Monday, May 18, 2015

Renting - Letting you scale up and down your housing as needed


Renting - Worth another look?

This is the second in a series of articles about Housing as a Service. Recently my wife and I sold our condo and started renting again. I believe everyone over the age of 30 at my work owns their own home. Everyone in the local Toronto area, that I took engineering with owns their own home. However, reading other blogs, and my own recent personal experience, has me wanting to research renting more.

How much house do you need in life?

Did you buy as big a house as you could afford in the area you wanted? This is a pretty common behavior. Do you really need that space, for all of the time that you have it?

Consider the following assumptions and graph of how much housing you really need
  1. Children move out when they are 18
  2. Each child has their own room, from the age of 1 (some would consider this a luxury, but let's assume we want to do this)
  3. You have 3 children 
  4. You only need a 1 bedroom dwelling as a single person, and a 2-bedroom as a married couple with no children

This graph is initially based on my own life, where I lived by myself from 2003 until 2012, albeit I had a 2 bedroom dwelling because I drank the real estate "Buy as much as you can" Kool-Aid.

As you can see, your housing requirements definitely move up and down throughout your life. Again, it may be a luxury for each child to have their own bedroom, but let's start with this as an assumption.

Below is a graph of what many people do who buy their "forever" house. Of course, the problem with a forever house... is you're buying enough space to last you forever, whether you need that space right now, or later once your kids have moved out or not.


The Forever House is based on the following assumptions/ideas:
  1. Once married, we can't live in a 2-bedroom apartment, we have to live in a house
  2. We have to buy a house big enough for all future children we want, so a 4 bedroom place right away
  3. We can't move once the kids are moved out, this is home!
Looking at the 40 year period from 2003 to 2063, we see the following:
  1. The 18, out the door strategy requires: 154 bedroom years
  2. The Forever House strategy requires: 222 bedroom years
This is a difference of  44%, which can work out to hundreds of thousands of dollars

How Does Renting Make a Difference?

We've just seen, that a "Forever Home" is inefficient because you are carrying a lot more house than you need. This leads to higher costs for cleaning, maintenance, and property taxes. If you consider that a home is "wearing out" or needs to be completely renovated regularly to not look dated, then owning more home than you need just means you have more to renovate!

But what does this have to do with renting? There are two strong reasons for a "Forever House", one is transactional cost, the other is "a sense of home". If you insist on owning rather than renting, your transactional costs are very high whenever you sell or buy a new home. Transactional costs are things like:
  • Real estate agent fees (often 2.5%-5% of the cost of the home)
  • Land transfer taxes (currently $32,200 on a median $1,000,000 home in Toronto)
  • Real estate lawyer fees
  • Staging and furniture rental fees
  • Home inspection fees
  • Moving expenses
In contrast, if you rent, and move to a new dwelling your transactional costs are:
  • Moving expenses
The much lower transaction fees, make it possible that you would move as you need more space and as you need less space.

The second reason many people have a "Forever Home" is they are emotionally invested in the home. Many refer to this as the "Pride of Ownership". When you're renting, it's much harder to get emotionally attached because it's not your property. While you may become attached to the community you live in, the house isn't yours and you know it. You're also unlikely to do any renovations on a property that isn't your, so by not being able to completely put your own personal stamp on it, you don't become as emotionally attached.

Conclusion:

Renting drastically lowers your transactional costs, which makes it concieveable you would move to a larger home as you need, and a smaller as your children move out on their own.

Renting also reduces the risk of emotional attachment to a home, which reduces the chance you remain in a place much larger than what you really need.

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