up in Google searches before 2008. As it turns out, it’s a term that was coined by realtors after the Great Recession to lure buyers back into the housing market. Houses had depreciated in value by so much that their scam was to convince buyers that resale value isn’t that important, since a forever home is meant to be owned…forever. You never need to sell so there’s no need to worry about its value.
While at same time, you’re also supposed to feel good if the house appreciates even though only your heirs will ever benefit from the gains because you won’t ever sell a “forever home” by definition.
I’d be impressed by such logic-defying feats of marketing if it weren’t for the fact that so many people fall for this and end up trading their most valuable resources—time and health—for one asset that never pays them to own it. A “forever home” then becomes an albatross, something that forces you to continue trading your time for money so you can pay off this illiquid asset that traps all your wealth. Too bad you’d only realize on your deathbed the quality of life and freedom you could’ve had if you’d owned assets that paid you rather than the other way around.
So, no, I have no interest in buying a “forever home”.
Does this mean I’ll never buy a home? No. It just means the math has to make sense before I do.
In order to justify owning, the cost has to be lower than renting. And since I don’t need a mortgage, the math differs from the usual rent vs own calculation since I’d be liquidating a part of my portfolio and paying with cash.
How does this work?
Ownership Costs
First we need to consider the ownership costs. Even if I had no mortgage, I still have to pay property taxes, insurance, and maintenance every year until I sell. These are forever costs that many first-time home buyers forget about when they’re distracted by granite counter tops and hardwood flooring. The reality is that property taxes cost around 1%/year on average on the home value, maintenance costs 1-3%/year, and insurance is on average 0.8%/year
Add it all up and it’ll cost you approximately 3% per year on average, even after the mortgage is paid off.
Loss of Yield
Liquidating a large chunk of my portfolio means that that amount will no longer be invested and yielding a passive income. Instead, it’s trapped in the equity of the home until I sell. This means I’d be giving up 4% in yield (using the 4% rule of SWR), which adds to the cost of owning a home.
So in order to justify buying a home with cash, my yearly rent better be higher than the yearly ownership costs (3%) + yearly loss of yield (4%) = 7%.
Since my rent is $1576 (all inclusive) x 12 = $18,912 per year, that means in order to break even, here’s how much cash I can liquidate:
$18,912 = C x 7%
C = $270,171
This means the house I can buy with cash has to be $270,171 or less. Since my rent was paid for by the yield of my portfolio, even though I no longer need to pay rent, I still need to pay ongoing ownership costs. So part of the original yield I was getting to pay rent must be redirected to cover this cost.
To summarize the equation:
If rent/year is R, ownership costs/year is O, and the home price is C, then
R = O x C
R= (4% + 3%) x C
R= 7% x C
C = R / 0.07
Some might argue that rent increases by inflation so wouldn’t that make my savings on rent get better overtime? Yes it does, but my portfolio also increases over time, beating inflation. As a result, the yield I’m losing by liquidating my portfolio also grows over time. My ownership costs also increase with inflation. When you factor all that in, best case it’s a wash, and worst case, the opportunity cost of losing out on the gains from the stock market is way worse.
This simple, back-of-the-napkin calculation shows that my rent is currently so low that it makes no sense to liquidate part of my portfolio to buy a house with cash. Especially since there’s very little chance I’ll find a home for $270,171 in a place I want to live in (feel free to send me suggestions if you know of any good places with houses that cheap).
If, in the future, we decide to upgrade to a bigger place and increase our rent to $2500/month, that equation changes to:
C = R / 0.07
C = ($2500*12) / 0.07
C = $428,571
That’s a bit better for Team Own, but still a bit of a stretch. So, suffice to say, I’ll probably be on Team Rent for the foreseeable future.
What do you think? At what price point would you liquidate your portfolio to buy a house? Do you know of any families who choose to rent instead of own?
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A more clear analysis would be of your finances vs. that of the person you are renting from. For example, you’re missing the part where home prices also increase roughly as much as inflation, so there should be no ‘loss of yield’. Many home owners in hot areas have significantly outpaced inflation these last few years. Also, you can get a lot of leverage by minimizing the down payment and you can refinance your loan if rates drop, so there is good diversification to be had by adding some real estate. Even if the two situations worked out equal (for example, the property owner paying all cash from investments and yield+fixed costs = price appreciation), the home owner also has the utility of a roof over their head vs. holding equities. All that being said, there are plenty of rent vs. buy calculators that cut to the chase of where rents are low enough to make sense. No two markets are the same (or even two properties), thus no one size fits all. I would just worry, if I’m a renter with a small child, that rents could increase and leave my with fewer good options. At least once you’ve bought a home, rent inflation risk is mitigated.
After years of renting (and being exactly like you on team rent), I have come to a conclusion that buying is purely an emotional decision.
By “emotional” I do *not* mean “irrational” or “impulsive”, but rather, buy a house because you want the things that putting a stake in the ground gives you (ability to upgrade/update the house, no risk of eviction, known consistency for kids to grow up etc).
The math needs to work out, and you need to be willing to pay the financial premium for following your emotional wish, but making the decision to buy only based on the math is a bit of a misleading approach.
So, calculate and math-shit-up(TM), know how much more owning will cost you, and if you want a house go get it. Sure, it will cost more than renting, but so what?
