Renting vs. Buying a Home: The 5% Rule
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- เผยแพร่เมื่อ 28 เม.ย. 2024
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Please note that while this content is broadly applicable, it was originally intended for a Canadian audience.
You can't compare rent to a mortgage payment. This way of thinking about the rent versus buy decision is extremely flawed. Comparing a mortgage payment to rent is not an apples to apples comparison. In order to properly assess the rent versus buy decision, we need to compare the total unrecoverable costs of renting to the total unrecoverable costs of owning.
That may sound like a complicated task, but I have boiled it down to a simple calculation.
Referenced in this video:
The Case for Renting a Home - Part 1 - www.pwlcapital.com/the-case-f...
The Case for Renting a Home - Part 2 - www.pwlcapital.com/the-case-f...
The Case for Renting - www.pwlcapital.com/resources/...
The Credit Suisse Global Investment Returns Yearbook 2018 - www.credit-suisse.com/media/a...
Read up on more investing advice, insights and white papers here.
www.pwlcapital.com/teams/pass...
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PWL Capital Blog Post: www.pwlcapital.com/rent-or-ow...
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Why am I watching this with $31 in my bank account
Buy a lotto, then it will make sense to you (If you win, of course)
@@EdgarDeSola that is horrible advice.
@@EdgarDeSola the lotto is not free... She would be wasting her money.
@@jrg305 There's never a free lunch! You pay one way or another.!
That's all you can afford to do at this time. Keep stacking your paper and take notes from this video.
Came here to learn if I should buy or rent.
Learned that I cannot beat this man in a staring contest.
Loll
Lol
Is he AI???? He doesn’t blink 😂
Hahahahahahahaha
Hahahhaha
1.7% inflation? 😍 Ah, the good old days.
15% today ❤
Ahhh, the good old days when someone would call the days of 1.7% inflation the good old days.
@@fablouis9783 actually, 3.7% annualized here in the US.
@DanCooper404 does the inflation number actually matters, if both real estate market and the stock market catch-up inflation in a similar way
@@shaprensteel1 yes it matters. The value of real estate tends to rise at at least the rate of inflation, while the market tends to decrease during times of high interest (which is the typical governmental response to high inflation).
This is why real estate is usually considered a hedge against inflation.
Ben - it would be extremely interesting to see an updated version of this video using the latest interest rates.
This. Both sides of the equation are quite different right now. He's looking at long term averages, but I wonder who's buying on long term averages after wathcing home prices crash 15% last year.
😂😂😂😂
The 10% rule 😢
The whole point of this video (and most of Ben's videos) is that you shouldn't react to short-term changes in the market because it's impossible to predict or extrapolate these into the future.
Lol
we gonna need Renting vs Live in a Van down by the River comparison
hahahAHAGAHAHA
Live in a camper up by the barn on the hill for me, but yeah.
in all seriousness, i think this 5% rule still applies. You would then be taking the Van as owned property, and the unrecoverable cost would be gas, maintenance, and maybe parking tickets?
van wins every time
Lol
this dude blinked like four times thru the whole lecture i swear to god bro u on another level
Bro I just tried to keep my eyes open as long as he does and I nearly went blind 😂 wtf
There are cuts lol
No he just blinked every time you blinked, that's why you didn't see it
Lol this comment and those replies surely made my day! 😂😂😂😂
Dude, it's contagious. I didn't blink until I saw him blink.
Man this is gold, I'm seeing a lot of comments on the numbers you've used - but people don't get the point. Just being able to pin down which variables to consider in this decision is a game changer, the numbers can be defined by you based on your actual reality - as you said about the investor's profile
THIS is the summary of the rent vs buy decision I’ve been trying to figure out for years. The rental income vs mortgage payment calculation never made sense to me. But this is much more logical and makes far more sense. Thank you for simplifying this!
Its an accurate breakdown with good explanations, but his entire explanation is a counter argument to his original statement.
Apples to oranges or not, they're both money sinks, and they're an equivalent cost, then home ownership is the better choice.
Not really sure why he went on a weird tangent about the stock market, but I have no interest in treating the stock market like a savings account.
