When it comes to maximizing your lifestyle and net worth, the question “should I rent or buy” is one of the most heavily debated. Even if you already own your home or apartment, it’s a good exercise to regularly consider whether living there is the optimal move.
Taking on debt to buy is always a gamble. But if you go down that route, your goal would be to use the debt to live a nicer life than you could have afforded to if you had to pay cash. The initial years after taking out debt to buy a home are generally the riskiest.
In contrast, the return on the rent you pay is essentially zero. Yes, in exchange for paying rent, you get a place to stay. But you have little chance of building equity.
BURL: The rest estate investing rule to follow
As real estate investor, I always recommend using the “BURL” rule — which stands for “buy utility, rent luxury” — to avoid financial regret.
Utility can be defined as something you absolutely need, with very little unused space. Luxury is something beyond what you need, such as a third empty bedroom, massive terrace and backyard with a swimming pool.
BURL helps you see that the true cost of living in a home that you own isn’t just the money you spent to live there. It is the opportunity cost of not renting it out at market rate.
A case study for the BURL rule
I once knew a couple in San Francisco who decided to downsize once they realized that they could rent out their 2,600-square-foot, four-bedroom, three-bathroom home for $7,500 a month.
Before the pandemic, they bought a second, smaller home in a less central location that cost 40% less than what they paid for the first house. Their new house had a mortgage of $3,000 and could have rented out for $4,500 a month.
To them, a smaller house with a rental value of $4,500 was more aligned with their budget and household size. So they rented out their old house for $7,500 a month and boosted their monthly cash flow by at least $3,000.
By following the BURL rule, they opted to buy — and live in — the slightly more utilitarian three-bedroom, two-and-half-bathroom house, and let someone else rent for luxury.
If you’ve owned for a while, it never hurts to do some research and see how much rent your home could command in the current market. You might be surprised. As of June 2022, the national median rent price has increased by 14.1%, according to data from Apartment List.
And thanks to inflation, population growth and demographics, rent will likely continue to go up indefinitely.
What smart real estate investors do
In my experience, the question of “rent or buy” boils down to this:
- If you have the cash for a down payment on a luxury home and want to avoid economic waste, buy and live in a property only if you’d be willing to pay its fair market rent.
- If you want to go luxury but don’t have the down payment, you can rest easy as a renter knowing that you’re getting a better deal on your rented home or apartment than its owner is.
Savvy real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the couple above, an investor following the 100 times monthly rent rule wouldn’t pay more than $750,000 because the monthly market rent was $7,500.
Spending $7,500 per month ($90,000 a year) on rent may sound expensive, but paying $7,500 a month in rent is actually relatively good value, since you’d have needed to spend roughly 360 times the monthly rent to buy that house at its market price of about $2.7 million at the time.
It may be harder to follow the BURL real estate investing rule in expensive cities like New York, Los Angeles and San Francisco. There are people who pay six-figures a year in rent, but are actually coming out ahead thanks to the BURL rule. These renters are investing in different properties in other parts of the country for higher rental yields.
A Honda Civic takes you around just fine, but some people like to drive Ferraris. The BURL rule says that if you can afford it, buy the Honda Civic and rent the Ferrari on weekends.
The other side of BURL
In the Midwest, there are properties for around $200,000 that could rent for $2,000 a month based on the 100 times monthly rent rule. Amazing value for investors but not so much for renters, even if the absolute dollar amount for rent is low.
If you were to buy such a home with a baseline of a $40,000 down payment, $160,000 mortgage, and 4% interest rate, the annual costs of ownership would be about:
- $6,400 mortgage interest
- $2,400 property taxes
- $1,200 insurance
- $3,000 maintenance
Add $800 a year in opportunity cost for not earning a 2% risk-free return on the $40,000 down payment, and it costs only $13,800 per year to own compared with $24,000 a year to rent.
Even if the owner could only charge $1,200 (versus an expected $2,000) a month in rent, bringing the $200,000 property purchase equal to 167 times the monthly rent, owning is still a better value proposition, especially if the property continues to appreciate.
If the area in which you live, or would like to live, has market prices that look like this, you should buy rather than rent, since you could get cash-flow positive immediately if you were to one day rent the property out.
Ultimately, where we choose to live is a very personal decision. We all want to live close to friends and family. We also want to live in an area with great food, wonderful entertainment, and pleasant weather.
But we can’t have it all! What we can do, however, is choose the best options with the money we have.
Sam Dogen worked in investing banking for 13 years before starting Financial Samurai, his personal finance website. He has been featured in major publications including The Wall Street Journal, The Sydney Herald, The Chicago Tribune and The L.A. Times. Sam’s new book “Buy This, Not That: How to Spend Your Way to Wealth and Financial Freedom” is out now.
Podcast: Real estate marketing strategy with Publish Partners | RENX – Real Estate News EXchange
Podcast: Real World of Real Estate with Gerald Tostowaryk
Max Jakubke, principal and founder of Publish Partners, and the firm’s digital marketing director Bianca Elliot discuss numerous strategies for effective online real estate marketing with host Gerald Tostowaryk.
One of the focuses for the episode, the second in a series on real estate marketing, is using data effectively to improve your storytelling ability about a project or development.
As part of the discussion, Jakubke and Elliot share some examples of successful campaigns.
Publish Partners is an international firm based in Vancouver.
