Buying a place to live versus renting it is one of the most important decisions you have to make with huge financial and other implications. There are many good arguments in favor of each alternative, including sense of ownership, flexibility, lifestyle, etc. We are only going to consider the financial side of the argument. If the same house or apartment can be either bought or rented, ignoring all the other considerations, which one makes more financial sense?

There are numerous methodologies that can be used to approach this problem and the answers may differ depending on which one you use. We prefer to use common denominators to compare scenarios which are hard to compare. You want to make sure that you are dealing with an “apples to apples” comparison before you run the numbers. Rather than describing a methodology, we will look at a specific example.

I live in a one bedroom apartment in North Vancouver, BC and my rent is $1,000 per month. If I wanted to buy this same apartment, I could own it for about $200,000. Assuming a $25,000 down payment, my monthly mortgage payment would be $1,095 plus a condo fee of $231, including property tax, to the total monthly payment of $1,325. So far, the difference between the two alternatives is a one time down payment of $25,000 and $325 per month. But if I buy the apartment, after twenty five years when my mortgage is paid, I will own it. Is it worth making a $25,000 down payment today and pay extra $325 for twenty five years to own it? Let’s see.

Assuming an 8% growth rate (which is the historic rate for Vancouver), this apartment will be worth $1,268,236 in twenty five years. If I invest the same $25,000 today plus $325 per month for 25 years in a balanced stock portfolio, assuming an 11% growth rate (which is the historic rate for the TSX index), I will have $834,931 in my portfolio in twenty five years. Based on the assumptions we made, it would make more financial sense for me to buy my place now than continue renting it. The problem with this comparison is its sensitivity to assumptions. For example, if we assume only 3% as a growth rate for the value of this condo, its value in twenty five years will be only $406,558, which is less than a half of the value of my stock portfolio in the renting alternative.

As you can see, a purely financial comparison is close to impossible. This means that your decision should mostly depend on other factors, such as your personal situation, your expectations on whether the market is going and whether you prefer to have a sense of ownership or flexibility. But this financial exercise is still useful and relatively simple. Make you own growth assumptions and play with the numbers.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.