# Rent vs. Own calculation details



## FinancialUnderdog (Mar 30, 2015)

Hello,

I'm doing a bit of research on rent vs. own argument (don't worry, not starting another one). So, I've decided to calculate what these two scenarios would be like for me, as accurately as possible. 

For owning scenario, I'v calculated the gain on my house (minimal), lawyer fees on purchase and the sale, realtor commissions, strata fees, municipal taxes, interest amount paid with the mortgage, maintenance expenses, even threw in moving expenses there.

For renting scenario, I've decided to ballpark the amount of money I'd gain by investing our down payment for 5 years, subtract the taxes, and subtract the rent expenses (for the exact same unit). 

Utilities are the same in these two scenarios, insurance too.

The question I have is this:

To somewhat accurately portray the investing of the down payment, I'm picking S&P500 returns over the last 5 years (that's the limit of my scope for these two scenarios). S&P500 went up by 70% in that timeframe. Is it accurate to simply assume that if I bought in with $50K, I'd end up with $85K - meaning gains are $35K and half of it is taxable at my capital gains rate? 

Is there anything I'm missing when comparing these two side by side? My goal is to compare it as accurately as possible, so throw anything at me.


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## Potato (Apr 3, 2009)

Insurance for owning will be a fair bit higher than for renting, likely to the tune of a few hundred dollars per year. In case you're not aware, I have a spreadsheet available to do all this. 

Are you trying to project out to the future, or look at past returns? A future expectation of investment returns will likely be lower than the past (though the same can be said for house appreciation), with a lot of variability on 5-year time frames. 

You also have to consider the cash flow difference -- in many cities (particularly Toronto and Vancouver) renting is significantly cheaper than owning an equivalent place, so in addition to investing your initial capital/would-be downpayment, you also get to build up additional savings over the years that you rent which can be invested. This also comes into play for the taxation: _will _it all be taxable? Many people facing the decision these days are stretched if they buy and can't max out their TFSAs and RRSPs (doubly so if the TFSA limit increases next year), so the renting side of the scenario may be able to partially or fully shelter the extra investments.


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## FinancialUnderdog (Mar 30, 2015)

Hi Potato,



Potato said:


> Insurance for owning will be a fair bit higher than for renting, likely to the tune of a few hundred dollars per year.


I'm focusing on my specific situation. In my case, it's a condo, and all of insurance is covered by strata fees except for content insurance, which I would have even if I was just renting - so it doesn't make any difference.



> Are you trying to project out to the future, or look at past returns?


No, I'm only focusing on the past 5 year time frame.

The investor-me in this case would take the downpayment ($57K) and invest it as one chunk and the investment would trail S&P500 returns (70% as per Yahoo Finance). He would then sell it at the end of the 5 year stretch just like the homeowner-me would sell the home and incur selling costs. Does it mean it`s safe to assume for the purpose of this discussion that investor-me would end up with $96,900 or gain of $39,900? 

Other details I've decided to leave out of the discussion - putting downpayment in a tax shelter, so cap gains on the half of the gain. Also, investing additional cashflow is not considered simply because in my case renting and owning are pretty darn close in costs (with owning slightly cheaper thanks to a large downpayment).

Thank you for responding! I'm trying to compare these two as accurately as possible.


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## 0xCC (Jan 5, 2012)

Yes, a 70% gain on $57,000 will give you $96,900. The calculation is $57,000 * (1 + 70%) = $57,000 * 1.7 = $96,900.

There are maybe a couple of issues with how you arrived at that 70% number though. The first is that if you just looked at the index itself then you probably won't find a fund that you could have invested in that actually matches exactly that return due to fees (even if they are very low all funds have some fees). The second is that maybe the gain that you found in the S&P 500 isn't total return but is only the increase in the index itself and doesn't include any dividends/distributions from the companies in the index. You might be better off trying to find an actual fund that you would have invested in and looking at the total return of that fund over the last 5 years.

EDIT: Here is information on the Vanguard 500 Index Fund that tracks the S&p 500: https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT#tab=1a. The 5 year return is 95.04% for the fund while the total return for the S&P 500 is 96.50% over the same time period. The difference is due to fees and maybe the fund having to make some adjustments and pay taxes that the index doesn't have to do.

The other thing you will need to consider in your calculations is the exchange rate unless you pick a fund that trades in Canadian dollars (the Vanguard fund is a US fund).


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## Just a Guy (Mar 27, 2012)

As a landlord, I can tell you that the insurance rates are different, even if you include the by the condo. For example, with my rental condo there are three different insurance policies involved the condo policy paid by the strata fees, the owner's policy paid by me (usually around $120/year) and the tenant insurance policy (also usually around $120/year). A homeowners policy on the same property is usually around $500-$1000/year. It replaces the the owner policy and the tenant policy, the condo policy is still paid by the strata fees on top of the homeowner policy. 

You also need to include higher maintenance fees than the condo. I often pay for maintenance over and above the condo strata. 

