And, now that every single real estate salesperson is mad at me, let me explain.
There’s a common perception that renting is “throwing money down the drain,” but it is, and it isn’t.
Let me play devil’s advocate for a moment and show you a case where renting makes financial sense…
Every mortgage broker, Realtor, or person with a vested interest in real estate will tell you that it makes more sense to buy than to rent.
And if you’ve ever read, “Rich Dad, Poor Dad,” they tell you that only the most brilliant financial minds rent, and suckers buy houses and condos.
Somewhere in between, there has to be a happy medium.
I do believe that more often than not, it’s better to buy than to rent. I’m not just saying this as a real estate salesperson, but rather because I believe it.
But I figured just for fun, and to show that I’m not biased, I’ll show you a case where it makes far more sense for my clients to rent…
I sold Alice & Chris an entry level condo in mid-2010, which was about 600 square feet, with no balcony, no parking space, but overall, pretty nice.
It was the perfect spot for them at the time, as they were about 24-25 years old, just starting their careers, and soon they would be engaged and wed.
Coming from their two parents’ houses, via university dorms, a 600 square foot condo downtown was like living a dream.
That was then, and this story takes place now.
After three years, they’ve outgrown the condo. They’re now in their late 20’s, eyeing a family, and their priorities, tastes, and preferences have changed. They’re suffocating in that tiny condo that was once a palace, and their need for more space is bolstered by the want for “something different.”
Alice called me two weeks ago and said, “We want out of our condo, but we don’t know where to go.”
This wasn’t an unusual problem; most buyers need to be introduced to several different neighbourhoods throughout the city before they can really hone in on one to plant roots in.
But Alice added, “Although we want out of our condo because we’ve outgrown it, we’re really not ready for ‘the next step.’ We don’t feel like we’re ready to buy a house, and we also don’t feel like we know enough about Toronto to determine where we want to live for the next ten years.”
She had a point.
Alice feared that she and Chris had to “pick” a neighbourhood, and be comfortable living there for at least five years. Transaction costs in real estate are high; we all know this. And if they didn’t like the area they picked, they couldn’t exactly up-and-move in six months.
So Alice suggested something novel: that she and Chris would rent.
Perhaps you don’t think it’s novel, but I’ll tell ya – it’s not that commonly done.
Home-owners don’t usually sell to rent, but in this case, it was the perfect solution.
Alice and Chris wanted more space; scratch that – they needed more space. They were living on top of one-another, and it was beyond time to move. But they felt they were too young to move to babyville, they still had a ton of friends living in the downtown core, and they sure as hell didn’t know where they wanted to buy a house – when that time was right.
So Alice figured they’d rent a condo for one year, which would act as a “bridge” of sorts.
They’d move from a 600 square foot 1-bedroom with no parking and no balcony to a 2-bed, 2-bath with a nice outdoor space and room for a car, if and when they bought one.
It made sense from a life-planning standpoint, but it made even more sense financially.
Don’t forget – proponents of buying over renting always say, “You have to buy so you can pay down principal!” But let’s look at the numbers in this case.
Alice & Chris had a monthly mortgage on their condo of $1,500, of which about $330 was principal, after three years.
Their monthly maintenance fees rose to $450, and that didn’t include heat, or hydro, which ran about $80 per month.
Their property taxes were just under $2,000, or about $167 per month.
The total cost of the mortgage interest, maintenance fees, utilities, and taxes ran just under $1900 per month.
Sooo……what would it cost to rent?
The places that Alice & Chris are looking at now are priced anywhere from $2,300 per month to about $2,800.
So let’s assume, for the purpose of this example, that they end up in a condo for $2,600 per month. That means they’re paying $700 per month more than what they were before.
And what do they get in return?
Instead of being crammed into a 600 square foot 1-bedroom, now they’re in a 1,100 square foot, 2-bed, 2-bath, with a wicked view of the lake, and space to FINALLY have six people over for dinner. Alice gets an entire closet for her shoes, Chris is finally allowed to keep more than one suit in the condo because Alice had previously taken 90% of the closet space, and they have the breathing room that they so desperately desired.
I think it’s win-win.
Proponents of buying over renting might say, “Well, they’re still throwing away $700 per month,” but there’s no merit to that argument. They’re not throwing away $700 per month; they’re spending that money on living.
$700 per month, times twelve months, is $8,400 per year. That’s one week-long vacation at an all-inclusive, plus eight meals at nice Toronto restaurants, and two pairs of shoes, and two suits.
There’s no reason that the average couple can’t make up that difference, or if they choose, just spend it on top of what they already spend.
You’re not throwing money away; you’re spending it on your lives. You eat, sleep, and live in your home, and what’s $700 per month if you’re miserable living in a sardine can?
Now if you took that money and put it towards a purchase, would you get as much, or as big a place? Maybe, maybe not. It depends on the market, and the location.
But rather than purchasing an entire house, which is more than Alice and Chris need right now, they’re deciding to spend $700 more each month to bridge the gap between a condo that’s too small, and a house that they’re not ready for. That $700 per month not only helps them avoid making a mistake in buying a home in a location they don’t like, but it also gives them the flexibility of looking for a home whenever they like.
After a year in the new condo, they’ll be on a month-to-month lease. If they find a house, great. If not, they can keep taking their sweet time.
Is it worth living in a rental for three years? I don’t think so. Then they’d really be throwing money away. But for one year, to act as a bridge, and to really “live it up,” as Alice puts it, I see no issue. In fact, I think it’s smart.
Consumers are free to spend disposable income how they see fit. And whereas your friend might have no problem blowing $700 per night for bottle service at TIFF parties, because that’s just “how he rolls,” you might prefer to wake up, and go home to, a bigger, brighter, more exciting condo each night.
Now I’ll throw one more log onto the fire here: what if the real estate market goes UP?
Well that’s the risk you run by renting, of course. You miss out on the possible gains on your existing condo, which you sell in order to rent, or you miss out on the possible gains of the house that you could have bought.
But I have to reiterate again: if you’re not ready to buy a house in Bloor West Village, East York, Leaside, and the like, and you want to continue living downtown but NOT in your teenie-tiny condo, then renting in the short-term is a fantastic option.