My wife and I are moving into a condo. The cost represents a little under 30% of our net worth. I consider owning a waste of money but divorce is also a waste of money, which would happen if I insisted on renting forever. :-D
@@dawnj2360 We own outright, so no mortgage. Our condo fees are about $350/month on a $230K condo. It's near Windsor, ON where housing is still pretty affordable though getting less so.
Why not do both? Get a re-advanceable mortgage. Not only will you be able to invest the principal but you will be to write off interest on the HELOC as well.
Don't buy your primary house as an investment. Do it for stability and for the love of creating a home. If you want to be rich, rent cheap and invest the difference. Being rich isn't everything though.
Don't forget to include that the return on owning a house isn't just appreciation of the asset, it's also that you didn't have to make rental payments. When you put those two together along with the fact you can deduct mortgage interest on your taxes (if you're in the US and do an itemized filing) it's better to own IF you plan to stay in the home for more than about 10 years (or keep it as a rental property). He did some weird math where he considered each component separately but never put them all together.
@@elmateo77 mortgage tax deduction in the US isn't as great as most people say it is. For many middle class americans, simply taking the standard deduction is almost as good as itemizing. In some cases, it's better. Halfway through the video Ben addressed the opportunity costs of 'keeping' your paid-off home. There are still costs even when your home is paid off. What would you say to that?
As a home owner who is thinking about buying a revenue property but having ethical problems with becoming a rent seeker, this video makes me see things a little differently. Thanks
I think it made a lot of sense back in the day when people didn’t move as much. Now days though, younger people are moving always looking for better oppurtunities across the country and even within the city to reduce commute or reduce rent etc. I think renting is cool when stable
Great video! Although I'm a home owner, I wouldn't consider the house so much as an investment, but a home, and as someone here mentioned, it's the quality of life (from one's personal taste) that is the reward. Doing what you want with greater freedom and privacy on your own property is an advantage that trumps having a landlord overhand your lifestyle, while having a better portfolio to look at in your hands imo. But that's really not as much the point from your video. From an investment standpoint, you also have to factor in market risks, which can be more volatile, compared to certain real estate over time. And at least in the US, there's tax deductions for your interest that you do not get as a renter.
I agree that there are plenty of non-financial factors that can make either home ownership or renting attractive, depending on your situation and goals. The interesting thing about risk in real estate is that any real estate index will not typically capture that true volatility of the market. This is because there are fewer transactions and less frequent reporting for real estate than for stocks and bonds. The other thing to keep in mind is that with an index fund you are taking on market risk, which can be volatile but is expected to pay off over time. With a home, you are taking on the risk of the real estate market *and* the risk of that specific asset (structure, location, etc.). The market could go up, while your specific asset may not. Deductible mortgage interest in the US is very interesting, especially for high earners with large homes. We do not have the same thing in Canada. Thanks for your comment - good addition to the discussion.
I agree. I currently have a mortgage and like my living situation, but will have a difficult decision to make when I retire. On the one hand I like where I live, on the other I'd like the freedom to live seasonally in retirement, and having a mortgage makes that difficult. I guess I'll figure it out when I get there.
@@BigBrother4Life Being a landlord is a job in and of itself. I think I'd rather sell it, invest the proceeds, just be a renter myself. It's much simpler.
I freaking LOVE your videos! It gives such insight in a world I thought I did not like. But the thought of starting investing in index funds, stock and such is now very exciting! You have a tremendous good case for house renting! It makes me want to rather put my money in stocks/index funds and make my fortune there!
Mikael....that's what I do. Rent modestly and then be very disciplined to invest the difference by maxing out tax-advantaged accounts, low-cost index funds, etc. It's a gamble that I'm willing to take. Although Ben justifies his work and proves it with math, many people will still buy a house because it's a very emotional thing.
Same here. The though part is to convince the family to accept a monthly budget surplus in our finances (I aim for 20% post tax), but I just take that money out immediate after the paycheck).
I'd argue 2 cases for owning a home: 1. Control against potential rising real estate costs. Rent isn't guaranteed long term, it can be hiked at any time, but a mortgage payment is generally flat for 30 years. 2. Privacy and freedom(non financial). With a rented home, you have limits on what you can do with the property. With your own home, your only limit is what the local government/HOA says you can/can't do. Then there's the idea of your landlord having keys to your home that can be unsettling for some.
In my country, many people desire to have their own house & lot. Most of us, I believe do not consider owning a house & lot an investment per se. What we believe in purchasing the property is the security of having a roof over your head (maintenance, government taxes -- we are aware, so no issues on that). At least when paying (the mortgage) the property, it is already fixed (includes interest, & what have you...) whereas versus renting, the rent amount could change after a year or so; and if your income can't catch up, it's trouble and depending on the market climate; rent amount tends not to go down but always up faster than the cashflow. But hey! Congrats it's a great video!
While I have never conducted a full analysis - as you have - I have always believed that once all the costs are added up, homeowners are lucky to break even. The unpredictability of home ownership is overlooked and never a consideration because , and especially in markets such as Toronto, the windfall is so large. The other consideration with the idea that a home is an investment is that it goes against basic investing principles, namely diversification. Having 50% + and in some cases closer to 75% of your net worth tied up in one investment is ludicrous. And finally, a home offers no liquidity, which is going to become even more important when interest rates rise. Keep up the good work!
I have done some research on my own, and decided to continue to be a renter for a while. Like you mentioned in the video, even when the home is paid off, there are recurring costs of owning the property like property taxes (1.1% from where I live), random maintenance (estimated 1%), and home insurance. So it's not free like most people think. Apart from cost, house maintenance can sometimes be a real headache (leaky roof, broken appliances, etc.) Renting frees up your mind from those troubles, since landlord takes care of it most of the time.
D P Yes DP isn’t it a wonderful feeling, knowing that after 30 years of mortgage payments, u get to rent your home from your municipality? Government s__ks
3% is the return before accounting for leverage. It's equity_fraction * return + debt_fraction * (return - cost_of_capital). Because it's cheap to borrow the leveraged return, the one the homeowner actually got, can be substantially higher.
@@tiendoan1333 majority of people dont leverage stocks but the majority of people leverage their house. Also, you can put 10% down on a house, I'm not sure if you can do the same with a stock: put down $10k and the broker puts in $90k.
Just so you know, you're causing me a lot of headaches. These are the same things I've been telling people for years - even doing the math in front of them. Everyone always told me I was wrong, so I assumed I was missing something. Now I have to fire my financial advisor and do my own investing. Damn you.
The one great thing about owning is control. You decide when to sell and you are not at the mercy of the landlord. Most people I know that rent move every couple of years. Rent hikes, or the owner decides to sell. Great video!
Tony Benjammin that is a good point, with moving comes some residual costs as well. Usually people are getting furniture more often, moving costs, maybe even some losses on applications/security deposits/etc, and rent prices rising.
Condo boards and home owner associations say otherwise according to many TH-cam videos sadly. Rent can only legally raise a small percentage each year here. 1.4% if I remember correctly.
Hi Ben, love your videos and presenting style. I'd like to say that the ability to become a successful investor is not determined by your housing status ie homebuyer or renter and being either will not hold you back. In fact , it's your personal qualities, attributes and general outlook on life that play a much bigger part in the success game. You can "rent" your way to wealth just like you can "own" your way to wealth. The a big plus of being a homeowner is the sign that you are able to save a deposit and take on a big commitment . But that's no guarantee of success as most homeowners will not move past that stage, they never become investors believing that home ownership is the ultimate goal and that they don't have to do any more. Let's look at the 2 STEPS to WEALTH CREATION : 1. INCOME GENERATION. ( salary, commissions, wages , businesses income etc. ) 2. CONVERTING THE INCOME INTO INVESTMENTS like real estate stocks and bonds etc. Unfortunately most people will never progress past phase 1, either not earning enough to do more than put food on the table and cover basic living expenses or not taking the next step to investing. Being a homeowner is a huge advantage when it comes to becoming an investor as you have equity to draw on. However you you also have to have the right mindset, knowledge and appetite for risk . Many homeowners are risk averse and will not consider using their "castle" as collateral, interestingly enough it's also the same p who won't blink when it comes to putting a new car, holiday or swimming pool on the mortgage. This mentality keeps them in the income generation mode until they can no longer work or get a job. The big secret to creating any level of wealth is to INVEST and the first and best investment you will ever make is to INVEST in yourself.
Thanks Ben, I love how you address all these investment preconceptions and tear them apart in each short video. I see Real Estate and Bonds just as volatility protection assets. Would you agree that generally speaking those are the best vehicles to maintain your money's value with less volatility in the long run? For the rest, I meanly use your factoring investment approach.
The arguments you lay out are compelling. They back up what i have long believed to be true. I also like your comment about mortgages enforcing discipline ... so true. If only I knew then what I know now ✌️😏.
Wow.. I just came across your channel and this stuff is great! A ton of useful information and easily explained. As happy as I am watching this it's just as annoying, it's like you're having this needle just popping filled balloons of things that I thought I had figured out lol. Always been in the stock market, dividend stocks as favourites (obviuosly) but you made me rethink that aswell. Indexfunds here I come.. End of the day I rather accept being wrong than to proud and things went to shit. Massive thank you for all the effort put into this!! /All the way from Sweden
I consider to be a forever renter because, in this case, I have the opportunity to change work easily without anxiety to change my routine (or I have the possibility to work in another countries xD). I think that is important NOT consider the house buying an investment (but is important, when we valued the purchase, assume what is the return if we rent the house to avoid unnecessary expenses).
Though you've raised excellent arguments supporting renting over home-owning, there are some obvious disadvantages to renting that were not addressed.- renters may be significantly limited to what they can do with their living space, hinged on rules and policies enforced by their landlords (including but not limited to renovations, property usage, pet ownership and utility usage)- renters often (but not always) have to "share" a structure with other people (landlord or other tenants), and may need to adjust their normal/comfortable habits or practices (i.e loud music, stomping around, kid noise, etc) to accommodate others, whereas home owners often have the choice- there is no guarantee that rental accommodations will be available. Currently in Victoria and Vancouver BC the rental market is miniscule and severely over-priced- because of the lack of rental units available, rent costs have sky-rocketed and are often as high as the mortgage price. Demand drives prices up.- renters risk that the owners may wish to reclaim the unit at any point- once a rental lease is completed there is no guarantee you will be able to renew. Having to search for a new rental is stressful and high costs can be incurred by moving Anyways, I really enjoyed seeing a different perspective and I appreciate that your video isn't meant to be an exhaustive list of pros and cons, all-encompassing. You opened my eyes to enlightening points I hadn't considered. Thank you! I will keep following.
Hi Jennyy07, I agree that owning has its set of benefits and renting has some disadvantages. The main point here is that in certain cases renting can be better than owning, and from a financial perspective the decision is pretty neutral between the two options. As a renter, I'm not sure that I agree with all of your points. -It is not any more difficult to find a detached home for rent. Also, many owners (where I live anyway) will own a condo, town home, or one side of a duplex. I don't think that shared space is a disadvantage for renters. Most owners will also have neighbors. One disadvantage of owning is that if you end up with bad neighbors, it is harder to move. -I agree rental vacancies in many cities are low making it harder to find a place to rent. However, those cities with high demand for housing will also have higher real estate prices. There is no guarantee that an appropriate home will be for sale *at a reasonable price*. If you genuinely cannot find a place to rent then of course there is no choice to be made. -The rental market in both Victoria and Vancouver is scarce (
Hi Jenny...I've been a renter for a long time. Nothing against homeownership though! I'd like to own one of these days, but it'd have to be the right fit, scenario, math, etc. Investment-wise, renting has been an absolute no brainer. I don't agree with all the cons you listed for a renter, but that's just my personal take, and everyone has a different perspective. There are many benefits to renting that Ben could have listed but didn't. Moreover, there are many cons of owning that he could have listed. Much of it comes to tolerance level. Some people don't want to tolerate the cons of renting, others don't want to tolerate the cons of owning - because yes there are cons to owning!
