If you’re not in the position to be able to (or even want to) buy a home, you may have heard that renting is as bad as burning your money. But it’s not a fair comparison.
Here’s how being a renter can work to your financial benefit.
Take advantage of pandemic prices
At the onset of the pandemic, rent in expensive cities, which had become prohibitively expensive for all but the rich, suddenly took a downward turn.
And the trend has continued: In Toronto, average monthly rents have declined for 15 straight months and are down 16% overall, compared to the early months of 2020, according to recently released research.
As a renter, you can use this to your advantage. Working from home is sure to be the norm for a while longer, and people are flocking to mid-size markets and smaller towns for more space.
If you want to keep renting in the city, now’s the time to lock in a lease at a great price — you may even be able to negotiate with your current landlord for an even better rate.
Misconceptions about renting vs. owning
You’ve probably heard that renting is basically throwing your money out. Or that owning a home is the only investment worth making.
But those assertions rely on some shaky assumptions:
- That you’re guaranteed to make money off of your home.
- That other investments wouldn’t make you as much or more.
In either situation, that’s not always the case.
Returns don't outpace the stock market
According to the 2016 Credit Suisse Globe Investment Returns Yearbook, Canadian stocks delivered an inflation-adjusted return of just under 6% a year between 1900 and 2015 (the U.S. stock market was slightly better over the period, at 6.4%).
Meanwhile, Canadian housing delivered price returns of about 5.4% between 1980 and 2016, according to the Canadian Real Estate Association.
In other words, putting your savings into a house purchase won't net you more money in the long run than investing in the stock market.
And don’t forget that owning a home also involves a number of non-recoupable costs like mortgage insurance, homeowners insurance, interest and property taxes. And when something breaks down, you’ve got to fix it yourself instead of simply calling the landlord.
All that that adds up and you’ll never see a return on those investments.
There’s more to life
Finally, the premise that owning is better than renting also assumes that homeownership is your No. 1 priority, without taking into account other goals you may have to spend your money on or what you’d like to do with your life.
If you don’t picture yourself repainting the ol’ white picket fence every spring, there are plenty of other enriching things you can do with your cash.
Other ways to enrich your life
When you’re paying a reasonable amount in rent, it frees up all kinds of money for other pursuits that can be just as financially worthwhile as owning your own home.
Here are a few.
Investing in stocks, bonds and ETF, either through a certified financial planner or a low-commission investing app is a great way to grow your money.
You don’t need thousands of dollars to do well on the market. Investing apps make it easy to set up a balanced portfolio of stocks, bonds and market-pegged ETFs and to contribute whatever you can spare at the end of each month — maybe $100, maybe even less.
It's a tried and true strategy and it will yield a tidy nest egg come retirement.
If you want to grow your money and you already invest or you’re risk-averse, you should consider a high-yield savings account. This type of account can pay upwards of 200 more times than your standard savings account.
Whatever you want to put your money aside for, whether that be an emergency, vacation savings or for a big purchase, a high-yield savings account can be the perfect place to keep your cash safe and working for you.
3. Pay off debt
Credit is convenient, but interest is a killer. If you’ve been relying on your plastic through the pandemic, you’re probably piling up plenty of expensive interest by now.
It may be time to consider putting housing-cost savings towards consolidating your debt. By dropping all your balances into a single lower-interest loan, you can make your debt easier to manage and even pay it off sooner.
Even if consolidating all of your debt isn’t an option, you should pay close attention to your credit score, which is a key factor that determines whether you can get a mortgage, finance or car or get a credit card.
There are a number of online resources that will help you monitor and repair your credit. Be sure to take full advantage.
4. Shop around for deals
Meanwhile, living modestly doesn't have to feel like a punishment. In fact, the more excess expenses you cut out, the more money you'll be able to put towards what you really care about. Your standard of living will be higher overall.
So if you like to shop online, why not download a free cash-back app that will give you a "rebate" on your everyday purchases.
5. Invest in yourself
It's never a bad idea to upgrade your marketable skills by going back to school. Even if you haven’t got all the funds upfront for a college program, taking out a student loan at a competitive rate can help make your dream come true without costing you all your savings.
“But owning a home is my dream”
If your heart is set on becoming a homeowner, you’re not necessarily destined to become house-poor.
Just make sure you follow these tips to make sure you come out of it in the best financial position:
- Get the lowest possible rate on your loan. The best way to save on a mortgage is to shop around. On the internet, you can easily compare rates from multiple lenders. And doing so can pay off huge: An interest rate just 0.5% lower can save you tens of thousands of dollars over the life of your loan.
- Save on homeowners insurance. Homeowners insurance is a must, but overpaying is not. As with your mortgage, shopping around for the lowest premiums is your top option for saving hundreds of dollars on insurance every year.
- Make a plan to be debt-free by retirement. When you’re designing your retirement plan, you don’t want to still be paying your mortgage — especially if your house is going to account for a chunk of your investments. Be sure to keep this goal in mind when you’re budgeting for a home and applying for a mortgage.