Buying vs. Renting
When it comes to the buying vs. renting debate, you know which side I am on – but it’s not just my opinion, there have been many studies done which highlight both the financial and psychological benefits of homeownership. Alberta is a particularly desirable with home prices far more attainable than most urban centres in all of Canada!
Let’s go over some of the advantages of buying a home versus renting…
Given the hot rental market in Calgary, buying a home is less expensive monthly, overall, than current rental prices. Yes, you will be paying more to interest than principal on your mortgage, at first, but you are also creating a simple investment in your long-term future at the same time. You’ll have a secure asset with traditionally less volatility than stocks, bonds and other financial investments. Property prices in Alberta are fairly stable and choosing a fixed-rate mortgage can insulate you from fluctuating mortgage rates.
Speaking of stable, homeownership gives you the stability to be the “boss” of your own space. If you want to paint the living room passion-purple – do it! Want to add a spaec for mom in the basement? You don’t need to ask permission (just permits!) and have more freedom to create the home you desire. Owning also saves you from having to suddenly move if the owner decides they want to sell or use the property for family.
Building up equity is one of the biggest draws to owning, with every mortgage payment helping you build equity for your future. You can also make renovation choices that can boost your value to directly impact your financial returns – giving you even more control in the future equity of your investment.
Another financial upside is the fact that there’s no capital gains tax on your primary residence – given generally 50% of the income made from investments is taxable, the fact that you don’t have to pay this on the accumulated value of your home is a major bonus.
But it’s expensive to maintain a home, right? Let’s be real, landlords factor maintenance in to their operating costs and at least a portion of that would be built in to the rental cost. There is a way for you to plan for these additional expenses so you can incorporate those “unrecoverable” costs into your initial home buying budget. It’s called the 5% Rule and while it is not accurate to the penny, it can help figure out your total actual monthly cost of homeownership.
So basically the 5% Rule says the annual unrecoverable cost of owning a home is approximately 5% of the property value. The total unrecoverable cost is the amount of money you pay for your home that doesn’t result in residual value – residual value being the home equity that you build up over time. Keep in mind that when you are renting, the total unrecoverable cost is the total amount of rent you have paid as the money doesn’t go towards purchasing an asset or investment. Unrecoverable costs for a homeowner include your property taxes, maintenance on the home (don’t include renovations that increase the value of the property) and the cost of credit, the interest you pay on the mortgage.
Your home is an investment, not just a place to live, and a recent study calculated how a home ownership performs over a 10-year period, making varying assumptions about how values change. It showed that even with a 10% decline in house prices, almost half of the homeowners studied would still see a positive rate of return AND 90% of the scenarios resulted in the homeowners coming out in ahead financially at the time of sale.
So, if you’ve been trying to make the decision to rent or buy, call me today and we can discuss all the pros and cons for your own unique situation and find you the perfect home to grow in while growing your personal wealth. Visit me on Facebook and Google!