I own a car and it costs way more than public transport. I still want to own that car. That’s the same way I think readers should decide on owning a house as well…
Just my 2c.
P.S @FC:
If you are in a situation to afford the house purchase and ownership and still be FI (not having to go back to a corporate job), why not?
You are trading the house ownership for a larger portfolio that continues to grow faster. But why worry about the portfolio size if it is large enough and growing faster than inflation?
Agreed. Owning a house and not having to move shit every couple of years works for people who don’t like packing and unpacking, etc. And your kid will gather a bunch of stuff more quickly than you think, haha. You do have to deal with house maintenance though. If there is a decent landlord in a decent apartment like in Europe or Asia, why bother with a house? But North America is unique in this way, the type of parents we are familiar with tend to gather in suburbs good school districts. It is also easier to send the kids to the backyards with other kids to tone down their screaming etc., unless there is a decent playground in walking distance. You could argue the math both ways, but owning the primary residence is more based on emotional needs and lifestyle choices, rather than finances. I know people living in Toronto areas, working in the university and government and they bought a house slightly less than 900k, and were pretty happy with it and not overly stressed. As long as a person doesn’t overstretch and gets stuck by mortgage, it is OK to buy a house and stay there for a while. There is no good or bad, just whatever makes you comfortable.
There is literally only one sole reason why I can’t bring myself to be a lifelong renter: I am terrified that I can be kicked out of the home I renting at the landlord’s whim. Moving is a draining experience, and I would especially HATE to be forced to move when I am old.
If it weren’t for that fact, I would totally be okay being a renter.
Yes, exactly this! I think there is a huge difference here based on what country you are from. In the U.S., you very much can and will be kicked out on a whim. For example, we just got kicked out of our rental last year when 8 months pregnant. The huge stress and instability is so worth buying, again considering costs need to make sense. Moving with kids, especially when unexpected and not having time off of work is horrible.
So this is not just a math equation but stability and safety for your family.
We have also lived in Europe, and their situation is very different. Leases are very long and many safe guards for tenants. People only move a few times in their life. It’s also much cheaper to rent there vs. buy and the buying process is very difficult. So overall, makes way more sense to rent. I get the sense that Canada is more similar to Europe in this regard. Historically, it has been much cheaper to buy than rent in the US, but now this has topped the other way with high home costs and especially the high interest rates.
The blanket statement from US residents that buying is an investment is not well thought out in my opinion. They often ignore many of the associated costs of home ownership and do not usually invest their money elsewhere. So yes, it’s good for people that may spend all their extra money on consumer products, but not necessarily for those that actually invest in the stock market.
So overall, definitely need to consider the country and market for the person who has their strong opinions on rent vs. buy. They are both valid, but coming from different backgrounds.
Great analysis. I think renting (especially with today’s astronomical real estate prices) usually makes sense. That said, we bought a place last year. I don’t have regrets (non-financial factors beyond just wanted to look cool drove the decision), but from a purely financial point of view, we’d be better off not having bought.
We are a family with one young child who rent in the UK. This has suited us so far as we’ve been moving around for work a lot for the last 10 years. Buying a home always seemed not worth it to me, financially and lifestyle wise. Now we are looking to buy so as to be in a good area for schools for the kid, and we’re less up for travel than before. For those who can access mortgages (easiest if you’re employed) then this means you don’t have to liquidate your whole portfolio, just enough for a deposit and the bank foots the rest (using leveraging like a “genius” property investor!). For us, the balance has tipped in favour of buying our own place, but I wouldn’t invest in property. Bleugh.
This is a good analysis of just the financial element but then what each person needs to do afterwards is place a value on the other perks of home ownership that you don’t get from renting.
I own a house outright. Things like getting to have pets, not having to adhere to a rental agreement, renovating when you want, not having to wait for some negligent landlord to do repairs on their own time, not having to worry about the landlord jacking up the price or reno-victing your family, etc. Are huge perks.
Not to mention how limited the choice is if you are looking for a rental with things like a nice kitchen, good appliances, a decent sized yard, off street parking, etc.
Nice post! You’re right of the people we know with kids I can only think of two families that rent. This actually made me go back and update the opportunity costs of our home, which were grossly underestimated. Specifically investing it in VTSAX (our investment vehicle of choice) at the time we paid it off in full would give us a cost yield close to 4%. We are also lucky that the homes in our area are as cookie cutter as you can get, so it’s easy to get an average rent. For our very specific area and situation, owning comes out slightly ahead of renting, for now. Thank you for the thought exercise 🙂
So here’s our situation: we owned a house in a HCOL city in Canada. The house was worth eventually 1.4 million at sale, which gave us 700k equity — and that’s a lot of money (plus house taxes of 7000 per year and expensive maintenance costs) to not be invested in the market. We moved out of Canada, and kept the house in case we wanted to move back. But we were only able to rent it out for about 5000 per month (less 10% prop management fee). After two years, we sold it.
We enjoyed being house-free, but eventually settled down in a lovely city outside Canada, where the rents were about CAD 2700 per month, plus utilities, due to there being such a demand for short term rentals. We love it here, and knew that we’d like to use this as a home base to age in place in the longer term. We were able to buy a house for CAD 400k. Our property taxes are CAD 700 per YEAR. If we need a plumber to fix something, it’s never been more than CAD 25. We have solar panels that cover all the electricity we use (we sell into the grid). The weather is almost perfect year round: between 22C and 28C during the day year round, and sunny and dry, so heating/AC expenses are almost nonexistent (though we have minisplits just in case we have a hot/cold night). We pay CAD 30 per month for water/sewage and CAD 5 to be on the grid. We can walk everywhere, and if we need a taxi to bring us home from the supermarket, it’s CAD 6.
