Rent vs. Buy: If You Have to Ask, You Should Probably Rent

I think people are missing the fact that MMM is talking specifically about Toronto in this post (and by extension, other larger cities). It would be foolish of anyone to say renting is always better than buying, or vice versa. It depends on a variety of factors, including where you live, how much housing prices are, how much rent prices are, what your current situation is, etc. For example, I’m saving for a house because I know I’m in the place I want to be for awhile, I have a stable job, prices for good houses are very low (I live in a small city), there is a poor stock of rental properties (something my city is trying to address to attract more young professionals). I can still bike commute because there is no difference between single family homes and rental properties in terms of distance to downtown (and my work). In my city I can buy a modestly priced house and, with insurance and property taxes included, pay less than a crappy rental. Another factor to consider, if you plan on staying in the same place, is that once you’ve paid off your mortgage, you now have an even cheaper place to live than you could ever find to rent, because now you’re just paying taxes and maintenance. Finally, if you’re a light sleeper, finding a good rental that’s built well enough that your neighbors don’t keep you up all night will cost you a lot. Obviously in the luxury apartment scenario above that’s likely not an issue, but some places, such as the city I live in, really don’t have much in the way of condos or other high end apartments (and the few it has get gobbled up so fast they never make it on the market).

MMM’s points make a lot of sense in the scenario he related, and if I lived in Toronto, or Tokyo, or New York, I would definitely rent. But it concerns me that some of the commenters are relaying “renting/buying is always better” type of arguments. It really comes down to doing the math + your individual housing needs. I think what MMM is trying to do here is to get people to challenge their assumptions, and think them through, not simply subscribe to another dictum.

Examples like this are why we will be renters for life

This is crazy. We live in a town home and were told what about the back yard?”
WE HAVE ACRES OF AVAILABLE GREENERY THAT WE DON’T HAVE TO MAINTAIN. There’s multiple parks, a huge pool, big common area spaces, a walking path, and a stream all included in our $1,000 per year HOA. Property taxes aren’t even that expensive. It was a no brainer for us. The stand alone homes in our area were much more expensive and you don’t get as much bang for your buck. Plus, these townhomes can be rented super quickly for at least $400 more than our mortgage payment!

I just don’t get it, and Toronto is even crazier than I thought!

My sister and her boyfriend recently bought a place downtown. They looked at buying vs renting and decided buying a place would be better for them. Sad part is, they paid more for their condo than we did for our house 3 years ago.

I mostly agree with this, and in fact I’m following your advice. I live in Boston, where the dynamic is pretty similar to what you described in Toronto (great economy, sky-high real estate prices, traffic, etc). I moved from the suburbs to an expensive and prestigious downtown neighborhood, which surprised a lot of my friends (“How can you afford that?”). But as you’d predict, I’m actually doing better financially than I was before, now that my commuting time and expenses are nil.

But I don’t have kids. There’s another issue here, and it’s so glaringly obvious that I’m surprised you didn’t mention it. It’s actually the first thing that many people consider once they reach a certain phase in life: public school quality. Here in Boston, as in many big cities, the public schools suck. Very few of this blog’s readers would be willing to entrust their kids to the BPS, unless they were lucky enough to get them into some kind of special program, which is always a gamble. But just a few miles away, in the inner ring suburban towns with the ludicrously expensive single family houses, the public schools are some of the best that you’ll find anywhere.

It would take a much longer post to flesh this out, but I’d argue that school quality is mostly a function of exclusivity. Schools perform well to the extent that they’re able to restrict their enrollment to high-performing kids. And high-performing kids tend to come from financially successful parents, so the best schools have some kind of financial barrier to entry.

The barrier is direct in the case of private schools that charge a lot of money for tuition. But elite public schools have a barrier too: they’re “free”, but you can only send your kids to them if you live in a town with extremely expensive real estate. So parents are in effect paying school tuition when they sign their fat mortgage checks. (Note: I’m not addressing the elite public magnet schools, like Stuyvesant in NYC, that select their student bodies with high-stakes aptitude testing. These are great for the kids who get accepted, but their numbers are few enough that they can generally be ignored in this conversation.)

You could argue that living in the city is so much better financially that you can shell out for private school tuition and still come out ahead. That might be true (although private schools in big cities can be eye-poppingly expensive). But schooling is such a huge issue for most people that it absolutely has to be addressed in a debate like this.

Love it! We personally decided that BOTH renting and owning was the right decision for us:

– We own and occupy a smaller town house. Gardening is one of my great passions, and our other top priorities are being in a good school district where we can walk to everything, and being in a dense neighborhood where we could have long-term friendships with our neighbors. At this point in our lives (mid 30s, 2 kids), we wanted to put down roots both literally and figuratively. For us, a smaller town house in a fabulous location with a small (but very productive!) yard is the way to be in the great neighborhood that we want, but at a reasonable (for the Northern VA area) price.
– We also own and rent out multi-family rental properties in a mid-size midwestern city. We had been saving a lot (of course!) and thinking of using it as the down payment for a bigger, single-family house. But shortly around discovering MMM a few years ago, I had an epiphany that it would make more sense to enjoy our smaller house and instead invest that money in rental properties that generate positive cash flow. We are very close to the point where the positive cash flow from the investments purchased by that “down payment” will entirely cover our mortgage each month.

