Fear of Missing Out (FOMO) Between Renting or Buying: What if You Used That Money to Invest Instead?

Homeownership versus renting creates lots of different opinions for financial reasons. Most homeowners believe they have more equity in their homes as opposed to throwing away money every month paying rent. On the other side are many renters that have the ability to build their investment portfolio using the difference between renting and buying based on what your rental price is versus what you would pay for a mortgage payment. The differing opinions depend on how each group uses the math involved to support their beliefs in whether you should rent or buy.

This article will show the different factors that determine the outcome of the two alternatives and to give you an idea of how much it would take to invest the difference between the two alternatives and what type of person each option is best suited for.

What Is “Investing The Difference?”

When you compare renting versus buying, here is how it normally goes: If you bought a house, you are building equity through the purchase of the house (real estate) over time; and if you rented a less expensive home, through investing the difference in rent into stocks over time. After 20 or 30 years will you have invested more money by renting (less your monthly lease payment) or buying?

The phrase “investing the difference” may sound simple, but it involves several factors. First, you need to determine what the actual difference is. Renting isn’t always cheaper than owning on a monthly basis, especially in cities where home prices have gone up significantly. Second, it’s tough to stick to the discipline of investing that difference month after month instead of spending it. Third, what you invest in is important. Putting the difference into a savings account that earns 2 percent produces very different results than investing in a broad index fund.

The comparison works best when you define your assumptions and stick to them. Most discussions skip this step. That’s why they often create more confusion than clarity.

The Real Costs of Buying a Home

Mortgage payments are just part of the costs of owning a home. First-time buyers often underestimate the full picture, which changes the math significantly.

Property taxes differ by location but usually range from 0.5 to 2.5 percent of the home’s assessed value per year. For a $500,000 home, that amounts to $2,500 to $12,500 each year. Maintenance and repairs are generally estimated at 1 to 2 percent of a home’s value annually; however, the costs can be inconsistent, with years of no expenses followed by significant bills for a new roof, furnace replacement, or foundation repairs.

If your down payment is less than 20 percent, you may need mortgage insurance. In Canada, the CMHC mortgage insurance premium can add a substantial amount to your total borrowing cost. Closing costs, land transfer taxes, home inspection fees, legal fees, and real estate commissions during a sale can all total several percent of the home’s value.

None of these costs build equity. They reflect the true cost of ownership that doesn’t show up in the monthly mortgage payment. A fair rent-versus-buy comparison must include all these expenses.

The Real Costs of Renting

Renting has costs beyond just the monthly rent payment. However, these costs are generally fewer and easier to predict.

Renters typically pay for tenant insurance, which is cheaper than homeowners’ insurance. They may also experience rent increases over time, which is a significant risk of renting in a high-demand market. If rent increases faster than wage growth, the renter’s financial position declines, even if their investment portfolio is increasing.

What renters do not pay includes property taxes (which are included indirectly in rent), maintenance and repairs, mortgage interest, or the costs associated with buying and selling. In the early years of a mortgage, most of each payment goes toward interest instead of the principal. A renter avoids this interest cost, which the “just build equity” argument often overlooks.

A Concrete Scenario: Two Paths, 20 Years

Consider two people in the same city with similar incomes back in 2005.

Alex buys a $400,000 home with a 10 percent down payment. The mortgage, taxes, insurance, and estimated maintenance average around $2,800 monthly. Over 20 years, the home appreciates to about $750,000. After paying off the mortgage, Alex has that equity minus selling costs of around 4 to 5 percent.

Sam rents a similar place for $1,800 per month and invests the $1,000 monthly difference in a broad index fund. Over 20 years, with an average annual return of about 7 percent (a reasonable historical estimate for a diversified equity portfolio, though not guaranteed), that monthly $1,000 grows to roughly $520,000.

In this scenario, Alex has more wealth. This is mainly because real estate in most major Canadian and American cities appreciated significantly during that time. But Sam’s portfolio is liquid. It isn’t tied to a single asset in one city. Sam can access it easily without paying a real estate agent, without waiting 60 to 90 days to close, and without taking on any debt.

Change the assumptions a bit, and the outcome changes. In a slower real estate market, Sam ends up ahead. If rent rose faster than $1,800 over those 20 years, Sam would have had less to invest each month, narrowing the comparison.

This is why the answer depends on your city, time frame, and behavior.

Why Location Changes Everything

Rent-versus-buy comparisons without specifying a city are nearly useless. The economics change drastically based on where you live.

In cities like Toronto or Vancouver, home prices have surged ahead of rents over the past two decades. Buying has been an exceptional financial choice for those who did it early enough. In smaller cities or areas with slower price appreciation, the math is often tighter or even benefits renting and investing.

A helpful shortcut is the price-to-rent ratio. Take the purchase price of a home and divide it by the annual rent for a similar property. A ratio below 15 usually suggests buying makes financial sense. Between 15 and 20, it depends. Above 20, renting and investing often appears more appealing based on the numbers.

