Monday, November 07, 2011

Own or Rent

A while ago I blogged about renting vs owning. I concluded by saying I realized why owning is better than renting but I'd wait to post those thoughts. Well, here they are.

Why renting can be better:
When you rent, you pay rent, maybe utils, cable, Internet, etc. When you own, you also pay property taxes, condo fees (maybe) and a lot of maintenance. Generally, your rental costs are lower than your ownership costs.

While the costs of ownership can rise without warning or limit, rent control exists (in some areas) to prevent that. Last year my rent increased by 0.7%. Shortly after I moved in, I found I needed a new oven. I had one the next day, and it didn't cost me a cent. Taxes can rise. Heating and electricity costs can rise. Condo fees can go up at any time, and the condo association can come and ask for money for things not covered in the fees, and they want it now. With a house, you can put off non-urgent repairs until you have the money. Interest rates on your mortgage can rise, possibly forcing you out of your house.

Now, if you rent, figure out how much you would be spending on ownership and invest it in some investments. After 25 years, you're rent is going to be pretty darned low, and the returns on the investments (as long as they weren't too high risk) should be pretty good.

Renting is also for better short-term mobility. If you're working contract to contract and you figure you may be moving to another city at any time, renting is better. If you have to move, you just give your two-months notice, and move out. If you own, you have to sell, which is a lot more work, and more expensive. This is especially important in times of high unemployment.

But, here's why owning can be better: Long Term mobility. Let's say you move into an apartment where you're assured the walls are thick concrete, only to find out they're not. It's just drywall and insulation. You can hear everything going on in your neighbour's apartment. (This is my current situation). If your neighbour likes to make a lot of noise at all hours, then you may want to move. Now, if your desire to move happens in the first couple of years after moving in, no problem. Move. What if it's 10 years after moving in? You get a new neighbour, and suddenly your life is miserable. Rent control has kept your rent relatively low. If you move anywhere else, you'll be renting at market values. Your rent will increase. If you happen to be on a fixed income, like after you retire, then this is especially bad.

Now, if you had bought, then you will have built up equity. If you decide to move, after ten years, your property's value has likely gone up. Of course, if you're moving within the city, then chances are properties all over the city have risen at similar rates, but for a similar dwelling, you shouldn't notice too much of a price difference. You'll be able to make a larger down payment due to the equity you've built up in your current place.

Another reason is for moving to a different market. Different cities have different markets. Toronto and Vancouver have insanely high housing prices. Sault Ste. Marie is very affordable. Ottawa is in between. Let's say you live in Ottawa in a house.  You and your next door neighbour both moved in at the same time, into identical houses, paid the same amount for the house, got the same mortgage, etc. Now, you and your neighbour have the same equity in your respective houses - let's say, $150 000.  Then one day you, and your next door neighbour have to move to different cities for some reason.

Now, let's say you each have a friend who are each neighbours in an apartment building. One of the friends has to move to Sault Ste. Marie, while the other has to move to Toronto.  Let's also say that you get a job in Toronto, and your neighbour gets a job in Sault Ste. Marie.   So you and your renting friend are moving to Toronto.  You're next-door neighbour and his renting friend are moving to Sault Ste. Marie.

You're next house will be way more expensive than his (and his will be bigger!). But you're both better off than the two next door neighbour's who rented. Each of you will be able to have a house in the next city. You'll use the equity to put a down payment on a house in Toronto, while he'll use his equity to buy a house outright in Sault Ste. Marie.

As for your renting friends? The one moving to Toronto will have to rent. Period. Owning will of the question (without some other finances, like a winning lottery ticket). The one moving to SSM _may_ be able to buy, but if he does, he'll likely only put 5% down on his house.

Another reason to own is when you need to upgrade your lifestyle. Renting a one bedroom apartment isn't too expensive. Two bedrooms are a little more expensive. But what if you have a growing family. You'll want more space. You'll want a house. At this point, you'll wish you had built equity up in a condo or bungalo or something smaller.

So, unless you see yourself moving to another city within 5 years, it's probably better to own.

As for me, I work in IT for the Canadian Government. Normally, that's about the most steady employment you can think of...other than maybe Tim Horton's franchise owner. But right now, it's less stable.  And if I lose this job, I don't see me sticking around Ottawa for too long. If I lose my job, then so will lots of other IT professionals in government. Many of them will have more roots in Ottawa than I'll have. The job market will be saturated. At which point, the housing market in Ottawa will really cool off. I'm at a disadvantage; I don't speak French. So, if I can hold onto my job, then I should buy something, but if I can't, then I'll probably be screwed.

*Sigh* I'm getting really tired of listening to my neighbour's stereo.

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