@@barryallen5507 The point about the stock market is that if you take your would-be down payment and invest it instead of buying, that's money you'd be earning returns on vs money that would be tied in your house, that, according to him/ his formula, would be appreciating at a lower rate. It's valid... to a point. The problem is that he never accounts for no longer having a payment when the mortgage is paid off, potentially for decades, greatly improving your cash flow. I guess the idea is that, if you invested, you'd have more money to draw on to continue your rent payments, and the other costs of ownership (maintenance, tax, insurance) never go away. Still, the other big flaw, I'd argue, is that it doesn't account for the rising costs of renting. Overall, rents are forever rising, so what might have been easily affordable in younger working years might become a huge burden during retirement. There's also always the issue of being forced out of your rental. You can't guarantee you can stay forever, and moving has financial (and potentially social, community based costs). Let's say you're renting with kids. Housing in your area has skyrocketed and your landlord wants to cash in and sell the property. You're forced to move, and you've now been priced out of your current area. Your kids are now forced into a new school district, new sports teams, perhaps a new church/ doctor/ dentist, and it's harder for you to see your own friends, you have a longer commute to work, etc. Just as one of the advantages of renting is not being tied to one place and being easily mobile, one of the advantages of buying is being secure in your community/ being able to put down roots, etc. So, yeah, renting might be the right solution for some people and at certain times in the lives of others, but I still think that ownership is better long-term for most.
@@barryallen5507the stock market is essentially your avenue to retirement. Without it you have no hope. Basically he's saying that if you can pay less in rent and be able to invest more into the market, setting yourself up for retirement, it could outweigh the benefits of owning a home. If you pay $1000 in rent and invest $2000 every month, that could outweigh having a $3000 mortgage and being unable to invest.
@@barryallen5507Investing in the stock market (e.g. with an all-share index tracker) will in the long run give far better returns than a savings account. If you're going to compare options of what to do with your money, it makes sense to compare against the more favourable options.
This summary is very misleading. Don’t forget that you play with borrowed money in the real estate scenario. A 3% return would be worth much more than even a 10%return in stocks. Be careful
Takes a shot every time he blinks.. still sober
LMFAO
Genious
You a fool😂😂😂
Holy shit..hes a robot
🤣🤣🤣
I am just mesmerized by those cute little swaying pine trees.
mee too
What weed you smoking?
This was such an pure comment haha I love it
That did it for me too.
Did someone say cute swaying pine trees?
You have made a very valid example about opportunity cost. That's something not many people talk about
I have a hunch that only the big fishes reap the benefits of investing . And anyway how can everybody can benefit from doing it ? Who is paying ? Don't tell me , the late comers ...
@@ketelin4285 you come to a financial video to scream at a random dude about your "hunch" that the stock market is a pyramid scheme. I wonder how much experience you have actually investing lol
A lot of people trying to push you into the stock market forget that you can’t live in your stock market investments, but you CAN put your down payment money into investment accounts until it’s time to buy the house. “Opportunity cost” is bunk.
I’m 52 yrs old. Inherited nearly a million dollars in my 20s. Today have a home with a small mortgage but little else. Didn’t invest or spend wisely. Wish I had seen this video 25 yrs ago.
@@Mrhalligan39 Nobody forgets that lol. Learn the difference between "this advice isn't right for me" and "this is bad advice, no one is as smart as me"
For me, I believe retirees who struggle to meet their basic needs are the ones who could not accumulate enough money during their active years to meet their needs. Retirement choices determine a lot of things. My wife and I both spent same number of years in the civil service, she invested through a wealth manager and myself through the 401k. We both still earning after our retirement.
This is true. I'm in my mid 50's now. My wife and I were following this same trajectory. Last two years, I pulled out my money and invested with her wealth manager. Not catching up with her profits over the years, but at least I earn more. I'm making money even before retiring, and my retirement fund has grown way more than it would have with just the 401(k). Haha.
It's unfortunate most people don't have such information. I don't really blame people who panic. Lack of information can be a big hurdle. I've been making more than $760k by just investing through an advisor, and I don't have to do much work. Doesn't matter if the economy is misbehaving; great wealth managers will always make returns.
STEPHINE KOPP MEEKS she is whom i work with look her....
Thanks for your recommendation, I have looked her up on the internet and through her site, very professional. already sent her message....
