News

Renter's Guide to Investing

Rob Carrick, a personal financial columnist, has written this wonderful article on the age old debate on buy vs rent. This article was published in the Globe and Mail on May 16, 2014. In this article Rob disproves the notion that buying a house and paying a mortgage is the best way to save.  This article is available at http://www.theglobeandmail.com/globe-investor/investment-ideas/the-renters-guide-to-investing/article18732568/

Rob explains this in a very eloquent manner using a Q&A guide to make the article even more interesting.

What am I trying to achieve?

 

He explains that Homeowners build wealth by paying off their mortgage in a nutshell buying equity in the house and hoping to sell it for a profit in the future. Renters on the other hand have less monthly expenses such as property tax, utility bills etc. Rob calls this saving as “Renter’s Dividend”.

Can’t I just spend my savings as a renter?


He explains that the renter dividend can always be spent by the renter or assets or luxuries throughout the their lives but that would put them at financial disadvantage to home owners.

What if I’m just renting for a few years before buying a house?


Rob says that if the renter is saving to buy a house then the renter’s dividend becomes their down payment. The best thing to do in this situation would be to put the savings in a high interest savings account to protect the principal.

How much should I invest?

 

Rob answers this question with a two part answer; the first part covers the actual amount he writes that even if the monthly mortgage and the rent are almost the same but home owners have other hidden expenses that a renter does not have to worry about such as property taxes, maintenance, improvements, furnishings and utility bills. This is the amount a renter should ideally invest. This should be around 1 to 2% to the value of the house. This should be applied to the local housing prices easily available. You can also apply this amount to the national average housing price which was $409, 708. This works out to be $512 to $683 a month.

 

What if I can’t invest that much?

 

Rob writes that it the minimum a renter should save is 1%.

 

Where should I invest?

Rob explains that a renter has many options when it comes to where to invest. The best investment would be to invest in models that defer or are completely tax free such as; tax free savings account or registered retirement savings plans. Unfortunately they both have a limit. If you want to save more then  dividends and capital gains are taxed less then interest on Bonds.  On the other hand Homeowners have an advantage here in that they can sell a principal residence tax-free.

 

 

Should taxes play a role in my investing?

 

Rob answers this question by siting a few alternatives to Bonds. Yes. Think about squeezing your bond allocation below where you might otherwise be, especially if you have 10-plus years to go until you plan to dip into your investments. A 30-year-old renter might have as little as 10 or 20 per cent in bonds (I’ll discuss mixing stocks and bonds for young investors in a future column).

If you hold stocks for the long term, keep in mind that 50 per cent of your capital gains are taxable. Many mutual funds and exchange-traded funds pay distributions that include a return of capital, which is basically a sliver of the upfront amount you invested. A return of capital is not taxed when received, but it does lower the adjusted cost base for an investment and thus increase the potential capital gain on sale.

How do I stay committed?

 

Rob writes that the only way to stay committed is to have that amount automatically transferred to your investing account from your chequing account every time you get paid.

Do I have to invest separately for retirement?


Rob explains the ideal mix is 10% of gross pay should go towards retirement and on top of that we should also invest the renter’s dividend.  This is the same for both Homeowners and Renters.

What kind of return should I expect?


Rob writes that Six per cent after fees is a reasonable expectation from a diversified portfolio with a heavy stocks weighting, but a little more may be attainable.

 

Monthly 
investment

Value after 
30 years
at 5% 
annually

Value after 
30 years
at 6% 
annually

Value after 
30 years
at 7% 
annually

Value after 
30 years
at 8% 
annually

$400

$325,150

$389,805

$467,781

$563,420

$500

$407,688

$487,256

$584,726

$704,275

$600

$489,256

$584,708

$701,672

$845,130

$700

$570,763

$682,159

$816,617

$985,985

SOURCE: GETSMARTERABOUTMONEY.CA'S COMPOUND INTEREST CALCULATOR

This article is based on the article “Renters guide to investing” by Rob Carrick published in the Globe and Mail on May 16, 2014. Some parts of this article may have been used in verbatim the article in its entirety is available at http://www.theglobeandmail.com/globe-investor/investment-ideas/the-renters-guide-to-investing/article18732568/ .