Great video. You’ve explained all the points I’ve argued for years. For me personally, I’ve been renting due to the fact that I don’t have to do any maintenance on the property or replace anything. Now, if I replace or have to fix anything, not only am I at a loss of money but also time. Now, since I value my time at my rate of pay through my employer, I’ll be at a greater loss. My next point is location. I’m getting a new place that’s brand new and only 5min away from work. Now I save on time, gas, and improved quality of life. Need I mention this new place also has 24hr maintenance and daily curbside trash pickup, gated, and has a pool I don’t have to pay for? For me, my long term goal is to continue to buy bonds which is my employers 401k. Funny, I read an article that says Warren Buffett suggest 90% into the SPX or index fund and 10% bonds. So I did the opposite and I’m really wondering if I should just go 100% bonds or a 95/5.
Diggs...screw bonds. You look young. Go 100% straight equity. That's what I do. I'm a renter too and I agree with what you said (except for the crumby bonds!)
Came to the comments to see renting vs owning fists being thrown... and was not disappointed. Interesting discussions being had, makes the vid valuable simply for helping strike those conversations! Keep up the great work.
Living here in kanada, I bought a house in oshawa in june 2012 for price of $265,000, I was able to squeeze in with a 5% downpayment, I lived close to the university and rented 2 of bedrooms to students, cash flow $1100 a month. I sold my house this past August for $570000. No debt, starting to invest in the stock market with some bumps but improving. I am currently renting a basement apartment in the country for $975 a month all inclusive including internet. I even have a total of 29 chickens in the backyard, get eggs, buy most of my food from local farmers, super fresh air with cornfields looking in the horizon. you take into account the property taxes, the interest from principal and all the utilities it came to about $1,050 not including internet. The student cashflow paid for their utilities, repairs for home plus new roof, furnace, etc. I believe I was lucky when I bought, but the sale was opportunistic in my part. Oh and best investment of all, I'm single!
Sorry for asking stupid questions halfway through but any cost the owner has with no residual value are not specific to owners but are also included in the rent right? (example - if property tax increases the landlorsd will try to compensate that in rent). also the opportunity cost of owning, while f course present, would need to factor in the saved rent. So in your 500k house example it'd be 2000 minus what it would cost to rent a similar place to live, right?
Yep. I regret buying where I live. It would have been substantially cheaper to rent and invest the saved money. It would also have given me more flexibility. As you say the main benefit is the forced saving aspect. The other benefit would be if we had a period of high inflation.
Ben have you thought about setting up a Patreon page? I would gladly take you as my financial adviser, but unfortunately I don’t live in Canada. I won’t think twice about donating though, since I’ve learned so much from your insights and analysis. Thanks!
One big advantage of having a paid off mortgage is the ability to time the market using a line of credit. My dad is locked in on a very low interest line of credit worth 50% the value of the house. During covid he put 50k in under valued stocks and returned 18k in 2 months. Obviously risky and wouldn't recommend to most people. If done proper ie buying fixer uppers and renting out additional rooms, home ownership is good. But only if done through the scope of an investment. And only if you plan on living in the area for the next 10+ years
During the 2008 recession many individuals lost their entire portfolios, you make stock market investing sound like a sure return. In addition when someone rents, if the owner decides to sell the property they have to find a new home once their lease it up. This is another reason for opting for home ownership. I am a landlord and I own several properties and I can tell you that each property is individual just like an individual stock concernig returns. Another benefit to home ownership is that you can tailor the home to your needs and wants, you cannot do that with a rental.
During the 2008 recession many individuals lost their homes, you make home ownership sound like a sure return. In addition when someone owns, if the neighborhood changes they may have to risk selling at a loss when finding a new home. This is another reason for opting for renting. I am a renter and I own several thousand stocks through index funds and I can tell you that owning only several stocks or properties would expose me to unnecessary risk. Another benefit to renting is that you can easily move to match your needs and wants, you cannot do that as an owner.
Ben Felix piie.com/publications/wp/wp13-3.pdf Perhaps you could do a video on this some day, I’m not intelligent enough to analyze articles like this. I have read Jack Bogle’s books, and his charts are elegant, even I can admire them. However the RE and unemployment charts are beyond my comprehension. Either way it would be of interest to hear your perspectives.
Some good points, but who buys houses all-cash? It's not realistic to compare what you could earn in alternate investments using the full value of the house, it's more likely that an average person would have the possibility to invest their mortgage deposit (down payment).
I'm 27, I've invested 20k in an indexed fund, in the hope of saving towards the purchase of my own property, and all of a sudden, you're really giving me food for though. Jeez, Ben! Thanks for shaking all that I understand about investment and saving!
Home ownership is working only for newcomers increasing in Canada. It's not perpetual process and also recession possibilities always there. So mortgage payment is also on risk for both parties. These factors would diminish this idea in near future.
Thank you for another very helpful video. I want to buy a single family home in montreal, and property tax plus school tax is quite high and making me reconsider renting for life.
Great video Ben! I would like to know the formula used in your example that brings you to a 5.63% return annually over 38 years. I'm having a hard time crunching the numbers and I would like to apply this for other examples of my own. Keep up the smart work!
Thanks! I believe that this is what you are looking for www.pwlcapital.com/wp-content/uploads/2019/03/PWL-WP-Kerzerho-Bortolotti-Great-Expectations-2019.pdf
Love this; I got so tired of hearing the renting is throwing away $$ mantra. But I ignored it, based on financial research. Good thing. The couple who bought an identical condo to the one I started renting in the same complex went underwater within a year or two after the real estate crash 2008. This was in the US in the suburbs around the capital. They told me they were $80,000 in the hole. The difference between the mortgage for the unit (before the crash) +condo fees, property tax vs. just renting was over $1000.00 in the renter's favor. That's at least $12,000 / year you could dollar-cost average into a low-fee index fund. Great presentation and points as usual in the video.
That's a really interesting example. I wonder what the financial outcome would have been for each of you if you stayed in your respective condos for 15 years - you renting and saving, and them owning.
The part that is confusing for me is that in my area, rent is more expensive than a mortgage payment and by paying rent, I'm paying someone else's debt down for them instead of putting money into my own appreciating asset. Unless I am missing something, it seems like buying is always the best option as long as mortgage payments are lower than rent costs monthly. Now I do understand that maintenance costs and real estate can go down in value which means it's up to the buyer to buy in the right location and buying the correct property the best that they can. Choosing the right property is crucial.
@@BenFelixCSI thank you! I watched it and great video. You're the smartest finance channel on TH-cam, half the time I just don't understand because I'm not on your level 😂. I do think from an investment perspective specifically, and not just a personal residence perspective, you can be strategic with the properties you buy in order to make it much more likely to be profitable above the average stocks return or something similar. Researching a market, buying at the right price/time, and utilizing tax laws in your favor to lower taxes paid, and calculating the potential cash flow of rental properties before making an offer can be a good way to sway the odds more in your favor! Appreciate the reply man!
Biggest thing everyone worries about as a renter is some landlord coming along and jacking up the rent. I live in Australia. No houses here. Every rental advertised has 100 people looking at it. You are subject to the market every renewal date.
Its interesting to me that you didn't mention at as an owner, i'm going to charge the individual renting the house out for the property to include property taxes, maintenance items etc. and then charge a 10% premium on that due to profit. So, while yes, you're correct the renter has a fixed cost and the home owner doing the renting will have fluctuation the net result is over time I as the home owner am going to come out ahead in nearly all aspects. Owning is almost always a better deal unless as you said the time frame from buying to selling is short. That time I don't believe to be 10 years, most likely closer to 4 in a flat market, and obviously more or less depending on the up/down swing of the market.
As an owner you are going to charge the renter market rent. You don't get to name your price as a landlord. Good luck covering all of your costs plus a 10% premium. Depending on your market it may be possible, but in most cities in Canada you will barely be able to cover your costs. Prices (and therefore the costs of owning) have risen much faster than rents in most developed countries. infographics.economist.com/2017/HPI/index.html
@@BenFelixCSI I do charge market rate at times and/or name my price for it. I do make 10% monthly on it now, but I think the bigger difference is is i'm speaking about the US and you're speaking about Canada. Different economics at work there. A quick search on Zillow and you can find houses that will allow you to do all of the above and make 10% on the monthly. The problem is its difficult to start and the education is even more expensive (not to mention riskier).
10% of monthly expenses doesn't say much. Can you please say how much of net rental income you make per year in % compared to invested capital? I don't believe it's more than opportunity cost of not investing it to alternative investments
A good analysis overall. However, there are several things that I think is often overlooked in the house ownership. It is the ability to sub-rent a basement or a part of the house. Any income from a sub-rental will subsidize the mortgage. For example, if a mortgage payment in Edmonton is about $1,500 but a basement can be rented out for $750 then a homeowner is in essence renting the upstairs portion of the house for $750 from the bank. Another thing: investments in housing is heavily subsidized by the tax payers via a mortgage default risk. This results in artificially lower interest rates because the risk on default for a house is much lower than a risk of default let's say on a car loan. Last but not the least, a renter is also paying for the maintenance of the property. It is just this maintenance is built into their monthly payment. A homebuyer can also budget for the maintenance by moving a smaller portion into a savings account every time a mortgage payment is made. Overall,
I agree with all points. If someone is willing to rent some of their space, they will reduce their cost of living. A renter does not typically have the opportunity to do this. I would not personally want to rely on renting out a space in my home to make home ownership work out financially.
Sub-renting is just one of the possibilities. Actually, the trend for the subrent is growing either via Airbnb or similar websites or just an outright basement rental. Surely, it is a matter of preference. The argument that renting is good because it an owner has to budget for maintenance assumes that a landlord will not include the cost of maintenance (whether actual or estimated) into the monthly rent. Certainly, certain unexpected repairs can happen but a good landlord with good preventative maintenance can do many things to avoid unexpected repairs. Another thing: unlike any other assets, home ownership is heavily subsidized by the government. No other asset can be purchased with 5% where a taxpayer will assume the risk for 2.75% premium called CMHC fees. No wonder banks are quite comfortable loaning whatever they can as long as you can fit into CMHC magic formula of debt to income ratio of 42%.
"The argument that renting is good because it an owner has to budget for maintenance assumes that a landlord will not include the cost of maintenance (whether actual or estimated) into the monthly rent." That is not the argument being made. The point of this argument is an owner needs to take into account maintenance costs when doing a calculation on ROI. Along with that, a renter's monthly rent will not fluctuate month-to-month if there are more maintenance costs that need to be repaired in a given month. I am generalizing here, but too often people try and simplify the calculation that home ownership is a great investment because 10 years ago they bought a house for $400k and today it is worth $700k. The reality is there are a lot of expenses, fees and costs that would eat away at the supposed $300k profit.
I agree with Kaleb. We also have to consider that the rental market will not always allow a landlord to charge enough rent to cover all of their expenses. A landlord may wish to charge $2,000 per month cover all of their expenses, but that does not mean that they will be able to find renters at that price.
A very interesting point. Do you believe that rental markets are efficient or reasonably efficient? In your example, if a landlord needs $2000 to recoup the costs but is unable to get this rent then I would argue that either the rental operations are inefficient (too many repairs, old house etc.) or the house was purchased at an inflated price. If we assume that rental markets are reasonably efficient then housing price vs rental rates should always move hand to hand. I personally do not know whether housing markets are efficient.
Although your point about costs are well taken, having had a crazy landlady terrorize our life for 12 months, the opportunity cost of owning a home in the broader wealth context, is money well paid for us!
I have been on the path of a forever renter for a long time, but there is always that hope that one day I will own a cottage on the lake with a nice plot of land.....
I like the idea of renting a place in the city and owning a cottage within an hour drive of the city. Not a rational dream, but it seems like that would be very nice.
In my city the price of an apartment or a house is way too high compared to my current rent. I think it would take at least 20 years to make a profit going from renting to owning and that is with a friendly bank that practically lends money out of charity. Buying an apartment gives you better standards and law abiding neighbours and that's a value in its own. But I don't really get the difference between buying and renting an apartment where one of them is at a premium - you still do not own it like a house that is all yours.
