Young adults face a lot of pressure from their parents and peers to own a home.

Canadians in general have a high rate of home ownership at 69 per cent and, in most cases, homeowners have seen tremendous increases in real estate prices over the past few decades.

For these reasons, many people believe home ownership is the ticket to wealth, while renting is a waste of money.

But are renters really throwing away money by “paying someone else’s mortgage?”

We need to look at a fair comparison of the rent-versus-buy scenario to know for sure.

The rent-versus-buy problem is not as simple as looking at the cost of monthly rent versus the cost of a monthly mortgage payment.

A better comparison looks at the true cost of home ownership, which not only includes the mortgage payment but also things like property taxes, insurance and maintenance.

What both of those arguments miss, however, is the total unrecoverable costs in each scenario.

For example, a monthly rent payment is a total unrecoverable cost — an expense that does nothing to improve the renter’s net worth.

A mortgage payment, on the other hand, only has partial unrecoverable costs — the interest paid on the mortgage.

The other portion reduces your mortgage amount and therefore increases your net worth.

A winning point for home ownership, right? Not so fast.

We also need to add up all the additional costs a home owner bears (property taxes, insurance, maintenance), plus any upfront money spent on a down payment, land transfer tax, title insurance, home inspection, etc., to close on the home.

There’s also an opportunity cost on the down payment and other closing costs.

That money could have been invested instead of used toward buying a home.

Let’s look at an example of a renter in Toronto who’s paying $2,000 a month to rent a 575-square-foot condo.

The same condo is listed for $449,000.

To purchase the condo, our renter would need to put down 5 per cent, or $23,450.

Then add another $17,062 to the mortgage due to CMHC insurance (required on all mortgages with down payments of less than 20 per cent).

For a total mortgage amount of $443,612.

Our upfront costs are not done, however, as we need to add in land transfer taxes of $10,910, lawyer fees of $1,000, title insurance of $449, plus a home inspection for $500.

That brings total upfront costs to $36,309. The opportunity cost of this amount in 25 years at six per cent a year is $155,834.

Now let’s look at the unrecoverable monthly costs. The mortgage is amortized over 25 years and has an interest rate of 3.5 per cent.

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The monthly mortgage payment is $2,215. Of that payment, $1,200 goes toward interest and $1,015 goes toward paying down the mortgage principal.

Property taxes come in at $375 per month, and we’ll also include the difference between home insurance and tenant insurance, which is $40 per month.

We need to factor in expected maintenance costs, which we’ll estimate at 1 per cent of the property value per year, or $375 per month.

The total unrecoverable monthly costs (interest, plus property tax, plus insurance, plus maintenance) is $1,990.

The unrecoverable costs for the renter and homeowner are nearly identical.

The total monthly payment for the homeowner, including property taxes, insurance, and maintenance, is $3,005 — but just $1,015 of that is helping to build equity in the home.

So, back to the rent-versus-buy argument.

We have to assume our renter has an extra $1,015 available in his or her cash flow each month to invest. What are the expected returns for a 60/40 balanced investment portfolio over 25 years — maybe 6 per cent?

Take $1,015 per month invested for 25 years at 6 per cent a year and you’d get $686,627. Add the opportunity cost of the down payment and other upfront expenses and you’d have a portfolio worth more than $842,000.

Historically, many people would be surprised to learn that the return on real estate has been closer to inflation.

Certainly, with the run-up in home prices over the last two decades, one should not expect significant gains from this asset class moving forward. The expected future value of the $449,000 condo in 25 years at 2 per cent growth per year is $736,600.

Is renting really a waste of money? Hardly.

This is just one example showing how to frame the rent-versus-buy comparison, but you can make a strong case for renting and investing the difference of the true cost of home ownership.

The next time you hear an argument that renting is throwing away money, stop and consider things like unrecoverable costs and the true cost of home ownership before drawing your own conclusion.