Homeownership is still part of the Canadian Dream
A large portion of renters (36 per cent) still believe that “paying rent is a waste of money.” The reality is that many people rent because they have to. In fact, homeownership continues to hold appeal: 8-in-10 Canadian millennials still aspire to own their own home.
No one can deny that homeownership is still part of the dream. But contrary to popular opinion, lifelong renting is definitely OK. Renting is not throwing your money away either.
Indeed, there are many inspiring stories out there about the simplicity and financial viability of lifelong renting. That said, renters still need more discipline than homeowners do when it comes to taking those extra steps to ensure they’re saving and building wealth outside of their homes.
Here are some ways lifelong renters can feel more secure about their finances.
1. Create more wiggle room in your budget
The first thing you can do as a renter is to stop living paycheque to paycheque, if you can. With increasingly high rents across the country, it can be especially easy to fall into this trap. If you receive your pay on a bi-weekly basis, your end-of-month paycheque may be covering the vast majority of your rent, leaving your mid-month paycheque to cover living expenses, entertainment and savings.
This leaves you vulnerable because as soon as your money comes in, it’s leaving again.
The budget site YNAB has a great tip for extending the life cycle of your income, it’s called “ageing” your money. The goal is to use last month’s money to pay for this month’s expenses. The concept is simple and a key component of financial security.
How do you do it? Start by tracking your expenses so you have a good idea of how much money is leaving your account each month. Put money aside to reach your monthly total and then some. Once you have saved 1.5 times your monthly expenses (it may take a little while), you can start automating all your bills, debt payments and savings at the beginning of every month. This way you’ll be more financially secure and you won’t need to worry about missing any payments.
2. Get into the savings habit
The main disadvantage of renting is that your rent qualifies as an “unrecoverable” expense. You’re never getting that money back.
Being “house poor” because of a high mortgage payment is one thing, but being “rent poor” is another. As a renter, you’re not building equity or wealth in your housing, so the need for savings is much greater. It’s important to live somewhere that enables you to save every month. But how much?
A good rule of thumb is the 50/30/20 rule, where 50 per cent of your income goes towards rent and living expenses, 30 per cent towards discretionary spending and 20 per cent towards savings and debt payments.
Of course, everyone’s financial situation is different and constantly evolving. There will be times when saving 20 per cent of your income seems impossible. This is where cementing good habits comes in handy. There’s nothing wrong with 10 per cent or five per cent with the hopes of contributing more in the future. The key is allocating a portion of your budget to savings and continually assessing your spending and your needs and wants. Once you’ve mastered this habit, you can learn about putting your savings into the right accounts (like an RRSP and a TFSA) and the right investment vehicles for your risk tolerance.
3. Don’t forget about tenant’s insurance
Many renters don’t think they need insurance because they figure their landlord’s insurance will cover them in case of any damage to their unit. This is a common misconception. In reality, you are responsible for all the contents of your home; your landlord’s insurance only covers the structure of the building.
According to the Insurance Bureau of Canada, only 50 percent of renters in Canada have tenant insurance.
This is a problem because emergencies and unexpected costs can result in heavy debt, which makes renters financially vulnerable. Remember, the key advantage to being a renter is that you are mortgage-free. The last thing you need is to pay for an emergency with an unsecured line of credit, or worse, a credit card. Tenant insurance is very affordable, ranging from a few hundred dollars a year to a few thousand, and is a must-have for maintaining your financial security and wellbeing as a renter.
If you want to look into tenant insurance, The Insurance Bureau of Canada offers free, unbiased advice.
4. Be flexible and realistic with your financial goals
Perhaps the greatest benefit of renting is the flexibility of lifestyle it affords you. When you haven’t invested a considerable amount of your savings in a home, you’re free to upsize or downsize as often as you like, pursue professional opportunities afar and diversify your savings.
This flexibility may often lead to new financial goals. Maybe one day you will consider homeownership, if it’s right for your lifestyle and if you enjoy the personal and financial stability that it requires. If you’re at peace with lifelong renting, you can look at the prospect of homeownership more objectively than most. You’ll be doing it because it’s right for you and not because you’re afraid of being priced out of the market or under the illusion that housing is a fool-proof investment.
Are you debating whether it’s better to rent or buy? Join our conversation onFacebookor onTwitter.
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FAQs
Key Takeaways
Both renting and buying have their financial advantages, and owning a home isn't right for everyone. Unlike homeowners, renters have no maintenance costs or repair bills and they don't have to pay property taxes.
