Warning – Buying a Home vs Renting will lose you $2 Million Dollars

Wow, based on our shocking research into the current housing market, we found that you are at the losing end of the wealth building spectrum just by buying a standard house. We will be testing the common phrases of “Real Estate is the best investment you will ever make” “Renting is throwing your money away” “Might as well pay yourself through forced investing with home ownership”

This topic may be shocking to some people as it was to us here at PFE – To test the home ownership vs renting debate, we have crunched the numbers on purchasing a house vs renting and included all the up front costs, ongoing costs and the expected value over 25 years.

So now that we have this data, let’s dig in.

Why Real Estate Matters?

Unless you haven’t been paying attention over the past 20+ years, you would have missed the almost vertical ramp up in real estate prices (with a major crash in 2008-2009). However, since this historic crash, the real estate market has rebounded to all time highs in Canada, USA and also Worldwide.

This is bringing enthusiastic investors into real estate and is also creating the FOMO effect among millennial and other younger generation investors. This is driving younger buyers further and further away from city centers (like Toronto) and driving up the small town real estate markets as well.

However, this is not all bad news, let’s do a dive into the financials and the Purchase vs Rent debate and provide some financial numbers and see why when renting your home you should come out ahead.

Detailed Financial Review (Example)- Buying vs Renting

So the first part of buying vs renting is to analyze the costs associated with the buying process. We will be providing supporting links to each of the financial assumptions we use for your own review and comparison to your local market (as the costs vary between city, region and country around the world). In this instance, you can replicate this analysis for your own local market.

Example Data – House price and Interest Rate

Why did we choose a $750k house price? – Well for our local market, there are very few detached houses available for sale at less than < $750k CAD. See the two real estate searches we made based around the Toronto, ON, Canada market on our multiple listing service (www.realtor.ca). You can see only 11 listings (located hours away) in the Toronto area at $500k vs quantity of 900+ listings in the $750k range.

Therefore, for our example we will be using the lowest available price for a 2-3 bedroom detached house at $750k CAD.

Only 11 houses listed for $500k CAD
Over 900+ listings based on $750k CAD

So now that we have our starting price point, we are also going to determine our mortgage rate for our example calculations – Based on current research, we see an average of 2% for a 5 year term (with 25 year amortization period) – https://www.mortgagerates.ca/mortgage-rates/ontario/.

Therefore, we will be using a 2% fixed interest rate for 5 year term.

Purchase Price and Mortgage Rate

Buying Process – Initial Sunk Costs

If we review the house buying process, we can see that we have to include the following conditions – Those fees include: Mortgage Down Payment, Legal / Lawyer Fees, Land Transfer Tax, Real Estate Agent Commission, Local Taxes on Agent Commission, Home Inspection Fees, Title Insurance. Note – local HST does not apply to resale homes in Ontario. In our example, we are assuming a 20% down payment to avoid paying mortgage insurance (CMHC here in Canada or PMI in the USA). Additionally, we have have used the closing cost estimates that are found here – https://wowa.ca/calculators/closing-costs.

Based on this calculation, we see that the purchase of a home is front end loaded to about $200k for a $750k home purchase price.

Initial Sunk Costs – Real Estate Example

Housing Costs – Monthly

After the initial purchase price and fees associate with purchasing a home, we now must deal with the ongoing costs for mortgage payments or rental fees in both instances. For our example, we are keeping the rental fees around $2550 CAD which is the average rent in the local market for a similar detached property with 2 or 3 bedrooms – https://rentals.ca/national-rent-report. Additionally, our mortgage costs are based on our 2% fixed rate (5 year term) and we will assume this doesn’t change over 25 years of the mortgage (but this is not likely in reality). We also include our property taxes in this calculation (in Toronto property taxes are around 0.80% and surrounding regions are 1.5% of property value – Therefore, we will use an average of 1% in our property tax calculation.

Based on this calculation, we see the purchasing is approximately, $1,889.68 more expensive per month – Remember this number as we will use this later on in the calculations.

Monthly Costs – Purchase vs Renting

Insurance Costs – Monthly

Now that we have our initial costs and monthly costs allocated, let’s look into insurance for a very large, expensive asset and the personal belongings contained within. This data is collected from the following sources. What’s the average homeowner’s insurance rate in Ontario? (ahainsurance.ca) and Tenant Insurance: Compare Renters Insurance Quotes – Ratehub.ca.

