I had a leaking problem recently with my bathroom faucet.
I went to talk to John, the 6-foot, 200-pound colossus 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’ll have to change the tap,” he said.
Thirty minutes later, the new faucet was installed and John came back down the stairs with his box of tools, wishing me a good day.
He will not send me an invoice for his work, or for the parts installed. I never get a bill for the work he does.
Hello, my name is Nicolas and I am a tenant.
I’m making it interesting with my faucet story. But the truth is, it’s not always nice to say you’re a tenant.
In Quebec, being a tenant after the age of 25 is about as socially accepted as having a venereal disease. Being a tenant when you’re a parent is almost seen as abuse.
However, 60% of the citizens of my city, Montreal, are tenants. In Quebec as a whole, about 40% of us rent our homes. This is slightly more than in France (35%), but less than in Hong Kong (44%), Germany (50%) or Switzerland (58%).
If you allow me to do psychology at two hundred, I would say that being a tenant has been frowned upon in Quebec for the past fifteen years. Either since residential real estate prices have really started to rise as interest rates have fallen.
Gradually, society decided that the purpose of existence was to own a home. And so as a tenant, not only do you not own a house, but you also do not 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 caused shifts even in the language. For example, a young couple will no longer say that they moved to Rosemont: they will say that they “bought” in Rosemont.
“Buying” is a badge of honor. The sign that we are adults, that we take our responsibilities, that we are enriched.
Even though I don’t intend to move, uh, sorry, to buy, I sometimes do the math to compare renting and buying. Each 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 ? Yet your mother has told you again: “Renting is throwing money away!” »
Everyone is throwing money out the window.
Comparing the amount of rent with the amount of mortgage payments is a rookie mistake. A rent is the maximum that we pay for housing, while a mortgage payment is the minimum that we pay for accommodation.
To this must be added the school tax, municipal taxes, insurance, contingency fund, maintenance, renovations… Not to mention the elephant in the room: the opportunity cost of the sums disbursed, which could have been used to acquire financial assets, which historically pay much more than the appreciation of residential real estate.
Why am I telling you about this? Because people around me, as well as several readers, have the impression that they must absolutely become owners in order to hope to get rich. The recent rise in interest rates is stressing them out: they’re thinking about buying a home, but the numbers just aren’t coming in anymore.
An old rule in real estate says that a cheap purchase price corresponds to 10 times the annual rent that renting the same accommodation could generate. A balanced price represents 15 times the annual rent, while a too high purchase price corresponds to 20 times the rent or more.
For example, a home that rents for $2,000 per month (so $24,000 per 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 an interest rate of 5.5% over five years gives monthly payments of $2,637. Of this sum, $1858 per month, or 70% of the total paid during these five years, is used to pay the interest costs of the loan. If you can rent a home for $1858 a month, save $779 and invest it in financial investments, you will get rich.
My advice: if you rent for a reasonable amount and you like your situation, don’t change a thing. Use the difference between your rent and what you would have paid to own and maintain your home, and repay your debts if you have any, or contribute to your financial investments.
Many homeowners have gotten rich with the rise in real estate prices over the past 20 years. But, to continue with my example, between the ages of 25 and 65, a tenant who would put the equivalent of a $48,000 down payment into a balanced portfolio of index ETFs and then add $779 per months, would end up with a portfolio of more than 2 million on the eve of retirement.
Not bad for someone who throws their money away.
The question of the week
Are you thinking of buying or selling real estate in the next year?