And the best part is that we can do home exchanges around the world, because there’s a big demand to stay in our city.
For us, having a house that generates a benefit for us when we’re away (free accommodation elsewhere) and is our long term place to settle down is the perfect situation. The only reason this works is that our costs for utilities, taxes and maintenance are so low, and the purchase price was low as well.
That sounds amazing! Can I ask what city you’re in, or at least what country?
It sounds like you live in Mexico?!
Congrats! It looks like you made a great move!!!!
Also curious what city and country you ended up in!
Thanks for this great article! Love the book, I even managed to get my financially illiterate husband to read it. We’re in a similar boat right now but for different reasons. Retired 6 years ago, and find ourselves with 30% more than we started with. We (i) want to take profits out and reset to our starting FIRE number, (ii) have decided that we want a home base in Canada for 5-6 months of the year, and (iii) would like to live close to (or even with) an aging parent. I’m leaning towards getting our own place in the same building as the parent, as then we can be close by but not too close, and we can rent out the apartment while we’re gone or use home exchange. We’ve moved a whole bunch into cash since we’re not in a rush (18 month to two year timeframe) so we can jump on the right place. Your 7% per year cost of ownership number was super helpful!
As a French person, I can assure you that owning a home is very very very prized in France (at least among all the French people I know) and that investing in the stock market is considered akin to casino gambling. The «only» way to make money and ensure a comfortable retirement, in their view, is «la pierre» (literally, the rock, aka housing). In their defense, it’s true that the French stock market (CAC40) hasn’t worked anything like the S&P500 since 2000 – primarily because the French don’t have a Facebook/Google/etc. Still, this was true even before the internet, when the US stock market was more in line with that of the rest of the world. Great analysis, and I’d add, if you’re single and childfree, owning a home makes even less sense imho (since you’re more able to move for jobs and geoarbitrage).
I don’t know where you would find a decent place to live in Toronto for $1500.
In any case, if you were to upgrade to bigger place, the rent would most likely be around $3000 – $3200. Here’s the resource
https://www.zumper.com/rent-research/toronto-on.
Plus it seems like you have inflated the numbers quite a bit for buying.
Property tax are usually 0.7%. Here’s the resource
https://www.toronto.ca/services-payments/property-taxes-utilities/property-tax/property-tax-rates-and-fees/
Property insurance is also paid by the renter as well. So there is no cost here. Also, property insurance of 0.8% seems too high.
So with the updated numbers. Here’s the calculation
ownership costs = (0.7% property tax + 1.5% maintenance cost) = 2.2%
Then the equation becomes
C = R / 0.062 //Update O
C = ($3100*12) / 0.062 //updated R
C = $600,000
You’ll most likely find in that range.
So, with the updated calculations, it might be worth considering buying if you ever decide to move to a bigger place. I agree, with your current rent doesn’t make sense at all.
Also, if you look at the home ownership just purely a financial decision, you get actually better return than stock market over long term.
Here’s the data for housing prices in Toronto from 1971. https://davidminer.ca/wp-content/uploads/2017/07/housing_prices_in_toronto_from_1971-2016.pdf
I agree most places in the world have a average return of 2-3% for homes aligned with inflation. But GTA is special as you can see from the data above.
With the above analysis.
Let’s say in another world, you bought a home for $600,000 on cash. After 10 years if you were to sell if with the closing cost. Your net worth would be $1.3 Mil (I used 6% average growth here)
And if you were to keep renting for another 10 years for $3100. Your net worth would be $750,000. (I used 7% average growth here)
Always run your numbers 🙂
As always, a well-reasoned mathematical analysis. Thank you! You are fortunate your rent is unusually low for the Greater Toronto Area. Lots of places in decent neighbourhoods are double that. Regardless, for me buying a house is more secure than renting because as the owner you are in control (as long as costs don’t control you).
Most places are rented to make a profit, which in my past experience as a renter has meant everything was frustratingly substandard, including maintenance. I’m now lucky to be a mortgage-free homeowner with low maintenance costs — actually, much lower than renting —so for anyone in my situation, it’s better to own for piece of mind and the satisfaction of making my surroundings what I want.
Love your math, and especially the notion that buying a house only makes sense when overall costs are lower than rent.
I will say this: even if the costs are *equal* (give or take), there’s a huge value to staying in one place and becoming a part of a community. Value to adults and definitely value to kids.
We moved around a TON. I calculated that our recent move was the 20th (twentieth, 2-0) in 40 years. I’m done moving for a long while if I can help it. The constant “in-flux” life, the lack of roots, is not for everyone. I know it’s not for me. I definitely want my kid to have a community around her, and so far it’s working well, knock on wood.
I will also say – we have a condo that we rent. Bought it at 2015, and our payment for it, including taxes and condo fees, are more than a $1000 lower than the rent we get for it.
Yes, we have to make investments from time to time, when, say, the AC needs to be replaced.
But overall it’s a profit. And that’s before we factor in the price increase, should we ever want to sell it.
