Certified financial planner Nico Felipe often hears a common question from his clients: is it better to rent or buy a home?
The Vancouver-based coach with the Paper & Coin financial company works mostly with millennials, who are also his peers. He is 25 years old.
Even clients who are not interested in buying a home ask this question out of curiosity, Felipe said.
“They feel a lot of pressure that they need to own a home,” Felipe told the Straight in a phone interview.
Millennials belong to the generation born (generally) between 1981 and 1996. They’re now 24 to 39 years old.
“As millennials are at an age when homeownership becomes an expectation, many get ‘house fever’ when they see their friends and family becoming homeowners,” Felipe said.
Plus, there is a “misconception that rent is wasted money”, he added.
“Fortunately, there is a lot of evidence that support that one’s financial future is not defined by this one decision,” Felipe said. “You can still have a stable financial future being a renter.”
He explained that the question is “less about renting versus buying and more about what you are doing with the excess money as a renter”.
“How you use that excess money will determine the financial future of young people who choose to rent,” Felipe said.
According to the BCIT-educated financial planner, just because one owns a home does not guarantee a stable future.
Felipe said he knows homeowners who refinance their mortgage every year to pay off their credit cards and line of credits.
“Homeownership has turned into a vanity metric in gauging one’s financial success,” he noted. “Although I may seem like an advocate for renting, I am a huge fan of homeownership. It is a powerful vehicle to create long-term wealth.”
As a financial planner, Felipe wants to provide his clients context to show that renting isn’t a waste of money.
The Straight asked Felipe to illustrate what happens in a situation involving a $500,000 home on the market. Under current rules, a buyer needs a minimum five percent down payment for a residence of that value or less, which is $25,000.
The financial planner went on to add three additional assumptions. It’s a 30-year mortgage. The buyer pays a monthly amortization of $2,000, while the renter pays a rent of $1,500. Lastly, to keep it simple, rent stays the same.
If the renter has $25,000 to start with, Felipe explained, they can invest the money in the stock market, making roughly seven percent with mutual funds or exchange-traded funds.
On top of that, they also have an extra $500 per month to invest as their rent is cheaper than the homeowner’s mortgage by that amount.
“By the end of the 30 years, the renter will end up with roughly $813,000 in their investment account,” Felipe said.
Turning to the homeowner, Felipe said that if the value of the property grew three percent every year, it would be worth about $1.2 million after 30 years.
According to him, it may look like the homeowner is the clear winner.
However, according to Felipe, there are some variables that many people often overlook.
These include ongoing costs that a renter does not have to worry about: property taxes, maintenance and repair costs, potential strata fees, and possible increases in interest rates.
“When you consider these extra factors, it makes it a lot more difficult to see which one of the two is the winner,” Felipe said.
Felipe has been working as a financial planner since 2016.
“As a 25-year-old professional, I have a unique perspective on financial planning for millennials,” he said.
Felipe was inspired to go into his profession by the example of his mother, Nicky, who is active in the field of financial planning and credit counselling.
“She is such a big part of why I do what I do,” Felipe said.
Felipe was four years old when he and his family left the Philippines and settled in Canada, in 2000. He and his mom often team up to provide financial literacy
“We’re big on understanding the challenges of immigrant families,” Felipe said.
As to the question of whether to rent or buy, Felipe said that instead of a blanket answer, it makes better sense to point out situations that suit a particular millennial.
On one hand, buying a property is a better option if one values the idea of homeownership and is looking for the asset to appreciate over time.
On the other hand, renting makes sense for a young person who prefers flexibility in changing careers and freedom in moving to other places.
Felipe said that based on his experience with clients during the past four years, the decision to be a renter or homeowner has little impact on their financial health.
“Clients who are stressed and anxious about money before becoming a homeowner are just as, if not more, stressed after becoming a homeowner,” he said.
According to him, stress and anxiety have to do more with one’s confidence in making financial decisions.
“This confidence comes from our level of financial education and feeling of being in control of your own financial situation,” Felipe said.