Why you should rent and not buy a home (Spoiler: you shouldn't)

Be careful who you take advice from...I mean, from whom you take advice.

Here is how my wife and I are saving for retirement: we are saving 10% of our income. In 5 years, we'll be able to put a down payment on a house that we can then rent out as two units. When we retire, other people will have paid off our mortgage and we'll have that rental income as pure income. Canadians will strike for months for that kind of pension cash-muuuuhney. We'll just commit our savings for five years.

Yet sometimes people make me wonder. Here's an article that was written by a man with a tiny head on renting vs. buying a home. Apparently it was some finalist in a Moneyville blogging competition. I became aware of it from someone (let's call her "Sheena") who is getting first-homebuyer's anxiety and needed someone to critically analyze this article on whether it is better to buy or to rent.

Luckily her husband is a Critical Analyst, and I am a Loud Mouth, and together we were happy to provide the following insightful debate. Disclaimer: we are both home mortgage owners, and we both don't wear American Eagle.

It breaks down like this. Guy with massive upper body and tiny head purchases his dream bachelor home: a 3-bedroom townhouse in Milton. Eight months later, he hates his new lifestyle and puts the house back on the market in favor of renting something for $800. He just barely breaks even with the housing transactions (no losses, lucky for him), but his lifestyle is now back to normal and he's investing in RRSPs again.

Here's my analysis.


One: I did a quick search for bachelor stuff in Milton and came up with the following: (sound of crickets). Two: Then I took a quick scan of rental properties that go for $800 and I came up with the following: my basement in Scarborough. I'm sure that you can also rent a balcony in downtown Toronto for $800 (luxurious summer getaway!). Three: Then I thought to myself, what kind of guy goes from a 3-bedroom "bachelor pad" to an $800 rental? Is he rooming with 6 Brazilian girls now? Maybe he overestimated the number of rooms that he'd need to store his Creatine powder? Or did he decide that a bachelor pad is a place that you can hang your suit when you want to go out drinking, and not a family residence in a family town with nice family-oriented parks and recreation?

That would be like someone moving to Northern Ontario, for the ladies.

He concludes that one can use a basic rule of thumb to determine whether to buy or to rent, by dividing the price of the house by the annual expected rent. If it's over 20, rent! If it's under 15, buy! Seems a bit arbitrary, considering that our parents bought their houses at 20% interest 30 years ago and are now all thankful for it, if not at least thankful for the ability to Teach Us Something Based On Their Hardships (young man).

But here is what I don't understand about that: Take a hypothetical case of a $500,000 house. If you rent that house, at the end of 30 years you have nothing. If you mortgage that house with a minimum downpayment, at the end of 30 years you have a house. And it's worth $1 million.

I hear what you are saying, "Sheena". "Don't look at it so long term!", you say. Ok, same scenario after 10 years: you own enough of that house to take out a line of credit against it, buy another house and get someone else to pay off your mortgage, reiterate every 10 years, and one day you can sell it, retire to Greece, and buy a dive shop. Or possibly Bali.

Or let's look at it from a 1-year perspective. If you've bought a house, after one year you have a lot of yard work on your hands and some renovation bills. If you've rented, you are the proud owner of new pink shirts, gym memberships, and Plenty-of-Fish contacts.

So here's the bottom line: don't take financial advice from a mid-20's bachelor. Take hair advice instead. Unless he/she has an unusually small head, in which case, take etc. "Etc." is what I use when I can't think of anything else to add to a list.