“You’re throwing your money away on rent.”

If I had a nickel for every time I heard a Realtor, mortgage broker, or general housing bull say that, I’d have enough to pay for some overpriced Toronto house. Or, y’know, enough for a slurpee. Either or.

The fact is this. Exchanging cash for somewhere to live is hardly throwing money away. You need shelter (unless you’re a true FRUGAL LEADER and sleep in a lean-to. The Early Retirement Extreme guy approves), and renting that shelter can often be cheaper and easier than buying it. After all, an owner needs to pay taxes, maintenance, insurance, and so on. A renter doesn’t–at least directly. These costs add up.

Say you were looking at two identical condos, next door to each other and exactly the same in every way. One is available for rent for $1,500 per month. The other can be purchased for $1,260 per month, plus $300 per month in condo fees and $100 per month in taxes.

You’d think the first condo would be the better choice. A renter would be ahead $160 per month, plus not have to worry about the inevitable maintenance expenses that will come up. Go renting! Renting is the bomb diggity!

I don’t even need to ask. I know the kids no longer say bomb diggity. They probably never said it.

But we’re forgetting one thing about the home buyer in this situation. If they’re paying $1,200 per month in mortgage payments, some of that goes towards principal.

Say that condo came with a $280,000 mortgage. A payment of $1,260 per month would pay the thing off in a little less than 25 years. Here’s a snapshot of the amount paid towards interest and principal over the first year.

Principal vs. interest, year 1

It even adds it up for us. In the course of a year, the owner will have accumulated $8,213 in equity. That’s an average of $684 per month, which works out to a decent savings rate. I know people who would do unspeakable acts for an extra $684 every month.

 

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Things aren’t quite so simple, of course. There are plenty of reasons why home equity isn’t exactly the best asset. You can borrow against it, but you can’t exactly take it out whenever you’d like, unlike liquid savings. And it’s tied to a leveraged asset that could fall in value.

If this condo falls in value $20,000, it’ll take more than two years for our borrower to get back to the point where he’s not in a negative equity situation. With home values almost everywhere in Canada crazy high, there’s a very real possibility of this happening.

Will renters be able to save?

I think saving via home equity isn’t the best way of saving. But at least it’s saving.

Let’s look at it another way. We tell a renter to take their excess cash and invest it, as well as using the cash set aside for a down payment as potential investment dollars. Since the stock market does tend to grow faster than the real estate market, this should make a renter richer than a homeowner.

But what about a renter who just can’t save? I’m sure you know at least one of those people. Instead of putting their excess cash in TFSAs and RRSPs, they spend it on smokes and temporary tattoos and being scared of the stock market. They’re not getting ahead at all.

At least if these people bought a house, there’d be some saving going on, albeit in a non-optimal way.

We assume renters will be able to save. But many people are renters not because they choose to be, but because they don’t have the means to put money away. Home ownership might be the only way these people will ever save money.

There are plenty of reasons why it makes sense to rent. It often costs less, it comes with less headaches (unless you get a crazy landlord) and it’s far easier to pull up and leave as a renter than it is an owner.

But at the same time, there are advantages to owning too. I feel like in today’s rent-happy world, they’re often glossed over. Folks need to realize there are pros and cons for each.

Tell everyone, yo!