This classic question is plaguing millennials everywhere.

Can you afford it? Are you ready to make the commitment? Is it the right time?  What you decide to do depends on both financial and personal factors. And we’ll give you a rundown.

You could be moving out for the first time or already renting for a few years when the question will inevitably pop up – should I buy a place or rent?

Rather than listing out pros and cons (which you can find anywhere), we think the best way to get our points across is to use a realistic case study. This way, you’ll be able to see how they can impact your own real-life situation.

Case Study – Rent or Buy

Meet Denise. Denise is a young professional who is moving out for the first time. She’s landed a good job in a big, albeit expensive, city.

Financial situation:

• Denise makes $75,000 annual base salary
• She has saved about $30,000
• She has an unused $15,000 line of credit
• She has around $10,000 in student loans

Professional/Personal situation:

• Denise is focused on her career and wants to grow professionally. She wants to live close to her job to save time for work, travel and personal hobbies 
• Denise has no hard ties to the city and isn’t sure how long she’ll stay there

The question:

Should Denise rent or buy?

The rent is so high in the city that it has Denise wondering whether she may as well buy a place. She has money saved up. She could benefit from future increase in prices and even rent it out if she were to leave the city.

First, let’s look at this situation from the numbers side

The market in the city is very hot right now. Home prices are high, which also keeps rental prices high. Denise finds a 1-bedroom condo, with a purchase price of $500,000, and she is comparing it with a rental unit in the same area.

We can split her costs into 2 different types:

1. Upfront costs

• • Denise won’t be able to put down 20% down payment, which would be $100,000. She can put down 5% for a $25,000 down payment
  • Other costs associated with buying property will total about $10,000. Examples, include property tax adjustments, land transfer tax, lawyer fees, etc.

Here are Denise’s start-up costs:

Rent vs. Buy – Upfront Costs

       2. Recurring (monthly) costs

• • These will include mortgage principal and interest payments and will also depend on the period she chooses over which to pay her mortgage (amortization period).
  • Since Denise won’t be putting down a 20% down payment, she’ll have to pay mortgage default insurance, otherwise known as CMHC fees. She won’t have to pay for it upfront, it’ll be added to her monthly payments. In this case, she’ll have to add $19,000 to her mortgage.
  • We like this website for getting a good estimate for monthly costs: https://www.ratehub.ca/mortgage-payment-calculator. You just put in your numbers and it’ll present you with different scenarios.
  • Condo fees, since she’s buying a condo
  • Taxes
  • Utilities

Here are Denise’s monthly costs for buying when compared to renting:

Rent vs. Buy – Expenses

For more details on what these costs are, check out our other post.

Other considerations:

• Because her down payment is on the lower end, a larger portion of her payment is going to interest (since she borrowed more money), instead of building her ownership in the property, i.e. her home equity
• Renting is often a fixed cost whereas owning will involve variable costs, i.e. unexpected repairs and renovations

Now, let’s look at Denise’s situation in 5 years:

Rent vs Buy Equity

Next, let’s look at qualitative factors

These will inevitably also have a financial impact on Denise.

• Professional/Personal goals
  • Denise is interested in working internationally early in her career and so, wants some flexibility in her living situation. Selling too soon may end up as a loss for Denise if her property doesn’t increase sufficiently in value to make up for the selling costs and even her upfront costs. However, it could be advantageous if the prices go up during her stay.
  • If Denise is willing to be a landlord, she would need to evaluate the rental prices in the area and whether it would cover her expenses while she is away

• Financial goals
  • Denise is unsure about taking on more debt. Now, let’s step in and examine this assumption. There can be 2 camps of people:
    • Like Denise, some people want to be debt-free. But its important to remember that not all debt is bad. You can think of it as an investment in your property for future growth. So, you can approach your purchase as investment and your debt as investment debt. 
    • On the other hand, thinking that all mortgage debt is completely fine can be problematic too. The key is that it needs to be affordable mortgage debt. By doing an evaluation like this one, you’ll be able to make sure you’re taking on affordable investment debt.

• Liquidity/time horizon
  • Denise’s liquidity will also go down, i.e. the cash she has on hand. She will have wiped out most of her savings and won’t have an emergency fund or funds for any other things she may want to do, like travel.
  • The value of her investment is tied in the property, which requires a little work to turn into cash again. If buying doesn’t make financial sense right now, its completely fine to wait until she has enough cash. By performing an analysis early, she can see how much she needs and thus, it gives Denise specific goals so she can adjust your saving and spending habits 😊
• Risks
  • Unfortunately, there are risks to both sides, which we’ll discuss in-depth in a future article. But, Denise will need to consider potential buying risks such as the impact of a housing bubble, unforeseen repairs and changes in financial situation. She should also consider potential renting risks, such as tricky landlord relationships

The verdict: to rent or buy?

Based on the financial analysis, it’s advantageous for Denise to buy. She would spend more on living expenses, but she would have $157,392 more in property value to show for it after 5 years. If Denise wants to sell before then, her value growth might be different, depending on the market. If she wanted to rent it out, she needs to make sure the rent can cover interest and other expenses.

However, other factors need to be considered too. Renting is quicker at the start and end and has lower start-up costs. Denise would also have to consider her budget. Even though it makes sense financially, can she keep up with the monthly payments? What impact would it have on her lifestyle, in terms of travel, entertainment, dining out, transportation costs? How and when can she rebuild some of her emergency funds?

Now, what about you?

Denise’s situation can help you assess your rent or buy question. Which of your factors are similar to Denise? What about different? How would that affect your own personal case study?

Buying can be a great choice for you, provided it fits your own financial and personal situation. It also opens the gateway to investing in property, which in turn opens doors for a source of more passive income.