Does renting make financial sense? ›
Key Takeaways
Both renting and buying have their financial advantages, and owning a home isn't right for everyone. Unlike homeowners, renters have no maintenance costs or repair bills and they don't have to pay property taxes.
How to build wealth while renting? ›
One of the best ways to build wealth over the long term is by contributing to tax-advantaged retirement accounts such as a 401(k) or a traditional or Roth IRA. If you're able to save money while renting, be sure that you're contributing as much as you can to retirement accounts.
Is renting a good way to make money? ›
Rental properties can be a great way to generate income, so long as your operating expenses aren't too high and your rent price is competitive. Rent payments, security deposits, move-in fees, and pet fees can also help cover your monthly expenses and leave money left over to save for future costs.
Does it make sense to keep renting? ›
Renting can make more sense than buying depending on where you live. If you live in an area where mortgage payments are significantly more expensive than the average rent, or if your lifestyle is better-suited to renting, it might make more sense to rent than to buy.
Is being a landlord a good source of income? ›
Being a landlord can be a solid source of income. However, determining how much profit a landlord can make depends on rental income, occupancy rates, property location, operational costs, mortgage payments, taxes, and the quality of tenants.
Does renting build credit score? ›
When you are looking at VantageScore® 3.0/4.0 or FICO® 9 and you are enrolled in a rent-reporting service, your on-time rent payments could increase your credit score with each on-time rental payment (assuming all of your other credit accounts are also in good standing).
Do millionaires rent their homes? ›
Many wealthy would-be buyers can afford to wait to buy their dream home — so they're choosing to rent instead. Some may be waiting for lower rates and more homes on the market. Others may believe the housing market is overvalued, according to Realtor.com, and want to avoid overpaying for a property that may lose value.
Are landlords usually wealthy? ›
Landlords Have an Average Income of $97,000 a Year
While landlords might bring in cash from several sources, their income levels tend to be solid. While the real median household income is just shy of $62,000, landlords bring in closer to $97,000 annually through all of their income sources.
How much profit should a rental make? ›
A good profit margin for rental property is typically greater than 10% but between 5 and 10% can be a good ROI on rental property to start with. What is the 2% cash flow rule? The 2% cash flow rule of thumb calculates the amount of rental income a property can expected to generate.
What is the most profitable thing to rent out?
- Party rental businesses.
- Storage rental businesses.
- Trailer rental businesses.
- Tool rental businesses.
- Dumpster rental businesses.
As a rule of thumb, your renter's income should be 40 times your rent, which is basically the same as 30% of their total salary.
Where do landlords make the most money? ›
When looking at rental income, tax benefits and accumulated home equity (thanks to rapid home value appreciation), landlords in San Jose, California, make the most money: $8,927 per month, or $107,122 per year.
Why is it smarter to rent? ›
Renters trade the peace of mind ownership brings with the flexibility to easily move to another location. As long as that flexibility is important to you, renting may be a better choice, at least for now.
Is it better to sell a paid-off house or use it as a rental? ›
Selling might be the better option if you need the proceeds to pay for your next home or stand to make a large profit. Renting it out could be a good choice if you're looking for additional income or if you're moving temporarily and plan to come back.
Why is renting stressful? ›
The stress of renting—including factors like not having the money to pay rent, being exposed to environmental hazards at a rental property, the hassle of moving and the stigma of renting—causes biological aging at a rate of 100% more than unemployment and 50% more than smoking, the researchers found, and has “real and ...
Does rental income make sense? ›
Real estate investments are often described as a "hedge against inflation." This is because with a fixed-rate mortgage, interest payments will stay the same but your rental income can increase over time. You'll also be building equity in the home and can benefit from inflation and appreciation long-term.
Is renting vs buying a home the 5 rule? ›
The 5% rule, when comparing renting and buying a home, suggests that it may be more financially advantageous to buy a home if the annual cost of owning the property, including mortgage payments, property taxes, and maintenance, is less than 5% of the property's purchase price.
Does owning a home make financial sense? ›
Your Home Builds Value
When you look at it from this perspective, it's easy to understand why buying a home is considered one of the best investments you can make to create wealth. As the value in your home grows, and you pay down your mortgage, the equity in your home builds.
What is the main reason to avoid renting to own 1 point? ›
The main reason to avoid renting to own is that you will pay much more than the cost of the item in a short period of time. When you rent to own, you are essentially borrowing money to buy the item, and the interest rates are often very high.