Hey Ben, I am a huge fan of your work. I agree with a lot of what you said in this video. However, I am stumped when it comes to a couple things. Have you factored in rent price hikes? A mortgage payment is steady, although I understand the total associated costs are larger. Also, have you factored in what the results would be if someone were to invest the difference in their monthly house payments (including mortgage, utilities, insurance, etc.) vs renting a similar home? I realize this can be tricky with a lot of the hidden costs you refer to in your video. I am curious to see a video breaking that down! It would also be great if you provided a spreadsheet that allows people to change multiple variables and see the cost analysis. Thanks!
Great video and I have also come to this conclusion. I bought a house 40 years ago that is now worth about $400,000. I invested the same amount 40 years ago in an investment portfolio that is worth may times more. And this does not take into account utility expenses and property tax.
My retired dad has come to this conclusion, too, but it took years of trying to explain it to him. The math checks out. However, not all of life is about maximizing profits, so there is that to be said.
I’m not sure the about the opportunity cost of house ownership point. Though I can kind of see where you are coming from. When a person retires then their cashflow is significantly reduced. Is the plan then to sell the assets gradually to pay for the perpetual rent? Or sell the assets and buy a house in cash? What about factoring in increasing rent over a person’s life? Compare buying a house at today’s prices, with increased income making it easier to pay off as wages increase. To me the uncertainty around how much rent will cost in say 20 years is worrying. Whereas I can fairly accurately predict what my mortgage repayment will be. Also, what about when rent is expensive? For instance, when rent is roughly the same price as mortgaging including all the extra costs. Doesn’t it then make sense to own? Might as well have the same money build some equity right? Personally, the uncertainty around future rent prices makes me feel uncomfortable not owning.
This is one way to look at things, but cost savings on initial highly leveraged position are not being considered. Also market forces enforce that rent is always a little bit more expensive than owning. A quick example from my area on apartments Rental 1000€ Buy your own about 950€ a month - but your principal payments are about 600€ from this, leaving only an actual cost of about 350€. Opportunity cost is 1.2% to 17%. Apartments do not have sudden cost risk neither, as the apartment building takes care of all of that, that's the fee you pay to them monthly for. In that cost are all property taxes etc, which are relatively lower for apartments, and relatively lower costs for basic stuff (water, electrical, heating). But over the years as your leverage decreases you will eventually reach a break-even point where rent would cost you less. At that point you can do cash out refinance, or do you want to live there anymore either and you can move? 7% annual gain would mean 171 428€ maximum value before owning a place becomes more expensive than renting for that 1000€ rental. So keep highly levered position on the place you live and it'll be lower cost.
The video is good, just understand the scenario being described is owning a home and just living in yourself vs renting. Other scenarios where one owns Real Estate can be a great investment. For example, if you buy a house or better yet a duplex/4-plex, and rent out half or more, you will likely be much better off than just renting. Market timing is more possible with RE unlike stocks. Over long term, RE doesn’t do that well in terms of appreciation, however over shorter periods of a few years it can do very well. If you purchase a home right after a real estate market crash in a good area, you will very likely come out way ahead if you are disciplined on when to sell (or rent it out). Certainly we can’t predict with any certainty when a RE crash will happen, but we do know after it occurs. If you are ready and buy after a crash, you can do very well after a few years provided the crash was due to overall market issues, not some local problem that permanently devalues land. RE moves up more linearly after a crash vs the stock market providing a large window to purchase, usually a couple years. That does mean one has to be able to raise capital and be willing to hold on to the property for several years. It's certainly more speculative and you have wait for a crash to happen so it shouldn't be a primary investment strategy, more alternative to augment return. Such strategies are certainly not for everyone. Owning property rather you live in it, or rent it others comes with many hassles and ongoing costs as discussed in the video. Gradually investing in a balanced portfolio is a much easier path and for the most part can be automated.
Here in the UK theirs Lifetime ISAs adding 25% to down payment on your first home. You can put £4k in a year and must have a mortgage property is cheep where i work 45-90k so I'm considering using it then buying in future though would over wise would just stick to shares. Interest rates are around 1.5% or 2.3% 5 year lockin so theirs a higher opportunity cost per year vs a diversified stocks and shares ISA 6.9% - 2.3% = 4.6% Don't think theirs stamp duty in the UK at that price if its your only property but theirs also costs associated with buying such as commission. paying in regularly percentage of opportunity cost would be something like (years - 1 ) * 4.6% / 2 Then put time and expenses at say 4% of the property value. I'm still trying to work out if it would make financial seance and by how much to buy property due to this Life time ISA. Theirs also suppose to be a partial interest free government loan though I don't yet know the details and i assume it cant be used in conjunction with the Lifetime ISA?
In my country, the Netherlands, renting a place is really expensive compared to home ownership. It's not uncommon to pay almost as much in rent for a place as someone else is paying in mortgage payments for a comparable place. While that doesn't cover things like maintenance, I'd say that renting is still very expensive in the long run in the Netherlands, especially at the current interest rates.
However the mortgage isn't 'free' either, it needs a deposit (down payment) that could be invested elsewhere so overall the difference isn't as big as it may seem.
Love your videos Ben but where have I gone wrong here? Below is not completely correct (I've ignored maintenance cost and rent cost) but I'm trying to highlight the part that leverage and taxes plays in this. If my cash for deposit is 10% of a property value and I express that value as 1D, then the property is worth 10D with 9D being borrowed from a bank. My opportunity cost (before taxes) is M% (market return) * 1D. If you buy, you pay I% (interest) on 9D (the loan) but earn C% (capital gains) on 10D. Your delta in net worth is 10D * C% - 1D * I%. Essentially, your capital gain % growth is not directly comparable to the market returns due to leverage. Further, there's no tax paybale on C% but there is on M%. Factoring in this, and the fact that housing is generally less volatile than stocks and is a different asset class, isn't there a decent case to be made for home ownership in an overall asset portfolio?
Hey Sam, the missing piece is the large cash flow requirement imposed by a traditional mortgage. Your example is true on day 1, but it is decreasingly inaccurate as the mortgage is paid down. You can see an example of how this affects the long-term outcome here docs.google.com/spreadsheets/d/1iDBncgxr20-AmP8l9Ox3beOs5T574B9otsortDbJW9k/
@@BenFelixCSI Hey Ben, for some reason I didn't get a notification of your response. I had a look at the spreadsheet and the numbers post-mortgage seem very fishy to me. In year 25, the owner has a change in net worth of $95,880. At the end of this year, the mortgage repayments are zero, however, in year 26, the change in net worth drops sharply to $52,556...this cannot be correct. If you have no mortgage this year compared to the prior year, then you are not paying down any interest, so it is impossible that you earn less in year 26 as opposed to year 25. You would still earn the same 2.7% capital gain each year, but without any liability. What am I missing? It makes sense that the renters change in net worth would drop, because the renters cash is relative to the home owner. If the owner has no mortgage, then renter has less free cash due to still requiring to pay rent. It doesn't make sense to me why the change in the owners net worth would drop though. The extra $45,431 should also go toward the same portfolio as the renter at this point. I extensively modelled and triple checked my numbers before deciding to buy my property, and in my situation, I am ahead with buying property, even assuming 0% capital gain (though I do receive rental income from a 2nd bedroom).
I'd like to see a vehicle one for private use I think it's pretty well known buying is better price wise than leasing, but what about for business use? buying vs leasing, new vs used, buy or lease within a corporation, or buy or lease privately and rent it to your corp ect.
The logic to investing in a home is in the ability to leverage. Its the cheapest form of leverage there is which means that even a 2 percent capital growth over a leveraged property can provide a significant return if you hold it long enough to appreciate. This cheap access to debt is not available with stocks. If you have a margin account then you are paying almost 3 times the interest rate of a mortgage.
One of the few things great about Rich Dad/Poor Dad (if you haven't read it - HIGHLY recommended) is that home ownership is a liability, not an asset. - An asset generates cash flow. - A liability takes from cash flow. - Which one is a personal home??? After that book though, Rich Dad/Poor Dad author drops off and is very gimicky based around selling you more crap. Once you understand this piece, home ownership is put into its correct perspective. - Not saying whether to own vs rent, only to understand what home ownership truly is. Regarding the question of owning vs renting, I do own. But, I own a liability, not an asset. I enjoy the control of home ownership. Whereas, renting costs and living standards are dictated by the landlord (within the limits of the law - if they are caught). - Not a landlord bashing statement, but renting = less control. So, it is a tradeoff.
I looked hard before deciding to Buy a house (despite knowing the numbers). My issue is that Renting an actual house is way way more expensive than the mortgage of a similar house. So it boiled down to a life choice.
However with a mortgage your 'principal' i.e. mortgage deposit (down payment) and the non-interest part of your monthly payments is blocked, and so it's losing money after inflation. That blocked money could be earning returns elsewhere, so in the end the difference between buying vs renting isn't huge - in the first few years.
Yes, it definitely is a lifestyle choice, but as long as you are ok with the math then go for it. But make no illusions that it's a more-sound investment decision. Not at all.
From a financial perspective you didn’t talk about the merits of leverage on home purchases or the tax exemption on principle residence. From a non-financial perspective, owning your home eliminates the risk that your landlord forces you to move. If you do not have plans to move for the next five to ten years and you have the money for a downpayment on a home, continue renting makes very little sense to me.
A home is the best investment possible to build generational wealth! Ben on this video only focused on the home owner benefits in the long run, what about the home you inherit from your grand parents or your parents which allows you to live mortgage free and invest your money in ETFs? Home ownership forces you to be disciplined and there are ways to pay off your home within six years. Rent only goes up, mortgage is at a fixed rate. I have never met a wealthy renter! Last but not least, being wealthy is above all a feeling, a state of mind, and perception is reality!
Hey Ben, thanks for another great video. Very informative and thought-provoking. Would love to hear you elaborate more on this topic and the opportunity costs in Part 2. I don't quite understand the opportunity costs and feel like I might be missing something. This got me thinking a lot. Here is what I came up with. Let’s say 2 individuals with the same salary each have 100k to invest. One decides to invest it as a lump sum in the market getting an average long-term return of 5.9%. The other decides to invest 100k towards a down payment on a home selling for 500k. It’s true that the initial 100k investment would have a greater return gaining 5.9% a year compared to 0.63%, but this doesn’t appear to take into account the opportunity for new money from ones personal income to be invested each month. If we assume the cost to rent is equal to the cost of ownership (it’s often similar if we’re looking at 2 similar condos in the same city) the available cash flow left over each month to invest would be about the same for the renter as it is for the home owner. The person who buys property with a mortgage is forced to save each month as they slowly pay down the mortgage and build up equity in their home. In addition to this they would have an equal amount of money left over from their income each month to pay down their mortgage quicker or to invest it in the market much like the renter can. Now this is where my math skills might need work. One would need to calculate and compare the initial 100k investment in the stock market and determine if it would grow to have value that is greater or less than the money saved from paying down a mortgage. The length of the mortgage and the various interest rates over several terms would play a role, I’m sure. I used Vanguard’s Fund Comparison Tool to simulate costs of investing in a balanced portfolio using low cost Index funds. The renter with an initial investment amount of $100,000 Anticipated annual return 6% Holding period (years) 30. Additional investment amount $5,500 yearly. MER for a balanced portfolio 0.22% plus trading commissions. Projected value equal to approximately $949,787. The home owner who also invests with an initial investment amount of only $5,500 Anticipated annual return 6% Holding period (years) 30. Additional investment amount $5,500 yearly. MER for a balanced portfolio 0.22% plus trading commissions. Projected value equal to approximately $441,482. Now add the profit from selling a home ($475,000 in your example). $441,482 + $475,000 = $916,482 In this example the renter is ahead by $33,305. But wait, this example assumes the home owner bought a 500k home (made 475k after closing costs) and over 30 years their home had zero appreciation. To be fair let’s assume the home appreciatied at a rate of 0.63% (average annual return after costs and inflation) over 30 years. Now we’re looking at closer to $573,479. $573,479 + 441,482 = $1,014,961 Owning a home earns you an extra $65k in this example. If one can find very affordable rent or live cheaply among family they would likely have more money left each month to invest than someone buying a house. And if by buying a home one is left house poor and cannot afford to pay down their mortgage quicker or has no money leftover to invest than they are likely going to be financially worse off than the renter in the long-term. I think it’s important to keep things in perspective whenever possible when using hypothetical situations to make comparisons. Looking forward to Part 2.