You should also include a budget for things that are usually supplied by the landlord like appliances.

You should also add up your mortgage payment, strata fees, insurance, taxes, etc and see if there is a difference between that monthly amount and the rental fee as the difference can also be invested.

A final thing to consider is the cost of leaving, should you decide you need to move. You'll again be responsible for realtor fees, legal, etc. While most people plan to stay put, statistics show the average Canadian moves every 7 years which is usually before the break even date on home ownership.


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## CalgaryPotato (Mar 7, 2015)

I think if you go on an assumption of making 70% over 5 years on your investments there is a good chance you'll end up disappointed in the results. Are you sure you want to go 100% equities in the first place?

I think you covered off most of the major things, but there are lots of other minor things. Someone above mentioned that people who own tend to move every 7 years, but from what I've seen people who rent move far more often. That can be costly in itself. Also why are you including the cost of both buying and selling the house?


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## Cal (Jun 17, 2009)

I am curious as to whether your calculations will go as far into the future that the house is fully owned, otherwise, shouldn't you calculate the full mortgage amount, as that is what you paid out of pocket.

Not clear, but perhaps you are only going to make interest only payments for the mortgage. Just trying to clarify.

Also not clear if you would put the 50k down on the home for your calculations, or if you would put 0 down, and invest it....or if you are running both numbers just to see.


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## Woz (Sep 5, 2013)

Given the comparison you’re making, I see a few issues:


You’ve just looked at the S&P500 price which doesn’t include dividends. Including dividends the S&P500 has done 93.6% in 5 years.
You haven’t accounted for currency. In the last 5 years the USD has appreciated 20.5%, so that 93.6% S&P500 return measured in USD is actually 133.2% when measured in CAD.
You’ve ignored the difference in monthly cash flows which would either increase or decrease the amount you have invested, increasing or decreasing your return.

To do the comparison accurately you need to seperate what you put into the house at the start (downpayment, lawyer fees, land transfer tax, etc.), what you put into the house on a monthly basis (strata fees, municipal taxes, mortgage payments (principal and interest) minus equivalent rent), and what you got out of the house at the end (equity, gain on house minus realtor fees and moving expenses). With those three numbers and the rate of return for investing you can quickly compare your cost of owning vs renting during the past 5 years.


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## none (Jan 15, 2013)

It would be better I think to just assume a growth of 7% of year for stocks.

It's really a balance of what you think interest rates, investment returns; and what the housing market is doing.

If the housing market is going up faster than your mortgage rate it's pretty hard beating making money on borrow money. Of course, losing money on borrowed money REALLY sucks.


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## fraser (May 15, 2010)

One issue is risk/diversification.

When you own a home and it represents most of your equity, you have an asset that is undividable and can, in a downturn, be difficult to unload. Not so with a basket of equities. You can make a sell decision and unload one or all of them within minutes. And you can quickly switch the content of that basket of equities to take advantage of market opportunities.

Not so with real estate.


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## sags (May 15, 2010)

A condo owner may want to include a budget for special assessments as well.

Evidently a lot of condo corporations are underfunded, are approaching critical years for big maintenance costs, and will have no other choice but apply special assessments.


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## FinancialUnderdog (Mar 30, 2015)

Just a Guy said:


> As a landlord, I can tell you that the insurance rates are different, even if you include the by the condo.


I'll check it with my insurance guy, but last time I looked it was very similar. I do have a fairly cheap policy though.



> You also need to include higher maintenance fees than the condo. I often pay for maintenance over and above the condo strata.


I've included extra maintenance costs that I've incurred in the last 5 years.



> A final thing to consider is the cost of leaving, should you decide you need to move. You'll again be responsible for realtor fees, legal, etc.


Yup, included all of those!


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## FinancialUnderdog (Mar 30, 2015)

CalgaryPotato said:


> I think if you go on an assumption of making 70% over 5 years on your investments there is a good chance you'll end up disappointed in the results.


Oh, I don't mind being disappointed! Correction, I'm happy with my choice, but I still want to do some math behind these two choices. 



> Also why are you including the cost of both buying and selling the house?


I think it's only fair if you include liquidation costs for both scenarios - this way you can compare them side by side.


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## Charlie (May 20, 2011)

A 90%+ 5yr investment return will be tough to beat. What was the return the 5yrs before that .


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## fraser (May 15, 2010)

I believe that there is a significant difference in the rent/buy equation between a home and a condo.

We live in Calgary. We are currently renting a condo (homeowners for 34 years).

I know the cost of the condo, the monthly mtce, and the taxes. The owner of this condo is making 2.5 percent on her money. This assumes 100% occupancy. But, a $30K assessment two years ago, plus 4 months of remediation where there were no renters, plus a recent assessment of $5K has wiped out all of that profit for at least 8 years.

Our equity returns have been 17, 17, and 10.4 respectively over the past three years.

