NINA DRAGICEVIC
April 2, 2024
Renting your home for life doesn't have to spell financial sacrifice; it simply means directing your money elsewhere.
Young people in today’s housing market can feel particularly hopeless, said Shelley Smith, an investment advisor at TD Wealth. Home prices are out of reach for many, and the higher cost of living makes saving for a down payment more difficult.
“I don’t think it’s unusual for someone in their 20s to say, you know, ‘I don’t think I can own a home,’” she said.
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Even millennials — some of whom are now in their 40s — have likely witnessed home prices go from attainable to impossible, especially in urban markets. As Vancouverite Brad Badelt wrote for The Walrus last year: “The experience has been like watching a train leave the station without me — and it’s not coming back.”
The federal government last week announced a renters' bill of rights to protect this segment of people, acknowledging that young people are renting more than previous generations and for longer periods of time.
But resigning yourself to less financial security if you are likely to rent for life isn't necessary, Smith said.
It’s hard to predict the future 10 or 20 years from now, when there may have been changes in your financial situation, the market, or your marital status. Instead, you can prioritize one goal that works in any situation — saving for life.
“I love to say, ‘Please save between 15 and 20 per cent of your pre-tax income,'" Smith said. “That’s going to be really hard to do — and honestly, you know, even 10 per cent seems laughable for some people at this point. But what you need to do is set up a regular savings plan, and you need to prioritize it.”
Just as paying rent is non-negotiable, Smith added, putting aside cash from every paycheque is also non-negotiable.
You can still have financial security — even significant wealth — without a house or condo, said Ed Rempel, the financial planner behind the blog and podcast Unconventional Wisdom.
“There is a perception from people that you have to buy a home to be well-off financially,” he said. “And that isn’t necessarily true.”
He has high-income clients who are renters, including an actor who was considering buying a Toronto condo. Instead, Rempel stressed the importance of flexibility for work. What if the actor got a job in Calgary, or California?
“A home is about security, but you actually get less freedom,” Rempel said. “There’s studies that show that people that rent get promoted faster in their companies, especially in companies that have offices all over the world.”
According to Impact Recruitment, companies love employees willing to bring their expertise to new locations, and favour them for career development.
Although the relatively new First Home Savings Account appears directed at hopeful homebuyers, Rempel coined the term “renter’s RRSP” for this account due to its unique benefits.
Why is it good for renters? You don’t ever have to actually buy a home with these tax-deductible contributions, he pointed out.
“After 15 years, you can just move it into your RRSP,” Rempel said. “It’s just a free extra $40,000 (of) RRSP room that homeowners don’t get.”
In fact, he added, if you have contribution room in both your FHSA and RRSP, he advises maxing out your FHSA first.
And investing early can have big gains. Rempel often explores investment strategies on his podcasts, which sometimes does not include home ownership — including the FIRE community, an acronym that stands for “financial independence, retire early.”
The FIRE movement is defined by extreme frugality and early investment, and many proponents are millennials, according to Investopedia.com. These investors commit to living very cheaply, save up to 70 per cent of their incomes, invest aggressively, and then retire early, living off small withdrawals from their funds.
Although saving at such a steep rate doesn’t suit everybody, the basic principles of starting early and wise investment strategies can apply to anyone.
“If you’re young, you want to invest for growth,” Rempel says.
“A lot of advisers will say, ‘You need some growth and some protection, and you need a balanced portfolio.’ But for younger people, mostly they want growth, and you should have maybe 100 per cent of equity. You do have a long time horizon — decades — in front of you.”
In fact, Rempel said smart and early investing outperforms real estate. “Real estate actually grows pretty slowly over time,” he noted, pointing to nearly 50 years of data.
For his blog, he compared data from U.S., global and Canadian stocks with Toronto real estate, from 1975 to 2022. If someone in 1975 had invested a down-payment-sized chunk of cash into stocks, they would have more money today than if they had bought a home, even at Toronto prices.
“If you’re disciplined,” Rempel said, “you could have a significantly higher net worth without ever owning a home.”
Rempel says the data even supports borrowing to invest, which he admits isn’t for everyone. It’s considered a high-risk strategy and some people don’t have the tolerance for the ups and downs of the market, he noted. Many people do the worst possible thing — when the market goes down, they get scared and pull out.
“I always tell people, if you’re going to borrow to invest, you should commit to a minimum of 20 years — like, don’t look at the market as it goes up and down,” he said. “I have no idea where it’s going to be next year. But I do know that 20 years from now, it’s going to be way up.”
Committing to regular savings serves any outcome — renting for life, or eventually buying a home, even if that’s later in life. Saving and investing priorities can change over time, Smith said, but they are always the end goal.
“I would sit down with someone and create an investment strategy that matches those goals and your risk tolerance, while knowing that it’s going to change, right?” Smith said.
“You may be perfectly happy today, taking a lot of risks. And then as you move closer to a goal, as you get closer to retirement, you're still going to have to sit back and say, ‘Is this the right retirement strategy? I’ve had it in place for 20 years where I’ve always invested in equities. Maybe I need to make a change now.’”
