Personal Finance Reads: The Wealthy Renter by Alex Avery

Book title: The Wealthy Renter

Year published: 2016

Author name & bio: Alex Avery is an analyst at CIBC, heading up their North American real estate research team. He lives in Toronto, in a house he owns. He’s been a landlord and a renter, but he and his wife decided to buy after they had kids.

What’s this book all about

The Wealthy Renter is largely about the cult of homeownership in Canada.

“The unconditional support for home ownership seems so absolute,” writes Avery. He’s here to show you don’t have to drink the Kool-Aid to prosper.

What are the benefits of renting? It makes financial planning much more simple and straightforward, Avery says. “The beauty of renting is that the rent you pay is very transparently 100-percent consumption, with no residual value — you walk away with nothing.”

That thought — that you walk away with nothing — is precisely what frightens people into getting a foothold on the property ladder at their first opportunity, even if it means overextending themselves financially.

The unconditional support for home ownership seems so absolute, writes Avery. He’s here to show you don’t have to drink the Kool-Aid to prosper

But to Avery, it’s an opportunity: renters have a very clear understanding of how much of their income they’re spending on housing. “It also takes away the mortgage payment as an excuse to let ourselves off the hook for not being more active on financial planning. As a renter, there can be no illusion of financial security provided by our housing,” he writes.

On top of that, renters get to externalize all the risks that comes with owning. Did the central bank finally raise interest rates? Let your landlord deal with that. And if that results in you paying more rent, you can always move — it can be a hassle and it’s not free, but it doesn’t compare to what’s involved with selling.

“If you were to try to do that as a homeowner, the transaction costs of buying and selling could be five percent more for each transaction,” he writes.

Avery walks readers through the factors that determine real estate values (supply and demand), where the true value of the house actually lies (the land it’s built on, the location, and access to transit, not the building itself), and the reasons governments encourage homeownership (Avery himself calls it a form of “social control”).

Avery’s thesis is controversial, and if you’re anything like me, you’ll likely find yourself arguing with him in your head

Construction is a major economic driver, therefore housing represents an important indicator of the wider economy's health. Home ownership encourages mutual respect for property and is shown to reduce crime, Avery notes. More cynically, he argues that it's in the interest of career politicians to push home ownership, since pro-ownership policies are popular amongst voters.

Who should read this book

The book isn’t marketed at millennials, per se, but young Canadians concerned with building wealth in these uncertain times would benefit from giving it a read. Avery’s goal is to lessen the pressure young people feel to enter the housing market. If buying means neglecting other facets of their personal finances, like saving for retirement, you might be better off abandoning the dream.

One of the more rebellious ideas he preaches is that buying a home often forces you to stay in one place, and in today’s labour market, that can be limiting for your career. It’s a reality that many twenty and thirtysomethings intuitively understand.

3 biggest takeaways

1. Even if you own a home, you’re still paying rent

Avery introduces the concept of ‘implicit rent’: all the costs associated with homeownership on top of your monthly mortgage payment (property taxes, maintenance, utilities, insurance, to name a few). The problem is that many homeowners don’t have a clear idea of how much they’re spending per year on these variable costs. If they did, they’d see that renting a house is actually much cheaper. In the meantime, renting would afford them the flexibility to spend their disposable income however they’d like.

Even after you’re finished paying the bank, he stresses, you’ll still be paying rent — to yourself.

Avery introduces the concept of ‘implicit rent’: all the costs associated with homeownership on top of your monthly mortgage payment 

Although implicit rent is a term few Canadians are familiar with, it’s commonplace in other countries. Homeowners in Iceland and Switzerland, for instance, are taxed based on amount of implicit rent they pay.

2. A house is a home — not an investment

Unlike stocks, homes aren’t what Avery would classify as a “pure investment”: they’re not fungible, they’re not readily liquid, and they aren’t going to pay you dividends. They actually pay “negative dividends,” in the form of taxes and ongoing maintenance costs.  

Emotions play a big part in the home-buying experience. “Housing can be a very personal thing,” he concedes. But sentimentality shouldn’t guide your investment decisions. Interestingly, Avery aims to teach readers to regard houses much like you would other consumer goods — a flat screen TV or a flashy car, for example. The arguments for owning a home “appeal to our inner consumer, who just wants to buy nice things.”

3. If you do decide to become a long-term renter, reinvest your savings

Avery points out that people view their homes as a savings accounts. In our consumer-driven society, owning a home actually forces you to put aside money into an asset you’re betting will grow in value. But if reducing the amount you spend on housing is integral to building wealth, as Avery argues, then putting money towards a maintaining a home actually sets you back.

Emotions play a big part in the home-buying experience. Housing can be a very personal thing, he concedes

There are other ways to force yourself to save. Avery proposes a number of alternatives:  automatically transferring of 10% from each paycheque to an RRSP or TFSA; life insurance policies; corporate matching programs, or dividend reinvestment programs (DRIP).

Lingering questions

Avery’s thesis is controversial, and If you’re anything like me, you’ll likely find yourself arguing with him in your head. And for good reason: he puts a lot of faith in the rental market and the regulations in place to protect tenants. Anyone who’s dealt with a bad landlord in the past might beg to differ. Rents have ballooned in major cities, a trend that analysts predict isn't likely to abate any time soon. In Toronto last year, condo construction didn't keep pace with demand. The supply imbalance is forecasted to drive condo prices up, enticing investors currently renting out their condos to list. Fewer available units, plus patchy rent control regulations, could spell trouble for tenants.

Favourite quote from the book

“The world has changed a lot in the past twenty-five years, and even more in the past fifty years. Isn’t it time to take a look at whether the old, conventional views on housing still make sense?”