There are so many articles arguing whether or not it’s better to buy or rent in the GTA. Neither answer is right or wrong and below I’ll explain why.
Holding real estate for the long-term is a fantastic investment, but so is holding a diversified portfolio of stocks and bonds. The key is to make a choice; the choice to do nothing is the worst choice for wealth accumulation.
Although real estate has been appreciating so well in the GTA, it’s not immune to fluctuations. But are stocks and bonds… there is a risk in every investment, you just have to make a choice. Not investing in neither is a choice too, and it will lead to the least amount of wealth accumulation.
We’ve always said, when buying real estate, make sure that you can afford to keep the property for the foreseeable future. You want to invest wisely, and make sure that you don’t overextend yourself. Overextending yourself is taking a mortgage so large that it impacts your lifestyle.
In our opinion, there are three options here:
Not investing in real estate or stocks or bondsThis is the worst case scenario, because, in 25 years, you will be where you are right now.
Renting and Investing in the stock marketThis is where the arguments begin. For some people, it is better to invest in the stock market rather than the housing market. To buy a house, you need to save up a down payment, and then also cover the mortgage, maintenance, and taxes. A lot of these costs could be invested in the stock market, and in some cases you would accumulate more wealth. That might be true if you’re buying a condo in the city, and plan to move in 2 years. The fees to buy and sell real estate would eat into the profit, and the money you put down in the form of a down payment and monthly expenses could have been invested elsewhere for much lower fees. For this argument to be true, renting has to be much cheaper compared to owning a home… and at the moment it isn’t.
Additional benefits of renting and investing in the stock market:
- Your money is liquid and you’re freer to make major life-changing decisions.
- You have more flexibility to move if you don’t like your apartment, or if your lifestyle or family dynamic changes suddenly.
Downsides of renting:
- Your living situation is reliant on your landlord keeping the property as an investment.
- Rents increase every year, while if you own a home you lock in on your living expenses at today’s prices for the foreseeable future.
Buying real estateThere’s an old adage that says: Real estate brought with sound mind, and held for a reasonable amount of time, is the best investment. This has made many families very wealthy. While not everyone can afford to become a real estate mogul, investing in real estate is a great way to force yourself to invest in your future. Once you put down your down payment, and are paying off your mortgage, you’ve started a 25-year investment program. (Although, if that scares you, some mortgage companies give you the option to freeze payments if you’re sick or between work.)
The additional benefits to owning real estate:
- You’ve locked into paying today’s living costs for the foreseeable future, while rents can dramatically increase in the future (like they did in 2017).
- Once you’ve paid back over 20% of your home, you can open a Home Equity Line Of Credit (HELOC). A HELOC is the most flexible borrowing option available. You can take $20,000 out of your HELOC and only pay the low-interest rate until you have the cash to pay it back.
- If you’re very savvy, you can borrow money against your home to invest any way you see fit. If you take out a $60,000 HELOC, and use it to invest in the stock market, you’re only liable to pay the interest on the loan, and that interest is also a TAX DEDUCTION! This is called the Smith Maneuver, and it’s the best of both worlds if you’re looking to own real estate and also invest in the stock market.
Downsides to owning real estate:
- In a slow real estate market, it’s hard to sell and get your money out.
- It’s difficult to estimate it’s exact value. Your home is worth what a willing buyer will pay and you will accept, so it’s very dependant on the neighboring sales, but also the specific buyers who are shopping.
Renting Vs Buying conclusion
If rents were 20% cheaper than the cost to own a home, then I would consider agreeing that renting and investing is a viable option. But since rental costs are on par with the fees to own a home, I strongly lean towards homeownership. At least if you’re planning to stay put for a few years.