Buying a house vs renting a house is one of the most important life decisions that most people have to take at some point in in time. Whether you’re getting married, or having children, or simply moving out on your own, this decision will make a lot of difference in your life and finances.
On one side of this buy vs rent debate are proponents of the buy decision, who firmly believe that a house is a solid (no pun intended) investment as well as providing an abode – a place you can come back to at the end of the day. Besides owning a house means you don’t answer to anyone about how you want to decorate and spruce up the place you live in.
On the other side of the debate are the renters who want to stay flexible, who want to have an upper hand in being able to move easily, if the situation so arises. Renters believe that paying rent is not necessarily throwing away money. It’s simply being better aware of your fixed monthly expenses related to your housing.
Now from what I’ve read, the balance is heavily tilted towards the buyers. More people prefer to buy instead of rent, especially if they’re growing families. Buying a house is a major milestone in most families’ lives. It is often seen as a sign of getting settled. This is the trend across countries and there are common factors for this. The Wealthy Renter, by Alex Avery, however attempts to present the other side of this debate. Through the book, the author explains that renting has many benefits and if used correctly, it is not necessarily inferior to buying a house.
The book starts by pointing out that housing costs are one of the biggest expenses that people will make in their lifetimes. So much so that it can even play a major role in how quickly one can retire. Hence it is very important to consider both sides of the coin before making that decision. “Where we live defines how we live our lives. Our housing choices determine how long it takes to get to work. How much time we spend with our friends and family. If you have kids, it determines where your kids will go to school, where they play, and who they play with. It can affect how well we do our jobs. It can determine how much money we have for other things, like travel and the nicer things in life, such as cars, clothes, jewellery, electronics, and collectibles. It’s probably the biggest factor that determines when we can retire and how we retire.”
Avery explains that the reason why buying houses is the favoured trend in many developed countries is that the government plays a major role in pushing house ownership. From maintaining interest rates at a suitable level (according to the prevailing inflation) to providing tax rebates for house owners, the government makes it “lucrative” for people in the market for a house. There are reasons to this, as the author explains further. But some of these reasons were valid during a time when there was not much mobility. People grew up, went to school, lived and worked in the same town they were born. They were expected to retire there itself. During such a time and age, house ownership probably made complete sense.
But today economies are getting more interlinked, with technology obliterating the gap between the customer, who can be in one country, and the workforce in another. In this era of globalization, staying flexible becomes the order of the day.
The Wealthy Renter is full of reasons why renting can have multiple benefits in a young person’s life. Not only can it limit your housing expenses, it can also help you divert the balance of your savings into investments that can give a better rate of return than housing does. Although, the book is written keeping the housing trends in the Canadian economy in mind, the advice given in the book – like universal economic principles – can be adopted for people living anywhere in the world. One simply needs to be aware of the trends in their city – namely housing prices, average income levels, mortgage rates, etc. All of these factors will play a role in whether buying or renting makes more sense.
The book describes the ongoing trends and compares the six biggest cities in Canada. Unsurprisingly, the trends are similar to what one would have faced in their house hunting journey. Housing prices in cities such as Toronto and Vancouver, being popular with job seekers, are increasing rapidly, often out of the reach of first time home buyers. There was one interesting piece of statistic that stands out in this book. Canada is the second-largest country in the world by area. The population of Canada is roughly 36 million. The population density is only 3.4 people per sq km. But of course, this density is not uniform. Considering that most of Canada gets cold, really cold, in the winters, the majority of people live in the southern part of the country, “…with more than 80% of Canadians living within 160km of the US border.” The population density in cities is much higher as a result, and consequently this demand on housing has led to a multi-decade boom in housing prices.
The author does a fabulous job in bringing to light many aspects of home ownership that are not apparent to someone who have never bought a home. He explains the hidden costs that are associated in owning a house. Property taxes, maintenance costs, legal fees, etc. often add up whenever you plan to buy or sell a house. He also talks about investment creep, which is real and significant mistake that many people make in their excitement of owning a new house for the first time.
The book makes convincing points on how housing should be seen as what it is – a combination of investment (the land) and expense (the building). The former can increase in value, while the latter can only depreciate.
By the end of the book, the author has laid out a convincing argument on how renting can be better than buying. Of course this cannot be applied to everyone blankly. It definitely depends on one’s circumstances, priorities and financial health. But it does plant a seed in your mind that renting can be a viable strategy after all.
In the end, whether you buy or rent, good financial habits will make the biggest difference in the quality of your lives. It will ultimately decide how and when you can retire. In my opinion, for renters to actually come out on top, the following two points are paramount. I would consider these two points to be the crux of the book’s advice:-
1) Rent for less than what your mortgage payments would be for a comparable house.
2) Invest the difference amount that you save into (diversified) stocks, mutual funds, or ETFs, that are likely to give you a better rate of return than housing.
Housing works because it is a forced savings plan. Once you have a mortgage with a bank, you’re essentially forced to make regular payments to the bank. But if you can keep the same discipline by investing your savings from renting at a lower amount, you can have the best of both worlds – become wealthy and at the same time be flexible in your life decisions.
This book is a part of a category of books that are aimed at the Canadian resident and are considered to be very good. The first one that I read was Wealthing Like Rabbits. The Wealthy Renter is the second one. There are more down the line and you can definitely expect reviews on those books very soon.