IF this condo was an investment property, it would be a loosing proposition. Yes, there has been a slight increase in value but not as much as one would expect. Especially because of some of the issues. Calgary is now in a real estate downturn. Condo's are, and have been, the first and the worst to suffer a market reduction.

Just one of the reasons that we will probably continue to rent.


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## bmoney (Jun 22, 2013)

Most people miss the single most important factor of comparison, which so happens to be the dirty little secret to real-estate LEVERAGE

Buying a property with 10% down is equivilent to 10:1 leverage. You might get 10:1 on Forex and 2:1 leverage on your margin account.

A 2% increase in the value of a property that cost $500,000 is $10,000. If you put down $50,000 on this property, the Return on Capital Invested is 20% Good luck beating those returns. Lots of people in my city are seeing property values appreciate north of 7% per year.

Now, is it cheaper to own or rent? Depends. Are you going to realize those paper gains? At the moment it's less expensive for me to rent than own (ignoring the equity paper gains), provided I rent for less than 5 years. The interest cost, property tax, maintanence fees, opportunity cost on investment income, closing fees, is more than what I pay in rent over 5 years. I made that decision 5 years ago, I've moved twice. The problem is my unleverged investment portfolio cannot keep up with the annual increases in house prices, so I am no better off having waited as this bubble keeps growing bigger. Likewise, most homeowners are no better off either, their properties keep increasing in value, but so do those properties they might consider trading up to. Unless they sell and become renters (which most will not) they will not benefit much unless they decide to take home equity loans to realize their gains - which is stupid but that's the reality and another discussion topic altogether.


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## none (Jan 15, 2013)

And leverage can work both ways. Losing money on borrowed money really really sucks.


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## fraser (May 15, 2010)

You only make a profit when you actually realize the gain, ie when you sell. 

The top line gain can be very different from the bottom line gain, ie net of real estate and legal fees.

We did enjoy significant gains on homes that we previously owned but the main purpose at the time was to provide a good living environment for our family.


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## bmoney (Jun 22, 2013)

none said:


> And leverage can work both ways. Losing money on borrowed money really really sucks.


Right, that's why being cash flow positive is so critical. People think they can hang on to the property during a down turn. When your average Joe invests in a second property, they are extremely susceptable to an economic downturn. The renter could lose their job, or the landlord, they get squeezed for cash flow, maybe a repair throws them over the top, and *poof* distressed sale. Heck, a few distressed sales can lower market value and they have to post additional collateral on a mortgage renewal.


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## Woz (Sep 5, 2013)

It’s also important to make sure your rate of return is higher than your cost of borrowing.

I know in Vancouver it’s fairly common to see condos rented at a cap rate in the low 3% range. It doesn’t take much of an increase in mortgage rates for the leverage on those properties to start working against them.


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## Just a Guy (Mar 27, 2012)

You may find this article interesting...

http://www.easysafemoney.com/rent-vs-own-revisited/


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## Charlie (May 20, 2011)

cute article:

5 year hold period
4.5% mortgage rate
10% decrease in value
$1100/mo equivalent rent....

so...basically...a 3.1% cap rate ($1100/mo rent less $2200 ptax on $350K property), financed at 4.5% with selling costs triggered in 5 yrs is a bad deal if the price goes down? 

Not suggesting this scenario is unlikely or that the Edmonton house buy is a good idea, but I just hate it when the assumptions drive the analysis. Especially when they're so skewed. 

(I think they could have reached the same conclusion using a 2.8% mortgage rate and higher equivalent rent and had a more credible article).


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## Woz (Sep 5, 2013)

Charlie said:


> (I think they could have reached the same conclusion using a 2.8% mortgage rate and higher equivalent rent and had a more credible article).


It was written in May 2010 when discounted 5 year fixed rates were 4.29%. Big banks were probably offering in the 4.5% range.


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## Charlie (May 20, 2011)

fair point. Didn't realize it was a 5yo article. Although I think most people were going variable at that time....which was about 2%.

He also alludes to fair rent for an equivalent place being $2K/mo instead of $1100 which would really change the result. 

And....just for fun...it seems the avg price is now $400K+ for a single home or $360K+ overall...so our buyer, with a variable rate and/or equivalent rent of $2K would be much further ahead (although it's not really fair to expect him to have predicted the market...).

My point was simply that I find that there's too much fudging the numbers in these types of articles. Here I think it's the equivalent rent, moreso than the rate --and the five year hold which makes buys difficult to justify. The pro-real estate articles tend to err on the side of appreciation -- asif that's a given.

Just a pet peeve.


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## Woz (Sep 5, 2013)

Yeah, I get your point. Real estate is one of the easier investments to fudge the numbers with, either up or down. Small changes to the inputs cause big changes to the results. That’s probably why property investors look at cap rate. It’s much more difficult to skew.


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## FinancialUnderdog (Mar 30, 2015)

Some quick calculations. Investing wins by $9K in my case.


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