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As real estate prices continue to heat up across the country, many younger Canadians are finding home ownership increasingly out of reach and considering the reality of renting for the long term.
Almost half of Canadians (48 per cent) are concerned about the ability to afford a home in the next two years because of rising prices, according to a RE/MAX Canada survey conducted last year. That number jumps to 71 per cent for those aged 18 to 34.
For those clients, this situation is an opportunity for advisors to re-evaluate their future goals and work with them on a plan that will help build wealth without the security of owning property.
Aaron Buchner, certified financial planner (CFP) at Buchner Financial Planning and financial advisor at Sterling Mutuals Inc. in Inverary, Ont., works with several millennial clients who rent. And with house prices in the Kingston area increasing almost 30 per cent in January from a year ago, many are priced out of the market, he says.
At the same time, many are also facing the societal pressure of buying a house as the next item on their to-do list.
“They think because they’re not able to take that next step of buying a house, they’re not making the right choices,” he says.
Given this situation, it’s important for advisors to get a better sense of whether purchasing property is important to a client, or if they’re comfortable renting for the long term. Moving forward with the latter scenario, he says, often requires clients to shift their perspective on building wealth.
“When I work with a lot of clients, the first thing I say to them is, ‘There’s nothing wrong with renting. Contrary to the whole belief that renting is throwing away money, it’s really not,’” Mr. Buchner says.
Clients who plan to rent for the long term can benefit from seeing the issue from a different angle, he says. Specifically, there are advantages of having money to enter the stock market earlier versus stretching finances to the limit to buy a property and potentially not having the budget to invest for several years.
“If you can be in the [stock] market for 30-, 40-plus years, you’re leaps and bounds ahead of that other person who bought a house but is unable to invest for an additional 15 or 20 years down the road,” he says. “If you invest properly, keep it in the market and hold true during all of these rocky times, you can potentially still have a great retirement and rent.”
Other renters prefer to set up plans in which they’re still putting money aside for purchasing a home in a tax-free savings account (TFSA) or registered retirement savings plan (RRSP), Mr. Buchner says. But if that opportunity doesn’t materialize, the funds can be used for retirement.
For younger clients who rent and are wondering about buying in this hot real estate market, Jacqueline Soong, CFP at Desjardins Financial Security Investments Inc. in Toronto, says it’s important to be aware of all of the costs that come along with property ownership that won’t come into the equation if they’re renting long term.
“Everyone always says, ‘I’m paying rent, which could be going toward a mortgage.’ Well, what about everything else that comes with home ownership?” she asks. “[There are] property taxes and repairs, and if you live in a condo, maintenance fees.”
How to build wealth like a homeowner
Most clients who rent are under the impression that they’ll need real estate to build wealth often because they aren’t investing the amount they’re saving on these expenses – essentially exhibiting similar habits to a homeowner, Ms. Soong says.
“A mortgage forces you to save money. You have no choice – you have to pay it. So, if you’re choosing to rent, then you have to take on the same mindset,” she says. “If a mortgage, maintenance, all that kind of stuff, would have been $3,000 a month, you set aside that difference and you invest it.”
There are opportunities in equities and other products that will allow investors’ money to compound and grow over the long-term in a TFSA or RRSP.
“Imagine if you’re renting and then you put an additional $2,000 a year aside plus all the other things that you can put aside?” she says. “You’d probably work out to be in the same position, if not better, than a homeowner, with a lot less hassle.”
Tami Romanchuk, advisor and tax and estate planning specialist at Shoreline Financial & Insurance Services Ltd. in Victoria, says it’s possible to achieve high net worth without buying real estate.
“There’s definitely a lot of other assets to take into consideration, different types of investments, whether it be cash investments in mutual funds, maybe shares of [a] business,” she says.
But this will ultimately depend on where renters are living and their income level, she says. In cities with high rent, for example, many younger clients don’t have much left to invest at the end of the month.
Thus, having a handle on cash flow is the first step to building wealth for clients who are renting, or planning to buy one day down the road, she says.
“If the cash flow’s not there, you have to look at that big picture,” Ms. Romanchuk says.
Specifically, that involves looking at earnings and what’s available after budgeted expenses to see how these numbers align with what they’re trying to achieve, she says. Everyone’s definition of wealth will be different.
“It’s a mindset, and regardless of whatever it is that you’re working toward, it takes commitment and accountability,” she says.
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