Thanks Mike, you basically wrote out my next video! At the end of this paper I go through a bunch of different hypothetical situations to help with keeping perspective. www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2017-07-07_Felix-Benjamin_The-Case-for-Renting_FINAL.pdf?ext=.pdf
Thanks for the response and the link to the paper you wrote that dives deeper into this topic. I really appreciate all the hard work you put into teaching and explaining everything to people. It's very helpful. Keep up the great work.
Ben Felix, I have a simple question: How many of your wealthy clients, as a percentage, are renters? It will be an interesting statistic to see how many people became wealthy by implementing this theory. I know a lot of wealthy people. With no exception they all own their homes.
Not a client of Ben. I'm a renter. I live in medium COL in California. I'm pretty wealthy. Ben's math checks out. Have read a lot, watched many you tube 'gurus' address buy/rent from an investment standpoint. Ben's work on you tube (and in his professional papers) is really something.
It all sounds good in theory, and I can't argue with the numbers, but most forever renters likely are not disciplined investors. More likely is they waste there extra money on frivolous stuff and end up with nothing in the end. I am sure there are exceptions, but I think my scenario would be larger percentage. The forced savings is a really big thing even if it was only 0.63%. I love your videos and I am not disagreeing with you ; this is one of those situations that in theory renting is better, but in the real world, I can't help but wonder. There is also the issue of leverage when purchasing a home. I'm not a math guy, but that probably needs to be calculated in.
I'm one of the exceptions, but yes I def see plenty of renters not being disciplined and throwing money away on BS stuff. Even if those same people had a mortgage, I guarantee you they'd do the same - and it'd probably be magnified because now they could justify the 'need' for unnecessary, costly remodels. So it's really all relative.
another well thought out video. I am a home owner and have friends who wish they had bought when i did ( I bought a 250k now house like mine in my area sell for 430) but I've spent on all the things you say (roof 6k, hvac 7k and all the bills) I completely agree I could have made more investing although I make enough i invest a large amount as well but at the end of the day I try to explain to friends that it's not a great as an investment as it seems but they just see the numbers as they lay. the reality is the 200k+ I have in equity is useless and meaningless unless I move to a cheaper market or sell and rent. on top of that it can disappear at the drop of a hat. one benefit of the money I have considered and may do when we have another crash is use a modest about of that equity locked in a a low rate to invest in the market when valuations are extremely low again. well see though I enjoy being debt free even if the debt would be making me far more than it costs.
Thanks Justin. Really good point about the home equity requiring you to either move/downsize or take a HELOC to realize the benefit. The nice thing about using the HELOC to invest is that the interest will be tax deductible.
Many people like me will buy a home as a consumption purchase that makes me happy about owning where I live even though it will cost me money like any consumption for please does. It will not be an investment also because you have to spend time learning and taking care of property - and time cost can add up to a lot
In a free market economy this makes a lot of sense, but in reality mortgage rates are several percentage units cheaper than investment loans, which makes home ownership look better
owning your own home gives you a peace of mind, less stress and more security. That is why it is preferred. And sometime you get lucky. If you bought an apartment in Vancouver in 2014 you would probably be $200,000 or more richer in 2018. And that with only 20% down payment.
I have way more peace of mind as a renter than I would as an owner, so I would say that point is highly subjective. I do agree, though, that peace of mind is a great reason to own a home, if owning a home gives you peace of mind. The best reason to own a home is forced savings. Owning a home with the hopes of getting lucky doesn't make a whole lot of sense.
Hi Ben, I don't understand the $14K/year opportunity cost for the $500K house. Is this $14K/year for all 30 years of the mortgage? If that's the case, this assumes that the renter has $475K up front to invest, at the start of the 30 years. (That's why I've seen oppo cost calculated from the down payment cash instead of the value.) And even in your example, the guy who sold the property now has to rent something, right? So he's losing money that way. Since monthly payments (including tax + Ins) tend to be the same for rent and buy, tax is an irrecoverable cost for both buyer and renter and should be left out of both sides of the equation. The only advantages to renting are maintenance and mobility, which are offset by increases in rent. IMO, the best course of action is to buy a house in the city (with the jobs), pay off the house, sell the house, and buy a cheap house in the country. Then you invest the profit AND still have free housing.
One of my upcoming videos walks through this calculation in detail. You are correct, but there is more to it. I am going to post a Google Sheet with the model so that anyone can dig into it. It will go up when the video goes up.
@@BenFelixCSI Renting allows you to focus? Does it not have distractions like dealing with multiple parties, like landlord/agent/trades when something needs fixing?
@@BenFelixCSI Interesting. I'm single with a mortgage. While my living situation is OK now (I'm also pretty close to nature) when I retire I plan to sell my house and rent.
good video. a bit too basic, however. risk adjusted returns? different geographical location analysis? Tax implications? Guaranteed shelter (not getting kicked out)? Investment fees? I'm renting for $2k per month right now. The same place with a call it 15% down payment would cost about $5k per month (mtg, interest, strata, ppt taxes, maintenance, etc.). Net $3k per month into a 6% yielding investment over 30 years (IRR should factor in down payment). FV (or I guess PV) of the investments will likely be higher than RE investment. Consider a leveraged portfolio returns? What does my RE have to compound at the keep up with the alternative? As prices come down off their highs, this analysis will change. Diversification is key and we will see why over the next 18 months as RE in Canada tanks. koodos to the Canadian government for allowing RSP reductions so first time buyers can put all of their eggs in one basket and buy an asset that is going down in value. Not sure if I'm a renter for life but definitely right now. Now, just gotta convince my wife to feel the same way :). A belief and behavioral system is hard to change. Thanks for sparking a good conversation.
Thanks. I try to keep a balance between getting the point across and digging into every detail. You are right, there are many variables that go into these rent vs. buy examples. I currently think about this in terms of 5%. If I can rent for 5% or less of the value of a home, then renting is the better deal. 5% is my estimate for the total unrecoverable costs of owning: 1% property tax, 1% maintenance costs, 3% cost of capital (interest on debt, opportunity cost on equity). So for a $700,000 home, the total unrecoverable costs would be $35,000, or $2,916 per month. If I can rent for less, I would expect to be better off (strictly from a financial perspective), renting. It goes the other way, too. If I find a place that I love for rent for $4,000 per month, then $4,000 X 12 / 5% is the equivalent cost of a home that I would be paying for. This helps to contextualize rent as a lifestyle choice. Am I comfortable with the housing costs equivalent to a $960,000 home? You're paying it whether you rent or own. Rent is just easier to see.
I believe in owning vs renting for the following reasons, In my country Jamaica I turned 500k jmd into 9.5m owning a home, then in Canada I turned 13k into 300k. All my life renting I never had those kind of money so I am a believer.
That I don’t agree with. It _can_ be a path to wealth. But it can also be a path to ruin. There are no guarantees when you’re boring money to invest in properties.
My renters pay my mortgage, taxes, insurance, property management and all other expenses and then they put a little cash in my pocket. It will be nice in the long run when the houses are paid off. While not average, its possible to beat the stock market ROI with rental property.
I really enjoy these videos and feel I learn something new every time I watch them and yet you lose me every time someone claims renting is a predictable cost. Depending on where you live, if there are no rent control laws, your landlord can and will raise your rent hundreds of dollars each year while the home owner's mortgage payment stays the same for decades. There's nothing predictable about rental costs except that you don't have to worry about maintenance costs.
Sorry, I disagree. You are only looking at it from the renter's perspective Cooper. So many factors that increase cost for both renters and owners. It's not predictable at all for either party. Property taxes get reassessed, min wage goes up, supply chain issues for materials, major appliance takes a hot steamy dump when you least expect it, etc. The list is very long, and both parties end up eating it. I rent but have many friends that own a home, and they get saddled with tiny costs often, and big costs rarely. E.g., the landscaper at one place (a single family home) raised his monthly fee from 90/mo to 115/mo. Another example is one needing to replace a rotted-out two-door gate. Materials and labor was $2000. (I could have done it for way less but it would have taken me 5x+ amount of time, headache/stress, poorer craftsmanship, etc.)
In Canada house - its not just a house. The whole Canadian economy is based on it. You need to make a lot of expenses and payments for repairs and constant upgrades. Most of the people do not understand that, but its a good thing for Canada. Lol.
My wife and I are moving into a condo. The cost represents a little under 30% of our net worth. I consider owning a waste of money but divorce is also a waste of money, which would happen if I insisted on renting forever. :-D
That is an important point!!
I'd divorce. Condo fees are ridiculous, at least here. $800 a month with a $900m mortgage? Yeah no
@@dawnj2360 We own outright, so no mortgage. Our condo fees are about $350/month on a $230K condo. It's near Windsor, ON where housing is still pretty affordable though getting less so.
This is why I will eventually end up a home owner as well!
I've managed to avoid getting married, but have mortgage. At least after I sell my house I won't have a mortgage.
I am so happy, I discovered you, I thought I was alone in this thinking. Tired of people telling me to buy a home. Bless you!
I have a mortgage and am really looking forward to selling my place.
If you're the village idiot, then I'm the village yokel! Nice to meet you!
Signed-
A forever renter
now i don't know what to do anymore
Why not do both? Get a re-advanceable mortgage. Not only will you be able to invest the principal but you will be to write off interest on the HELOC as well.
Lol me too ...
Thats probably a good thing, means that you are thinking about everything before you make a decision.
if you are looking to stay in an area, buy the house. just make sure you can afford it.
Don't buy your primary house as an investment. Do it for stability and for the love of creating a home. If you want to be rich, rent cheap and invest the difference. Being rich isn't everything though.
My mind is blown.
I didn't believe it so I did the maths with my parents house that they stayed in 13 years, and I'm shocked.
Don't forget to include that the return on owning a house isn't just appreciation of the asset, it's also that you didn't have to make rental payments. When you put those two together along with the fact you can deduct mortgage interest on your taxes (if you're in the US and do an itemized filing) it's better to own IF you plan to stay in the home for more than about 10 years (or keep it as a rental property). He did some weird math where he considered each component separately but never put them all together.
@@elmateo77 mortgage tax deduction in the US isn't as great as most people say it is. For many middle class americans, simply taking the standard deduction is almost as good as itemizing. In some cases, it's better.
Halfway through the video Ben addressed the opportunity costs of 'keeping' your paid-off home. There are still costs even when your home is paid off. What would you say to that?
As a home owner who is thinking about buying a revenue property but having ethical problems with becoming a rent seeker, this video makes me see things a little differently. Thanks
More great food for thought. I have always been a promoter of home ownership, but your video makes me rethink that. Ready for Part 2! Thanks again!
There's nothing wrong with being a home owner! I simply think that renting deserves a better reputation. I'm glad the information was useful.
I think it made a lot of sense back in the day when people didn’t move as much. Now days though, younger people are moving always looking for better oppurtunities across the country and even within the city to reduce commute or reduce rent etc. I think renting is cool when stable
Great video! Although I'm a home owner, I wouldn't consider the house so much as an investment, but a home, and as someone here mentioned, it's the quality of life (from one's personal taste) that is the reward. Doing what you want with greater freedom and privacy on your own property is an advantage that trumps having a landlord overhand your lifestyle, while having a better portfolio to look at in your hands imo. But that's really not as much the point from your video.