So yeah, you have to do the math.
And your math, for what it’s worth, should include the emotional cost-benefit analysis of living in a community, of having the surety of not being kicked out, and, on the other hand, of all the headaches and limitations home ownership comes with.
But I wouldn’t reject it outright.
I like this analysis and it’s similar to the way I crunched the numbers before buying my house in a LCOL area. The only thing I’d make sure to consider is they type of place you are living in. If you are comparing renting a 1br apt to buying a 3 br house, the numbers will never work in favor of buying.
A house is a big commitment. If you plan to travel frequently, it doesn’t make sense. But if you want to stay in one location for at least 5-10 years, I think buying is valid. I’ve been a homeowner for 25 years and I wouldn’t want to go back to renting. It’s so much more comfortable in our home.
With prices of houses in Toronto being what they are, and the cost of living here being what it is (insane)it would make more sense to Airbnb when visiting your family and then maybe buying a place in southern Europe, which I’ve seen nice places for 100k -200k in places like Rome, Barcelona, some smaller cities in the south of France, and Portugal etc. While you’re visiting in Canada or south east Asia or Mexico you can still have a home base in Europe which I believe it’s cheaper to live! Homeschooling your kid or international schooling is fine for raising children in my opinion!
Canada has become insane with its cost of living! I don’t see that changing anytime soon. It has become like Switzerland! Hahaha!!
Just sayin!
Buying in Southern Europe seems like a great idea, but as someone with some experience of these countries, the complex bureaucracy and taxes (in another language) you will have to wade through may cause you to rethink this!
I think the home price range you’re indicating for European real estate is way off. You cannot purchase a home in that price range in cities like Rome, Barcelona and many others in Portugal or France. If the cost is in the range of $100k-$200k, you are looking at sonething in the sticks with minimal services, stores or infrastructure.
Kind of obvious you’re not getting your info from reputable sources.
FYI Bengen the inventor of the 4% rule is coming out with a new book next year … and revised the 4% rule… which. he says is not actually a rule … early retirees he … suggests should maybe take out less etc etc etc here is the. interview https://www.youtube.com/watch?v=gQqcKepuQdA Yes maintaining a house we have found. to be very expensive … you can geo- arbitrage renting and/or buying a home by going to cheaper countries in Central/South America/Europe/Asia. and send your kids to an international school$$$?/home school etc … Mr .Money Mustache, GoCurryCracker, Root of All Good , Our Rich Journey and many more in the FIRE movement have bought homes for their family … in Canada you could move somewhere cheaper like Windsor , Chatham, Forest, Saskatoon etc etc… explore your options for what you want? Once kids reach school age schools/education become paramount in most parents’ minds, also healthcare and safety etc etc …
I withdraw 4% annually as an early retiree and for the last 5 years since retiring at age 44, my portfolio has done nothing but grow exponentially. I’m starting to think that 4% is actually a low number and that even 5% is a feasible SWR.
Also, Windsor, Chatham, Forest are crapholes (I can’t speak to Saskatoon as I haven’t lived there. I would never go back to Windsor, Chatham, Forest. Too many close minded prejudiced individuals living there who are not welcoming to outsiders who settle in the area.
Central/South America – you get what you pay for. Asia too. Eastern Europe – same. You pay cheap, you get cheap.
We rent, in the Greater Vancouver area. We did own and sold our townhouse in 2021 at a good profit of $300,000 (even after factoring in everything we put in over the years). We weren’t FIRE or investment aware at the time and only sold due to both of us losing our jobs and no EF cause we were just rebuilding it after a mat leave.
Our plan was always to own again after getting back on our feet. But, now 3 years later, back on our feet, FIRE aware, the math just doesn’t add up for Greater Vancouver. As a family of 4, our rent is 11% of our growth income and owning would be 35-40%. Granted, our rent is super low and not changing. We rent from my parents, they live upstairs, we all benefit from supporting each other, kids have a huge backyard. We get to homeschool our kids and have flexible jobs we love all because we have built in childcare from renting from parents. The opportunity cost would be giving up almost $40,000 yearly in ETF investing funds that we built up to this year. The shaming gets a bit much sometimes (we’re South Asian). But, it’s not enough for us to ignore the numbers. We’re on a path to wealth for ourselves and able to built generational wealth for our kids by renting and putting money into high growth ETFs. And that’s at at 42 and age 50! Feels like a no brainer at this point.
Great analysis. However, I feel the numbers are bit skewed towards renting.
For sure, with your current rent it doesn’t make sense to buy.
However if you were to rent a bigger place it would be around $3000 -$3300. Resource here. https://www.zumper.com/rent-research/toronto-on
So your updated R is ($3100 * 1200) = $37200
For buying, average property tax is around 0.7%. Here’s the resource https://www.toronto.ca/services-payments/property-taxes-utilities/property-tax/property-tax-rates-and-fees/
And when you’re renting you’re also paying property insurance, at least we have always. So we can omit that cost.
So the updated O is = (0.7% property tax + 1.5 Maintenance cost ) = 2.2%
Updated
C = ($37200 / (4% + 2.2%)) = $600,000
You can probably get something in that price or lower in GTA.
Also, one more thing which is missing from your calculation is the net worth in buying vs renting.
