When it comes to growing wealth, rent can seem like a four-letter word. But owning your home isn’t the only path to prosperity — there are plenty of ways renters can expand their net worth, too.
One third of Canadians either rent or live in a home they don’t personally own, and many renters often have a tough time shaking the feeling that homeowners have some sort of advantage when it comes to growing their wealth.1
To unlock the secret to building wealth without owning a home, renters should approach saving and investing with the right mindset, says Alex Avery, author of The Wealthy Renter, and Romana King, author of House Poor No More.
Act like a homeowner
One of the most enticing aspects of home ownership is that it essentially allows people to save for their retirement simply by paying down their mortgage. According to King, renters should consider adopting this same mentality and continually put money away every month. “You need to force yourself to not take a full paycheque. To get that money out and into savings,” she says.
Automating savings can be an effective way to grow your wealth, because it removes the temptation to spend that money. Whether you set up automatic transfers from your bank account to an investment account or move the money yourself, by building this habit you’re essentially doing the same thing as homeowners who pay down their mortgage, explains King.
How much should you save as a renter? As a benchmark, think how much you’d have to spend per month to own a home. Here’s where you may see some of the benefits of renting.
Consider what the average monthly mortgage cost might be for a home that suits your needs. But don’t stop there. Consider too all the maintenance and expenses you might need to budget for, like a roof that is due to be replaced in the next few years. Advantage renter here: Homeowners don’t always get back what they put into the house, while renters can keep all that maintenance money for themselves.
Add up all those costs and compare that to what you’re paying in rent, and, if you’re able, put the difference into your investments. This can really work to your benefit if you can find housing that’s less than what you would pay for a mortgage and maintenance.
The money you save may seem insignificant now, but once you factor in the benefits of dollar-cost averaging, a strategy that involves putting a set amount of money into the market every month, and the power of compound interest, you should start to see your net worth rise. Using an investment calculator can help you see the impact these savings can have on your future.
Time is on your side. Use it wisely
Rising borrowing costs are keeping some mortgage-paying homeowners up at night, but higher interest rates may be a positive for renters who save. “As the average house price has continued to get more expensive — not on an absolute basis but compared to incomes — the returns become less likely to be attractive,” Avery says. “The returns in the public markets and other investment markets have only improved over that time.” For example, as recently as November 2023 you could get a risk-free return above 5% on an 18-month non-cashable Guaranteed Investment Certificate (GIC). 2
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Every housing decision is a little like taking medicine, where everyone has a different prescription and it’s a function of their own needs.
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As a young renter, you have decades of potential investment growth. While Avery doesn’t believe the cost of housing should dictate how aggressive you are with your investments, he says renters should consider saving as soon as possible and take full advantage of Registered Retirement Savings Plan (RRSP) matching, or any other savings programs offered by their employers.
King agrees, adding that younger investors with higher costs could consider being more growth focused. “If your housing costs are higher than if you owned a home, the reality is you have two knocks against you,” she says. “You’re paying more and you’re not getting an asset. You may want to consider more risk in your investing.”
In addition to taking advantage of tax-sheltered incentives, such as an RRSP or a Tax-Free Savings Account (TFSA), it might be worth opening a First Home Savings Account (FHSA). Although this relatively new tax-advantaged account was created to help offset the costs of purchasing your first home, the funds you save can be transferred tax free to an RRSP if you decide later on that owning a home isn’t a priority.
Knowledge is power
The best way to take advantage of being a renter today is to learn as much as you can about the housing market as well as other types of investments available to you. It’s also important to figure out what you actually need and where you want to be in the next five or 10 years.
“Every housing decision is a little like taking medicine, where everyone has a different prescription and it’s a function of their own needs,” Avery says, adding that those needs can change over time. “It’s a complicated discussion that depends on where you’re at in your career, what your objectives are, where you want to live and what your income looks like.”
Although the rental market suited Avery’s personal needs for years, he says that when he and his wife had twins in 2010, they quickly realized they needed a new home. “We ultimately bought a house where we made a long-term commitment,” he says. “I’ve been happy, but the return on our housing has been less attractive and lower than the returns on other investments. It really was a lifestyle decision.”
The benefits of renting
After watching home prices surge in recent years, many homeowners now face the prospect of seeing their monthly mortgage costs climb thanks to rising interest rates. In a worst-case scenario, some people may be forced to sell, triggering added costs that mean they potentially risk losing money on their home. Renters don’t face those costs. And there are other benefits to renting that could include:
- No real estate taxes
- Lower utility costs
- No maintenance expenses
Being a renter provides a level of flexibility homeowners can only dream about, says Avery. As rents go up, it’s relatively less expensive to move to something more affordable, he explains. “It’s as simple as finding a cheaper, smaller place, finding a roommate or changing locations.” Avery recognizes that may not be a person’s first choice and that it may mean expanding your search area to include nearby communities, especially if you live in a major metropolitan area.
But this flexibility makes it easier for renters to adapt to the current economic environment by casting their gaze further afield for better paying jobs or cheaper rent. “It’s very expensive for homeowners to sell and move to another location,” he says. “The transaction costs are high and breaking a mortgage can be expensive.”
Rent may be a four-letter word, but so are words like rich and time and gain. With the right mindset, you can grow your wealth whether you own a home or not.
- “To buy or to rent: The housing market continues to be reshaped by several factors as Canadians search for an affordable place to call home”, Statistics Canada, September 21, 2022 https://www150.statcan.gc.ca/n1/daily-quotidien/220921/dq220921b-eng.htm, Accessed November 15, 2023 ↩
- “What TD offers”, www.td.com/ca/en/personal-banking/personal-investing/products/gic/special-offer?#tab2, Accessed November 15, 2023 ↩