From an investment standpoint, you also have to factor in market risks, which can be more volatile, compared to certain real estate over time. And at least in the US, there's tax deductions for your interest that you do not get as a renter.
I agree that there are plenty of non-financial factors that can make either home ownership or renting attractive, depending on your situation and goals.
The interesting thing about risk in real estate is that any real estate index will not typically capture that true volatility of the market. This is because there are fewer transactions and less frequent reporting for real estate than for stocks and bonds. The other thing to keep in mind is that with an index fund you are taking on market risk, which can be volatile but is expected to pay off over time. With a home, you are taking on the risk of the real estate market *and* the risk of that specific asset (structure, location, etc.). The market could go up, while your specific asset may not.
Deductible mortgage interest in the US is very interesting, especially for high earners with large homes. We do not have the same thing in Canada.
Thanks for your comment - good addition to the discussion.
The US has capital taxes on principle residences, with only 250k lifetime exemption. If your gain is $1M then you'll be paying taxes on 750k.
I agree. I currently have a mortgage and like my living situation, but will have a difficult decision to make when I retire. On the one hand I like where I live, on the other I'd like the freedom to live seasonally in retirement, and having a mortgage makes that difficult. I guess I'll figure it out when I get there.
@@alankoslowski9473 Perhaps rent your place and go whereever the fuck you want to.
@@BigBrother4Life Being a landlord is a job in and of itself. I think I'd rather sell it, invest the proceeds, just be a renter myself. It's much simpler.
I freaking LOVE your videos! It gives such insight in a world I thought I did not like. But the thought of starting investing in index funds, stock and such is now very exciting! You have a tremendous good case for house renting! It makes me want to rather put my money in stocks/index funds and make my fortune there!
Thanks! Great to know the videos have been helpful.
Mikael....that's what I do. Rent modestly and then be very disciplined to invest the difference by maxing out tax-advantaged accounts, low-cost index funds, etc. It's a gamble that I'm willing to take. Although Ben justifies his work and proves it with math, many people will still buy a house because it's a very emotional thing.
I’m going to rent and invest in the S&P 500.
Same here. The though part is to convince the family to accept a monthly budget surplus in our finances (I aim for 20% post tax), but I just take that money out immediate after the paycheck).
@Agent Sauerkraut Futures and derivative products. Can go up to 20:1 leverage without margin calls. Margins these days are a puny 1.8%
@@guillaumegiroux9425 I have an auto transfer setup. I don't even see it.
A total world market index fund is better.
I'd argue 2 cases for owning a home:
1. Control against potential rising real estate costs. Rent isn't guaranteed long term, it can be hiked at any time, but a mortgage payment is generally flat for 30 years.
2. Privacy and freedom(non financial). With a rented home, you have limits on what you can do with the property. With your own home, your only limit is what the local government/HOA says you can/can't do. Then there's the idea of your landlord having keys to your home that can be unsettling for some.
In my country, many people desire to have their own house & lot. Most of us, I believe do not consider owning a house & lot an investment per se. What we believe in purchasing the property is the security of having a roof over your head (maintenance, government taxes -- we are aware, so no issues on that). At least when paying (the mortgage) the property, it is already fixed (includes interest, & what have you...) whereas versus renting, the rent amount could change after a year or so; and if your income can't catch up, it's trouble and depending on the market climate; rent amount tends not to go down but always up faster than the cashflow. But hey! Congrats it's a great video!
While I have never conducted a full analysis - as you have - I have always believed that once all the costs are added up, homeowners are lucky to break even. The unpredictability of home ownership is overlooked and never a consideration because , and especially in markets such as Toronto, the windfall is so large. The other consideration with the idea that a home is an investment is that it goes against basic investing principles, namely diversification. Having 50% + and in some cases closer to 75% of your net worth tied up in one investment is ludicrous. And finally, a home offers no liquidity, which is going to become even more important when interest rates rise. Keep up the good work!
Those are all great points, Andreas. Thanks!
I have done some research on my own, and decided to continue to be a renter for a while. Like you mentioned in the video, even when the home is paid off, there are recurring costs of owning the property like property taxes (1.1% from where I live), random maintenance (estimated 1%), and home insurance. So it's not free like most people think. Apart from cost, house maintenance can sometimes be a real headache (leaky roof, broken appliances, etc.) Renting frees up your mind from those troubles, since landlord takes care of it most of the time.
D P
Yes DP isn’t it a wonderful feeling, knowing that after 30 years of mortgage payments, u get to rent your home from your municipality?
Government s__ks
Great points DP
and Karl....great points too!
Thanks for your videos Ben, good work
3% is the return before accounting for leverage. It's equity_fraction * return + debt_fraction * (return - cost_of_capital). Because it's cheap to borrow the leveraged return, the one the homeowner actually got, can be substantially higher.
Stocks can be leverage too
@@tiendoan1333 majority of people dont leverage stocks but the majority of people leverage their house. Also, you can put 10% down on a house, I'm not sure if you can do the same with a stock: put down $10k and the broker puts in $90k.
@@waynew174No, we usually put down $10K and gain access to 10x or 20x without occurring liabilities at around 1M T bills rates
Just so you know, you're causing me a lot of headaches. These are the same things I've been telling people for years - even doing the math in front of them. Everyone always told me I was wrong, so I assumed I was missing something. Now I have to fire my financial advisor and do my own investing. Damn you.
Haha! I don't think that I'm sorry.
The one great thing about owning is control. You decide when to sell and you are not at the mercy of the landlord. Most people I know that rent move every couple of years. Rent hikes, or the owner decides to sell. Great video!
Tony Benjammin that is a good point, with moving comes some residual costs as well. Usually people are getting furniture more often, moving costs, maybe even some losses on applications/security deposits/etc, and rent prices rising.
Condo boards and home owner associations say otherwise according to many TH-cam videos sadly. Rent can only legally raise a small percentage each year here. 1.4% if I remember correctly.
@@dawnj2360 It depends on the area. Some areas don't have any restrictions, so they can raise it as much as they think they can get away with.
Hi Ben, love your videos and presenting style.
I'd like to say that the ability to become a successful investor is not determined by your housing status ie homebuyer or renter and being either will not hold you back. In fact , it's your personal qualities, attributes and general outlook on life that play a much bigger part in the success game.
You can "rent" your way to wealth just like you can "own" your way to wealth. The a big plus of being a homeowner is the sign that you are able to save a deposit and take on a big commitment . But that's no guarantee of success as most homeowners will not move past that stage, they never become investors believing that home ownership is the ultimate goal and that they don't have to do any more.
Let's look at the 2 STEPS to WEALTH CREATION :
1. INCOME GENERATION. ( salary, commissions, wages , businesses income etc. )
2. CONVERTING THE INCOME INTO INVESTMENTS like real estate stocks and bonds etc.
Unfortunately most people will never progress past phase 1, either not earning enough to do more than put food on the table and cover basic living expenses or not taking the next step to investing.
Being a homeowner is a huge advantage when it comes to becoming an investor as you have equity to draw on. However you you also have to have the right mindset, knowledge and appetite for risk .
Many homeowners are risk averse and will not consider using their "castle" as collateral, interestingly enough it's also the same p who won't blink when it comes to putting a new car, holiday or swimming pool on the mortgage. This mentality keeps them in the income generation mode until they can no longer work or get a job.
The big secret to creating any level of wealth is to INVEST and the first and best investment you will ever make is to INVEST in yourself.
I love your videos. I just wished I was a bit smarter to understand them in their entirety 😀
Thanks Ben, I love how you address all these investment preconceptions and tear them apart in each short video. I see Real Estate and Bonds just as volatility protection assets. Would you agree that generally speaking those are the best vehicles to maintain your money's value with less volatility in the long run? For the rest, I meanly use your factoring investment approach.
Wonderful explanation. I have really enjoyed watching your videos.
Thanks for putting time and effort to make them!
The arguments you lay out are compelling. They back up what i have long believed to be true.
I also like your comment about mortgages enforcing discipline ... so true. If only I knew then what I know now ✌️😏.
Agree with the video and the concept but many people take great pride in their own home, a happiness that has significant economic value.
I take pride in my rental and don't tell people I'm renting.
It's all in their head
Ross...economic value? Um, no. Not at all economic value.
That happiness 'value' you speak of is an emotional, not economic, value.
Wow.. I just came across your channel and this stuff is great! A ton of useful information and easily explained. As happy as I am watching this it's just as annoying, it's like you're having this needle just popping filled balloons of things that I thought I had figured out lol. Always been in the stock market, dividend stocks as favourites (obviuosly) but you made me rethink that aswell.
Indexfunds here I come.. End of the day I rather accept being wrong than to proud and things went to shit. Massive thank you for all the effort put into this!! /All the way from Sweden
I consider to be a forever renter because, in this case, I have the opportunity to change work easily without anxiety to change my routine (or I have the possibility to work in another countries xD). I think that is important NOT consider the house buying an investment (but is important, when we valued the purchase, assume what is the return if we rent the house to avoid unnecessary expenses).
Though you've raised excellent arguments supporting renting over home-owning, there are some obvious disadvantages to renting that were not addressed.- renters may be significantly limited to what they can do with their living space, hinged on rules and policies enforced by their landlords (including but not limited to renovations, property usage, pet ownership and utility usage)- renters often (but not always) have to "share" a structure with other people (landlord or other tenants), and may need to adjust their normal/comfortable habits or practices (i.e loud music, stomping around, kid noise, etc) to accommodate others, whereas home owners often have the choice- there is no guarantee that rental accommodations will be available. Currently in Victoria and Vancouver BC the rental market is miniscule and severely over-priced- because of the lack of rental units available, rent costs have sky-rocketed and are often as high as the mortgage price. Demand drives prices up.- renters risk that the owners may wish to reclaim the unit at any point- once a rental lease is completed there is no guarantee you will be able to renew. Having to search for a new rental is stressful and high costs can be incurred by moving
Anyways, I really enjoyed seeing a different perspective and I appreciate that your video isn't meant to be an exhaustive list of pros and cons, all-encompassing. You opened my eyes to enlightening points I hadn't considered. Thank you! I will keep following.
Hi Jennyy07, I agree that owning has its set of benefits and renting has some disadvantages. The main point here is that in certain cases renting can be better than owning, and from a financial perspective the decision is pretty neutral between the two options. As a renter, I'm not sure that I agree with all of your points.
-It is not any more difficult to find a detached home for rent. Also, many owners (where I live anyway) will own a condo, town home, or one side of a duplex. I don't think that shared space is a disadvantage for renters. Most owners will also have neighbors. One disadvantage of owning is that if you end up with bad neighbors, it is harder to move.
-I agree rental vacancies in many cities are low making it harder to find a place to rent. However, those cities with high demand for housing will also have higher real estate prices. There is no guarantee that an appropriate home will be for sale *at a reasonable price*. If you genuinely cannot find a place to rent then of course there is no choice to be made.
-The rental market in both Victoria and Vancouver is scarce (
Hi Jenny...I've been a renter for a long time. Nothing against homeownership though! I'd like to own one of these days, but it'd have to be the right fit, scenario, math, etc. Investment-wise, renting has been an absolute no brainer.
I don't agree with all the cons you listed for a renter, but that's just my personal take, and everyone has a different perspective. There are many benefits to renting that Ben could have listed but didn't. Moreover, there are many cons of owning that he could have listed. Much of it comes to tolerance level. Some people don't want to tolerate the cons of renting, others don't want to tolerate the cons of owning - because yes there are cons to owning!
Great video. You’ve explained all the points I’ve argued for years.
For me personally, I’ve been renting due to the fact that I don’t have to do any maintenance on the property or replace anything.
Now, if I replace or have to fix anything, not only am I at a loss of money but also time. Now, since I value my time at my rate of pay through my employer, I’ll be at a greater loss.
My next point is location. I’m getting a new place that’s brand new and only 5min away from work. Now I save on time, gas, and improved quality of life. Need I mention this new place also has 24hr maintenance and daily curbside trash pickup, gated, and has a pool I don’t have to pay for?