So for e.g. If you were to buy in GTA for $600,000 and sell after 10 year including the closing cost and all the cost mentioned above your net worth would be $1.037 mil (This assumes the 6% growth)
and if you were to rent for $3100 for 10 years. Your net worth would be $736,000 (This assumes the 7% growth). A difference of almost 300,000
Here’s the data dating back all the way to 1971 for housing prices in GTA. According to this, the average yearly compounded growth is 7.1% but I still assumed 6% for our calculations. https://davidminer.ca/wp-content/uploads/2017/07/housing_prices_in_toronto_from_1971-2016.pdf
In most of USA the average growth for home is around 2-3% aligned with inflation but GTA is a different story as you can see from the data above.
In the above example wouldn’t buying makes more sense mathematically ?
I confess I don’t follow the math as to why use only 1 year’s rent for how much house you could buy. I guess you are saying you’d take that 1 year out of your investments at the start of the year whether you are buying a house, or paying monthly rent?
We bought a house 20 years ago and it has worked well for us. We wanted a place to feel grounded (I grew up in the area, my wife came to the country as a refugee with nothing, so the American dream is a BIG deal to her). We bought at what turned out to be a bad time as we were on a 5 yr fixed loan at 5.5% and then the market crashed just before it was going to adjust. We were underwater and sweating bullets. About a year before rates would have gone up, we got a notice that we could refi (thanks Obama) and we dropped to a 2.6% rate, fixed (US fixed, so fixed forever). Since then we stopped paying extra principal and put that difference into savings and investments. That was part of what helped us FIRE ourselves almost 2 years ago (with a house payment, in a part of the country generally considered really expensive). It works fine for us, and I like doing DIY projects to maintain and improve the place, part of my retirement activities keeping me healthy and involved. We most likely will keep the place as we start to travel more, and pass it on to our kid eventually. The place has gone up about 60% in value since we bought it.
So anyway, I guess the point is it can make sense but not always for strictly math reasons, but when combined with softer more human aspects. As far as your rent, $1500 wouldn’t get you a 1bd cracker box in a bad area around these parts.
“I confess I don’t follow the math as to why use only 1 year’s rent for how much house you could buy. I guess you are saying you’d take that 1 year out of your investments at the start of the year whether you are buying a house, or paying monthly rent?”
I’m comparing how much yearly rent would cost compared to yearly homeownership expenses + yearly loss in yield income. It’s not just for one year, it’s every year because the maintenance + insurance + property taxes are re-occuring costs, as are the loss in yield. I’d have to withdrawal the yield yearly to pay for the ongoing ownership costs even if I bought with cash.
Reasons for buying
– not able to rent in a location you want to live (non financial reasons)
– not disciplined enough to save regularly, or not able to stress oneself consistently over the long term to save as a mortgage does
– not comfortable managing assets in 100% liquidity, seeking diversification (non financial reasons)
– long term plan to stay in one place , so that can sell the property down the road for more
It costs money to live rent or own. The people I know renting are paying well over 3k per month. A one bedroom can go for that downtown Toronto so families are paying more to have the space they need. Have you ever considered buying and renting out the property as an income property? Then you’re money is making you money paying down the mortgage plus the gains in the property itself over time eventually the cost of living there is less then renting the same space. Not having a stable place for kids would be harder since my kids would miss out on building relationships routines and having extracurricular experiences. Traveling sounds great, fun, and would give us a lot of different experiences but it does have stressors and limitations. I want to travel with my kids but when it seems worth it to me to spend that money because traveling costs money that is not an investment but a luxury. At the end of the day you need a place to live not just visit. I own and yes my money is tied up but it feels no different then the money I have in the market except that money I can see the value and liquidate it faster. I don’t know if we could buy the house we live in now, since values have increased. If I hadn’t bought and was renting I would feel stuck renting and would be paying more then it costs us to live here. I wouldn’t like feeling limited by the rental market paying off someone else’s mortgage. This is a home not just a place to live. I don’t have to ask my landlord to do anything to it and yes it has a monetary value but that isn’t all that matters for my kids who are still very young. In the future who knows I don’t have to decide that right now just what works for us today.
“Have you ever considered buying and renting out the property as an income property?”
I have zero interest in becoming a landlord. Plus, the rentals in my province favour tenants over landlords. My life is too awesome to be wasting it dealing with leaky faucets myself and/or babysitting property managers.
As with everything else, this is a personal decision and varies widely depending on where you live and your long-term goals. I grew up in NYC and my family rented when I was a kid. If I still lived in a city I would still rent. I live in the suburbs of Charlotte NC where property taxes are much lower. We pay about $3K/year in property taxes on a house that is valued at about $850K. I would not pay $850K for this house today. We bought it years ago for much less. Timing is also important. I’d be hesitant to make any big home purchase today. Interest rates & prices are too high. The other big advantage in the US is that you can deduct mortgage interest on your taxes. Our rate is 3% so we don’t write off as much as others. And when you sell your house in the US, you don’t have to pay taxes on any gains under $500K. So many of us plan to downsize to a condo or apartment when our kids move out and we won’t have to pay taxes on the gain. The US has a shrinking middle class and this is part of the reason why. And to speak to the emotional part, it’s really nice to rip out carpet, paint walls, plant trees and watch your kids climb them. I don’t believe in the concept of “forever home,” but it’s nice to have a place where your kids can draw on the the walls and clog the toilets without fear of eviction.
