Renting risks and rights in a buy vs rent decision

Two kinds of risk, two kinds of protection

Owners carry risks that are easy to see: a big repair bill, a mortgage renewal at a higher rate, a market that stalls just when they want to sell. Renters carry risks that are quieter but just as real.

A renter is exposed to the landlord's decisions, to the pace of rent increases, and to the temptation to spend rather than invest the money not tied up in a home. A renter's protection comes from tenancy law and from their own financial discipline.

Neither list tells you which choice is better. They tell you what to price in and what to prepare for.

The main risks of renting

Four risks come up again and again. Each can be reduced but none disappears.

• Rent increases. In places with a cap, increases are limited while you stay. In places without one, such as Alberta, increases are governed mainly by notice requirements. See rent control by province.
• Loss of the unit. A landlord may sell the building, move in a family member or renovate. Provincial rules decide when this is allowed, how much notice is required and what the tenant is owed. Check your tenancy board for the current rules.
• Moving costs and disruption. Even a good tenancy can end, and moving costs money and time. The calculator lets you set a move frequency and a cost per move so you can see how much it adds up to.
• Not building equity by default. A mortgage payment forces some saving through principal repayment. Renting only builds wealth if the money you did not spend on a down payment is actually invested.

What the rules typically cover

Tenant rights are provincial, so the details differ, and they are updated. This is a list of topics to check rather than a statement of what any province allows.

Your provincial tenancy board or branch publishes the current rules on each of them, usually in plain-language guides.

• How and when rent can be increased, and how much notice is required.
• Rules on security deposits, if any, and how they must be handled.
• Notice a landlord must give before entering the unit.
• How a tenancy can be ended by either party and what notice applies.
• Who is responsible for repairs and how to raise a problem.
• How to resolve a dispute through the tenancy board.

The investing risk renters often overlook

A fair buy vs rent comparison assumes the renter invests the down payment and closing costs the buyer spent, and also invests any monthly savings. That is a decision, not a given.

To show how much it matters, here is one example. Suppose a $600,000 home with 20% down, a 4.5% mortgage rate and 3.5% yearly appreciation, compared with renting at $2,300 a month growing 3% a year. The only change below is the renter's investment return over 10 years.

If the renter never invests the difference, the renter's side collapses. If the return is lower than hoped, buying looks better. If the return is high, renting looks better.

The mirror risk for owners

Owners face their own version of uncertainty, and it is worth putting next to the renter's risks. A mortgage renewal at a higher rate can lift the payment materially.

Using the same $600,000 example, we changed only the rate at the first renewal. If the mortgage renews at 6% after the first term, the buyer still finishes ahead by $8,924 after 10 years. If it renews at 7%, the renter finishes ahead by $13,200.

That is a reminder that neither side is risk free. See mortgage renewal risk for how to stress-test your own plan.

Practical ways to reduce renting risk

A few habits go a long way. Keep the lease and every notice in a safe place. Know your province's rules before a dispute starts, not after. Build an emergency fund so an unexpected move does not become a financial crisis.

If you are renting while saving for a home, consider an automatic transfer on payday into a registered account. Renters can use TFSA, RRSP and FHSA room, so the savings can compound tax-free or tax-deferred. The first home savings tool shows how those contributions build over time.

Most of all, run the numbers under pessimistic assumptions for both options. If your preferred choice still works, you can commit with more confidence.