There are few decisions in life as important as your first home. And with the housing market rising, everyone seems to have advice about this decision. Millennials who are moving to bigger cities feel the pressure to get into the market. They’re told that buying is the smart move, and renting is just throwing away money. But is it? I took a look at the numbers and found six reasons why renting for Millennials is sometimes the best option.
“You build equity when you buy a house”
This statement is frequently used as an argument against renting. The tenant rents for years and the landlord makes a profit, when the tenant could be using that money to save for a down payment or paying off a mortgage. On a basic level this is true, but it overstates the idea of gaining equity from owning a property. Most 30-year mortgages build very little equity over the first 20 years, and only start building equity in the last decade. Most of your mortgage payment in the first two-thirds of time that you own a property is going towards insurance, taxes, and the organization that gave you the mortgage. Unless you’re very sure you are going to live in this house for the next 30 years, you’ll build minimal equity.
House values also tend to increase with inflation. There have been very few periods in the last 100 years when house prices have risen beyond inflation, and when they did, they eventually declined when the “bubble burst.” When a housing bubble bursts, the market value of your home quickly declines—but your mortgage debt doesn’t. Unless you get lucky and buy the right property at the exact right time in the right location, the chance of your house value rising by significantly more than the rate of inflation is minimal.
Being tied to a place for an allotted time
Millennials are lucky to have started our careers at a time dominated by technology. Many people have the freedom to work remotely from their computer. This freedom does not mesh well with a mortgage payment, which only sees equity growth in its later years. The economy is changing, and Millennials tend to go back to school or switch careers more often than baby boomers, but there’s little incentive for us to tie ourselves down to a 30-year mortgage until we know we’ll be staying in one place for a long time. Renting allows Millennials the freedom to spend money on travel, starting a business, or paying off student debt, rather than having money tied down in a place where you aren’t sure you will want to live for the next three decades.
There are better ways to grow your wealth
Not only are the gains of equity from buying a house in some ways overstated, but if investment is your goal, there are more profitable ways to go about it. Renting can save you a lot of money on your yearly spending, and that money can be used to invest in stocks, ETF’s, Index Mutual funds, RRSP’s and other investment strategies that have a higher overall gain. As mentioned above, house prices tend to increase alongside inflation. Adjusting for that, a house in 1897 cost the same as a house in 1997. As for investing, The Financial Planning Standards Council states that, “Return assumptions for a balanced portfolio range from 4.55%…to 6.05%.” Therefore, investing in stocks and bonds with the cash you’ve saved from renting is a more profitable option. The money you gain over years can be used to buy a home in a city that you know you’ll stay in.
Peace of mind
The lack of stress about maintenance or repair fees is a major perk of renting as well, as the landlord or building manager responsible for these. This removes a major source of worry from your life as a renter, since you don’t have to think about replacing the furnace or the pipes if they break or hiring someone to check problems in your house. I know many homeowners who are frustrated with the amount of work they have to do just to maintain their living space. Renovations and repairs can be a huge drain, both financially and of your time. Renting allows you to spend your free time enjoying your home, not just keeping it in order.
Another way renting removes stress is that you don’t have to worry about fluctuating markets and property taxes. In Manitoba, the most rent can increase is 1% and 3% each year (with some exceptions), which many renters can manage. Property taxes, on the other hand, can rise by more, and the value of your home can swing wildly without you having any ability to budget for it. Knowing how much you are paying at the beginning of every month is a big stress reliever for Millennials, who often freelance and work jobs that are more fluid.
Amenities and extras
Not a lot of people have a pool, a gym, a party room, or a tennis court in their house. But with a lot of newer condominiums, these are built in! These facilities are right in the building and make exercise and social gatherings easy and affordable, which is important in our society where we all seem to be so busy. These amenities would normally require Millennials to pay a membership to a gym or club, plus transportation costs. With many buildings having these amenities built in, it saves renters both money and time. Not to mention the cost of having these perks in your home as an owner would vastly outweigh what renters spend for building fees in a year!
Another benefit with renting a condo or apartment is that you are surrounded by a built-in community. Many of my good friends are people who rented beside me, went to the dog park at my building or who I just bumped into in my neighbourhood at some point. You’re surrounded by hundreds of neighbours in an apartment building, which can come in handy when you need someone to watch your dog for a day, borrow a drill for a project, or just want to get together with some new friends.
It is the best option
Thanks to rising student debt and a tough housing market, many Millennials have no choice but to move back in with their parents after going to college or university. In these cases, for a young professional looking to live on their own, renting is a better option. The freedom of living on your own without the stress of the housing market allows Millennials to get closer to their dreams while saving up money and building a life.
According to new research from Florida Atlantic University and Florida International University Faculty, “Renting and reinvesting the savings from renting, on average, will outperform owning and building home equity, in terms of wealth creation,” which can allow younger people to live the life they want. Traveling, being in a city, having a safe home, and chasing your career: all of this is possible and more attainable while renting. Renting isn’t throwing away money; you get to live in a place with all the amenities of owning a home, without any of the costs of upkeep! Don’t let old advice keep you from living your dream.
Have you chosen to rent? Are you a happy homeowner? Tell us why that choice was right for you in the comments!