{"id":1845,"date":"2017-08-04T12:25:44","date_gmt":"2017-08-04T17:25:44","guid":{"rendered":"http:\/\/www.holypotato.net\/?p=1845"},"modified":"2017-09-25T19:50:07","modified_gmt":"2017-09-26T00:50:07","slug":"rent-invest-difference-not","status":"publish","type":"post","link":"https:\/\/www.holypotato.net\/?p=1845","title":{"rendered":"Rent and Invest the Difference. Or Not."},"content":{"rendered":"

In some markets there\u00e2\u20ac\u2122s a difference in the cash flow between buying and renting. Particularly in Toronto and Vancouver, it can cost a lot less each month to rent a house than to buy the same place (this is why<\/i> there\u00e2\u20ac\u2122s commentary about these cities being in a bubble). You can (should!) save up that difference and invest it<\/a>, and come out much better as a renter than a buyer. <\/p>\n

I\u00e2\u20ac\u2122ve been banging that drum for a while. I made a rent-vs-buy calculator<\/a> to help you estimate how much better off you might be. <\/p>\n

But a very important point is that you don\u00e2\u20ac\u2122t have<\/strong> to save the difference. It\u00e2\u20ac\u2122s not just about how much money you have at the end (though that\u00e2\u20ac\u2122s important), but the options you have along the way. You can spend the savings on increased lifestyle if you want \u00e2\u20ac\u201d living in a bigger\/better house than you could otherwise afford, travelling more, eating out more, whatever it is that you want to trade money for to improve your life. Or have Plan A be save and invest the difference.<\/p>\n

When the shit hits the fan, you can use the difference as an important safety buffer on your budget. You may “build equity” with each mortgage payment, but you can’t eat<\/em> equity, and in the meantime you have to keep paying your mortgage. <\/p>\n

So when Wayfare was in the hospital<\/a> and then continued being sick so we’re down to basically one income, we were (and still are) able to stay in our house. Firstly, because we had an emergency fund<\/a>. Secondly, because we have awesome parents who can help pick up Blueberry so I could keep that one job (and who gave us the confidence that there was another backstop behind our emergency fund if needed). But also because, as expensive as Toronto rents are, we’re actually able to (almost) afford to live here on (almost) one salary.<\/p>\n

Let\u00e2\u20ac\u2122s do a quick comparison (not our personal numbers, but taken from real GTA listings of similar houses on the same street, and the ratios would be the same): <\/p>\n\n\n\n\n\n\n\n\n
 <\/td>\nOwned house<\/td>\nRented house<\/td>\n<\/tr>\n
Mortgage\/Rent<\/td>\n$2933<\/td>\n$2200<\/td>\n<\/tr>\n
Insurance<\/td>\n$100<\/td>\n$40<\/td>\n<\/tr>\n
Property tax<\/td>\n$550<\/td>\n0<\/td>\n<\/tr>\n
Maintenance*<\/td>\n$700<\/td>\n0<\/td>\n<\/tr>\n
Total<\/td>\n$4283 ($3583)<\/td>\n$2240<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

(All else equal, see notes, * – maintenance can be deferred\/ignored temporarily in a crisis, but not long-term). <\/p>\n

When cut down to a single salary of ~$4,350\/mo after-tax and CPP\/EI ($70k\/yr pre-tax), a family in the rental house still has $2,110\/mo to spend on food, transportation, utilities, phones, summer camp, and other necessities, so the emergency fund doesn’t get drained too fast with one person out of work. It\u00e2\u20ac\u2122s likely a tighter budget than they had before, but they can manage for a fairly long time if needed. <\/p>\n

In the owning situation, there’s only $767 left over — not nearly enough to get by on, and then only if they ignore maintenance. The house is eating through the emergency fund, and with nothing being set aside for maintenance they\u00e2\u20ac\u2122re one poorly timed major repair away from catastrophe. Unlike the renters, the owners have to worry about a possible forced move on top of the immediate medical crisis. <\/p>\n

Having a few years of that kind of cash flow difference with two incomes (and saving the difference) also meant that the renters also go into their medical crisis with a good-sized emergency fund saved up, and instead of being used up in the purchase, the sizeable downpayment is spinning off dividends to help with cash flow. So even if they fell short or lost both<\/em> jobs, they could manage for a while. <\/p>\n

This is why the rent-vs-buy debate matters<\/em>. In exchange for a little less security of tenancy, the renters gain a massive increase in resiliency and flexibility. <\/p>\n

Notes: This is the edge of affordability for a 2-income household where each head makes $70k\/yr pre-tax (and on a side note, I had to go north of the 407 to find a matched pair of 3-bdrms to fit that kind of budget, but the price:rent holds in North York). The maintenance amount is a rough estimate and can be deferred\/ignored in a crisis for a while. This simple cashflow analysis ignores factors like investment returns\/opportunity costs, transaction fees, etc., that would be captured in a full rent-vs-buy calculator. While not our specific numbers, the ratio of the owning cashflow to renting cashflow requirements is still very close to the choice we faced when we moved here.<\/small><\/p>\n","protected":false},"excerpt":{"rendered":"

In some markets there\u00e2\u20ac\u2122s a difference in the cash flow between buying and renting. Particularly in Toronto and Vancouver, it can cost a lot less each month to rent a house than to buy the same place (this is why there\u00e2\u20ac\u2122s commentary about these cities being in a bubble). You can (should!) save up that […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[],"_links":{"self":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1845"}],"collection":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1845"}],"version-history":[{"count":8,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1845\/revisions"}],"predecessor-version":[{"id":1853,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1845\/revisions\/1853"}],"wp:attachment":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1845"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1845"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1845"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}