Perfect time for sellers in Saskatchewan real estate market – Global News
For people who analyze statistics for a living, interpreting numbers is often about perspective.
For example, take home sales in Saskatchewan last month.
The province saw a 10-per cent reduction in home sales from 2021. However, last year was a record year for home sales in Saskatchewan.
“Overall, most regional markets are starting to shift away from the exceptionally tight market conditions seen earlier in the year,” the Saskatchewan Realtors Association said in a press release.
“However, most regional markets still face conditions that are tighter this July then they were last year.”
One of the reasons for the reduction is the spending issues many people are facing as inflation has drove prices of everyday items up. Another reason the market has slowed is the simple fact it’s summer and people aren’t home.
“People are on holidays, they’re out farming and so typically we see a slower market and people are maybe not used to that because during the pandemic we had a market that was very busy throughout the year,” said Chris Guérette, the CEO of Saskatchewan Realtors Association.
“So we are returning to sort of pre-pandemic activity during this time of the year.”
Buyers are more leaning towards more homes priced under $400,000, which as a result means less are available and slowing down sales.
“Inventory levels trended up in July over previous months, but every region still faced inventory levels that were lower than the previous year and long-term averages,” the press release read.
“Overall, most regional markets are starting to shift away from the exceptionally tight market conditions seen earlier in the year. However, most regional markets still face conditions that are tighter this July then they were last year.
Guérette said overall, the provinces market it a lot more stable than other places.
“We know that we won’t have the drastic ups & downs that other large municipalities are facing & other provinces are facing at the time right now. So that means places like Ontario and B.C are seeing some really large dips and some swings.”
Guérette said it is a sellers’ market right now, with the average price of a home in Saskatchewan going up to $335,000.
How to send your kids off and prepare for university housing.
© 2022 Global News, a division of Corus Entertainment Inc.
Real estate as a wealth creator – Ottawa Business Journal
Who is the wealthiest person you know? Almost without a doubt they will tell you that they have substantial real estate holdings inside their portfolio.
If you’ve been toying with the idea of purchasing an income property, now is the perfect time to jump in. You might be asking yourself, “Why now?” Well, because there is an opportunity in the marketplace that I have never seen in my 20+ year career and will likely never see again.
Over the last two years, the value of your home has increased, on average, 40 per cent. The market has peaked and we are having a bit of a soft landing thanks in large part to the Bank of Canada raising the overnight rate four times already this year.
How is this an opportunity?
First, we have a cohort of first-time buyers with solid incomes and the best of intentions that simply cannot break into this market. They are your new tenants. The average home in Ottawa purchased today would require a household income of $137,050, assuming you had 20 per cent down. A six-figure income is now needed to buy the average home in Ottawa!
Secondly, the new found equity in your current home could be your ticket to getting into investment real estate. You may be eligible for an up to 80 per cent loan on the current market value of your home; equaling the down payment for your first investment property.
There are so many reasons why real estate is a wealth creator, but let’s start with this: Say you buy a $1 million property with 20 per cent down—in other words you invest $200,000 to buy a $1 million investment—but which number do you earn your return on? You earn a rate of return on the value of the building, not on the value of your down payment. Your tenants pay the mortgage and expenses, and you reap the rewards!
Ottawa has an average 5.6 per cent rate of return over the past 50 years. With 20 per cent down, you have a 5x multiplier on the market rate of return on your initial investment. Your down payment has earned a 28 per cent rate of return over the last 50 years! Do you know anyone in the stock market that can say the same?
Now, this is an oversimplification. To determine your actual rate of return you have to subtract the interest cost on the mortgage you are carrying and utilities, taxes, and maintenance. Individual results will vary, but real estate is a solid winner in any case.
Reason number two that real estate is a winner: Real estate values in Ottawa rarely go down on a year-over-year basis, and when they do the losses are quite small. In fact, Ottawa has recorded a contraction in average sale price only three times in the last 50 years.* The biggest one-year drop was 2.9 per cent. The second biggest was 1.9 per cent, and the third was 0.4 per cent.
American business magnate, investor, and philanthropist, Warren Buffet has famously said, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Why is this so important? It’s important because it is very difficult to recover from losses.
If we return to the $1 million purchase example above: Imagine you had $1 million worth of stock and the market crashed… You probably owned Nortel stock around the 2000’s or bought Shopify at its peak recently. Your million dollars becomes $500,000 overnight. But what happens when there is a corresponding increase of 50 per cent in the marketplace? Are you back to $1 million? Unfortunately, you are not… Your $1 million crashed to 50 per cent, and when the market rebounds by 50 per cent you are left with $750,000 and a $250,000 loss. Ouch…. Now do you see the wisdom in Warren’s words?
This is merely the tip of the iceberg here, and a deeper dive into your particulars would be recommended. Reach out to a professional to help guide you through the process of starting your real estate empire one door at a time.
*According to Ottawa Real Estate Board historical trends stats.
About Sean McCann
It’s not about me. It’s about you and how your home tells your story. Far too often real estate can feel transactional. I’m not interested in transacting. My singular interest is in guiding you and your family to your best possible outcome. It’s about building meaningful connections, in an increasingly disposable world, and understanding how your home is the epicentre of your world. Let’s be honest, my family’s well-being and future success lies in the experiences I create and the advocacy that I earn with you today. I appreciate you and I intend to honour the trust that you place in our relationship. Let’s have some fun and do something special together!
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