For me, my long term goal is to continue to buy bonds which is my employers 401k.
Funny, I read an article that says Warren Buffett suggest 90% into the SPX or index fund and 10% bonds. So I did the opposite and I’m really wondering if I should just go 100% bonds or a 95/5.
Why the love for bonds if you dont mind me asking?
Looking at the SPX since December it has already made it to all time highs. I’m expecting a pullback.
Diggs...screw bonds. You look young. Go 100% straight equity. That's what I do.
I'm a renter too and I agree with what you said (except for the crumby bonds!)
Came to the comments to see renting vs owning fists being thrown... and was not disappointed. Interesting discussions being had, makes the vid valuable simply for helping strike those conversations! Keep up the great work.
Thank you!
Living here in kanada, I bought a house in oshawa in june 2012 for price of $265,000, I was able to squeeze in with a 5% downpayment, I lived close to the university and rented 2 of bedrooms to students, cash flow $1100 a month. I sold my house this past August for $570000. No debt, starting to invest in the stock market with some bumps but improving. I am currently renting a basement apartment in the country for $975 a month all inclusive including internet. I even have a total of 29 chickens in the backyard, get eggs, buy most of my food from local farmers, super fresh air with cornfields looking in the horizon. you take into account the property taxes, the interest from principal and all the utilities it came to about $1,050 not including internet. The student cashflow paid for their utilities, repairs for home plus new roof, furnace, etc. I believe I was lucky when I bought, but the sale was opportunistic in my part. Oh and best investment of all, I'm single!
Bat....you bought at a good time and house hacked. Very smart
If I had a home I was renting out, I would immediately send this to my renters 🤣
Dopes
100%!
I am a forever renter with a stock portfolio diversity of index funds
Sorry for asking stupid questions halfway through but any cost the owner has with no residual value are not specific to owners but are also included in the rent right? (example - if property tax increases the landlorsd will try to compensate that in rent). also the opportunity cost of owning, while f course present, would need to factor in the saved rent. So in your 500k house example it'd be 2000 minus what it would cost to rent a similar place to live, right?
Yep. I regret buying where I live. It would have been substantially cheaper to rent and invest the saved money. It would also have given me more flexibility. As you say the main benefit is the forced saving aspect. The other benefit would be if we had a period of high inflation.
I agree 100% Ben! great video. waiting for # 2
Thanks Oj!
Ben have you thought about setting up a Patreon page? I would gladly take you as my financial adviser, but unfortunately I don’t live in Canada. I won’t think twice about donating though, since I’ve learned so much from your insights and analysis. Thanks!
Can u make a video about REITS?
Ya I'll do that eventually.
Your channel was featured in my business class today. Keep up the great work!
Wow that is really interesting. What was the topic for the class?
One big advantage of having a paid off mortgage is the ability to time the market using a line of credit. My dad is locked in on a very low interest line of credit worth 50% the value of the house. During covid he put 50k in under valued stocks and returned 18k in 2 months. Obviously risky and wouldn't recommend to most people. If done proper ie buying fixer uppers and renting out additional rooms, home ownership is good. But only if done through the scope of an investment. And only if you plan on living in the area for the next 10+ years
During the 2008 recession many individuals lost their entire portfolios, you make stock market investing sound like a sure return. In addition when someone rents, if the owner decides to sell the property they have to find a new home once their lease it up. This is another reason for opting for home ownership. I am a landlord and I own several properties and I can tell you that each property is individual just like an individual stock concernig returns. Another benefit to home ownership is that you can tailor the home to your needs and wants, you cannot do that with a rental.
During the 2008 recession many individuals lost their homes, you make home ownership sound like a sure return. In addition when someone owns, if the neighborhood changes they may have to risk selling at a loss when finding a new home. This is another reason for opting for renting. I am a renter and I own several thousand stocks through index funds and I can tell you that owning only several stocks or properties would expose me to unnecessary risk. Another benefit to renting is that you can easily move to match your needs and wants, you cannot do that as an owner.
Love your videos Ben, have u ever considered the theory that home ownership increases unemployment by 1%, obviously the home owner can’t easily move
Thanks!
Is there any data to back that 1% figure up? I have heard the mobility argument against home ownership, but have never seen it quantified.
Ben Felix
piie.com/publications/wp/wp13-3.pdf
Perhaps you could do a video on this some day, I’m not intelligent enough to analyze articles like this. I have read Jack Bogle’s books, and his charts are elegant, even I can admire them. However the RE and unemployment charts are beyond my comprehension. Either way it would be of interest to hear your perspectives.
Some good points, but who buys houses all-cash? It's not realistic to compare what you could earn in alternate investments using the full value of the house, it's more likely that an average person would have the possibility to invest their mortgage deposit (down payment).
I'm 27, I've invested 20k in an indexed fund, in the hope of saving towards the purchase of my own property, and all of a sudden, you're really giving me food for though. Jeez, Ben! Thanks for shaking all that I understand about investment and saving!
Thanks for keeping an open mind to new information!
I love your video!
Great video!
as someone that just got reno-victed from my vancouver rental you can't factor in that peace of mind you get from owning.
Home ownership is working only for newcomers increasing in Canada. It's not perpetual process and also recession possibilities always there. So mortgage payment is also on risk for both parties. These factors would diminish this idea in near future.
Thank you for another very helpful video. I want to buy a single family home in montreal, and property tax plus school tax is quite high and making me reconsider renting for life.
Makes sense. There is nothing wrong with renting.
Great video Ben! I would like to know the formula used in your example that brings you to a 5.63% return annually over 38 years. I'm having a hard time crunching the numbers and I would like to apply this for other examples of my own.
Keep up the smart work!
Thanks! I believe that this is what you are looking for www.pwlcapital.com/wp-content/uploads/2019/03/PWL-WP-Kerzerho-Bortolotti-Great-Expectations-2019.pdf
You are exceptionally gifted with common-sense. Something very rare these days.
Thank you!
Love this; I got so tired of hearing the renting is throwing away $$ mantra. But I ignored it, based on financial research. Good thing. The couple who bought an identical condo to the one I started renting in the same complex went underwater within a year or two after the real estate crash 2008. This was in the US in the suburbs around the capital. They told me they were $80,000 in the hole. The difference between the mortgage for the unit (before the crash) +condo fees, property tax vs. just renting was over $1000.00 in the renter's favor. That's at least $12,000 / year you could dollar-cost average into a low-fee index fund. Great presentation and points as usual in the video.
That's a really interesting example. I wonder what the financial outcome would have been for each of you if you stayed in your respective condos for 15 years - you renting and saving, and them owning.
I'm a Landlord with multiple properties and I totally agree with this video
:applause:
The part that is confusing for me is that in my area, rent is more expensive than a mortgage payment and by paying rent, I'm paying someone else's debt down for them instead of putting money into my own appreciating asset. Unless I am missing something, it seems like buying is always the best option as long as mortgage payments are lower than rent costs monthly. Now I do understand that maintenance costs and real estate can go down in value which means it's up to the buyer to buy in the right location and buying the correct property the best that they can. Choosing the right property is crucial.
You are missing lots. This one might explain it better. th-cam.com/video/Uwl3-jBNEd4/w-d-xo.html
@@BenFelixCSI thank you! I watched it and great video. You're the smartest finance channel on TH-cam, half the time I just don't understand because I'm not on your level 😂. I do think from an investment perspective specifically, and not just a personal residence perspective, you can be strategic with the properties you buy in order to make it much more likely to be profitable above the average stocks return or something similar. Researching a market, buying at the right price/time, and utilizing tax laws in your favor to lower taxes paid, and calculating the potential cash flow of rental properties before making an offer can be a good way to sway the odds more in your favor! Appreciate the reply man!
I will be a forever renter. Thanks for the video.
Nothing more depressing than seeing 65 year old retirees still renting. Financial suicide
Biggest thing everyone worries about as a renter is some landlord coming along and jacking up the rent. I live in Australia. No houses here. Every rental advertised has 100 people looking at it. You are subject to the market every renewal date.
Its interesting to me that you didn't mention at as an owner, i'm going to charge the individual renting the house out for the property to include property taxes, maintenance items etc. and then charge a 10% premium on that due to profit. So, while yes, you're correct the renter has a fixed cost and the home owner doing the renting will have fluctuation the net result is over time I as the home owner am going to come out ahead in nearly all aspects. Owning is almost always a better deal unless as you said the time frame from buying to selling is short. That time I don't believe to be 10 years, most likely closer to 4 in a flat market, and obviously more or less depending on the up/down swing of the market.
As an owner you are going to charge the renter market rent. You don't get to name your price as a landlord. Good luck covering all of your costs plus a 10% premium. Depending on your market it may be possible, but in most cities in Canada you will barely be able to cover your costs. Prices (and therefore the costs of owning) have risen much faster than rents in most developed countries. infographics.economist.com/2017/HPI/index.html
@@BenFelixCSI I do charge market rate at times and/or name my price for it. I do make 10% monthly on it now, but I think the bigger difference is is i'm speaking about the US and you're speaking about Canada. Different economics at work there. A quick search on Zillow and you can find houses that will allow you to do all of the above and make 10% on the monthly. The problem is its difficult to start and the education is even more expensive (not to mention riskier).
Definitely. Real estate can end up being a very expensive educational experience.
10% of monthly expenses doesn't say much. Can you please say how much of net rental income you make per year in % compared to invested capital? I don't believe it's more than opportunity cost of not investing it to alternative investments
A good analysis overall. However, there are several things that I think is often overlooked in the house ownership. It is the ability to sub-rent a basement or a part of the house. Any income from a sub-rental will subsidize the mortgage. For example, if a mortgage payment in Edmonton is about $1,500 but a basement can be rented out for $750 then a homeowner is in essence renting the upstairs portion of the house for $750 from the bank.
Another thing: investments in housing is heavily subsidized by the tax payers via a mortgage default risk. This results in artificially lower interest rates because the risk on default for a house is much lower than a risk of default let's say on a car loan.
Last but not the least, a renter is also paying for the maintenance of the property. It is just this maintenance is built into their monthly payment. A homebuyer can also budget for the maintenance by moving a smaller portion into a savings account every time a mortgage payment is made. Overall,
I agree with all points. If someone is willing to rent some of their space, they will reduce their cost of living. A renter does not typically have the opportunity to do this. I would not personally want to rely on renting out a space in my home to make home ownership work out financially.
Sub-renting is just one of the possibilities. Actually, the trend for the subrent is growing either via Airbnb or similar websites or just an outright basement rental. Surely, it is a matter of preference.
The argument that renting is good because it an owner has to budget for maintenance assumes that a landlord will not include the cost of maintenance (whether actual or estimated) into the monthly rent. Certainly, certain unexpected repairs can happen but a good landlord with good preventative maintenance can do many things to avoid unexpected repairs.
Another thing: unlike any other assets, home ownership is heavily subsidized by the government. No other asset can be purchased with 5% where a taxpayer will assume the risk for 2.75% premium called CMHC fees. No wonder banks are quite comfortable loaning whatever they can as long as you can fit into CMHC magic formula of debt to income ratio of 42%.
"The argument that renting is good because it an owner has to budget for maintenance assumes that a landlord will not include the cost of maintenance (whether actual or estimated) into the monthly rent."
That is not the argument being made. The point of this argument is an owner needs to take into account maintenance costs when doing a calculation on ROI. Along with that, a renter's monthly rent will not fluctuate month-to-month if there are more maintenance costs that need to be repaired in a given month.
I am generalizing here, but too often people try and simplify the calculation that home ownership is a great investment because 10 years ago they bought a house for $400k and today it is worth $700k. The reality is there are a lot of expenses, fees and costs that would eat away at the supposed $300k profit.
I agree with Kaleb. We also have to consider that the rental market will not always allow a landlord to charge enough rent to cover all of their expenses. A landlord may wish to charge $2,000 per month cover all of their expenses, but that does not mean that they will be able to find renters at that price.
