The choice to buy or to rent really comes down to a personal preference. But if economics are the deciding factor then you should always buy.

We did the math on a property that was bought and then rented. The property is located in Liberty Village. It is a one bedroom with parking and locker (plus the bonus of a large balcony). It sold for $315,000 and currently rents for $1700 per month. The details are as follows: 5% down ($15,750) and a mortgage of $299,250 at 2.94%. (five year fixed with a 25 year amortization). Monthly mortgage payments would be $1407. Property taxes are $150. per month and condo fees are $361. The total monthly outlay is $1918 versus renting at just $1700 per month. The difference is $218. This difference is what people with limited knowledge focus on.

Now let’s consider what happens after five years. The Renter invests the difference (they never do) but let’s believe they will do this every month and they earn an interest rate of 2% after tax (probably high). After five years the Renter would have saved $13,760. What happens to the Buyer? After five years, the Buyer would have repaid $43,764 of principal on the mortgage (forced saving). That’s because the payment of $1407 is split almost equally between interest and principal repayment. So the Buyer would be $30,000 ahead of the Renter even if the property never increased by one dollar!

If you assume that the property increased in value by 3% per year (the historical average for real estate), the property would be worth $365,000. The Buyer would then have increased their equity in the property to $109,514. If the Buyer had borrowed the down payment of $15,750 from family and repaid it, the net gain would still be $93,764. The biggest risk one can make is not investing in real estate!

If real estate prices increase, those who do did not buy are clearly the losers. But the naysayers will still ask: what happens if real estate drops in value? If they do, then both the Renter and the Buyer win. So how does the Buyer win? When real estate prices fall, the more expensive properties fall further. So while the property you own is worth less, the property you want to upgrade to is also worth less and the price gap narrows. The best time to upgrade your property is usually when prices are falling, not when they are rising. In summary renting involves the worst economic outcome and also comes with the biggest risk.