Posted at 8:00 am
I recently had a problem with my bathroom faucet leaking.
I went to speak to John, the 6-foot, 200-pound behemoth who is remodeling my neighbor’s kitchen. An hour later, John was lying on my bathroom floor, his face hidden under the sink.
“I think we need to change the faucet,” he said.
Thirty minutes later the new faucet was installed and John came down the stairs with his tool box and wished me a good day.
He doesn’t send me an invoice for his work or for the parts installed. I never get billed for his work.
Hello, my name is Nicolas and I am a tenant.
I make it interesting with my faucet story. But the truth is, it’s not always nice to say you’re a renter.
In Québec, renting after age 25 is about as socially acceptable as having an STD. Being a renter when you’re a parent is almost considered abuse.
However, 60% of the citizens of my city of Montreal are renters. In Quebec as a whole, about 40% of us rent our homes. That’s slightly more than France (35%), but less than Hong Kong (44%), Germany (50%) or Switzerland (58%).
If you allow me to study psychology at two hundred, I’d say that in Quebec for the past fifteen years, it’s been frowned upon to be a renter. Either since the prices for residential real estate have risen properly when interest rates have fallen.
Gradually society decided that the purpose of existence was to own a home. So, as a renter, not only do you not own a home, you also don’t actively work to pay for one.
As if the most important hockey game of our lives was being played and not only were we not on the ice, we weren’t even in the arena.
This led to shifts even in the language. For example, a young couple will no longer say that they moved to Rosemont, but that they “bought” in Rosemont.
“Buy” is a badge of honor. The sign that we are grown up, that we take responsibility, that we are enriched.
While I don’t plan on moving, er, sorry, buying, I sometimes do calculations to compare renting versus buying. Every time I come to the same conclusion: renting at a reasonable price is more profitable than buying the same apartment, especially in an expensive market like Montreal.
How is it possible ? But your mother told you again: “Rent is throwing money away!” »
Everyone throws money out the window.
Comparing the amount of rent to the amount of mortgage payments is a rookie mistake. A rent is the maximum one pays for an apartment, while a mortgage payment is the minimum one pays for an apartment.
Add to that school taxes, council taxes, insurance, provident funds, maintenance, renovations… Not to mention the elephant in the room: the opportunity cost of the sums paid out that could have been used to acquire financial assets that historically pay much more than the appreciation of residential real estate.
Why am I telling you about this? Because people around me, like some readers, are under the impression that in order to get rich, they need to own property. The recent rise in interest rates is stressing them out: they’re thinking about buying a house, but the numbers just can’t keep coming.
An old real estate rule says that a cheap purchase price is 10 times the annual rent that renting the same apartment could generate. A balanced price corresponds to 15 times the annual rent, a purchase price that is too high corresponds to 20 times the rent or more.
For example, a house renting for $2,000 a month (ie $24,000 a year) would sell cheap at $240,000, balanced at $360,000 and $480,000 in an overvalued market. In Montreal we are definitely in the third option.
Buying a condo for $480,000 with a 10% down payment and a 5.5% interest rate over five years results in monthly payments of $2,637. Of this amount, $1858 per month, or 70% of the amount paid over those five years, is used to pay the interest cost of the loan. If you can rent a house for $1858 a month, save $779 and invest it in financial assets, you will become rich.
My advice: if you rent for a reasonable amount and you like your situation, don’t change anything. Use the difference between your rent and what you would have paid to own and maintain your home, and pay off debts if you have any, or contribute to your financial investments.
Many homeowners have become rich with the rise in home prices over the past 20 years. But to continue with my example, a renter between the ages of 25 and 65 who would put the equivalent of a $48,000 down payment into a balanced portfolio of index ETFs and then add $779 per month would end up have a portfolio of more than 2 million on the eve of retirement.
Not bad for someone throwing their money away.
The question of the week
Are you thinking of buying or selling real estate in the next year?