as they continue to live in their homes and use those services. (Actually, you have to pay them whether you use the services or not.) Anywhere you live, there are property taxes to be paid as long as you live there. If you leave, you can stop paying them.
It’s easy to underestimate the cost of maintaining a home, particularly because the costs are large and infrequent.
Another non-interest rent homeowners pay that most people don’t think about as rent is maintenance. This one is a tough number to nail down because it isn’t a set number and it isn’t payable each month. In fact, many of the costs of maintaining a home occur only once in a decade or even once every forty or fifty years.
Most roofs will last between twenty years and as long as fifty or sixty years. On the shorter end of the scale, the caulking around a bath tub or shower should be re-done every five or ten years, depending on how much use it gets and what kind of caulking was used.
A new roof costs a lot more than a tube of caulk, but both cost money and they will need to be replaced. Anyone who has owned a home will tell you that maintenance costs happen a lot more frequently than you might expect, and there are a lot more maintenance items than you would think. Homes are complex — they are made up of plumbing systems, heating and air conditioning, at least one bathroom, a kitchen, a foundation, windows, doors, and a whole lot of things that are painted. It is easy to underestimate the cost of maintaining a home, particularly because the costs are large and infrequent. A lot of them can be deferred for a long time without too much trouble. But if they’re deferred too long, like waiting to replace the roof, they can result in much more extensive damage.
A reasonable rule of thumb for this cost is 2 to 5 percent of the value of the home each year. For homes owned through a condominium corporation, most of the costs of maintenance (but not all) are covered by the condo fee. Still, the condo corporation might underestimate the costs of maintenance and end up raising condo fees to make up for deferred maintenance. Or, if they wait too long, they might make a special assessment (a large one-time fee charged to all unit owners) to cover a major repair.
Insurance is another non-interest rent cost. Renters don’t notice a landlord paying insurance in case the house burns down, but they’re quietly paying it. Homeowners rarely forget how much insurance costs!
So, in total, the rent a mortgaged homeowner pays includes: 1) interest on the mortgage; 2) maintenance; 3) property taxes; 4) utilities; and 5) insurance — and often a few other items (like mortgage insurance premiums, homeowners’ association fees, security fees, etc).
TABLE 4.1
| Renter | Mortgaged Owner | |
| Primary Form of Rent | Rent | Interest |
| Rent Paid: | to Landlord | to Bank |
| Other RentsMaintenance: | Landlord Pays | Owner Pays |
| Property Taxes: | Landlord Pays | Owner Pays |
| Utilities: | Landlord/Renter | Owner Pays |
| Insurance & Other: | Landlord Pays | Owner Pays |
It’s cheaper to rent a home as a renter than it is as an owner. Sometimes a lot cheaper.
Paying rent to a landlord is just a cleaner and simpler way of paying for the use of a home, compared to separately paying all of the costs outlined above. Homeowners are cutting out the middleman and paying all of the expenses relating to the home directly, including the interest payable when they borrow the money to purchase the house.
Now here’s an amazing thing about renting: It’s cheaper to rent a home as a renter than it is as an owner. Sometimes a lot cheaper. There are a number of reasons, and we’ll discuss many of them throughout this book, but they include the fact that renters usually rent smaller places than owners buy; many rental homes in Canada are older than owned homes, and often that means fewer modern features; landlords are more practical and financially disciplined when they spend money on maintaining and renovating rental housing; and landlords often undercharge on rent because they
*Average two bedroom monthly rent compared to average monthly mortgage payment, based on average home price, 5% downpayment, and a 2.4% mortgage rate with a 25 year amortization. Source: CMHC, 2013.
expect to make up the shortfall when the property goes up in value (which doesn’t always happen).
It’s true — in every major city in Canada, it is cheaper to rent a home than it is to buy a home.
What about when a homeowner pays off their mortgage? Are they still paying rent? Doesn’t the cost of home ownership drop off substantially once there are no more mortgage payments? In fact, the costs of home ownership don’t go down when a homeowner pays off their mortgage. Not even by a penny!
What does happen is that the mortgage payments, which were a part of rent, disappear, but they are replaced by an “implicit” rent. The implicit rent isn’t a payment that has to be made; it’s a payment you make to yourself.
Just like maintenance, it’s a very difficult number to figure out, and it can change significantly over time. And because it’s not a number you can see each month, it’s dangerous. If you don’t keep track of implicit rent, it can sneak up on you and become much larger than you’d ever imagine.
To understand implicit rent, think about it this way: When you buy a house, you take on a large mortgage, and over a long period of time you pay it o
The amount of income you haven’t earned because you’ve owned your home instead of investing in other things is implicit rent.
ff. When you do that, you’ve actually done two things. First, you’ve saved up a lot of money over a long period of time, and second, you’ve lived in a home.
If we separate these two things, you can look at the act of saving up a whole lot of money and look at other things you could do with all that money. You could buy bonds or dividend-paying stocks, or you could buy a rental property. All of which would pay you a regular income. All that money you would have tied up in owning that home could provide a lot of income,
TABLE 4.2
| Renter | Mortgaged Owner | Unmortgaged Owner | |
| Primary Form of Rent | Rent | Interest | Opportunity Cost |
| Primary Rent Paid: | to Landlord | to Bank | to Self (and Consumed) |
| Other RentsMaintenance: | Landlord Pays | Owner Pays | Owner Pays |
| Property Taxes: | Landlord Pays | Owner Pays | Owner Pays |
| Utilities: | Landlord/Renter | Owner Pays | Owner Pays |
| Insurance: | Landlord Pays | Owner Pays | Owner Pays |
and you are entitled to that income because it would be your money. That income — the amount of income you haven’t earned — is the “opportunity cost” of owning your home instead of investing in other things. And that is implicit rent.
The amount of rent you pay to live in a home doesn’t depend on whether there is a mortgage or not. It depends on how much the home costs. What changes as a homeowner pays down their mortgage is they gradually shift from paying the bank rent to paying themselves rent.
With the various ways homeowners pay rent, it’s easy to lose track of the total amount of rent there is for a home. What makes it most difficult is the implicit rent.
Try this: Ask a home-owning friend how much their house
