Property Virgins: The Finances of Owning vs. Renting

People have always told me, “it’s better to own because renting is just throwing your money away”, and I’ve always understood the general concept, but never fully understood the exact math of that – UNTIL NOW.

As you may know, we bought a house. It was emotional, and scary, but once I got past the initial shock, I’ve really been obsessed with getting to the bottom of why (or if!) owning makes more financial sense for us than renting (especially since I found this CBC analysis to be quite confusing).

And through my research, I have developed a GOLDEN RULE for whether you should BUY or RENT that can be applied to the housing situation in any city, no matter where in the world you are! (It is of course an oversimplification of how the finances work out, but it covers the basics).

So here we go, the real-world example for owning versus renting, based on “ballpark” figures for Vancouver:

Mortgage: $2600, + $250 in strata fees, + $100 in property tax. So let’s say to own a 2 bedroom apartment in a nice Vancouver neighborhood is roughly $3,000/month.

Renting in the same neighborhood: Between $2,200 – $2,600/month. Example via craigslist:

But it’s not about comparing the $2,600 to rent to the $3,000 in mortgage payments, the real numbers you need to compare are the amounts you are “throwing away” in both scenarios. While in renting you are throwing away all of it, when you buy, the amount you are throwing away is the INTEREST amount of your monthly mortgage payments.

So in our example above, lets say 50% of the mortgage is going to INTEREST (basically just thanking the bank for letting you borrow hundreds of thousands of dollars), and 50% is going to paying off your PRINCIPLE (the actual mortgage). That means $1300 in interest, + the $250 in strata fees, + the $100 in property tax equals roughly $1700 is being “thrown away” monthly, and the $1300 being paid toward the principle you will GET BACK when you sell your house.

Therefore when it comes down to it (ignoring all that down payment money for now), in our scenario above, owning is like paying $1700 in rent (ie. throw-away interest) for a beautiful 2 bedroom apartment instead of $2,600 in rent (therefore saving $900/month), and the those savings plus a little more (the $1,300 principle paid per month) you are just being forced to invest for the time being.

I’m not saying everyone should go out and buy a house (you gotta compare your “I” to average rent in your city!), but I can’t tell you how good it feels to finally “get” the finances (and it allows me to sleep soundly at night). Now that we own we are still throwing money away (in the form of interest), just not as much money as we would be throwing away by renting (since we live in a city that is very expensive to rent in).

And best of all, now when people say to me, “oh you bought a house!? WELCOME to the wonderful world of debt!”, I respond by saying I don’t feel it’s the wonderful world of debt at all, I feel like it’s the wonderful world of forced savings.

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DISCLAIMER: Of course the above calculations do not take into account the amount you need for your down payment, initial closing costs (like $10K!), plus repair costs that may come up that a landlord usually takes care of (new roof, water heater, etc), but on the flip side of that when you are renting you also can see your costs sky rocket (like in San Francisco where rental costs are going through the roof!). I also very much appreciate that such high forced investments will not work for everyone, and as we literally just started doing this, I’m not even sure how it will work for us! But I promise you I will let you know how it goes. 🙂