Based on these rates, we see that insuring your home is approx. $100 CAD a month and Contents Insurance for renters is approx. $25 CAD a month.

Home insurance vs Rental

Utilities / Energy Costs – Monthly

Now that we have our housing costs, purchase fees and insurance in place, we can work on the ongoing utilities or energy costs associates with both types of properties – For our example, we will assume no energy savings between renting or buying your home. The data for utility costs are sourced from here – Financial Accountability Office of Ontario | Publication (fao-on.org)

Utility Costs (Monthly)

Maintenance – Monthly

One aspect that’s often overlooked in these calculations is the cost associated with keeping the roof over your head in good condition. Roofs leak, furnaces need replacement and windows/doors need replacement. This doesn’t include the upgrades that most people make to their homes for comfort and or decorative purposes (new kitchen, bathroom, basement finishes, man caves etc). From our research, we see that home maintenance can be assessed at (3-5%) of the home value per year. The details of home maintenance are summarized nicely here – The ultimate home maintenance guide | MoneySense. For our example, we will use a conservative value of 2% per year.

Home Maintenance Costs – Monthly

Asset Growth – Monthly

This is the most controversial part of home ownership and why people often state the following statements – “Real Estate is the best investment you will ever make” “Renting is throwing your money away” “Might as well pay yourself through forced investing with home ownership”. If any of these statements ring true with you, this is the section you want to focus on. Based on our calculations, we are using the initial sunk costs of $202,025.00 CAD that would be required to purchase a home, and investing this amount in the stock market instead. Additionally, we are using the number we saved from above at $1,889.68 CAD which is the difference in housing costs monthly and investing this into the stock markets as well. We are also assuming the stock market returns a 10.7% CAGR – 30 year rate as sourced by Average Stock Market Return | The Motley Fool and the real estate market returns a 3.1% CAGR – 36 year rate as sourced by Canada New Housing Price Index | 2021 Data | 2022 Forecast | 1981-2020 Historical (tradingeconomics.com). We are also assuming linear growth both within the real estate markets and stock markets – Not entirely realistic but this is equally applied to both sides of the owning vs renting equation and we are using 30+ year CAGR rates which already include sizeable negative corrections for both stock markets and real estate investments.

Asset Growth – Buying vs Renting

Selling Process – Final Sunk Costs

As the final component of input costs into our analysis, we need to consider the costs associated with selling the real estate asset in order to capture the growth of the asset and turn it into liquid cash. With the stock market investments, we are assuming a minimal fee to sell investments in working with a discount brokerage. Therefore, if we mirror some of the costs associated with purchasing a house above and remove the lines that don’t apply, we can see the costs laid out as per below.

Selling Process Costs

CONCLUSION – Final Calculations – 25 Year Timeframe

Now let’s turn our attention to calculating all these numbers over a sizeable timeframe of 25 years (the total time it takes to pay off the house fully) and see what the results are. This requires diligence on the part of the home owner and renter as well as both parties must maintain their payment and investing cadence in order to arrive at the final conclusion. So let’s tally up the final costs from everything above and see what we can determine.

Final Calculations – 25 Years

So we can see if we take the initial sunk costs, monthly costs associate with housing, insurance, utilities, maintenance, final sunk costs and asset growth + the initial asset value of the house, the sub total is negative for the buying case in the tune of -$400k CAD while the case of renting yields a positive return of $1.99M CAD.

Basically, based on the actual math with real world data, it appears to be a money losing proposition to own a home as your sunk costs and recurring costs will eat away any gains made from this asset value – TRULY SHOCKING!! 😮

Let us know if you see any errors in our methodology or calculations, we appreciate your feedback in the comments below.

That’s all we have for now, this was a very detailed and extensive effort, so please leave a like or comment below to show your support.

Thanks for reading,

The Lab Manager

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If you want to support our efforts at http://www.personalfinanceexperiment.com, please leave a comment, hit the like button and subscribe to the blog.

Also, if you like what you read – Please consider supporting us with a coffee – https://www.buymeacoffee.com/PFExperiment undefined

3 thoughts on “Warning – Buying a Home vs Renting will lose you $2 Million Dollars

  1. Good analysis however the broker fee is only paid on the selling transaction, not the buying transaction…so you don’t pay it twice in the lifecycle. It doesn’t change the picture very much though.

    From a behaviour perspective though…disciplined savers/investors may tend to pay a mortgage down quicker in my experience. This changes the ratio of interest paid over time significantly.

    Liked by 1 person

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