So, my add-on to this great advice is – if you’ve already purchased a smaller house that you really like, and the cost is reasonable vs. renting but now you are tempted to trade up to a larger house (because everyone else you know is!) – well, what if you didn’t? What if you instead get rid of stuff, get some bunk beds, and decide to just enjoy your smaller house?

Sadly, the push towards home buying is not usually about the money. Sure, the “throwing money away” argument is playing on a loop for most people but let’s face it, it’s about status. That’s why housing and transportation make up more than 50% of the average family’s budget. Ridiculous!!!

People want the stamp sized back yard and the status-oozing car(s), no matter the cost in blood, sweat and tears to get it. Not only that but a housing purchase is “aspirational” with many choosing to be house poor because the home is the number one statement of status…including its perfectly manicured front lawn (the most expensive unused carpet you’ll ever own.

Bottom line: seeking status = living for other people because we haven’t come to grips with our own insecurities

Great article, but just 1 thing to add into consideration. If you buy an appropriately sized and priced property in a good, walkable area near work etc. then pay the mortgage off quickly. In 17 months I’ll be mortgage free and only on the hook for a fixed $409 per month covering taxes, HOA and insurance. It ties up a chunk of equity but has its benefits – 4% savings from not having a mortgage, potential capital growth, the security of knowing that it’s mine, the flexibility of having bought a perfect rental in a perfect location and knowing the rental numbers make good financial sense and the comfort that my monthly spend is much lower from having no mortgage so that I require less income to cover my spend. Yes, the HVAC or stove, or anything else not covered by the HOA could develop a fault, but it’s unlikely on a relatively new build and it’s an acceptable risk. Everyone here has good points, just depends on individual circumstances. The key is to keep questioning your own decisions and do the math. Great blog MMM, you’re making a difference to a lot of lives, mine included.

This. So much. Thank you! I’m renting in a city where property prices don’t make much sense owning, and this is clearly earning the disapproval of my suburban-living-it’s-just-a-40-minute-interstate-car-commuting- work-till- you’re-70-and-then-drop-dead colleagues.

When I rationalize and show them the numbers, they suspect my math (I’m a PhD in STEM- literally, you know, a rocket scientist) as not taking into effect that renting is throwing money away, while owning is “building equity” and results in “tax savings”. I know this comment didn’t add anything useful to the discussion here, but some of us have to vent here because this is one of the few sane places on the internet.

Wow, $2300 for a 2br luxury apt in the middle of a world class international city? You can’t even get a studio-1br in the middle of many “second class” cities in the US for less than $2500.

On another note, not everyone needs to commute downtown for their job. And not everyone wants to be in a city center. With the internet, it’s becoming increasingly irrelevant to pile yourself up around millions of other people. I’m currently in San Francisco and while living car-free would totally be possible, it’s amazing how slow/non-existent the buses are around here. Then again, I wouldn’t want to drive in this congested, rude mess either. Definitely beats taking the bus that is 75% of the time full of crazies. I’m sure this isn’t like every city though.

As someone who’s renting in a fairly expensive city (Melbourne, Australia), and who has considered buying next year, this rings true.

I’d probably end up buying a 2 bedroom unit 15km from the city, as anything closer would be too expensive for my liking. Might be OK if it’s still bikeable :)

Great post! Just recently I was thinking that this was a good topic for MMM!

I live in Montreal with my wife and 2 kids and I’m a happy renter. I pay under $1200 for a 2 bedroom apartment (1050 sq ft, heating included) not in downtown proper but close enough (35-40 min public transit, 30 min biking or 15 min by car) in a very nice zone with lot of parks, biking paths and wooded areas. The apartments here sell for at least $350K, while the houses can go well above $600-700K.

Whenever I say that I have no interest in buying I get weird looks and it’s almost impossible to convince people that buying is not necessarily a good financial decision. Most will just say something like “… yeah, but my parents’ house has tripled in value since he bought it…”. Which in 25 years means 4.5% increase BEFORE inflation. But well…

A few points that I like to bring up when discussing this matter:

* What’s the price-to-rent ratio of your city (price of the house / annual rent)? 1-15 means it probably makes more sense to buy. Over 21, rent makes more sense. (16-20 is not that clear). For Montreal is currently above 30.

* Another advantage of renting is that you’re more likely to “overbuy” than to “overrent”. For example, a couple just married will probably buy a house with 3 bedrooms thinking of when they’ll have a family, even if that’s 10 years in the future. You’re also more likely to, for example, add $4000 blinds for your windows (true story from a coworker) because, “…hey, what’s 4k more in a 350k apartment…”

* Renting does not necessarily mean apartment. In the same neighborhood where I live I could rent a 4 bedroom house for $1600. I just don’t want to for the moment.

* On the other hand, apartment doesn’t mean you must listen to your neighbors all the time as some might think. Choose wisely before renting. For example, I live in the last floor (4th) so I have no neighbors on top, in a corner unit so I only share one wall and it’s a concrete building so we rarely hear anything and when we do is really faint.

