With mortgage interest rates at a national low, sales prices on the rise and the real estate market favouring buyers, the local climate seems to indicate a favourable time to invest in real estate. But admittedly, home ownership comes with its associated costs, and may not be the right choice for all Montrealers alike. Here are pros and cons of buying vs renting, along with an analysis we hope remains fairly unbiased despite our evident affinity for building strong real estate portfolios.
Unless you find an amazing deal, chances are that owning your own home will come with a steeper monthly carrying cost than renting. This is especially true for investments made in condo projects with gyms, pools, and other amenities. Homeowners need to account for monthly property taxes as well as repairs and other maintenance costs, which drive up the monthly costs.
The difference however, can be minimal if buyers take the time to scout out good investment opportunities on the market.
Let’s take, as an example a Downtown loft we advertised last week.
With a 5% downpayment, that’s $1280 a month in mortgage costs and just under $2000 a month in total carrying costs including insurance, phone, internet and cable bills.
Meanwhile, renting a modern, new or completely refurbished 1 bedroom condo of this caliber downtown would set you back between $1500 and $1800.
As a rule of thumb, it’s recommended to keep home expenses (whether rent or mortgage) under a third of your income. If you earn $60,000 a year, you shouldn’t be spending more than $18,000 a year (or (1,500 a month) on housing. More information about that here.
When you rent an apartment in Montreal, you’re putting anywhere between $800 and $4000 a month into your landlords pockets. The average rental price (for a 1 bedroom apartment) of $1000, over 5 years, amounts to a whopping $60,000 with zero returns. On the other hand, paying off a mortgage builds equity each month which you can cash in on when you sell or refinance your home.
Generally speaking though, because of the way principal payments are structured in mortgages, owning a home only starts to be more financially rewarding than renting if you hold onto the investment for more than 5 years. If you plan to relocate in the near future and you’re not comfortable renting out your home, it makes more sense to hold off on homeownership.
Another factor to consider is the downpayment cost. Your downpayment counts towards your principal- the amount you get back when you sell your home. Most banks will accept a 5% downpayment (providing you have decent credit history) but the best mortgage terms are secured on 20% and 25% deposits. If you don’t have any capital-intensive business ventures lined up for the near future, tying up a 20% mortgage is a great forced savings plan. If you do, it might be cause for unnecessary stress.
Case study: 185 Seminaire, a 1 bedroom condo in Griffintown.
Asking price: $245,000
Closing costs: $16,531
Carrying cost per month: $1804 (on a 25 year mortgage)
Average rental prices for 1 bedrooms in the building: $1500
Owning this condo for 25 years will cost you $496,672 less than renting, an average savings of $19,867 each year.
Potential for Income
Homeowners can create passive income by renting out rooms in their home, or renting out the entire home if they own more than one property. Tenants cannot (legally) earn passive income from their rentals, and under most leasing contracts will face severe penalties for attempting to do so.
Homeowners are responsible for maintenance of their own homes. In addition, owners of condominiums will be expected to pay condo association fees for maintenance of the communal spaces and amenities. Tenants, on the other hand, are relatively free from the financial burdens of repairs and maintenance costs.
The main emotional benefit of renting rather than buying is the sense of flexibility that comes with being a tenant. Tenants have the freedom to move around with more ease; rental leases being easier to break than mortgage contracts. But homeownership and the freedom to travel need not be mutually exclusive. Providing the home is located in or relatively close to the GMA, finding a short or long term tenant to occupy the home while you’re away is always an option.
Homeownership, on the other hand, brings a sense of stability that is difficult to attain as a tenant. Living in your own brick and mortar means you can customize and decorate the space to your own preferences, build a timeless collection of books or furniture without the daunting thought of lugging it around from rental to rental, and build long term relationships with your neighbours and community members. Even if you choose to not occupy it yourself, the home remains as a physical asset you can fall back on and eventually pass on through your family.