Long term Results of Renting vs Buying a House

In the long run, buying a house instead of renting a house generally works out better for most households.  Whether you buy or rent, non-mortgage costs will increase around the same rate.  The main advantage of buying a house is that the upkeep, home insurance and property taxes are roughly 35% to 40% of your initial annual house expenses, excluding utilities, which whether you buy or rent you will be the same.  The cost of the mortgage stays relatively the same, although you should expect interest hikes in the next 25 years.  On your final year of your mortgage, the cost of your mortgage might be less than 50% of your housing costs (excluding utilities).
    For renters their rent will increase around the same rate, but because the rent is much higher than the variable housing costs of the owner, the rent will increase in terms of dollars at a much faster rate.
    It wasn't until we had a TFSA that we could illustrate the long term benefits of home ownership.  Being able to take taxes out of the equation really simplifies the spreadsheet results.  One of the biggest surprises was that even though the home owner has a paid off house, they would also have a larger TFSA than the renter.  The early growth of the TFSA by the renter is eclipsed by the home owner savings by the time they are ready to retire, assuming they would have bought their house in their mid-twenties.


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Credit Card Nerd Math

Below we have a chart with the results of owning vs renting your home for the long run.  The house is located in Winnipeg.  The house was bought for $249,000 with a $12,450 (5%) down payment, starting with a five year fixed term with a 2.44% interest rate.  The difference in home insurance, annual upkeep plus property taxes is $5600 a year.  The house would rent for $1250 a month and the $12,450 was put into a TFSA by the renter.  The cash flow difference between renting and buying was put into a TFSA also until buying became cash flow positive, in which case we deducted the cash flow savings (it didn't make sense to have two TFSA going if the difference would be the same anyway).
    The assumptions we made were;
a 3% annual increase in rent;
a 4% annual increase in property taxes, home insurance and upkeep;
a 6% return on your TFSA;
a 2% annual increase on your home value, but the house dropped $19,000 (7.6%) in value in the first year;
an interest rate increase to 3.1%, 3.7% and 4% after 5, 10 and 15 years to show the effect of increased mortgage rates;



Buying a House

Year

Home Value

Annual Cost

Equity

1

$230,000

$18,692

-$7,849

5

$248,959

$19,643

$41,791

6

$259,017

$20,700

$59,462

11

$280,369

$22,772

$122,019

16

$309,550

$24,771

$198,553

20

$335,067

$26,484

$268,562

25

$369,941

$29,040

$369,941

30

$408,444

$17,464

$408,444

35

$450,956

$21,248

$450,956



Renting vs Buying Expenses

Renting a House

Year

TFSA Difference

Annual Cost

1

$17,111

$15,000

5

$31,323

$16,883

6

$41,806

$17,389

11

$65,279

$20,159

16

$107,322

$23,370

20

$138,586

$26,303

25

$180,973

$30,492

30

$139,790

$35,349

35

$89,438

$40,979

40

-$25,612

$47,505

45

-$137,160

$55,072


TFSA Balance between a Renter and a Buyer


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A Wake Up Call

Buying your first house can be one of the most stressful times of your life.  Sometimes the signs of stress can be a good thing though, because a life without stress sometimes means a life with nothing to lose.  Being underwater on your mortgage is a terrible feeling, but in the end, you should come out ahead.
    In the long run, even if you discount the equity in your house to zero, you can come out better than if you rented your whole life, because your reduced housing costs later in life will more than make up for the initial investment and savings from the renter.
    Whether the housing market is up or down, one thing is for sure.  The same people will be buying or renting their home.  Why, because the most important step is the first step, which is having the conviction to making a down payment and buying your first home.
    Important Note: Every market, every house and every household is different.  What works for one family in Winnipeg might not work out for a different family in Calgary.  The above is for illustrations only and does not guarantee you that buying a house is right for you or your family.