Buying or renting, that is the question

April 26, 2017

In this period of large-scale residential migration, many people planning to move are asking themselves: is it better to rent or buy a residence?
 
No single answer
 
There is no single answer to this question. Buying or renting a home is a personal choice. Leasing is often done in a short-term perspective while buying is seen as a long-term investment. If the amounts invested by the tenant are for the most part unrecoverable, investments made by an owner in his residence will in part increase the value of the investments.
 
The choice between buying and renting is also made on the basis of several other factors including the age and marital status of the purchaser, his financial resources and time horizon. A young couple, for example, will become owners to have an asset in which they will raise their children and possibly resell such in the future. Conversely, retirees will often choose to rent for not having to assume the maintenance required by a property in their own name.
 
 Practical calculation method
 
When considering the only financial component of a purchase or lease, there is a practical method developed by the IQPF (1) to estimate the non-recoverable expenses of a property and thus compare such to those of a rental. This method assumes that the down payment, the "capital" part of the mortgage, and part of the renovations are owner expenses that will be recoverable at the time of resale.
 
How to proceed?
 
1. Add up all recurring monthly fees related to the coveted property:
                       - Taxes
                       + Insurance
                       + General maintenance services
                       + Common expenses
                       + Electricity
                       + Heating
                       + Mortgage
                       + Monthly renovation costs
                       = Monthly cost of ownership (A)
 
Subtract from the market value of the property the mortgage balance and selling costs to obtain the net value of the property (B).
 
By investing the amount obtained in (B) in his residence, the prospective purchaser waived the return that such an amount would have earned had it been invested in other investment vehicles.
 
This is called the waiver cost (C).
 
3. Calculation of the waiver cost (C):
 
Using the 2016 Projection Assumption Standards (2), the prospective purchaser calculates the return that would have been obtained if it had instead invested the net worth of its property (B) in other investment vehicles, Such as an RRSP / TFSA contribution, a repayment of debts (saved interest costs), or shares or bonds. He adds up the amount of these returns to get his waiver cost (C).
 
4. Estimate the non-recoverable monthly cost of ownership:
 
                       * Monthly waiver cost (C)
                                               _
                       * Estimated monthly value of property (3)
                                               +
                        * Monthly cost of ownership (A)
                                               =
                   Non-recoverable monthly property expense
 
By having an estimate of the monthly cost of a property, the future purchaser can compare it to that of a rental and thus choose the option that best meets his budgetary constraints.
 
The owner, on the other hand, can use this estimate to determine the rent he will charge his tenants to cover his non-recoverable costs.
 
While these calculations predict the cost of a property, the actual real cost may vary considerably from the original data, as estimates are based on future returns. Also the cost of waiver may be very different from one person to another depending on whether the acquirer has higher mortgage costs or is a more or less aggressive investor.
 
The tax exemption on the capital gain from ownership of the principal residence at the time of resale is another aspect that should not be overlooked either.
 
I invite you to contact me so that you can make a choice that takes into account both your short and long term objectives while considering financial constraints you may have.
 
                                    
(1) IQPF: Institut Québécois de la Planification Financière (Quebec Institute of Financial Planning)

 

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