Rent Vs Buy

 

My clients sometimes ask the question should I rent and save or buy now. As a Realtor it  is very difficult to answer the question becuase it is based on varying factors:

 

1) How long do you plan to stay in the area?
2) Are you about to change jobs?
3) Might you relocate?
4) Are getting married soon?
5) Are you breaking up?

 

The questions are endless.

 

But for the most part boil down to this, if all things remain equal are you better off to rent than to buy?

 

The following are case studies that represent some of my clients questions.

I will use the following website tool at canadamortgage.com called the Rent vs Own tool.

 

Case Studies

 

Client 1

Is a single female in her mid thirties. She has been pre-approved for 350k and currently pays 1400/month rent. She also has a downpayment of 25k. Here are the numbers I used for the canadamortgage.com tool:

 

 

The Results

 

The rental alternative will allow you to save and invest both the downpayment of $ 25,000 and the monthly rental savings, initially at $ 337. At the end of the 60 month term your before-tax investment will have grown to $ 50,895, assuming the savings rate of 5 % per annum. After paying annual income taxes at 20 % on the investment interest gain, the investment will have grown to $ 49,421.

 

In order for the home purchase alternative with a mortgage interest rate of 2.1 % to perform as well as the rental option, the annual rate of property appreciation must be at least -0.69 % . Total property appreciation of -3.4 % together with principal repayment would result in homeowner's equity of $ 56,178 in 60 months, less the 2 % cost to market the home of $ 6,758, for a net gain of $ 49,421.

 

If the home value increased by more than $ -12,117 ( -3.4 % ) in 60 months, purchasing would be a better financial option than renting.

 

 

Interpretation

 

In this clients case, purchase is better, becuase the value of the condo could fall -12,117 and it would still be better than renting. Even if the home depreciates in value, purchasing is a better option. In Vancouver prices are pretty stable and it's good to know that your decision to purchase has paid off.

 

 

Client 2

 

Is a recently divorced parent of 1. Her child is still in high school and wants to ensure that her child continues to go to the same school. She has stated that as soon as the child has finished high school she no longer wishes to live in that school district. Her child has 2 years left. The client has 50k down and qualifies for a 400k loan. Rents in the area are 1400/month.

 

Here are the numbers I used for the canadamortgage.com Rent vs Own tool:

 

 

The Results

 

The rental alternative will allow you to save and invest both the downpayment of $ 50,000 and the monthly rental savings, initially at $ 429. At the end of the 24 month term your before-tax investment will have grown to $ 65,584, assuming the savings rate of 5 % per annum. After paying annual income taxes at 20 % on the investment interest gain, the investment will have grown to $ 64,493.

 

In order for the home purchase alternative with a mortgage interest rate of 2.1 % to perform as well as the rental option, the annual rate of property appreciation must be at least 0.92 % . Total property appreciation of 1.9 % together with principal repayment would result in homeowner's equity of $ 72,641 in 24 months, less the 2 % cost to market the home of $ 8,149, for a net gain of $ 64,493.

 

If the home value increased by more than $ 7,432 ( 1.9 % ) in 24 months, purchasing would be a better financial option than renting.

 

 

 

 

Interpretation

 

The client would be better off purchasing only if the property appreciated 1.9% in 2 years. The time horizon is too narrow to predict a 1.9% gain. Also her investment would have grown to 64k giving her a bigger down payment and protection from a small market gain or loss when she moves in 2 years. In this case it is better and safer for her to rent than to buy.

 

Feel free to contact me regarding any questions you may have regarding your situation.

 

Shafiq Muljiani
Sutton Grp-West Coast Realty
#301 - 1508 West Broadway
Vancouver, BC V6J 1W8
Cell: 778-928-7423
Fax: 1-866-961-4976
E-mail: shafiq@sutton.com
Website: www.homeinthecity.ca