9.07.2013

personal update, our new (rental) house, and why we'll never own a home

We've moved! We're renting a much larger, newer, and more comfortable house in central Mississauga. We've lost the huge backyard of our old rental home, but the backyard here is still a decent size, the largest of any house we saw that we'd want to live in. (The choices were huge backyards with old, un-maintained, falling-apart houses, beautiful new townhouses with either no backyard or a tiny square of cement, or this place!)

We have more space - way more space - in this house on two floors than we had in the old place on three floors. And after two major floods, we're pretty happy not to have a basement! The basement of the current house is a separate apartment, and those tenants do not share the yard.

One of the big differences in this house is that our landlord and his family used to live here, so everything is new and well-maintained. It is by far the nicest place either of us have ever lived in.

It will be a while until we're all set up, but I've decided - for once - to take it slow. Normally I run out and buy everything we need, do all the decorating right away, locked and loaded in two weeks, max. This time I'm in no hurry. Happily, our insurance settlement from the flood covered our moving expenses and car repairs, and we can replace a few of the most important items we lost.

"If you don't mind me asking, why are you renting?"

As we looked for this home, realtors and some owners expressed surprise that we were not renting only to bridge a gap between homebuying, but renting for the long haul. One owner was shocked that we had lived in our previous rental since 2007, and would be there still, if not for the flood. I guess renting is considered all right for young people who are just starting out, and maybe for older folks in transition, but a middle-aged couple isn't supposed to rent.

Yet one of the bright spots in our miserable summer was being able to simply walk away from that sewage-flooded house, with no responsibility to clean or renovate. Moving is never fun or easy, but within two weeks of the flood, we had signed a new lease, and within two months, we were gone. After the sewage flood, I could only think, "Thank [something] we rent!"

I mean no disrespect to any readers - most of you, probably - who own your own home, and never would have done otherwise. Each to their own, and I hope the market is kind to you.

For me, there are many reasons to rent, and I can find no compelling reasons to buy.

We can't afford it, and we don't care

When we were younger, it was much more important to us to "choose to be poor," so to speak - to keep our expenses low, have less earning pressure, and thus time to pursue our own goals. Renting gave us time to write, and when we could scrape some money together, to travel. Buying would have meant choosing a life path strictly for maximum earning potential. And beyond the downpayment that we didn't have, buying anything in the New York area would have tripled or quadrupled our monthly expenses.

Since then, the housing market has only gotten worse, from my point of view. Home ownership is ever more expensive, and the dream of easy money from buying and selling is ever more of a gamble.

The equation isn't only financial. Owning itself means nothing to us. We love a nice living space, and always try to have one, but we don't need or want the responsibility that comes with home ownership. In our previous home, in one year the furnace and oven both needed replacing. All I did was pick up the phone. It was someone else's bill, and someone else's headache.

The experts agree. Or do they?

The only thing we don't have is a house to sell. We have no means of generating a large amount of income from the sale of a house, which would presumably buy us a more comfortable retirement. We don't have that, it's true.

On the other hand, we don't have a house that we can't sell. We don't have the potential reward, but we also don't have the risk. We're most comfortable with that.

Conventional wisdom says that renting is "throwing your money away," and smart investors always buy. I never understood the first part, because I'm pretty sure than my rent buys me a place to live that someone else is responsible for maintaining.

The second part is based on several assumptions that don't apply to every situation. Once upon a time, it probably made perfect sense. My parents bought a home and paid off the mortgage in less than 10 years, with only one income-earner. These days, in any place we've lived, we couldn't pay off a mortgage in 30 years. And why would I want $500,000 in debt?

I notice, too, that most calculations of renting versus buying don't account for the cost of maintaining a home. Take this article, for example. Top 10 cities where renting is better than buying says:
Real estate research firm Zillow did the math and factored in all kinds of possible costs, including monthly rent and mortgage payments, insurance, property taxes, maintenance and closing costs, and expected price appreciation to come up with the exact point at which buying becomes less expensive than renting.
But the article itself seems to use a simple rent-multiplied-by-months equation.

This video looks at the economics of buying vs. renting, challenging the idea that buying is always a better deal. In comments, people give the usual arguments - "But at the end you own the house" - even when it's clear that the house has actually cost you way more than you would have spent renting.

In Time magazine's business section, a former homeowner considers renting. He writes:
At first I thought that buying a home would also be a smart financial decision. The more research I do, however, the more I realize that the notion of homeownership as a magical path to wealth is a marketing ploy of the real estate industry. In fact, home prices (like gold prices) generally barely keep pace with inflation.

There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability (you’re not at the mercy of a landlord) and freedom (you can do what you want with the place). But financially, it’s not always the best bet.
I agree that homeownership is more stable than renting. But freedom? Not really. If you are hamstrung by mortgage costs or stuck with a house you can't sell at a profit, you're not free. The house itself takes up a certain amount of your time. You may enjoy that time and see it as well-spent. But it's not free.

