In the interests of complete transparency, I’m going to say that I am a homeowner. I’ve owned my current home since 2004, and I bought my first home in 2001. I only ever rented for a few years – maybe 2? – before I got my very first mortgage and jumped on the property ladder.
Things have changed drastically in the past 20 years… Damn! I hate typing that out, but facts are facts. Twenty years ago, I was able to buy my first place for $74,000. Fortunately, I bought just before prices in my province went crazy.
I’ve listened to both sides of the own vs. rent debate, and both sides make good points. Personally, I still prefer to own. Why?
When I’m old, I want to have the option of selling my home to pay my bills. Renters do not have that option.
I’ve spent years reading Garth Turner’s advice at the Greater Fool. He strongly advocates that people who own sell today, if not yesterday, so that they can take advantage of the incredibly high housing prices that we are currently seeing in various parts of Canada. He exhorts them to invest their tax-free capital gains, to create a cash flow that will pay for their living expenses, and to become happy, carefree renters. Mr. Turner has written numerous blog posts about the costs of home ownership, and how people routinely discount the costs of maintenance, repairs, taxes, land transfer fees, and all other expenses that come with owning a home. Paying the mortgage is least of a homeowner’s concern. There are so many other ways that a house becomes a financial albatross!
Mr. Turner advocates for becoming a renter, allowing the landlord to subsidize your housing expenses, and investing the difference between rental payments and mortgage payments. I will admit that this perspective is compelling. Having owned my home for years, I am known to refer to it as a money pit. There’s always something that needs to be paid. Renting and living off my investment portfolio does have a seductive ring to it.
…Until I start thinking about whether my portfolio is big enough to handle 20 to 30 years of rent increases. I don’t want to be 75 years old and facing yet another rental increase that means I’ll have to move to a smaller, less desirable location. I know the stock market has returned 10%-12% on average over very long periods of time. That’s all fine and good. Yet, we know that this is an average. Some years, the stock market drops.
If I have a $200 per month rental increase in a year where my portfolio has taken a hit, then don’t I have to liquidate some of my principal to pay my rent? And doesn’t that mean that I’m cannibalizing my portfolio’s capital right when I shouldn’t be touching it? Once the money has been withdrawn to pay rent, it’s no longer able to recover and grow. Selling during a downturn means I’d be decreasing the size of my portfolio at the worst possible time in order to keep a roof over my head.
That is precisely what I should not be doing in my dotage. Remember, the ideal scenario is that my portfolio will always churn off enough capital gains and dividends to cover my living costs.
But what if it doesn’t? What if my portfolio isn’t big enough to churn off sufficient funds to pay for my living expenses once I’ve stopped working? Then what happens? Who comes to my rescue as my portfolio dwindles over the years?
With a house, I believe that I have a few more options. Once it’s paid for, there’s no longer any risk that the bank will foreclose on it. Whew! It’ll still cost me in upkeep and repairs. Those are just a fact of life. However, my house lets me participate in house-hacking if necessary. I can take in a roommate. I can rent my house to someone who needs the space while I live somewhere else. If I needed to, I could sell it and use the money to pay for my long-term care. Or I can die in my own home, secure in the knowledge that no one ever forced me to leave a place where I wanted to live.
I’ve yet to see the pro-renting advocates address the fact that not everyone is able to build a portfolio that is large enough to cover ever increasing rents, and the other costs of living. Mr. Turner’s suggested course of action works wonderfully for people who bought in Vancouver 25 years ago and are now sitting on millions in equity. I’m not as easily persuaded that it works for people who don’t already have a boatload of equity to invest in the stock market. It’s true that a house cannot be sold one doorknob at a time to pay for one’s bills. However, it can be sold all at once and hopefully the money lasts as long as needed.
Life has taught me that there is no one right answer for every situation. If you can build a portfolio large enough to sustain you, then I see no problem with renting. It’s the situation where a large portfolio isn’t in the renter’s future that troubles me. In those circumstances, it’s very difficult for me to believe that renting is better. If the portfolio isn’t sufficiently large to cover life’s expenses, and there’s no home to sell, then what is the renter to do to find additional money?
I will think on it some more. Stay tuned.
