Rent vs. Buy?
We ordered a pizza a few months ago, and our favorite delivery guy asked, Garry you are a Mississauga Real Estate Agent, right? Yes, I said, why do you ask? Should I buy a house now? I am worried the prices are too high! My first question and immediate response is always, were are you living now? Do you currently own?
Pizza delivery guy answered; we are currently renting, we have three children and everyone’s telling us not to buy a house right now; prices will drop! What would you recommend Garry; I know I can trust what you say. I smiled, BTW: the last part of the “I know I can trust what you say” came just as I was providing the tip. With a huge smile, p.d.g said, you are one of my top 5 customers; which meant to me; (size of tip), as we don’t often order pizza. So, I hurried up the three flights of stairs to my office, back down to provide our business card and recommended we get-together.
Consider the pros and cons
If you are currently renting, and you have come to accept the realization; you are stuck making monthly payments for shelter costs, most likely for the next 20-25 years, then this needs to be kicked around and you need to consider everything.
But what advise should we give p.d.g?
Lets assume our pizza delivery guy buys and ends up paying $2500.00 monthly towards a mortgage payment. Of this amount monthly, approximately 52% or $1300.00 goes towards paying down the principal; every month! 48% or $1200.00 of the payment, is like rent, and its to be viewed as interest cost.
Now one might argue, yes, but if the prices drop, and p.d.g waits to buy, his total debt will be less! Because the purchase price will be less! True; but at what point in time, will buying make most since vs renting? There is a point in time, as shown in the comparison chart below, that you can see when is the benefit!
But, you need to consider, possible moving expenses? Are you happy with the current space? Can you count on the rent never going up or increasing? If you believe that home values will drop, how much will they need to drop, over what period of time? Further, while you wait, what are the total costs of renting? How do they compare to interest costs, maintenance fees, taxes, etc… over time?
Lets make some assumptions p.d.g is financing 85%-95% of the purchase vs. paying all cash, here is our recommendation:
- Find yourself a great property in the price range of a 2.5 – 3 percentage point ratio of your annual total family income! In other words, buy and borrow within your means and not what the bank wants to lend you!
- Consider a property with a granny suite, that’s currently illegal; that can be made legal. This provides additional income and increases the property value.
- Expect that interest rates will increase sometime in the near future, so take advantage of the low borrowing cost benefit now.
- Learn how to buy a house, within the boundaries of a great area that has more expensive properties framing the neighborhood.
- We know monthly rent is money out the window, so view the purchase price cost as an opportunity cost. You have no choice but to pay shelter cost for the balance of your life, so why not build your own equity rather than your landlords?
- We know, if home values decline, homes at the lower price category drop far less than the big huge expensive ones! (percentage speaking).
- Although you can afford to purchase more now, know that if a decline in values occur, many of the areas owners in larger homes will want to sell, and they will want the smaller homes within the area to live. They do not want to move the kids from their school friends!
- Your landlord will never add you to their “Will” for paying your rent on time!
Do your homework by clicking a comparison chart that you can customize for your personal rent vs buy chart.
Garry and Gina Hillis are realtors with 27 years of experience. They always prepare cost to own charts and spreadsheets for buyers and sellers to assist them in their decision making. They have also just released a guide for buyers, designed to provide answers to questions and checklists too insights when buying. The lifestyle budgeting map helps buyers work through their own personalized income allocation to ensure they make great decisions on the amount of home they should buy.
Visit our web site at www.hillisgroup.ca