After University, I moved around a lot. I lived in Toronto, Mississauga, Sault Ste. Marie, and where I now reside, London, Ontario. Like many young people, I didn’t know what I wanted to do, where I wanted to be, or who I would end up with as a life partner.
Renting a place to live, as opposed to owning, made a lot of sense for me—as there were no strings attached. It allowed me to move unencumbered. To go where I needed, and wanted, to go.
For many people renting makes more sense than buying. Conventional wisdom is that renting is throwing money out the window. But this simply isn’t true.
Everyone needs a place to live, and it costs money for that place regardless if you own or rent it. If you own it, you have to pay interest on your mortgage, property taxes, for upkeep on your home, higher insurance costs, and invest fairly significant amounts of your time in caring for the home, not to mention costs related to procuring the home—real estate fees, lawyer fees etc., and like costs when selling the home. This money all goes “out the window.” Shelter, like food, is a cost—whether you rent or own.
Renting is simply a way to acquire that shelter. And for many people, depending on their situation in life, it makes most sense. For me, when I was younger and single, that was most certainly the case. For others who don’t need the space of a home or want to be anchored to a specific location, this may be the case as well.
If a smaller space suffices, rent could very well make most sense for you financially and otherwise.
Best Investment Ever
Many people say their house is the best investment they’ve ever made. They say this because for many people, their house is the only investment they’ve ever made. Yes, housing prices have gone up over time. But so have the prices of other assets.
Take stocks for example. If you had invested $100,000 in U.S. stocks in 2015 when Canadian real estate prices took off like a rocket, that $100,000 investment would be worth $260,000 today. That works out to be an 11.6 percent average annual rate of return. Canadian real estate over that period is up about 7.7 percent per year on average. Yes, real estate has done well. But had you taken the $100,000 and invested it in stocks instead of real estate, you would have done better. This is the case historically.
The reason real estate has proven to be such a good investment is the leverage component, which magnifies returns. A typical buyer sinks about $100,000 into a home as a down payment, and the rest is borrowed money, which earns a rate of return as real estate appreciates. Of course, this is if real estate appreciates, which it has over time. But there reaches a point where prices get so high, like today, where prices simply can only go so much higher before people can no longer afford them. At some point the rate of growth has to slow. And at that point leverage stops magnifying gains. Leverage, too, can magnify losses. Which makes it a double-edged sword.
I’m not saying real estate prices are going to go down, simply that they’re not likely to rise as fast as they have—which likely will make real estate not as great of an investment from its currently elevated prices.
Do Something
For most people the home they live in is a non-productive asset. It does nothing to generate income. They live in it, and it bears expenses. Prior to the recent runup in real estate prices, residential real estate prices appreciated at about the rate of inflation per year. It’s only in the last 10 to 20 years that prices have taken off.
Productive assets, on the other hand, like stocks, generate income. As a result their returns, over time, should be higher than non-productive assets, as has been the case historically. Something that produces something is more valuable than something that doesn’t.
If you rent, and pay less money than you would to own a house, you can invest the money that otherwise would go into owning a house in stocks which likely are to appreciate more than real estate. And this is what you should do if you’re renting. Because you’re not building equity in a house as a renter, that money should instead go into building up equity in businesses—in stocks. Over time, you will make out just as well, if not better, than the home owner. So you don’t need to fret if you’re a renter about not owning a home. Instead of owning a home, you can own productive businesses.
Bottom Line
Whether you should own a home or not all comes down to your life situation. If you need the space, by all means go for the home, it probably makes more sense. You’ll build equity in the home. You’ll have a place to call your own and more space for your family. You’ll have pride-of-ownership. There are all sorts of benefits to owning a home.
But if you don’t need the space, don’t ever let anyone tell you you’re throwing money out the window. This simply isn’t true. Money either way, whether you’re an owner or renter, is going out the window. You can choose to put the money you’d otherwise be using to build up equity in a home into stocks, and you’ll be no worse off—you may be better.