Rent or Own?

For the last year the McQueens have stayed in Embrun, and I with them, unsure how much longer we'll be staying there. During that time I've assumed I'd be renting when I moved out. But, thanks to a nice tax return, some fiscal restraint, some on-call and higher-level acting pay, I had some unexpected growth last quarter. Suddenly, the idea of home-ownership was something that could happen for me in the not-to-distant future.

While the question is still academic, one day I will have to answer it; should I rent or own my dwelling place?

If you just answered "You should own. If you rent, you're just throwing your money away" then you've just disqualified yourself from being informed enough to give me advice on this subject.  I'll try to explain why.

First, let's define "throwing your money away." I assume what people mean when they say that in relation to renting as opposed to owing is that you're giving your money away without building equity.   In accounting terms, you're moving money from an asset (cash) to an expense (rent).  It causes your total equity to decrease.    When you own your house or condo, as you pay your mortgage you're actually buying something. When you move out, you will get that money back.  In accounting terms, you're moving money from an asset (cash) to another asset (property).  Assuming a 0% mortgage, your total equity doesn't change.  Then, as the value of your home goes up, your equity increases without you having to actually do anything.

It's true that when you rent, you're throwing your money away. But, it is also true of owning. In fact, you're throwing a lot more money away on ownership. In both cases you have to throw money away on heat, water, utilities, cable, phone, etc. Some of that might be included in the rent, but you are paying for something that you can't get back.

Furthermore, with owning, you're paying interest. In fact, with a 25 year amortization period and a 10% down-payment, you're going to pay for the house about 2 and a half times over; once for the value of the house, and the rest is interest. Paying interest is definitely throwing your money away.

Now, if you're lucky, when you go to sell your house, you can get all that back. Don't forget, with ownership comes maintenance. With rent, somebody else is responsible for upkeep. There's also property taxes. With a condo, there's condo fees, and extra expenses that aren't included in the fees.

In order to compare price sheets, I wrote a little mortguage calculator program. You can fill in all the figures for owning and renting and compare the two. Generally speaking, at the end of the amortization period you'll pay way more for ownership, and you're rent - due to rent control - will be pretty low.

How do you get ahead by renting? This is the hard part. When you own a house, every time you're paying your mortgage you're taking part in a forced-savings plan. If you don't invest in anything else, at least you have a house! With renting, you must invest elsewhere! You need to invest in good mutual funds, money markets, etc. With good investing you can come out ahead.

"But what if the economy tanks, like it did in 2008? Then your investments aren't worth much." True, but neither is your house. When the markets fall your risky investments are worth less. (You shouldn't have many risky investments close to retirement.) In time the markets will rise. You will get your money back. Now, if the local economy tanks, people lose their jobs, and many have to move. Moving requires selling of housing. With people leaving in droves (because the local plant closed, as often happens in a bad economy) then there's lots of people selling their houses, but not many are buying. The law of supply and demand requires the value of the house to fall.

Remember, the value of anything is the most someone is willing to sacrifice for it. If the city estimates the value of your house at $300 000, but no one is willing to buy it for more than $150 000, then your house is really only worth $150 000. After all, that's all you can get out of it. Therefore, that's it's value. Maybe another time someone will to pay more, but not now. And now is when you need it.

Most people also say it's the best investment you'll ever make. I've read a number of books written by several financial advisers and most say the same thing; "If your house is your best investment, you could be in trouble." In fact, here is a good article explaining why it's a bad investment. And here is a good response.  They usually say something like "Owning isn't for everyone.  You should buy a house because that's how you want to live."

So, my point is that the debate between renting and owning isn't as clear cut as you may initially think.

I have recently come to the conclusion that owning is better than renting for reasons I'll explain later.