Tenants

Are you sick of renting? Have you been considering buying a house or condo for the first time? Renting vs. buying is a never-ending debate, and there is no “correct” answer since everyone’s needs are different. Keep reading for more insight about renting and buying Toronto homes and learn about the advantages that come with both options.

The Benefits of Home Rentals

  • Maintenance expenses and hassles are minimal. If a toilet gets clogged, tenants contact their landlords for help.
  • One predictable and simple payment. Homeownership involves a lot more than mortgage payments. You also need to consider home insurance, utilities, sewage and water bills, condo fees, maintenance fees, property taxes, etc.
  • Not crazy about the neighborhood? You can relocate each year. Tenants can move affordably and easily each year if desired; the true financial advantages of ownership occur gradually. If you are not ready to commit to anything, renting may be a better option.
  • Moving is cheaper when you rent. Buyers are responsible for land transfer taxes for purchases, commissions for sales, and legal costs for both.
  • Occasionally, rentals are just cheaper. Your expenses overall each month will be much cheaper if you rent, as opposed to buy. This is particularly true if your down payment isn’t very impressive. Granted, as a renter, you are paying off a mortgage that isn’t yours.

The Benefits of Homeownership

  • You aren’t paying another person's mortgage, you are paying off your own. Although a portion of all mortgage payments involves bank interest, another portion is allocated towards equity building. You can liken this to a built-in savings program.
  • If there is an increase in property value, your landlord won’t profit from it, you will. This can also go in the opposite direction, though – if prices fall, your pocketbook will be negatively affected (if you opt to sell).
  • At times, buying is a more economical option. The rental market in Toronto isn’t cheap or easy – particularly if you want to reside downtown. If your down payment is decent, it may be more worthwhile to buy than rent (as far as monthly cash flow goes).
  • More freedom. You don’t need anyone’s permission to make changes to the home when you own it. You’re free to replace appliances, install hardwood flooring, or anything else that will enhance the property in your eyes.
  • Where else can your money be put? Toronto real estate is predictable and has historically returned stronger ROI’s than other forms of investments. That’s why real estate a big aspect of investors’ portfolios. However, it doesn’t come with guarantees. If you are a renter and your money is spent on frivolous expenses, buying a house or condo would be a smarter financial plan over the long run.

An Example in Real Life: Buying vs. Renting

Home: 36 Lisgar St.
• 660 square feet
• One bedroom
• Purchase for $345,000 (as of July 2017)
• Purchase for $1650 a month (as of July 2017)

Rental costs

  • Rent each month: $1650
  • Hydro costs each month: $50
  • Insurance each month: $30
  • Total rental costs per month: $1730

Ownership costs

  • Down payment amount: $34,500
  • Buying costs: $2192 (land transfer tax after legal fees + rebates for first-time buyers)
  • Mortgage fees: $1465 each month (on a 10% down payment with 2.69% interest and an amortization period of 25 years). Hydro costs each month: $50
  • Condo fees each month: $422 (which includes heating and cooling)
  • Insurance each year: $15,000
  • Property taxes each year: $1965
  • Total ownership costs per month: $2225

Conclusion: on paper, it would appear that it costs almost an extra $500 each month to buy property rather than rent it. However, there is more than meets the eye here.

 

For instance, let’s say both the owner and tenant live in an apartment for five years. After five years have passed…

 

The Tenant:
• Can expect to pay $102,000 in hydro/rent (and that’s without any rent increases – rent generally increases by 2% each year).
• The landlord’s property equity will increase by close to $40,000, but the tenant won’t be taking home any of it.

The Owner:
• Can expect to pay $130,500 in hydro, insurance, taxes, mortgage, and condo fees.
• Will increase equity by $39,108 via mortgage contribution payments (the remainder of their payment each month is allocated to interest).
• Appreciation of price if sold: $176,650 (as per the average appreciation of condo prices in Toronto of 51.2% from the summer of 2012 to the summer of 2017).
• Net proceeds of the sale five years later:
• Selling price: $521,650
• Selling costs: $26,082 (with a 5% assumption for legal fees + commission)
• Outstanding mortgage five years later: $271,293 (from the initial $310,500 mortgage)
• Net proceeds: $224,275

In conclusion: the homeowner gets more than $187,000, which is higher than the amount initially invested.

Mind you, things aren’t that simple. There are other aspects to keep in mind, like the following:
• A renter may have invested the original down payment of $34,500 (plus the $495 they saved each month from reduced monthly expenses) and received a return for it.
• An owner could pay an extra $28,500 in carrying expenses.
• The price appreciation for a condo can significantly differ based on the timeframe.
• Rental rates tend to gradually increase, just like ownership costs. Potential maintenance expenses are included here (for example, an unrepairable fridge).

In conclusion: the homeowner gets more than $187,000, which is higher than the amount initially invested.

Mind you, things aren’t that simple. There are other aspects to keep in mind, like the following:

  • A renter may have invested the original down payment of $34,500 (plus the $495 they saved each month from reduced monthly expenses) and received a return for it.
  • An owner could pay an extra $28,500 in carrying expenses.
  • The price appreciation for a condo can significantly differ based on the timeframe.
  • Rental rates tend to gradually increase, just like ownership costs. Potential maintenance expenses are included here (for example, an unrepairable fridge).

Who Should Continue to Rent?

  • If one of the following categories is applicable to you, you may be better suited to rent rather than buy: You can’t afford to save for a down payment. Down payments are an important aspect of your calculations.
  • You don’t like to take risks. The only way to get a return is to take risks, but there aren’t any assurances of price increases in the future.
  • You’re not sure where you will be 3 to 5 years from now. For the most part, the more time you reside in a home, the simpler it will be to make a profit or breakeven. If there is a decline in the market and you are forced to sell (perhaps because you are relocating to a different city), you may end up with an investment loss. If you are expecting to relocate, it would be more sensible to continue renting.
  • The home you want is out of your budget. Most people buying homes for the first time are drawn to condos because of their affordability. However, if you’re dead-set on living in a house, don’t forget to factor in the substantially higher buying prices, in addition to the renovation and maintenance expenses you’ll inevitably have to pay.

Who Should Buy?

  • You have the money to purchase property in an area you like. Over time, it will appreciate, and you’ll have more than enough funds to finance your lifestyle. Refrain from borrowing the full amount that a bank offers you when applying for a loan. In doing so, you won’t have any leverage.
  • You aren’t keen on paying off someone else’s mortgage, just your own. Financially speaking, it is worth your while to make an investment in yourself. Doing so can be very empowering.
  • Your perception of real estate entails more than investments. The property is your domain. The fact that it may potentially enhance your net worth with it is icing on the cake.