The cost of renting can be expensive over the long run. In last blog Who me, a Donald Trump?… Part 2 I talked about the importance of owning your home as a real estate investor. Her are the numbers on why you want to own instead of renting.
I was sitting with some friends at dinner the other night and someone asked “How do you build wealth because it always seems that you need money to make money?” Another friend said, “I just got lucky I bought my first condo and it went up in value, which allowed me to buy a house, which went up in value and when I sold that I bought a pretty nice home.”
Everyone knows that owning your own home is typically a better solution to renting. I am not telling you anything that you don’t already know but have you ever calculated the difference in the cost between renting and owning your home?!
Lets just say you pay $1,000 in rent a month that is $12,000 a year. Over five years that is $60,000 (which is anywhere from 1 -2 years salary for some). Now if you rent your whole life, say from the age of 20 to 65 (and you had the unbelievable fortune of never having a rental increase) at a $1,000 dollars a month that would be $540,000 that you would have spent in rent. This money that you will never see again because it was your rent money and you did not own the property you lived in.
Paying a mortgage
To again keep the numbers as easy as possible lets say you put $25,000 down (you can lend yourself up to $50,000 from your RRSP’s if you are a couple) and got a mortgage for $175,000. With a current 5 year fixed mortgage rate of 4.19% and a 25 year amortization, you could buy a $200,000 1 bedroom condo in New Westminster. I know you are thinking “Ya but I don’t want a condo in New Westminster I want a $400,000 condo in Kits or anywhere else…” The point of this is just to follow the numbers. (By the way there are currently about 433 listings in the Greater Vancouver area from Maple Ridge to the Sunshine Coast to Whistler at or below $200,000.) If you bought your first place for $200,000 tomorrow and owned if for the full 5 year term paying a mortgage of $939.00 a month and sold it at the same price you bought it for you would have accumulated $22,156 in equity.
What really happened to my friend from dinner the other night was not luck. What really happened was that he started to own part of something and that something grew in value over time as he built equity. In this basic scenario (not including property appreciation, rental increases, taxes, strata fees, or moving costs from a land lord deciding to move you along whether you like it or not…) there was a difference of $81,156 between the gains of owning and the loses of renting. Instead of never seeing your rent money of $60,000 ever again after five years of renting, you would be worth $21,156 more and 5 years closer to not having to pay any more mortgage payments or rent ever again if you own. It just goes to show you that investing in real estate is better than the cost of renting.