Re: “The other big advantage in the US is that you can deduct mortgage interest on your taxes”
A big asterisk needs to be added to that statement. Please don’t mislead.
This true only if you itemize. For vast, vast majority of families, taking the standard deduction is much more attractive.
Re: “you don’t have to pay taxes on any gains under $500K”
Not true if you used it as a rental property.
Also, the 500k applies to married couples. It’s only 250k if you’re single.
I’m in Australia and we don’t have those costs.
For eg, no tax, not even 1%, insurance of 1% is preposterous. Maybe 0.2% on avg here. 1-3% maintenance, again, preposterous. To think that the avg $1m home costs on avg 10-30k in maintenance is just not true.
I understand home ownership is not for everyone, but the security, knowing no one will kick me out (shifting is a headache), the memories and the great capital growth, makes it all worthwhile imo. For some, maximizing their wealth to every last $ is not the be all and end all. There’s no right or wrong answers here, just what’s right for you.
Forgot to mention, we do have a rates charge, of which mine equates to < 0.2%. Also note the capital gain on your own home here is tax free. There are very few people that rent willingly here. They only rent because the can't afford to buy, and rents are astronomical. But people keep streaming in because its such a great country to live in. Not sure how much longer, the govt can continue with these high immigration numbers, but I think its too late anyway, and this issue will end up costing them the election in a few months time.
Great analysis and completely agree. Two quick notes:
1) Capitalization rate: You have effectively recreated the “cap rate” which is used by real estate investors to compare investing in different properties. It is simply a property’s Net Annual Income / Cost to Buy. Historically in the US, over many decades, the cap rate for residential real estate has been between 5% and 9%. Strictly from a financial perspective, you should buy when the cap rate is over 7% and rent when it is below 7%. This applies to all markets, regardless of the fact that every market is indeed different.
2) Return on ONE Specific House: I owned a house in a very nice central Dallas neighborhood for 17 years (2005-2022). After tracking taxes, major repairs, and insurance costs during this period, I calculated that the house earned a return of 3.1%, pretty much the US historical average. It was a great place to raise my kids but, as a financial investment, it was a “dog”. My 60/40 retirement portfolio did a lot better during those 17 years – though my kids had a lot of fun (apparently kids are expensive :).
Part of why renting makes sense for a lot of folks is because cap rates are in the toilet. In Vancouver, for example, trivial math says to expect a sub 2% cap rate.
i understand not putting all your money into a house … but another option … only pay the deposit and get a mortgage . that way you keep the money and stay invested .
Given the high interest rates, that would make the math even worse. The mortgage interest would add to the cost of the ownership, making it skew even more toward rent.
Great analysis. However, I feel the numbers are bit skewed towards renting.
For sure, with your current rent it doesn’t make sense to buy.
However if you were to rent a bigger place it would be around $3000 -$3300. Resource here. https://www.zumper.com/rent-research/toronto-on
So your updated R is ($3100 * 1200) = $37200
For buying, average property tax is around 0.7%. Here’s the resource https://www.toronto.ca/services-payments/property-taxes-utilities/property-tax/property-tax-rates-and-fees/
And when you’re renting you’re also paying property insurance, at least we have always. So we can omit that cost.
So the updated O is = (0.7% property tax + 1.5 Maintenance cost ) = 2.2%
Updated
C = ($37200 / (4% + 2.2%)) = $600,000
You can probably get something in that price or lower in GTA.
Also, one more thing which is missing from your calculation is the net worth in buying vs renting.
So for e.g. If you were to buy in GTA for $600,000 and sell after 10 year including the closing cost and all the cost mentioned above your net worth would be $1.037 mil (This assumes the 6% growth)
and if you were to rent for $3100 for 10 years. Your net worth would be $736,000 (This assumes the 7% growth). A difference of almost 300,000
Here’s the data dating back all the way to 1971 for housing prices in GTA. According to this, the average yearly compounded growth is 7.1% but I still assumed 6% for our calculations. https://davidminer.ca/wp-content/uploads/2017/07/housing_prices_in_toronto_from_1971-2016.pdf
In most of USA the average growth for home is around 2-3% aligned with inflation but GTA is a different story as you can see from the data above.
In the above example wouldn’t buying makes more sense mathematically ?
“And when you’re renting you’re also paying property insurance, at least we have always. So we can omit that cost.”
The cost I’ve specified for rent is all in. No extra rental insurance needed.
You could get a loan instead of liquidating your portfolio. Hopefully your investments would grow faster than the interest rate of the loan. Personally, I’ve purchased all my past homes in cash but that’s how I’ve learned that historically getting a loan pays off. It’s actually a leveraged investment on real estate that has been a hugely winning bet for most people, because most people wouldn’t leverage like that on a stock market investment.
With the current high interest rates that would make the cost of owning even worse. Also, not worth the risk to HELOC it out and invest. Your stocks could drop, your mortgage increase, and house price decrease all at the same time.
I’ve picked up somewhere a rough guide of purchase price being 200 times rent as a target to not exceed. Not too much higher than your guideline calc. Also, some people neglect mobile park fees or condo fees in their calcs. They are a MAJOR consideration as they can change, especially from a newly built condo. I personally hate the idea of committing to a condo with unknown future fee increases. Not sure I will ever buy again as I love the option of changing my location, but that also means its optimal to rent short term furnished or airbnb and the like.
