Renting your home for life doesn't have to spell financial sacrifice; it simply means directing your money elsewhere.
Young people in today鈥檚 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.
鈥淚 don鈥檛 think it鈥檚 unusual for someone in their 20s to say, you know, 鈥業 don鈥檛 think I can own a home,鈥欌 she said.
Even millennials 鈥 some of whom are now in their 40s 鈥 have likely witnessed home prices go from attainable to impossible, especially in urban markets. As Vancouverite Brad Badelt wrote for The Walrus last year: 鈥淭he experience has been like watching a train leave the station without me 鈥 and it鈥檚 not coming back.鈥
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鈥檚 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 鈥 saving for life.
鈥淚 love to say, 鈥楶lease save between 15 and 20 per cent of your pre-tax income,'" Smith said. 鈥淭hat鈥檚 going to be really hard to do 鈥 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.鈥
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 鈥 even significant wealth 鈥 without a house or condo, said Ed Rempel, the financial planner behind the blog and podcast Unconventional Wisdom.
鈥淭here is a perception from people that you have to buy a home to be well-off financially,鈥 he said. 鈥淎nd that isn鈥檛 necessarily true.鈥
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?
鈥淎 home is about security, but you actually get less freedom,鈥 Rempel said. 鈥淭here鈥檚 studies that show that people that rent get promoted faster in their companies, especially in companies that have offices all over the world.鈥
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 鈥渞enter鈥檚 RRSP鈥 for this account due to its unique benefits.
Why is it good for renters? You don鈥檛 ever have to actually buy a home with these tax-deductible contributions, he pointed out.
鈥淎fter 15 years, you can just move it into your RRSP,鈥 Rempel said. 鈥淚t鈥檚 just a free extra $40,000 (of) RRSP room that homeowners don鈥檛 get.鈥
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 鈥 including the FIRE community, an acronym that stands for 鈥渇inancial independence, retire early.鈥
The FIRE movement is defined by extreme frugality and early investment, and many proponents are millennials, according to . 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鈥檛 suit everybody, the basic principles of starting early and wise investment strategies can apply to anyone.
鈥淚f you鈥檙e young, you want to invest for growth,鈥 Rempel says.
鈥淎 lot of advisers will say, 鈥榊ou need some growth and some protection, and you need a balanced portfolio.鈥 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 鈥 decades 鈥 in front of you.鈥
In fact, Rempel said smart and early investing outperforms real estate. 鈥淩eal estate actually grows pretty slowly over time,鈥 he noted, pointing to nearly 50 years of data.
For his blog, he compared data from U.S., global and 好色tv 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.
鈥淚f you鈥檙e disciplined,鈥 Rempel said, 鈥測ou could have a significantly higher net worth without ever owning a home.鈥
Rempel says the data even supports borrowing to invest, which he admits isn鈥檛 for everyone. It鈥檚 considered a high-risk strategy and some people don鈥檛 have the tolerance for the ups and downs of the market, he noted. Many people do the worst possible thing 鈥 when the market goes down, they get scared and pull out.
鈥淚 always tell people, if you鈥檙e going to borrow to invest, you should commit to a minimum of 20 years 鈥 like, don鈥檛 look at the market as it goes up and down,鈥 he said. 鈥淚 have no idea where it鈥檚 going to be next year. But I do know that 20 years from now, it鈥檚 going to be way up.鈥
Committing to regular savings serves any outcome 鈥 renting for life, or eventually buying a home, even if that鈥檚 later in life. Saving and investing priorities can change over time, Smith said, but they are always the end goal.
鈥淚 would sit down with someone and create an investment strategy that matches those goals and your risk tolerance, while knowing that it鈥檚 going to change, right?鈥 Smith said.
鈥淵ou 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, 鈥業s this the right retirement strategy? I鈥檝e had it in place for 20 years where I鈥檝e always invested in equities. Maybe I need to make a change now.鈥欌
This report by 好色tvwas first published April 2, 2024.