A very interesting point. Do you believe that rental markets are efficient or reasonably efficient? In your example, if a landlord needs $2000 to recoup the costs but is unable to get this rent then I would argue that either the rental operations are inefficient (too many repairs, old house etc.) or the house was purchased at an inflated price. If we assume that rental markets are reasonably efficient then housing price vs rental rates should always move hand to hand. I personally do not know whether housing markets are efficient.
Although your point about costs are well taken, having had a crazy landlady terrorize our life for 12 months, the opportunity cost of owning a home in the broader wealth context, is money well paid for us!
That landlady vetted you prior to signing lease. Maybe you should have vetted crazypants before signing lease, eh?
I have been on the path of a forever renter for a long time, but there is always that hope that one day I will own a cottage on the lake with a nice plot of land.....
I like the idea of renting a place in the city and owning a cottage within an hour drive of the city. Not a rational dream, but it seems like that would be very nice.
Just read similar comments by Bob Shiller and found this. Really interesting! Thank you for your videos
Thanks for watching!
In my city the price of an apartment or a house is way too high compared to my current rent. I think it would take at least 20 years to make a profit going from renting to owning and that is with a friendly bank that practically lends money out of charity. Buying an apartment gives you better standards and law abiding neighbours and that's a value in its own. But I don't really get the difference between buying and renting an apartment where one of them is at a premium - you still do not own it like a house that is all yours.
Hey Ben, I am a huge fan of your work. I agree with a lot of what you said in this video. However, I am stumped when it comes to a couple things. Have you factored in rent price hikes? A mortgage payment is steady, although I understand the total associated costs are larger. Also, have you factored in what the results would be if someone were to invest the difference in their monthly house payments (including mortgage, utilities, insurance, etc.) vs renting a similar home? I realize this can be tricky with a lot of the hidden costs you refer to in your video. I am curious to see a video breaking that down! It would also be great if you provided a spreadsheet that allows people to change multiple variables and see the cost analysis. Thanks!
Tell that to my mom please
She's your mom. Not your boss. Tell her it's your money.
I do what I want with my money. That doesn't stop her from yapping.
How do you edit your videos like this can you tell me what you use ?
Great video and I have also come to this conclusion. I bought a house 40 years ago that is now worth about $400,000. I invested the same amount 40 years ago in an investment portfolio that is worth may times more. And this does not take into account utility expenses and property tax.
My retired dad has come to this conclusion, too, but it took years of trying to explain it to him. The math checks out.
However, not all of life is about maximizing profits, so there is that to be said.
Awesome video excited to see part 2
Glad you enjoyed it.
I’m not sure the about the opportunity cost of house ownership point. Though I can kind of see where you are coming from.
When a person retires then their cashflow is significantly reduced. Is the plan then to sell the assets gradually to pay for the perpetual rent? Or sell the assets and buy a house in cash?
What about factoring in increasing rent over a person’s life? Compare buying a house at today’s prices, with increased income making it easier to pay off as wages increase.
To me the uncertainty around how much rent will cost in say 20 years is worrying. Whereas I can fairly accurately predict what my mortgage repayment will be.
Also, what about when rent is expensive? For instance, when rent is roughly the same price as mortgaging including all the extra costs. Doesn’t it then make sense to own? Might as well have the same money build some equity right?
Personally, the uncertainty around future rent prices makes me feel uncomfortable not owning.
thanks
This is one way to look at things, but cost savings on initial highly leveraged position are not being considered. Also market forces enforce that rent is always a little bit more expensive than owning.
A quick example from my area on apartments
Rental 1000€
Buy your own about 950€ a month - but your principal payments are about 600€ from this, leaving only an actual cost of about 350€. Opportunity cost is 1.2% to 17%.
Apartments do not have sudden cost risk neither, as the apartment building takes care of all of that, that's the fee you pay to them monthly for. In that cost are all property taxes etc, which are relatively lower for apartments, and relatively lower costs for basic stuff (water, electrical, heating).
But over the years as your leverage decreases you will eventually reach a break-even point where rent would cost you less. At that point you can do cash out refinance, or do you want to live there anymore either and you can move?
7% annual gain would mean 171 428€ maximum value before owning a place becomes more expensive than renting for that 1000€ rental. So keep highly levered position on the place you live and it'll be lower cost.
The video is good, just understand the scenario being described is owning a home and just living in yourself vs renting. Other scenarios where one owns Real Estate can be a great investment. For example, if you buy a house or better yet a duplex/4-plex, and rent out half or more, you will likely be much better off than just renting.
Market timing is more possible with RE unlike stocks. Over long term, RE doesn’t do that well in terms of appreciation, however over shorter periods of a few years it can do very well. If you purchase a home right after a real estate market crash in a good area, you will very likely come out way ahead if you are disciplined on when to sell (or rent it out). Certainly we can’t predict with any certainty when a RE crash will happen, but we do know after it occurs. If you are ready and buy after a crash, you can do very well after a few years provided the crash was due to overall market issues, not some local problem that permanently devalues land. RE moves up more linearly after a crash vs the stock market providing a large window to purchase, usually a couple years. That does mean one has to be able to raise capital and be willing to hold on to the property for several years. It's certainly more speculative and you have wait for a crash to happen so it shouldn't be a primary investment strategy, more alternative to augment return.
Such strategies are certainly not for everyone. Owning property rather you live in it, or rent it others comes with many hassles and ongoing costs as discussed in the video. Gradually investing in a balanced portfolio is a much easier path and for the most part can be automated.
I do also have a video on investing in real estate. I will be curious to see your comments there. Thanks for watching and commenting!
But how does home ownership home up against rising rents? Both the cost of real estate and the cost of rent have skyrocketed in Vancouver
Here in the UK theirs Lifetime ISAs adding 25% to down payment on your first home.
You can put £4k in a year and must have a mortgage property is cheep where i work 45-90k so I'm considering using it then buying in future though would over wise would just stick to shares.
Interest rates are around 1.5% or 2.3% 5 year lockin so theirs a higher opportunity cost per year vs a diversified stocks and shares ISA 6.9% - 2.3% = 4.6%
Don't think theirs stamp duty in the UK at that price if its your only property but theirs also costs associated with buying such as commission.
paying in regularly percentage of opportunity cost would be something like (years - 1 ) * 4.6% / 2
Then put time and expenses at say 4% of the property value. I'm still trying to work out if it would make financial seance and by how much to buy property due to this Life time ISA.
Theirs also suppose to be a partial interest free government loan though I don't yet know the details and i assume it cant be used in conjunction with the Lifetime ISA?
In my country, the Netherlands, renting a place is really expensive compared to home ownership. It's not uncommon to pay almost as much in rent for a place as someone else is paying in mortgage payments for a comparable place. While that doesn't cover things like maintenance, I'd say that renting is still very expensive in the long run in the Netherlands, especially at the current interest rates.
However the mortgage isn't 'free' either, it needs a deposit (down payment) that could be invested elsewhere so overall the difference isn't as big as it may seem.
Love your videos Ben but where have I gone wrong here? Below is not completely correct (I've ignored maintenance cost and rent cost) but I'm trying to highlight the part that leverage and taxes plays in this.
If my cash for deposit is 10% of a property value and I express that value as 1D, then the property is worth 10D with 9D being borrowed from a bank.
My opportunity cost (before taxes) is M% (market return) * 1D.
If you buy, you pay I% (interest) on 9D (the loan) but earn C% (capital gains) on 10D. Your delta in net worth is 10D * C% - 1D * I%. Essentially, your capital gain % growth is not directly comparable to the market returns due to leverage. Further, there's no tax paybale on C% but there is on M%.
Factoring in this, and the fact that housing is generally less volatile than stocks and is a different asset class, isn't there a decent case to be made for home ownership in an overall asset portfolio?
Hey Sam, the missing piece is the large cash flow requirement imposed by a traditional mortgage. Your example is true on day 1, but it is decreasingly inaccurate as the mortgage is paid down. You can see an example of how this affects the long-term outcome here docs.google.com/spreadsheets/d/1iDBncgxr20-AmP8l9Ox3beOs5T574B9otsortDbJW9k/
@@BenFelixCSI Hey Ben, for some reason I didn't get a notification of your response. I had a look at the spreadsheet and the numbers post-mortgage seem very fishy to me. In year 25, the owner has a change in net worth of $95,880. At the end of this year, the mortgage repayments are zero, however, in year 26, the change in net worth drops sharply to $52,556...this cannot be correct. If you have no mortgage this year compared to the prior year, then you are not paying down any interest, so it is impossible that you earn less in year 26 as opposed to year 25. You would still earn the same 2.7% capital gain each year, but without any liability. What am I missing?
It makes sense that the renters change in net worth would drop, because the renters cash is relative to the home owner. If the owner has no mortgage, then renter has less free cash due to still requiring to pay rent. It doesn't make sense to me why the change in the owners net worth would drop though. The extra $45,431 should also go toward the same portfolio as the renter at this point.
I extensively modelled and triple checked my numbers before deciding to buy my property, and in my situation, I am ahead with buying property, even assuming 0% capital gain (though I do receive rental income from a 2nd bedroom).
I am a "forever renter" and I feel great.
Same!
At a certain point, you must factor in your life span. As a Senior, it makes so much sense to liquidate, rent, and enjoy life.
I'd like to see a vehicle one for private use I think it's pretty well known buying is better price wise than leasing, but what about for business use? buying vs leasing, new vs used, buy or lease within a corporation, or buy or lease privately and rent it to your corp ect.
The logic to investing in a home is in the ability to leverage. Its the cheapest form of leverage there is which means that even a 2 percent capital growth over a leveraged property can provide a significant return if you hold it long enough to appreciate. This cheap access to debt is not available with stocks. If you have a margin account then you are paying almost 3 times the interest rate of a mortgage.
One of the few things great about Rich Dad/Poor Dad (if you haven't read it - HIGHLY recommended) is that home ownership is a liability, not an asset.
- An asset generates cash flow.
- A liability takes from cash flow.
- Which one is a personal home???
After that book though, Rich Dad/Poor Dad author drops off and is very gimicky based around selling you more crap.
Once you understand this piece, home ownership is put into its correct perspective.
- Not saying whether to own vs rent, only to understand what home ownership truly is.
Regarding the question of owning vs renting, I do own. But, I own a liability, not an asset.
I enjoy the control of home ownership. Whereas, renting costs and living standards are dictated by the landlord (within the limits of the law - if they are caught).
- Not a landlord bashing statement, but renting = less control. So, it is a tradeoff.
I looked hard before deciding to Buy a house (despite knowing the numbers). My issue is that Renting an actual house is way way more expensive than the mortgage of a similar house. So it boiled down to a life choice.
However with a mortgage your 'principal' i.e. mortgage deposit (down payment) and the non-interest part of your monthly payments is blocked, and so it's losing money after inflation. That blocked money could be earning returns elsewhere, so in the end the difference between buying vs renting isn't huge - in the first few years.
Yes, it definitely is a lifestyle choice, but as long as you are ok with the math then go for it.
But make no illusions that it's a more-sound investment decision. Not at all.
From a financial perspective you didn’t talk about the merits of leverage on home purchases or the tax exemption on principle residence. From a non-financial perspective, owning your home eliminates the risk that your landlord forces you to move. If you do not have plans to move for the next five to ten years and you have the money for a downpayment on a home, continue renting makes very little sense to me.
he literally explained all of these points...watch again maybe?
A home is the best investment possible to build generational wealth! Ben on this video only focused on the home owner benefits in the long run, what about the home you inherit from your grand parents or your parents which allows you to live mortgage free and invest your money in ETFs? Home ownership forces you to be disciplined and there are ways to pay off your home within six years. Rent only goes up, mortgage is at a fixed rate. I have never met a wealthy renter! Last but not least, being wealthy is above all a feeling, a state of mind, and perception is reality!
What if the maintenance costs and tax are lower than the rent after the mortgage is gone
Hey Ben, thanks for another great video. Very informative and thought-provoking. Would love to hear you elaborate more on this topic and the opportunity costs in Part 2. I don't quite understand the opportunity costs and feel like I might be missing something. This got me thinking a lot.
