There are many articles in newspapers, on the web, on social media, etc. arguing that renting is good and that you’ll be OK if you don’t own the roof over your head. In my opinion, these articles pander to people who are suffering during this housing crisis. To get clicks and eyeballs they exploit people’s cognitive bias–our need to hear anything that supports our point of view. These stories tell us some agreeable fiction that, for a moment, makes us feel better. In this particular case, I am rebutting the story “Renting for Life? Here’s what that means for your financial planning” published by the Canadian Press on MSN. While the Canadian Press argues that renting is good, and owning is bad, it ignores some basic fundamental facts:
Renting is bad
Owning is good.
Arguing Renting is Good
Now everyone is entitled to their own opinion, but no one is entitled to their own facts.
The Canadian Press argues in favour of renting, saying that renting simply means “directing your money elsewhere.” (Yes, I agree, out of your pocket and into your landlord’s pocket). Many such ‘pundits’, including this article, actually argue that you’ll have more ‘security’ by choosing to rent. They say instead you should, “save for life.” (oh, halfway through this article posted on MSN, this story is broken up by a video from Money Talk News on “The 1% Rule: A Quick Trick for Profitable Rental Properties.” Wow!).
Further, the Canadian Press argues that Canadians should set aside cash from every paycheque, and invest it aggressively.
The Canadian Press argues, “home is about security.” They argue (wait, I thought you just wrote that home wasn’t the path to security) what Canadians really need is more freedom. They cite that companies love employees who “will bring their expertise to new locations (assume that means a sleeping bag and tent too) and favour them for career development”. And so, this ‘opportunity’ is good for tenters, I mean renters, because they have a greater chance for workplace advancement. I’d love to see the data on that. Everyone knows the best way to move up workwise is to move out to another employer, not move to another city. In Canada, there aren’t all that many ‘other cities’ to move to. Employment in Canada is rather concentrated in a few major centres.
The Canadian Press in this article argues that by investing aggressively, you can get much better returns on your money than you ever could in real estate, “smart and early investing outperforms real estate.” And “If you’re disciplined, you could have a significantly higher net worth without ever owning a home.”
You know, there is so much wrong with this I almost don’t know where to start.
Why Renting is Bad
So let’s begin with some facts.
Investing aggressively is how people lose money in markets. Whether it’s Nortel, Bre-X, bitcoin, or whatever the latest fad is, aggressive investing is akin to gambling. Don’t gamble with your future because the Canadian Press says you are young and you can take the loss.
Next, paying off your mortgage is the greatest savings program you could ever have. Your parents have what they have because they bought a house and paid it off. With every mortgage payment, you become wealthier than you were the month before. You build equity in your home, and you enjoy the increased value of your residence over time. And remember, unlike stocks or bonds, where you pay taxes at your highest marginal tax rate, when you sell your principal residence in the future at a substantial gain, usually hundreds of thousands of dollars, maybe over a million now, you get to keep all that money tax-free. And you didn’t have to play Russian roulette in the markets.
The Real Cost of Renting
But let’s look at what it means as a landlord to rent something out; whether that be a house, a condo, whatever. You add up all of the costs—the same costs as a homeowner… but that’s not true. A landlord who rents out a residence has to pay higher mortgage costs (because it is a rental) and pay higher insurance costs (because it is a rental) and pay more for maintenance and repairs (because it is a rental).
You take all these costs and then add a margin for profit. A landlord’s thinking goes: “I could take my money and put it into a GIC or other safe investment and get an easy return without the headache or hassle of being a landlord. So, I will need to get at least double that for the headache, hassle, and risk of being a landlord… otherwise, I will just stick with the safe and easy investment and forgo the problems of dealing with tenants and collecting rents.
Now, who pays for the higher costs of owning and running a rental and the required profit margin on top of that to get anyone to be a landlord? The Renter. Who gets to keep the capital appreciation of the property over time? The Landlord. After 25 years, who has nothing to show for paying rent (that is going up year over year beyond the cost of inflation unless you have rent control, in which case you are just waiting to be renovicted)? The Renter. Who has a property that continues to generate income, has been leveraged to buy even more properties that are also now generating income, and is enjoying a growing portfolio of properties that continues to become more valuable? The Landlord.
I could do all kinds of fancy calculations, but the fact is that Canadians who own the roof over their head are among the wealthiest people on the planet because they own real estate. And those Canadians who don’t own the roof over their head, aren’t. See Statistics Canada.
We need to be empathetic and provide strategies to help Canadians own the roof over their heads so they can get all the benefits that come with ownership instead of making them feel it’s OK to risk the insecurity of renting.
The goal of every Canadian should be to buy something and eventually own a residence. Ownership today will require most people to make sacrifices, sometimes difficult ones. But unless you make those sacrifices, a tent may be in your future. No one ever expects to be homeless. I’m sorry, our country needs to do better, but that’s the hard reality for many, many Canadians.
Renting is bad.
Owning is good.
Let’s put a plan together, and let’s get it done.
You can do it!
