Should I Rent or Buy a Home in Canada?

Are you looking to downsize but don’t know if you should rent a property or buy? When the time comes to downsizing from your home to an apartment or condo, it is difficult to decide whether renting or owning a property is the right strategic move for you. There are many financial and emotional factors that you must consider.

Let’s Look at an example:

Jerome and Janet have approached retirement and are looking to downsize their home to a smaller apartment. But they are not sure if they should rent or buy. Their current home is worth $1.0 million and after covering moving expenses, real estate fees, and other selling costs, the home’s value is now $900,000. Both Jerome and Janet plan to invest the proceeds from the sale.

The total return from these investments will give the couple monthly income of $5,500 , after taxes.
If the couple chooses to rent, the monthly investment income would help them cover their monthly rent payments of $3,000 per month.
On the other hand, if the couple chooses to invest the money they have leftover from selling their home into purchasing a condo, they would have to pay regular monthly expenses such as maintenance and utilities, property tax, insurance and such for a total of $3,500 per month.

What would be the best financial decision for them?

For Jerome and Janet, renting is the cheaper option in terms of cash flow. This is because, after their monthly rent expense, the couple is still left with $2,500 from their investment income. They are essentially living rent-free. However, in some cases, owning property may be a better long term investment.

Let’s say the rate of appreciation for the condo is 6% per year over the next 10 years. At the end of ten years, the condo Janet and Jerome purchased for $900,000 will be valued at a little over $1.6 million. They would have an economic gain of over $700,000 by the end of year ten and because this is their principal residence, they get a tax exemption on the gain making it tax-free.

So Here’s the Tip:

In the end, the choice of renting or buying is a financial decision. So if you are looking to live rent-free, selling your home and investing the proceeds may be the better option for you. However, if you are interested in gaining a profit from selling your property, then you will want to consider buying.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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