In Toronto and Vancouver, price-to-rent ratios have been 25 to 40 or higher in recent years. In many mid-sized Canadian and American cities, they are closer to 15 to 20. The ratio doesn’t dictate what you should do, but it provides a starting point for the comparison in your market.

What This Means Today

For anyone facing this decision in 2025, several points are important to consider.

Mortgage rates are significantly higher than they were in 2020 and 2021, raising the cost of owning compared to renting. At the same time, home prices in many markets remain high. This means the financial case for buying is weaker than it was five years ago in many cities, though this varies by location.

On the investment side, making consistent monthly contributions to a broad index fund is a simple way to build wealth over time if you have the discipline to stay committed. Discipline is key here. The “investing the difference” strategy only works if you actually invest the difference instead of gradually incorporating it into your lifestyle spending.

For Canadians, the Tax-Free Savings Account and, for first-time buyers, the First Home Savings Account are vital tools. A renter who consistently contributes to a TFSA can build a significant tax-sheltered portfolio over time. A buyer who eventually purchases with help from the FHSA benefits from a tax deduction and tax-free growth on the way out for a qualifying first home purchase.

Tax planning is essential in both paths. The best financial outcome in either case usually comes from effectively using available registered accounts.

Common Mistake to Avoid

The biggest mistake in the rent-versus-buy debate is viewing the decision purely from a financial perspective.

Owning a home offers stability that has genuine non-financial value. You can renovate, get a pet, paint the walls, and settle down without needing a landlord’s permission. For families with children, the school district tied to a specific address may be more important than the investment math. Psychological security is real, and it should be part of the calculation, even if it’s hard to measure.

Renters sometimes feel pressured to buy due to cultural expectations rather than because it’s the right choice for them. Buying a home when you’re likely to move within five years, when your income isn’t stable, or when you’re stretching to afford it are all situations where the financial reasoning for buying is genuinely weak.

The mistake lies in optimizing for one aspect while overlooking others. Financial comparisons matter. So do flexibility, stability, lifestyle, and the honest question of how much of your net worth you want tied up in a single illiquid asset.

Conclusion

The rent-versus-buy FOMO question doesn’t have a straightforward answer, and anyone claiming it does is oversimplifying. What matters are the specific numbers in your city, your timeline, your discipline as an investor, and what stability and flexibility mean to you personally.

Renting and investing the difference is a valid route to wealth. So is buying a home and building equity over decades. Often, the person who comes out ahead is the one who made a well-informed decision based on their actual situation and stuck with the strategy long enough for it to succeed.

Understanding the comparison, with all its factors, is more valuable than knowing which option wins. The goal is to make a decision you understand and can commit to, not just to choose the option that sounds better at dinner parties.

Frequently Asked Questions

Is it always better to buy than rent from a financial perspective?

No. The financial outcome depends heavily on the local housing market, the price-to-rent ratio, the appreciation rate of real estate versus the stock market, and how consistently the renter actually invests the difference. In high-cost cities with elevated price-to-rent ratios, renting and investing can produce comparable or better financial outcomes over long periods. In markets with strong real estate appreciation and reasonable entry prices, buying often wins. There is no universal answer.

What does “investing the difference” actually require to work?

Renting versus buying an actual home has three critical components: Cost - The actual monthly difference in expense between renting versus buying (which generally isn’t that large); Discipline - The discipline to regularly set aside, every month, the difference between renting and buying, without spending it on lifestyle improvements; and, Return on Investment - An investment product that yields meaningful returns over the long term. One simple approach is an indexed mutual fund (i.e. a broad index fund, such as the S&P 500) that you hold in a TFSA or other type of registered account. While the strategy appears relatively easy to accomplish, this is not going to happen without some degree of consistency on your part for a significant number of years.

How do I determine whether it is better to rent or buy in my area?

A good starting point is your price-to-rent ratio, which is calculated by dividing the purchase price of the home you are considering (e.g. the amount you would pay to purchase that home) by the amount of rental income that you would receive, in one year, from a similar property to rent. If this ratio is 15 or less, then generally speaking it is better financially to buy than to rent. If, however, the price-to-rent ratio is 20 or greater, then it is generally better financially to rent and invest. However, in addition to the price-to-rent ratio, you need to consider how long you plan to stay in the house (if you are likely to be moving less than five years after purchasing the house, then generally speaking it does not make financial sense to buy due to transaction costs), how much risk you are comfortable taking with a single asset concentrated in one asset, and whether you have a reasonable ability to consistently save if you rent. This is not financial advice and any decision you may make will depend on your specific situation therefore I recommend that you consult with a qualified financial adviser who understands your local real estate market.

If you want to test this framework with your own numbers, use the interactive calculator and review the historical invest scenarios.