The New York Times offers a sophisticated buy-versus-rent calculator that takes a large number of variables into account. I couldn't account for many factors, such as interest rates and property tax (one of the joys of renting, I don't know about those things), but from what I could tell, it would be 30 years before buying a home was actually better financially than renting in my area.

This article in the Financial Post (the business supplement of Canada's rabidly right-wing National Post newspaper) spells it out more flatly than most.
Does it make more sense to buy or rent a home from an investment perspective? It’s a question I get asked more than any other. The answer, in an era of historically low interest rates and perpetually rising real estate values, appears to be obvious: buy.

Just ask any real estate agent and they’ll tell you, “Don’t pay your landlord’s mortgage for him,” or “Build equity for yourself instead of flushing your money down the toilet,” and our favourite, “There has never been a better time to buy.”

It all sounds pretty convincing, but it’s wrong. Unless you need the security blanket of owning your home, it is nearly always a better financial move from an investing standpoint to rent rather than buy. The reason: People rarely consider three major costs of owning a home.
The three factors are: the costs associated with buying and selling, the operating costs of ownership, and the impact of a mortgage. The second factor - the cost of maintaining a home - is the one I find most people overlook. Friends have told me they pay nearly the equivalent in rent every month to maintain their home. About the impact of a mortgage, the Financial Post writer says:
This isn’t preparing for retirement. This is preparing for job interviews in your seventies when you should be enjoying cocktails after a round of golf.
I notice that even the very smart and sensible Suze Orman, who used to categorically tell everyone to rent only until they had saved enough for a down payment, has changed her mind. Orman now says, "Just because you can buy a home or condo doesn't mean you should. Here are some instances in which renting makes more sense."

She offers four reasons why you might want to rent. One is the down payment. Personally, I cannot imagine forking over that kind of cash in return for the right to pay off a huge mortgage. But more tellingly, reason number four is: "You don't really want the responsibilities and risks associated with being a homeowner." I appreciate the recognition that some of us just don't care.

A touch of insecurity

The only potential negative that has now arisen is that renting a house is not as secure as an apartment rental. Renting a house in Ontario, there is the possibility that the owner could choose not to renew our lease, if he wanted to sell the house, or move back in, or have a family member move in. That's what happened with our first house, in Port Credit, a risk we knew from the start. That move turned out to be very beneficial, but this could happen with any house we rent in Mississauga. We try to screen for that possibility, but we're depending on people to be honest about their intentions - a big if.

I think if it turns out we are moving too frequently, we would probably go back to apartment life. For now, we are carefully breaking down each box we empty and storing them all in the garage. One year from now, when our landlord renews our lease, I'll Freecycle them. If the landlord doesn't renew, we may save even more money by renting an apartment again.

It seems that for many North Americans, owning a home is a sign of adulthood, one of the three things you're supposed to do: get married, have kids, and buy a house. Lucky me, I've skipped all three!

18 comments:

Cara said...

I used to believe owning a house provided financial security for 'senior' years but no longer. Two of my friends bought houses but were unable to maintain them. Consequently, one friend is unable to sell her place and can't move closer to her daughter and grandchildren. She urgently needs money for important and expensive dental work, and until the house is sold she's living on very little. For two years she's tried to sell it and nobody wants it because of its condition. So she faces a classic Catch-22: you need money to make money. My other friend will face the same problem when she needs to sell her house. Each of them I now think would have been better off renting.

laura k said...

I used to believe owning a house provided financial security for 'senior' years but no longer.

Right. It probably does for many people, but definitely it's not a sure thing. There are risks involved.

My main problem with the "renting is throwing your money away" idea is that it's presented as fact, as if real estate is a guaranteed investment.

johngoldfine said...

Our house has certainly increased in value since we bought it in 1972, though, god knows, a dollar doesn't buy what it used to, as people have said since time immemorial....)

Since 1972, we've had:

* three new roofs
* most of a new foundation
* complete new siding
* four house paintings
* a new chimney
* all new wiring
* a new septic tank and leach field
* a new water pump
* two new furnaces
* four different woodstoves
* two washing machines
* three refrigerators
* a new stove requiring partial kitchen remodel
* several windows replacing rotten ones
* extensive tree removal

Those are more or less the things we had to do. I've left out interior remodeling, a porch, horse housing, horse rings, other discretionary items, and million cheaper but necessary maintenance purchases that a renter would not be responsible for.

I doubt that the increase in house value has kept pace with those upkeep expenses, and, in any case, those are sunk costs I never expect to recover. Time and chance happen to us all, but we have every intention of living here until we are no longer living anywhere.

So, I think the upkeep money part of your argument is one I can endorse as sound.

impudent strumpet said...

BTW, thank you for that New York Times calculator. I hadn't seen it before, but it just reinforced that the decisions I've made are better for my circumstances than I'd even imagined.

laura k said...

John, thanks for that. Your home is obviously a big part of your life choices, your lifestyle (awful word). You and your pack couldn't have the life you enjoy without it. And you want to live there forever.

