Investment return assumptions in buy vs rent

What the return assumption actually does

In the calculator both households spend the same total monthly housing budget. Whoever spends less on housing invests the difference. The renter also invests the cash the buyer spent on the down payment and closing costs. Those investments grow at the assumed return, and the final renter net worth is largely a product of that single number.

That makes the return assumption the renter's mirror of home price growth. It is quiet in the first years and then compounds. For a longer view of the logic, see rent and invest the difference and the opportunity cost of a down payment.

All numbers here use one illustrative base case: a $600,000 home, 20% down, a 4.5% mortgage rate, a 25-year amortization, 3.5% yearly appreciation, $2,300 rent growing 3% a year, 2% inflation, a 10-year stay in Alberta and a nominal return that varies below. Nothing here is a forecast or a statement of what any account will earn.

Results across return assumptions

Only the return on invested savings changes in this table. The buyer's net worth stays at $460,065 in every row because the home and mortgage are unaffected.

The break-even return

Asking what return would make the two paths equal is more useful than debating whether 5.5% or 7% is right. For the base case the break-even return is about 5.50% for a 5-year stay, 6.77% for a 10-year stay and 6.75% for a 15-year stay.

The break-even also depends on the home price assumption. If appreciation is 2%, the renter needs only about 3.43% to keep up. If appreciation is 5%, the renter would need about 9.73%. The two assumptions are two halves of the same bet, so choosing a high number for one and a low number for the other builds a conclusion into the inputs. See home price appreciation assumptions.

Choosing a return you can defend

Returns depend on what the money is invested in, for how long and at what cost. A savings account, a bond fund and an equity fund are very different assets, and a single yearly percentage hides that spread.

Some practical guardrails:

• Match the assumption to the actual plan. If the renter would hold mostly cash or guaranteed products, a lower return is the honest input.
• Subtract fees. A return shown before fund fees and advice costs overstates what lands in the account.
• Use a nominal return with a nominal inflation assumption, or a real return with real figures, but do not mix them. See real vs nominal dollars.
• Run at least a low, middle and high case, and look at the break-even return rather than a single outcome.
• Be aware that returns are uneven. A decade can include long flat or negative stretches that an average hides.

Taxes and registered accounts

The base case treats the return as untaxed, which is closest to money held in a TFSA, FHSA or RRSP. Renters can use that registered-account room too; it is not exclusive to buyers. Savings in those accounts compound tax-free or tax-deferred.

Money held in a taxable account earns less after tax. The calculator can apply an effective yearly tax drag. At a 25% drag the same 5.5% gross return nets out lower, and the buyer's lead on the base case grows from $41,686 to $82,565. At a 50% drag it grows to $119,378. These are illustrative drag levels, not tax advice, and your own situation depends on the account type, income and the kind of return.

The takeaway is to check which accounts the renter would really use and whether there is contribution room. See down payment sources: FHSA, RRSP and TFSA for the account rules.

Volatility and the probability view

A steady 5.5% a year is a convenient fiction. Real returns are uneven, and the order matters when the money is withdrawn at a particular time. The calculator's Monte Carlo view simulates random yearly home and investment returns around your assumptions and reports the share of runs in which buying finishes ahead.

On the base case, with an assumed 6-point yearly volatility for home values and 12 points for investments, buying finishes ahead in about 61% of 1,000 simulated paths. That is a statement about the assumptions and the chosen volatility, not about reality. The probability tool lets you change both.