But most of all, the flexibility of moving if we need to or if we want to is great.

Enjoy how you crunch numbers. Can you do Vancouver B.C. & maybe show how to accomodate a larger family?

OK… I’ve just gotta play devil’s advocate for a moment here. It seems like you’ve got an apples to oranges comparison going here. You’re comparing a giant McMansion in the suburbs to a 2 bedroom apartment in the city. The only factor that seems to tie these two together is that they are “nice”. But you’re probably comparing 3000 square feet to around 1000 square feet – it’s just not a true comparison in my mind.

What if you compared renting that 2 bedroom apartment in the city to a buying a nice 2 bedroom bungalow in the city? Oh, that’s right… we can’t consider a nice 2 bedroom bungalow in the city because those only exist in “working class neighborhoods” and heaven forbid upper middle class white people lower themselves to cavorting with plumbers, construction workers and landscapers – and folks who might not be white and college educated!

Sorry for the sarcasm – but I faced an enormous amount of criticism and skepticism from my upper middle class white friends and family when I chose to buy in a working class section of Denver. But from my perspective, my 900 square foot bungalow is just about perfect. I’m walking distance from everything I need, if I do want to go downtown for some reason, it’s about a 6 mile “commute” (which can easily be accomplished by hopping on a bus or the bike path.) I have room for an enormous garden where I grow a big percentage of my own food, my mortgage (back when I still had one) was about 1/3 the cost of a 2 bedroom apartment, and now that it’s paid off, my monthly housing costs (including taxes, insurance, utilities and upkeep) run around $300/month. And if I ever do choose to sell it, the house is currently worth about 4 times what I paid for it 20 years ago.

And despite the fears of my friends and family, my neighbors totally rock! Here, the kids all walk to school, people regularly walk, bike or take the bus for transportation, people work on their own houses & cars & yards, and there are no HOAs to get on your case if your lawn isn’t perfect. You know… it’s where people still live with less ridiculousness!

Back in college I had a professor from India who claimed that the caste system was alive and well in America. At the time we all thought he was crazy, but the older I get, the more convinced I am that he was right. If people were just willing to step out of their “caste comfort zone” a tiny bit, there’s a whole other world of possibilities out there.

Anyhow, I’m not saying that everyone should buy a house – gardening & upkeep aren’t everyone’s cup of tea – but I just think that if you’re gonna make comparisons, they should be more apples to apples.

Where I live, the rents in the city are ridiculous. $3500 for a one bedroom of mediocre quality! I think it’s pretty simple. If rents are about equal to what your mortgage would be, better to buy if you can come up with the down. If rents are significantly less and you can use that saved money and invest it, that’s another story. Where I live most people can’t afford to live close to work, even figuring commuting costs and time.

Then there’s the added inconvenience of possibly being kicked out for no good reason with very little notice. Or rental increases every single year, not corresponding to improvements in the apartment. Or if you want to move and you’re in a rent controlled area, you probably can’t afford the new place, so you’re stuck.

We recently bought a condo; our mortgage plus other costs is less the most of the current rents in our neighborhood (and it won’t increase – though the HOA will from time to time) and a good 1500 to 2500 lower than what the same place would be in the city. We have a relatively short commute but it’s pleasant. Moving to the city wouldn’t reduce it all that much, if at all (depending on where in city). I think we made the smart move. It all depends on the circumstances.

Thanks for this important analysis. Maybe someone else has pointed it out already, but outrageously inflated house prices in Toronto (and ‘burbs) are not “just the way things are” but the result of a massive credit bubble. In 2009 when Canadian real estate should have crashed right alongside that in the USA, the government slipped the banks some money to make that problem go away. Plus – 2006 brought 40-year amortizations and 5% down, the latter often “disappeared” by banks baking that 5% into “cash-back” loans. Never mind “stated income” (low to no documentation) loans for the self-employed and so on, until the claim that Canada doesn’t have a subprime problem like the USA did starts to sound delusional.

So, if history is any guide, and it usually is in asset bubbles, prices will correct at some point and bear some relation to incomes — which have not risen in Canada in line with housing prices.

Rent is controlled only in some areas and only to some extent; for example, Ontario rent controls apply only to construction before 1991.

The main problem with renting is insecurity and it’s completely integrated with the housing bubble — there’s no escape. A lot of rental properties, including condos, are owned by “specu-vestors” hoping to flip. They’ll take a loss on the monthly if they think they can make more through rising asset value. But that’s going to end soon due to overbuilding. Then as sellers rush to the market to lock in their gains, tenants will have to go elsewhere. There’s a real shortage of quality institutional & professionally managed rentals in the True North, which puts even financially savvy renters at a disadvantage — you have to gauge your landlord’s commitment carefully.

It all comes down to a problem with affordable housing on a grand scale.

But yes, renting makes a lot more sense in an inflated market if you need/want flexibility, fewer maintenance hassles, can find something decent and have a landlord who is in it for the long haul, plus some municipal attention to landlord-tenant law. And it’s a crazy shame that renters are looked down upon. For many, it’s a choice.