Not sure if you should continue renting or buy a home? What are the advantages of both? In this episode, we discuss advantages of renting, benefits of owning a home, and what to do if you don't have enough for a down payment. We also explore the home builders graduated payment plans and benefits of building equity.
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Hi there, I'm Karl Yeh and welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics, and tips from home buying experts.
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So today, I'm joined by Cory McDonald, Community Manager with Brookfield Residential and the question we're going to answer, actually the topic we're going to answer today is:
What are the advantages of buying a home versus renting?
Now, I know this is a question that I'm sure you always get.
Always get. Especially because people that are moving either out of their parent's basement or brand new to the city, they want to have a look at the different costs associated with each.
[00:01:00] Being very biased myself, I do have a little bit of a say that I think buying brand new makes a lot more sense than renting, but different situations would say that renting makes more sense to the individual.
I'll start with renting.
Depending on if you might not necessarily have approval or you're trying to rebuild your credit score, sometimes renting is a great way to get into a new place, build some independence and try and rebuild a little bit of that credit to eventually get you into a brand [00:01:30] new home as well.
Sometimes when you're first starting on a brand new home and you don't necessarily have all of your furniture, a lot of these rental places will come fully furnished so you don't have to spend an arm and a leg buying your bedroom set, buying your TV, buying all of your furniture.
So that's a cost that's associated in the rental fees as well. So there are some benefits in that sense.
Benefits of buying a home
I would say that I think from a financial standpoint, there's a lot more benefits to [00:02:00] buying brand new.
Even in a flat market, you're still building equity versus spending money and paying somebody else's mortgage instead of getting that equity back in yourself.
A very basic example is if you're renting on let's say $1,500 a month, that's $18,000 a year. Over five years, that's close to $90,000 that you're spending on living.
So even if there's no increase in the value of your home over a five year period, you're still getting [00:02:30] X amount of dollars back in the sale of your home so you'll eventually get that money back versus renting where once you've kind of paid it on rent, it's gone.
You're not really seeing it again.
Yeah. Five years, you have $90,000 that you've paid somebody else, right? Whether it's in an apartment or whether it's in a basement or wherever, you're still renting, you're paying it to somebody else.
Versus, let's say you buy a house for $100,000, even if there's no increase, right? [00:03:00]
So the market has stayed completely flat for five years, which is kind of unheard of, especially in places like Vancouver, Toronto, where it's a little crazy in the market. You're still building equity in your house for those five years, right?
Cory McDonald: That's correct.
So if you think about it, then that $90,000 you paid plus the equity that you could have made, that's a huge difference.
It's not just losing $90,000 over that five year period. It's the loss [00:03:30] of equity that you could be putting into your home. So it could be closer to $180,000 swing in the difference in costs.
Karl Yeh: Depending on how the market has risen from your ...
Which nobody can predict.
So I'm not comfortable saying that each market is going to go up one to nine percent because no one can 100 percent predict the resale market.
But generally, you're right, a lot of the major Canadian cities are seeing a lot of growth. So it is a great investment to buy now and then have that appreciate over the next [00:04:00] couple of years.
What if I don't have enough money for a down payment?
What about the argument about, okay, so yes, let's say I do want to purchase, but I don't have the money to pay the down payment.
And so my thinking would be, okay, let's save up for that down payment.
A lot of brand new home buyers are maybe a little bit intimidated because new homes do require a down payment than if you're just getting out in the market you might not have five to 20 percent required to make that purchase.
There are [00:04:30] a lot of tools I will say that either the builder themselves or even a lot of financial institutions will provide those builders to help get them into a home sooner rather than, again, the costs of waiting.
Home builder graduated payment plan
So a lot of builders will have a graduated payment plan. So even if you don't have say as an example the basic five percent down payment-
Karl Yeh: Well let's take the $400,000 home. What is that, five percent down?
Five percent down on most new builds. If you're using a mortgage, $20,000 would be five [00:05:00] percent down payment.
Which we understand is a lot of money for a brand new home buyer.
I don't have that in my back pocket right now, I don't have that my couch cushions, but there are resources out there to help you out.
So if a new builder, if you have even five to $10000, or even if you're able to find a loan from a family member to get that amount, then over the construction process, over the building time to complete your home, you can save up and pay off the remaining $10,000 over that timeframe.
A lot of these builders will [00:05:30] do, it's an interest free so you're not paying additional costs on top of that.
So it's a great way for you to get in now, instead of having to rent or to wait to get into the home that you love and you want to get into.
So let's reiterate that. So let's say, obviously the construction of a new home takes eight months, right? But you only have $5000 or maybe even $2000 as a down payment.
So, between the time it takes you to put that $2000 [00:06:00] to eight months later to actually, your home is completed, you're saying in between that time, there's a lot of builder programs that can actually allow you to continue paying that down payment until your house is complete.
Correct. As a builder, we like it because we're moving product, we're moving our inventory and selling our homes.
As a buyer, it's allowing you to not have to access a bank for a loan and pay interest or to have to wait and lose money.
Even like I said, if you're able to borrow from family or friends [00:06:30] to do that, we already discussed the numbers as far as the loss in renting versus being able to own.
So, in five years when you turn around and sell that home, that's easily money you could turn around and give back to that family or friend member once you've made that equity back.
Building equity from your home
So it's actually the same as what we talked about renting, right? So $1500 over five years each month, we're talking back to $90,000.
So let's [00:07:00] say, okay, I wanted to save money to meet that $20,000 down payment for that say $400,000 house. But if you really think about it too, you're actually losing the same amount of money because you're still paying rent, and while you're saving up, you could still be making the equity.
Correct. You'll probably even losing more than that $20,000 because not only are you throwing money towards somebody else's mortgage, towards rent, but then you might be compromising your lifestyle to try and save up that [00:07:30] money on top of your rent as well.
Awesome. Is there anything else you want to add in terms of the advantages of buying versus renting?
Most of the markets right now are accommodating towards growth and return on your investment. So it's a great way to kind of put your foot in the door by even starting out small and then two to three years down the road, you can always upgrade based on what your financial realities are at that time.
Perfect. So just to let you know [00:08:00] , we also have a rent versus own calculator that you can take a look at. It's in the description below. Thank you very much, Cory.
The question I have for you is:
What are your thoughts on renting versus buying? What are your thoughts on the advantages and disadvantages of each?
Let us know in the comments section below. Thank you very much for joining us and we'll catch you next time.
Rent vs Own Calculator
Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below.
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About Cory McDonald:
Cory has been working for Brookfield Residential for over 5 years and has had the opportunity to