Not owning can be a great thing. Don’t like the way the neighbourhood is changing? Move. Want to be closer to the waterfront? Move. Have you decided to travel the world for a year? No problem. Move your belongings into a rented storage locker and hit the road!
A lot of people feel the stress of owing a lot of money in the form of a mortgage and worry about whether they’ll be able to continue to make their mortgage payments. The alternative is ugly — defaulting on a mortgage can mean huge costs. You could lose your entire down payment to things like transaction costs on the sale and legal bills, or, even worse, you could end up in bankruptcy.
When you rent, you leave all of those worries to the landlord.
All right, Alex. That all sounds great, you say. But isn’t renting still just paying someone else’s mortgage? You’re still throwing away all that money on rent, and at the end of the day you have nothing left to show for it.
Actually, everyone is paying rent, all the time. There are no exceptions. We’re all “throwing away our money on rent.” And that might actually be the best reason of all to choose renting.
CHAPTER 4
Rent — Something Everyone Pays. Always.
The backbone of the argument most people use to “prove” owning is better than renting is that to pay rent is to throw your money away. That a renter is simply paying the mortgage of the owner of the property.
While this argument seems logical and is intuitively appealing, it’s an over-simplification that ignores two important factors: 1) the owner of the property has invested money into owning the property and is taking on the risk of the property going up or down in value; and 2) everyone who lives in a house (or mobile home or recreational vehicle or tent) is paying rent. Always.
That second point might seem like a ridiculous statement, so let me clarify what I mean. The word rent is defined as money paid for the use of something. For housing, rent is what is paid for accommodation — which can be an apartment, a house, or any other form of accommodation. However, any payment should be considered a rent payment if there is 1) a use or service provided in exchange for the payment; and 2) there is no remaining value after the rental period expires.
The most common rent that everyone is familiar with is the rent that a renter pays to a landlord. The renter signs a lease and agrees to pay a set amount of rent each month, and when the lease is over, the renter leaves with nothing remaining. This type of arrangement clearly qualifies as rent.
But there are three other forms of housing rent: one we’re all familiar with, although we don’t usually refer to it as rent, second, the routine expenses that apply only to homeowners, that might not be considered rent, and third, another you might be less familiar with.
The first of these other forms of rent is the “rent” that a homebuyer pays to a bank when they borrow money to buy a home. The money borrowed is, of course, a mortgage, and the money paid in exchange for the use of that money, interest, is in fact rent. The homebuyer is paying rent for the use of the bank’s money over a period of time. The homebuyer then uses the money borrowed through a mortgage to buy a house — which means the rent they are paying to borrow the money is actually rent they are paying to occupy the home.
Every mortgage has an interest rate, which determines the amount of rent/interest the borrower pays to the bank each month, and there is also a principal payment. The principal payment is part of a mortgage payment that reduces the amount owing, and after many, many payments, eventually the principal payments reduce the mortgage balance to zero. The principal portion that reduces the balance is not “rent,” but a reduction to the service the bank is providing to the borrower. Reducing the principal owing on a mortgage is kind of like shrinking a full cable package until eventually you cancel all together. Once the mortgage is paid off, the rent (interest payments) stops, and the borrower no longer enjoys the use of the bank’s money.
The interest payment is a part of the rent a homeowner pays, but it’s not all of the rent. To figure out what the other rents are, let’s look at all the other payments renters and owners have to pay to live in a home.
Renters usually pay a specific amount of rent, but they also sometimes pay some of the utilities and other costs. The total of these payments should be considered the total rent.
For owners, the rent payments start with the interest portion of the mortgage payment. We can add to that the second type of rents we’ll refer to as non-interest rents, including all the other regular costs of owning a home. These include property taxes, because property taxes are payable every month, and they are meant to be payments to the municipal government for things like schools, public hospitals, highways and roads, sewers, and other infrastructure services. Homeowners are required to continue to pay property taxes for the use of the services provided by the municipality as long as they continue to live in their homes and use those services. (Actually, you have to pay them whether you use the services or not.) Anywhere you live, there are property taxes to be paid as long as you live there. If you leave, you can stop paying them.
It’s easy to underestimate the cost of maintaining a home, particularly because the costs are large and infrequent.
Another non-interest rent homeowners pay that most people don’t think about as rent is maintenance. This one is a tough number to nail down because it isn’t a set number and it isn’t payable each month. In fact, many of the costs of maintaining a home occur only once in a decade or even once every forty or fifty years.
Most roofs will last between twenty years and as long as fifty or sixty years. On the shorter end of the scale, the caulking around a bath tub or shower should be re-done every five or ten years, depending on how much use it gets and what kind of caulking was used.
A new roof costs a lot more than a tube of caulk, but both cost money and they will need to be replaced. Anyone who has owned a home will tell you that maintenance costs happen a lot more frequently than you might expect, and there are a lot more maintenance items than you would think. Homes are complex — they are made up of plumbing systems, heating and air conditioning, at least one bathroom, a kitchen, a foundation, windows, doors, and a whole lot of things that are painted. It is easy to underestimate the cost of maintaining a home, particularly because the costs are large and infrequent. A lot of them can be deferred for a long time without too much trouble. But if they’re deferred too long, like waiting to replace the roof, they can result in much more extensive damage.
A reasonable rule of thumb for this cost is 2 to 5 percent of the value of the home each year. For homes owned through a condominium corporation, most of the costs of maintenance (but not all) are covered by the condo fee. Still, the condo corporation might underestimate the costs of maintenance and end up raising condo fees to make up for deferred maintenance. Or, if they wait too long, they might make a special assessment (a large one-time fee charged to all unit owners) to cover a major repair.
Insurance is another non-interest rent cost. Renters don’t notice a landlord paying insurance in case the house burns down, but they’re quietly paying it. Homeowners rarely forget how much insurance costs!
So, in total, the rent a mortgaged homeowner pays includes: 1) interest on the mortgage; 2) maintenance; 3) property taxes; 4) utilities; and 5) insurance — and often a few other items (like mortgage insurance premiums, homeowners’ association fees, security fees, etc).
TABLE 4.1
| Renter | Mortgaged Owner | |
| Primary Form of Rent | Rent | Interest |
| Rent Paid: | to Landlord | to Bank |
| Other RentsMaintenance: | Landlord Pays | Owner Pays |
| Property Taxes: | Landlord Pays | Owner Pays |
| Utilities: | Landlord/Renter | Owner
|