Buying Vs Renting a Home (and Investing)

The debate sometimes seems simplistic. On one side are people who love real estate and believe their home is the best investment in the world. On the other stand stock market investors, who encourage young adults to invest in the stock market rather than buy a house. In fact, it’s your financial and personal situation that determines whether it’s more advantageous for you to buy a home or rent and invest the difference in the stock market.

Buying a Home

Property prices have risen sharply in recent years. According to Centris, the median price of a single-family home on the island of Montreal was $737,000 in the first quarter of 2024. You won’t save much on a condo, which sells for $455,000 according to the median price. With prices like that, not everyone qualifies for a mortgage. Unfortunately, in such cases, buying or renting a home is a question that’s quickly resolved!

Buying a home also means having enough of a down payment to qualify for a mortgage. In general, the down payment should be at least 5% of the sale price of the house for properties costing $500,000 or less (and 10% or more on the higher portion). You’ll also have to pay the notary, welcome tax and moving expenses. That’s a few thousand dollars you could save by staying a tenant.

Living in an Apartment

Gone are the good times for tenants? In recent years, rental prices have been rising rapidly. Data from Rentals.ca indicates an average posted price of $1,763 in Montreal in June 2024 for a one-bedroom apartment. It’s worth noting that the quality of apartments in Montreal is highly variable, and that buying a house or condo can significantly improve your daily life, giving you more space or more functional rooms.

People who prefer to avoid responsibility, who shun a sedentary lifestyle or who want a lot of cash in the short term don’t make the best candidates for buying a home. Staying in an apartment and investing the difference in the stock market may be a better option. From a financial point of view, to get to the bottom of this, you need to use the tools at your disposal and make a few calculations.

Using Calculators

Logic has its place when it comes to determining the best choice between buying a house or renting an apartment, and investing the difference. On the Internet, you’ll find an array of calculators designed to help you take all the important financial factors into consideration, including the one from the Autorité des marchés financiers (AMF). These are very useful in giving you an initial idea of the feasibility of your property purchase plans. Please note, however, that to get a loan, each institution will make its own calculations according to its own criteria.

In the case of a purchase, you need to consider the price of the property, the downpayment, the amortization (number of years), the interest rate, property taxes, closing costs (notary, inspection, etc.), the real estate broker’s commission on resale, increase in value, condo fees, insurance, renovations, contingency fund and other maintenance costs. If you’re staying in an apartment, you’ll need to calculate the rent and its annual increase. In addition, you’ll need to choose a rate of savings and return in line with your investor profile.

Analysis of Julie’s Project

Julie is 30 years old and has an annual salary of $90,000, which is above the Quebec average, and $60,000 in savings. She’s hesitating between buying a condo in Montreal or renting an apartment. She sees the condo as forced savings, which she’ll sell when she’s 60 to finance her old days. Her calculations are based on a number of assumptions: a 190% increase in property value over 30 years, a 2% annual increase in rent and a 5% annual return on investments, since she invests in low-cost exchange-traded funds (ETFs). She relies on the Canadian Real Estate Association to estimate the increase in value of her future condo.

Cost of a Condo in Montreal

Julie has put all her savings to date into her downpayment. Since she doesn’t have 20% down, CMHC insurance is added to her loan. A $455,000 condo, with a $407,245 loan at 4.5% interest, will cost her a total of $676,197 over 30 years. To calculate the interest to be paid over the 25 years of her mortgage, Julie averages the posted rates over the last 20 years and subtracts a 123 basis point discount after discussions with her bank.

More costs are added. We’re talking about $5,000 for the move, inspection, notary, etc. Plus, for 30 years, she’ll be paying condo fees, currently at $250 a month. She anticipates an annual increase of 2%. At the end of 30 years, these costs will total $121,704. Her municipal and school taxes are $2,500 this year. She also expects a 2% increase. On resale, she would get $864,500.

With mortgage payments of $2,254 a month, Julie doesn’t have a lot of remaining cash to invest. Her take-home pay is $59,727. More than $27,000 goes toward the condo loan. Her other expenses total $2,000 a month. This leaves her with $8,679 a year to invest. If she invests this amount every year, a 5% return will give her $588,261 by the time she’s 60.

Living in an Apartment to Invest Massively

Julie is stunned by the sheer number of costs associated with home ownership. She wonders if she wouldn’t be better off finding a one-bedroom apartment and investing heavily. At $1,763 a month this year, and factoring in a 2% annual increase, she’ll pay a total of $858,258 for housing over 30 years.

Her take-home pay, minus her rent and other expenses of $1,542 a month (since she has no condo fees or taxes to pay), leaves her with $20,067 a year to invest. At the end of 30 years, she’ll have a sum of $1,360,138.

The difficulty with this approach is to save and invest this enormous sum every year. It’s a safe bet that few human beings will be able to resist the temptation to use it to consume: travel, restaurants, cars – the temptations are numerous!

Which Is Better?

According to our calculations, it’s slightly more profitable for Julie to buy a condo. Her financial assets will be slightly higher at age 60. However, the difference is small, and she should be guided by her own preferences.