Those are the kinds of considerations that make sense to me as reasons to buy a home, as opposed to finances.

Imp Strump, your welcome! I hope it works out for you. Condos are great deals for real estate developers, but not always for investors. I hope yours is.

laura k said...

^^ I should add that I know you are a researcher and not prone to rash decisions, so I'm sure if you invested in it, it's a good deal.

Dharma Seeker said...

I will probably never be in a position to buy a house, not as a single person. A condo might be a possibility one day, but as a pet owner I actually have more rights as a tenant than I would as a condo owner, where condo boards can set arbitrary rules about pets (no dogs over a certain weight for example).

Gareth said...

I think the other issue that can affect some decisions is whether or not you live in a renter-friendly jurisdiction, by which I mean not just the legal framework but whether the actual practice of the law is as friendly to the renter as the law says it should be.

laura k said...

Dharma S, good point re pets!

Gareth, I agree that tenant-friendly laws could be part of the equation, but I wonder how much that really factors into the decision of buying a house. It seems to me that most people who want to buy houses don't believe in renting, no matter what the landlord-tenant laws are like.

Gareth said...

I agree it's only a (small) part of the equation: I think that it may be a factor in whether people decide to make the switch from renting sooner than they might otherwise have, rather than making them think about buying in the first place. There's also just the local cultural norm issue about whether renting or owning is more common -- powerful if resistible, of course!

laura k said...

Cultural norm! That's exactly the phrase I was looking for, thank you. Yes, it's a cultural norm to be a homeowner, at least by a certain age.

Also, that's an astute observation, that in places unfriendly to renters, people might be more likely to consider buying.

Rachel Adelson said...

Renting is a sane, sensible option, especially in areas with extreme price inflation due to cheap credit and government/bank incentives.

Plenty of people rent out of choice, not necessity. They may want to save or invest their money in a more easily accessible fashion (i.e. keep it liquid), have a short time frame, be testing out a new area or (cough) lifestyle, dislike home maintenance, etc.

As credit starts to slowly dry up and borrowed money starts to get more expensive, things will change.

Apart from outrageously overpriced housing relative to income (esp. in the GTA and Vancouver), another main problem is a lack of quality rental housing. That may change, too, once the market distortions start to work themselves out.

In a balanced market, a house (or owned apartment) is simply a nice, secure place to live, not an investment.

Rachel Adelson said...

Hi, wanted to add a couple of things to this great discussion. Real estate/housing is so emotional!

First, cultural norms seem to be a big part of it. Have heard that in Germany, for example, renting is the norm. Having a lot of purpose-built rental housing helps. You're not subject to the short-term whims of amateur landlords & "specu-vestors."

Second, how funny that landlords who buy houses for the express purpose of renting them out -- which implies the expectation of a good supply of renters -- then wonder why said renters want to rent. Cognitive dissonance?

Renting is clearly viewed as a forced choice, not a voluntary choice. And renters are called "basement dwellers" (sounds like "bottom feeders") when plenty of us live well above ground. And plenty of owners seem to need those "basement dwellers" as "mortgage helpers."

Canadian real estate is endlessly fascinating!

laura k said...

Rachel, thanks so much - fascinating, as you say.

In internet parlance, a basement dweller refers to an unkempt, socially inept, usually overweight male who spends all of his free time online, and - as the negative stereotype goes - lives in his mother's basement. While being a hipster geek may be all the rage, being an actual geek or nerd is still grounds for bullying.

I had no idea that basement dweller also referred to renters! Gak. Gross.

You're so right, though. Renters are looked down on, yet here are all these mortgage-payers who obviously need us. Great point.

tornwordo said...

Our place is currently up for sale as we plan to go back to renting. We have been lucky with real estate and have been able to invest in rental property in Florida with proceeds from a recently sold Montreal triplex. As we have no pensions, this seemed like the way to ensure a late life passive income. It certainly beats bank interest rates at the moment. Also, with a property management company handling it, much of the headaches have vanished (although not the unexpected expenses that arise). I am currently smarting over how expensive insurance is in Florida due to hurricanes. Should have done my homework more thoroughly.

laura k said...

That sounds like a great plan - rent now, retire with real estate income later. I guess rental properties in Florida are a better bet than actually trying to live in Florida. Something like 55% of the homes in that state have been foreclosed.

I hear rents are very good in Montreal, compared to either Toronto or Vancouver. Is that true?

Richard Dillon Dillon said...

It seems that mortgage and rental prices are similar these days, so why be tied down to a 30-year payment plan? If you can keep your property well maintained and thus increase its value, what good is that if nobody can afford to buy it? I have nothing against home owners either (without you, I wouldn’t have a house to rent), but knowing that I won’t be tied down to expenses I have to make to keep my place valuable means I can enjoy life more!

laura k said...

That's exactly our thinking. In NYC, because we had a rent-controlled apartment, a mortgage would have tripled or quadrupled our monthly payments. Here in the GTA, our rent might be more in line with a mortgage payment... but that doesn't consider the down payment!