I’m curious what you’re renting for $1576/month all inclusive in Toronto. Is this a one bedroom? Two?
Rent-vs.-buy is certainly a math question, but there’s a derision towards people whose housing choices differ from yours that is odd and confounding. As other commenters have pointed out, the calculus of renting changes significantly when rentals are scarce, you’ve been forced to move unexpectedly, your rent rises significantly, you have more than one child and/or older children that take up more space, you want a dog, your child plays the drums, you’re a gardener, etc. And I’d be curious how your math looks when you do more than apply a simplistic static equation to what is certainly a time-variable question. Maybe we’re at a place in time where hostility gets the clicks, but it’s not hard to imagine why someone would choose to purchase a home outside of being brainwashed by clever realtor marketing.
I think whether you decide to rent depends on your lifestyle. If you need to move a lot for work and/or like to travel then it’s probably better to rent. On the other hand if you hate moving, buying a house can provide stability as long as you buy it at the right price and in a decent neighborhood. I force myself to travel because it’s a way to keep in touch with relatives and explore new areas but I get homesick when I’m gone more than a week. I love being home, wandering in the yard listening to the birds, monitoring my gardens even in winter. I feel very connected to this patch of earth. I don’t know if I would be happy living in an apartment surrounded by people but I suppose if I had to I could get used to it.
One bedroom. I’m comparing the cost of renting one bed versus buying one bed condo. The 2nd equation is $2500/month for a 2 bedroom versus $400K 2 bedroom condo.
For what is worth, a good house for 200-250k can be found in Madrid (an many other places in Spain) 🙂
“Of all our friends and family members, the number of parents we know who chose to rent are next to nil. This is because not only is owning viewed by North Americans as the ultimate status symbol, renting carries a stigma.”
Is it also because in a lot of places, renting the home that you *want* (or even just need for a family) is often hard to find and/or prohibitively expensive? In a rent vs. buy calculation a three bedroom apartment will likely always win against a house, but I’d love to see the rent/buy comparison calculations for a rental that includes in suite laundry, bicycle/sports equipment storage, fully fenced yard that allows pets, has a swing set (and/or trampoline, sandbox,etc.), outdoor living space, off street parking, etc. These things aren’t even really luxuries, but basic family things that contribute to quality of life and are feasible when you buy a house, but much less so when you rent an apartment/condo or even when you rent a single family home.
A mortgage, even at higher than recent rates, is a hedge against inflation and doesn’t require paying for a house in full and minimizing the opportunity cost. So sure, if you have super cheap rent then buying may not make sense, but your back-of-the-napkin calculations aren’t super informative outside of these scenarios.
Rental costs don’t scale up the same way as ownership costs do for larger properties, afaict. For example, I’d expect a $3m house in our area to rent for around $6k roughly. A 2BR apartment that might go for $1.2 m would be $3000 or so. As you move up the cost ladder renting becomes even more favourable. The likely reason is because at the higher end of the income scale your target audience for renting is much smaller.
All that said, at those prices renting beats owning hands down based on pure numbers. It’s not even close. In Vancouver, fwiw.
I think it is as you oft say: you gotta Math that Shit Up! I own. But I did the math and bought within the $$ range that made sense at the time (2014), and now I’m in a position where keeping my house (and U.S. fixed mortgage) at current cost of owning (including insurance, maintenance, and tax) is waaaay cheaper than rents in my area. To give some hard numbers, my mortgage + 3% value “annual costs” broken down monthly = about $1250 per month. A similar single family in my area rents for ~ $1750-$2000. I think I’m in a rare position where it does make sense to keep owning. Current buyers? Not so much. But the point: I did the math then, and I look at the math regularly to make sure it still makes sense. Current buyers need to just do the math; or, at least acknowledge there is a COST to emotional decision making.
I agree with you that the math on a 1 or 2 bedroom condo/apartment right now favours renting in most markets in Canada vs purchasing. Yes you are taking the risk that rents could spike like they did, but you are also mitigating the risk that your condo reserve is poorly funded and upcoming repairs will cause your condo fees to spike!
As for comparing renting a house vs owning a house, the math can become a bit trickier and your “lifestyle choices” need to be taken into consideration. Do you enjoy mowing the lawn and general yardwork? How about home maintenance and repairs, do you always call someone or do you tackle the clogged drain/damaged toilet yourself. IF you outsource everything to someone else, renting also almost always works in your favour, but if you enjoy the “sweat equity” do lots of maintenance and repairs yourself, then owning can many times play out in your favour.
Owning a home comes with surprises and people don’t think about all of the hidden costs that come with home ownership (new lawnmower, plants for the yard, patching holes in a wall, furnishing all of these rooms etc), that they avoid the math and convince themselves that owning is always better.
You Millennials are going to inherit real estate from your Boomer parents tax-free!
Thank you immigrant Boomer parents for taking advantage of decent home prices.
Generational wealth all the way!
I don’t agree with how the 4% rule is being applied here, because the risk profile between drawing down an investment portfolio versus maintaining a house is so different.
A portfolio drawn down at 4% has a (small) nonzero chance of going to $0 in 30 years.
An insured, maintained home does not have that kind of risk. Over a long enough time horizon you should expect to preserve capital with inflation.
