Tuesday, February 12, 2013

Renting Vs. Buying: What No One Tells You About The Costs of Home Ownership

This subject has been done to death. Search anywhere on the internets and you can probably find a list of pros and cons for renting vs. buying. However, considering I have now been a homeowner for about 3.5 years and I was a renter for 3.5 years, I feel like I have a balanced view on the subject. For starters, I am not pro-owning (I am not con-owning either- to each their own! I am just trying to remain objective here). I actually firmly believe there are a lot of benefits to renting such as:
  • Stable payments
  • Worry-free, low maintenance living
  • Chance to live in different areas of town
  • More affordable in some areas
  • Low commitment
I jumped into home ownership overnight (literally- please see this post). I was 23 and I decided one day to buy a condo, and within two weeks I had bought one! It was crazy and 100% not a bright idea. I love love love my condo now, but it was basically a really tough transition for me. With a lot of people my age looking into buying, I thought I would do a quick write up of the realities of home ownership and why it is not necessarily better than renting.

1. It Is Expensive
Probably more expensive than you think! First you have your closing costs, and then you need to start paying mortgage payments, maintenance fees, property taxes, hydro, and general maintenance of your space! There are also a lot of unexpected costs. For instance, because my condo was a relatively new build (I am the second owner) the property taxes hadn't been assessed yet. The seller's portion of expected taxes was taken off the sale price, so I didn't exactly get a wad of cash for them. And then when the back taxes were owed, I ended up paying owing about $500 a month for 6 months. That means 68% of my income was going to my mortgage, maintenance fees, taxes, and hydro. SIXTY EIGHT PERCENT! Once it was paid off, I ended up owing no taxes for a year because I overpaid (it is through my mortgage company and they only reassess every 6 months). Even still, I was spending around 50% of my income on just living costs. Insanity! Luckily I have a much higher income now, but it is still shocking that I survived that time without going into debt!

You may not think of this when buying a condo- but maintenance fees can go up! My condo fees went up around 25-29% two years in a row! That was an unexpected expense that I suddenly had to adjust for! It wasn't a huge impact in a small condo like mine, but in a larger unit it could be quite substantial.

Other costs? Closing costs when you buy and sell can be quite high! Plus if you don't put 20% down you need to pay money to the CMHC as "insurance" for being a higher risk mortgagee. That meant about $4000 added to my mortgage!

Lastly, you can't rule out maintenance costs of a home. My condo is still only 5 years old so it is in great shape, but you never know when something expensive will hit and you have to pay for the repair or replacement of that broken item!

2. You Might Not Make Money
Everyone talks about owning a house vs. renting as being the better choice financially. Renting is thought of as "throwing your money away". I find this ridiculous! If I add up the amount I spend per month on interest on the mortgage, maintenance fees, property taxes, and utilities it is roughly $1000!! I could get a decent place for $1000 a month, especially if I shared. That is money that I will not see a return on!

And I should add in here- for people that own homes versus condos- I do have maintenance fees, but my utilities and insurance (and probably property taxes) are much lower than a house. I think a house would actually be more expensive than my maintenance fees.

You then might argue that I can sell my place and make a profit. This is true- if I am lucky. But if you take into account that I have spent $12,000 a year NOT on the principal of my mortgage, that is $36,000 over 3 years. Lemme tell you, while I have been lucky enough to see growth in my condo's value, it is not $36,000. So I really don't think I am making money so much as breaking even on my investment. I actually have a spreadsheet on what I need would need to sell for (after closing costs!) to break even. If I had spent $1000 on rent and invested the difference (ie- my actual principal payments) I would probably have close to the same net worth as I have now. I did the math! The return on my principal payments vs. the increase in value of the condo is about a 6% return, before closing costs. My closing costs would eat up most of my return. Better than market rates right now, but it can be completely eroded in the market quite fast.

Plus, when you sell you can lose 5% of the value to just the realtors' fees. Yikes! Of course...that assumes the value of your home doesn't fall. Then YOU actually have to write a cheque to sell your place. There used to be a show on HGTV called My First Sale and I saw a lot of those people going into the red in an attempt to sell their homes because values had dropped to less than they owed/closing costs.

I realize that with renting you never get your money back- but you are also buying a roof over your head while you live there. I have term insurance that makes no money and I will never get a return on, but it serves a purpose. Keep it in perspective!

3. You Have to Commit
It is really hard to overhaul the home you buy- and even harder to move it to another location! They say to make your investment worth it (in terms of all the costs associated with it), you need to own the place for about 5 years. I was a little naive when I bought my condo. I thought I would live here for a couple of years and then meet Mr. Right and move into a bigger place and rent this one out. Little problem though- where do I expect to get my next down payment when I am putting a lot of extra savings into my mortgage? Luckily (?) Mr. Right has been elusive so I have been quite happy here for 3 years and maybe I will make it to 5!

All said, I do enjoy owning my own place. I just want to get the message out there that it is not the cash cow that everyone thinks it is! Renting a place is not throwing away your money because it has a lot of benefits and offers a lot of peace of mind! I can't even imagine what I would have done in those early years if I had lost my job or become incapable of working- I could NOT save a large enough emergency fund with the payments I was making.


  1. WELL written Casey! I have been a home owner for 35 years and have never seen it explained SO clearly! xo Sheila

  2. I love the comparison of renting to term insurance. Renting isn't throwing money away!

    We rent and probably won't be ready to purchase for about another 5 years.

    I'm not in a rush though. We're on track to pay off our debt by the end of next year. Then we'll be able to save properly for retirement and build our savings.

    While we can't anticipate all additional expenses, we sure can plan for some!

    Thanks for the insight =)

    1. either way you are paying for a roof over your head. buying just adds an investment portion to that!! (Kind of like permanent insurance!)

      Omg, can you tell I work in insurance? haha


Pin It button on image hover