Here is what I came up with.
Let’s say 2 individuals with the same salary each have 100k to invest. One decides to invest it as a lump sum in the market getting an average long-term return of 5.9%. The other decides to invest 100k towards a down payment on a home selling for 500k. It’s true that the initial 100k investment would have a greater return gaining 5.9% a year compared to 0.63%, but this doesn’t appear to take into account the opportunity for new money from ones personal income to be invested each month.
If we assume the cost to rent is equal to the cost of ownership (it’s often similar if we’re looking at 2 similar condos in the same city) the available cash flow left over each month to invest would be about the same for the renter as it is for the home owner.
The person who buys property with a mortgage is forced to save each month as they slowly pay down the mortgage and build up equity in their home. In addition to this they would have an equal amount of money left over from their income each month to pay down their mortgage quicker or to invest it in the market much like the renter can.
Now this is where my math skills might need work. One would need to calculate and compare the initial 100k investment in the stock market and determine if it would grow to have value that is greater or less than the money saved from paying down a mortgage. The length of the mortgage and the various interest rates over several terms would play a role, I’m sure.
I used Vanguard’s Fund Comparison Tool to simulate costs of investing in a balanced portfolio using low cost Index funds.
The renter with an initial investment amount of $100,000 Anticipated annual return 6%
Holding period (years) 30.
Additional investment amount $5,500 yearly.
MER for a balanced portfolio 0.22% plus trading commissions. Projected value equal to approximately $949,787.
The home owner who also invests with an initial investment amount of only $5,500
Anticipated annual return 6%
Holding period (years) 30.
Additional investment amount $5,500 yearly.
MER for a balanced portfolio 0.22% plus trading commissions. Projected value equal to approximately $441,482.
Now add the profit from selling a home ($475,000 in your example).
$441,482 + $475,000 = $916,482
In this example the renter is ahead by $33,305.
But wait, this example assumes the home owner bought a 500k home (made 475k after closing costs) and over 30 years their home had zero appreciation. To be fair let’s assume the home appreciatied at a rate of 0.63% (average annual return after costs and inflation) over 30 years. Now we’re looking at closer to $573,479.
$573,479 + 441,482 = $1,014,961
Owning a home earns you an extra $65k in this example.
If one can find very affordable rent or live cheaply among family they would likely have more money left each month to invest than someone buying a house. And if by buying a home one is left house poor and cannot afford to pay down their mortgage quicker or has no money leftover to invest than they are likely going to be financially worse off than the renter in the long-term. I think it’s important to keep things in perspective whenever possible when using hypothetical situations to make comparisons.
Looking forward to Part 2.
Thanks Mike, you basically wrote out my next video! At the end of this paper I go through a bunch of different hypothetical situations to help with keeping perspective. www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2017-07-07_Felix-Benjamin_The-Case-for-Renting_FINAL.pdf?ext=.pdf
Thanks for the response and the link to the paper you wrote that dives deeper into this topic. I really appreciate all the hard work you put into teaching and explaining everything to people. It's very helpful. Keep up the great work.
Ben Felix, I have a simple question: How many of your wealthy clients, as a percentage, are renters?
It will be an interesting statistic to see how many people became wealthy by implementing this theory.
I know a lot of wealthy people. With no exception they all own their homes.
Not a client of Ben. I'm a renter. I live in medium COL in California. I'm pretty wealthy. Ben's math checks out. Have read a lot, watched many you tube 'gurus' address buy/rent from an investment standpoint. Ben's work on you tube (and in his professional papers) is really something.
It all sounds good in theory, and I can't argue with the numbers, but most forever renters likely are not disciplined investors. More likely is they waste there extra money on frivolous stuff and end up with nothing in the end. I am sure there are exceptions, but I think my scenario would be larger percentage. The forced savings is a really big thing even if it was only 0.63%. I love your videos and I am not disagreeing with you ; this is one of those situations that in theory renting is better, but in the real world, I can't help but wonder. There is also the issue of leverage when purchasing a home. I'm not a math guy, but that probably needs to be calculated in.
I'm one of the exceptions, but yes I def see plenty of renters not being disciplined and throwing money away on BS stuff.
Even if those same people had a mortgage, I guarantee you they'd do the same - and it'd probably be magnified because now they could justify the 'need' for unnecessary, costly remodels.
So it's really all relative.
another well thought out video. I am a home owner and have friends who wish they had bought when i did ( I bought a 250k now house like mine in my area sell for 430) but I've spent on all the things you say (roof 6k, hvac 7k and all the bills) I completely agree I could have made more investing although I make enough i invest a large amount as well but at the end of the day I try to explain to friends that it's not a great as an investment as it seems but they just see the numbers as they lay. the reality is the 200k+ I have in equity is useless and meaningless unless I move to a cheaper market or sell and rent. on top of that it can disappear at the drop of a hat. one benefit of the money I have considered and may do when we have another crash is use a modest about of that equity locked in a a low rate to invest in the market when valuations are extremely low again. well see though I enjoy being debt free even if the debt would be making me far more than it costs.
Thanks Justin. Really good point about the home equity requiring you to either move/downsize or take a HELOC to realize the benefit. The nice thing about using the HELOC to invest is that the interest will be tax deductible.
Ben Felix really oh that makes it very interesting! thanks for the tip I had no idea!
wrong.. you are saving on your monthly in comparison to renting an equivalent property.
Many people like me will buy a home as a consumption purchase that makes me happy about owning where I live even though it will cost me money like any consumption for please does. It will not be an investment also because you have to spend time learning and taking care of property - and time cost can add up to a lot
The taxes for selling a principal home may outweight being taxed on stocks in Canada
In a free market economy this makes a lot of sense, but in reality mortgage rates are several percentage units cheaper than investment loans, which makes home ownership look better
That's why long-term borrowing usually doesn't make sense. Investing without borrowing makes the most sense.
owning your own home gives you a peace of mind, less stress and more security. That is why it is preferred. And sometime you get lucky. If you bought an apartment in Vancouver in 2014 you would probably be $200,000 or more richer in 2018. And that with only 20% down payment.
I have way more peace of mind as a renter than I would as an owner, so I would say that point is highly subjective. I do agree, though, that peace of mind is a great reason to own a home, if owning a home gives you peace of mind. The best reason to own a home is forced savings.
Owning a home with the hopes of getting lucky doesn't make a whole lot of sense.
Hi Ben, I don't understand the $14K/year opportunity cost for the $500K house. Is this $14K/year for all 30 years of the mortgage? If that's the case, this assumes that the renter has $475K up front to invest, at the start of the 30 years. (That's why I've seen oppo cost calculated from the down payment cash instead of the value.) And even in your example, the guy who sold the property now has to rent something, right? So he's losing money that way. Since monthly payments (including tax + Ins) tend to be the same for rent and buy, tax is an irrecoverable cost for both buyer and renter and should be left out of both sides of the equation. The only advantages to renting are maintenance and mobility, which are offset by increases in rent. IMO, the best course of action is to buy a house in the city (with the jobs), pay off the house, sell the house, and buy a cheap house in the country. Then you invest the profit AND still have free housing.
One of my upcoming videos walks through this calculation in detail. You are correct, but there is more to it. I am going to post a Google Sheet with the model so that anyone can dig into it. It will go up when the video goes up.
Ben, is it safe so say that you’re a renter ?
I am currently a very happy renter. Maybe not forever, but for now it allows me to focus on my career and family while saving aggressively.
@@BenFelixCSI Renting allows you to focus? Does it not have distractions like dealing with multiple parties, like landlord/agent/trades when something needs fixing?
In your last podcast you mentioned moving closer to nature. Are you renting or buying?
Buying. I just got back from a walk in the woods from my doorstep. Couldn’t be happier.
@@BenFelixCSI Interesting. I'm single with a mortgage. While my living situation is OK now (I'm also pretty close to nature) when I retire I plan to sell my house and rent.
Another great video ... thank you!
good video. a bit too basic, however. risk adjusted returns? different geographical location analysis? Tax implications? Guaranteed shelter (not getting kicked out)? Investment fees? I'm renting for $2k per month right now. The same place with a call it 15% down payment would cost about $5k per month (mtg, interest, strata, ppt taxes, maintenance, etc.). Net $3k per month into a 6% yielding investment over 30 years (IRR should factor in down payment). FV (or I guess PV) of the investments will likely be higher than RE investment. Consider a leveraged portfolio returns? What does my RE have to compound at the keep up with the alternative? As prices come down off their highs, this analysis will change. Diversification is key and we will see why over the next 18 months as RE in Canada tanks. koodos to the Canadian government for allowing RSP reductions so first time buyers can put all of their eggs in one basket and buy an asset that is going down in value. Not sure if I'm a renter for life but definitely right now. Now, just gotta convince my wife to feel the same way :). A belief and behavioral system is hard to change. Thanks for sparking a good conversation.
Thanks. I try to keep a balance between getting the point across and digging into every detail. You are right, there are many variables that go into these rent vs. buy examples.
I currently think about this in terms of 5%. If I can rent for 5% or less of the value of a home, then renting is the better deal. 5% is my estimate for the total unrecoverable costs of owning: 1% property tax, 1% maintenance costs, 3% cost of capital (interest on debt, opportunity cost on equity).
So for a $700,000 home, the total unrecoverable costs would be $35,000, or $2,916 per month. If I can rent for less, I would expect to be better off (strictly from a financial perspective), renting.
It goes the other way, too. If I find a place that I love for rent for $4,000 per month, then $4,000 X 12 / 5% is the equivalent cost of a home that I would be paying for. This helps to contextualize rent as a lifestyle choice. Am I comfortable with the housing costs equivalent to a $960,000 home? You're paying it whether you rent or own. Rent is just easier to see.
I believe in owning vs renting for the following reasons, In my country Jamaica I turned 500k jmd into 9.5m owning a home, then in Canada I turned 13k into 300k. All my life renting I never had those kind of money so I am a believer.
Thanks for sharing your experiences! Owning certainly can work out well.
@@BenFelixCSI Welcome. Yes it does. Its the single greatest way to wealth, not killiing yourself on a 9-5
That I don’t agree with. It _can_ be a path to wealth. But it can also be a path to ruin. There are no guarantees when you’re boring money to invest in properties.
@@BenFelixCSI I guess you may be right but I am a firm believer that it is more a path to wealth than any other means.
The data from around the world does not agree with that. The main reason being that it is very hard to diversify.
My renters pay my mortgage, taxes, insurance, property management and all other expenses and then they put a little cash in my pocket. It will be nice in the long run when the houses are paid off. While not average, its possible to beat the stock market ROI with rental property.
I would consider renting in my area because its very expensive. I can invest in real estate in other areas.
I really enjoy these videos and feel I learn something new every time I watch them and yet you lose me every time someone claims renting is a predictable cost. Depending on where you live, if there are no rent control laws, your landlord can and will raise your rent hundreds of dollars each year while the home owner's mortgage payment stays the same for decades. There's nothing predictable about rental costs except that you don't have to worry about maintenance costs.
Sorry, I disagree. You are only looking at it from the renter's perspective Cooper.
So many factors that increase cost for both renters and owners. It's not predictable at all for either party. Property taxes get reassessed, min wage goes up, supply chain issues for materials, major appliance takes a hot steamy dump when you least expect it, etc. The list is very long, and both parties end up eating it.
I rent but have many friends that own a home, and they get saddled with tiny costs often, and big costs rarely. E.g., the landscaper at one place (a single family home) raised his monthly fee from 90/mo to 115/mo. Another example is one needing to replace a rotted-out two-door gate. Materials and labor was $2000. (I could have done it for way less but it would have taken me 5x+ amount of time, headache/stress, poorer craftsmanship, etc.)
In Canada house - its not just a house. The whole Canadian economy is based on it. You need to make a lot of expenses and payments for repairs and constant upgrades. Most of the people do not understand that, but its a good thing for Canada. Lol.