I think to fix this, you should use a safe withdrawal rate calibrated to preserve 100% of starting capital with inflation. Easily more like 3%, maybe less. Other FIRE bloggers have written on this.
Maybe housing still looks expensive depending on the area, but I do think a more apples to apples comparison would close the gap somewhat.
Otherwise it would be like saying always invest 100% equities because the return is higher than bonds.
Are you retired? I am. A 3% withdrawal rate is unnecessary. 4% works fine. 5 years into retirement and my investment portfolio has grown more than inflation. I also reset my 4% withdrawal rate annually based on portfolio balance.
Those bloggers who recommend a 3% SWR at most are trying to instil fear into you and their readers. And, they know nothing more than anyone else. Their job is increasing readership and making people like you dependent on them.
Better you think for yourself. Taking advice from others is fine but ultimately, it’s your life and your decision that counts.
Ultimately, do as you wish.
Have you ever visited small towns in the maritimes? Nova Scotia has beautiful small towns near gorgeous beaches with houses in the $100k to $300k price range.
In any typical population, there is a line that separates the entrepreneurs and the non-entrepreneurs (90Percenters and the 10Percenters).
Homeownership from the mindset of the10Percenters is not mathematically efficient use of the financial resource.
Homeownership from the mindset of the 90Percenters is stability and security.
When the time has come for your son to decide that homeownership which includes the 9 to 5 of everyday living, hopefully, you will respect his decision (easy said than done).
Just want to emphasize some buildings don’t want to rent to families with 2 or more screaming kids running around at home. And this is normal behaviour for children.
A good friend’s daughter who is mother of 2 kids under age 4, in Victoria BC, she and hubby had real big problems with their landlord because of their happy kids’ rambuctious play behaviour. This was an apartment in 2024 They will continue to rent (now elsewhere) because they can’t afford to buy.
I am eldest of 6 children. I DID grow up in 1 bedroom for 5 children in Waterloo ON downtown. We were poor. I stress very much having 2 young children under ie. 10 yrs. old, and more you will find it difficult to control noise level with adjacent tenants in a rental apartment.
Hi, FireCracker.
Can you please explain or maybe make a post on how you and Wander find decently priced rentals and how you evaluate them?
I’m in the same position as you guys are (living in Toronto with a young baby, but have a another decade until FIRE.
Owning a home can provide stability and the opportunity to improve living conditions, but it also entails maintenance and repair obligations. Thank you for sharing this.
If you don’t realize there’s a difference between renting in NY, Paris, London, Rome, etc. vs. somewhere else, you are hopeless.
Just want to update a case. A nephew (in med school) and doctor-wife just bought a house in mid-town Toronto. They have 2 kids under 5 yrs. Had been living for 5 yrs. in an expensive rental condo downtown. Originally to be close to hospital when a child had brain cancer, who died later.
They lead busy lives. Clearly they are probably getting financial help from parent(s). They do want to stay in TO.
This article gave me a lot to think about when weighing the costs of renting versus owning a home. I’ve been in situations where renting felt more flexible, but using cash home buyers to sell my previous house made a huge difference. It was fast, straightforward, and saved me a lot of stress.
Thanks for the information! It really makes sense and I’d recommend to take care of your outdoor space. This Queen Free-Standing Pergola 4x6m at https://cosydeals.com.au/products/queen-free-standing-pergola-4x6m is massive! If you want a full-blown outdoor living space, this is the one. Perfect for BBQs, outdoor dining, or just chilling in style. What’s your vision—cozy lights and plants or a more modern, minimalist look?
I faced the renting vs buying dilemma last year and realized buying made sense when my mortgage was only $150 more than rent for a 5-year plan. I also researched home security systems reviews to factor installation costs and protect my investment. BTW, I tested two smart lock brands by living with each for a week before deciding. I tracked repair expenses and friend visits to estimate wear and tear. Owning meant I could paint walls, build a small deck for weekend grilling, and finally get that puppy I’d been dreaming of. It’s been so truly rewarding!
I guess buying a house is always a good investment opportunity. Land and houses always gain value, while other assets might fluctuate in price quite frequently. But if you have a good design and renovation, you will manage to resell or let it be much more free than without it. In Singapore, we use Vlux Lighting to design all the lights in our houses that we let afterwards.
People planning to own homes should read this first.
Absolutely loved the article!!! For me it is absolutely opportunity costs.
In my area the house I want are 600k. To avoid PMI insurance, I need to cough over 20% for a down payment or 120k
So being invested in the market and seeing personal annual returns of over 100%, why would I give the bank 120k when I can make 120k on that money??
I can literally pay rent for the rest of my life utilizing 120k year after year living in a 600k home.
If I were to buy that home with that kind if down payment I would probably still have a 3k or more a month mortgage payment.
Home purchases are pure traps unless you have the kind of money that buying a 600% home outright doesn’t even phase your financial situation. My 3 cents! Thought I would add an extra penny
in case any are interested on how you can double your income yearly, go to redflightcapital.com and go to “trading department “
This is very informative.
Buying a home can be a big decision, and having accurate data can make it easier to evaluate your options. You might want to check out the Orange housing values to get an idea of recent trends in your area. This resource can provide insights into local properties, helping you compare prices and make a more informed choice before making a commitment. Always consider factors like neighborhood growth and future development when planning a purchase.
Check your income, savings, and debts. Get pre-approved for a mortgage so you know what you can realistically afford.