"An unrecoverable cost is a cost that you pay with no associated residual value..." The term is easier to understand than the definition
Somehow i clicked on your name and saw your subs... good shit man
Welcome to the finance industry where we make simple things more complicated.
This was the sentence which made me think I was going to need to actually focus
Pseudo intellectuals love making the definition harder to understand than the term.
@@usernameluis305 wow, way to ruin the fun
what i learned: keep living at home with parents
Thats not silly ...thats what billionaires, millionaires and politicians children do. Why start from level 0 in every generation. Thats the secret of rich. Thats the culture in asian countries too. Rich kids start from a higher platform bcoz they do not fly the nest. Kids flying the nest is the worst thing for a family tree in practicality.
@@David_prod-eNGee ha ha ..dont know ..may be what i commented is an obvious open secret. By the way i am from asia ..in our culture ..if a father has two kids he tries his best to have his children live with them all through life ...split his home into 3 portions one for parents one for son one for daughter. Some dads simply buy two homes for two kids. And the next generation kids do the same so there is no bankruptcy / no homeless poverty or there is no this weird thing of every kid starting from zero. Every kids stands on his dads wealth platform and go above from there . Cheers. In my case ..my grand dad has 3 kids so he left 3 homes for 3 kids ...my mom got 1 home and my dad got 1 home .i myself purchased 2 homes. So thanks to my grand dads wisdom ..i own 4 homes on my side alone. My wifes parents have a home including that we have 5 homes for our 2 kids. This is how wealth is built. Cheers have a great day. And all the while we lived and living with our parents in a same home. Their guidance is added bonus.
At the expense of unrecoverable cost of sanity.
@@pingdingdongpong when we say living with parents, its kind of the home is split into 3 portions.of living area ..we have common kitchen, common electricity bill, common cars, common cooking and cleaning maids, common property tax, our parents guide our kids we never risk baby sitters, kids get monitored when we tour on work assignments, and the list goes ...its a win win ..with some give in take back.cheers.
@@pingdingdongpong and in the western world ..children of millionaires, billinaires, politicians, business men mostly follow asian life style and they dont become homeless all of a sudden like other common man westeners. Its weird someone from a well to do family going homeless in a matter of a few years.
Thinking of owning a home as only a financial and wealth-building decision is part of the reason that the real estate market is out of control these days. The primary reasons I own my house are familial. There's no way I'd have ever weighed my options of using my downpayment to buy my home vs. investing it into the stock market and continuing renting, even if the latter scenario was more lucrative.
So make a decision based on emotions and not logic. Ie make a decision for the emotional win instead of yhe financial win.
@@JLfpvit's not making a decision based on emotion over logic. It's simply valuing other things beyond financial return. Homeownership is not exclusively a financial investment.
Well put. Property is, today, almost 100% seen as an investment. Tied to this is the fact lenders have been increasing payback length into retirement and salary multipliers, meaning buyers have more money....meaning sellers will naturally increase prices further. Today's mortgage is a chain round your neck till you die.
@@JLfpv Is life harder or easier when you're that simple?
This doesnt make sense, either way you have to pay for property, who says you cant rise children of have a family in a rented space? You still have to work and pay, if anything wouldnt saving more money on housing help pay stuff like food, better education, clothes…?
I think the increase in rent needs to be considered here. During initial years, owning might look expensive but then in GTA market people have started making cash surplus due to almost fixed EMI and a lot higher rents now.
True, but it's also hard to pin down.
In this sense, owning is simple because (ignoring refinancing), you know what you will have to pay each month for the capital and tax portions of the costs of the house. (Maintenance is volatile, but likely to roughly follow inflation)
Rent price changes could stay as they are, follow inflation, or go crazy, depending on how your local housing market changes going forwards, and that's not possible to accurately predict very far into the future.
If you think of this as "this is just how much the costs will be next month", and keep in mind changes in the housing market are more likely to hurt the renter, and changes in the "whatever you use to make money" market is more likely to hurt the owner, then it's still useful.
The taxes on your house can also go up.
Not at all. Rent increases are offset by compounding returns on other investments like stocks and bonds
@@harrywang9375 Negative. That’s the cost of capital.
wait.. why is nobody talking about the house itself, i mean owning abhouse you can sell any time and get your money back, not with renting... or what am i missing here?
As a 30 year veteran of the financial services industry I’ve had this discussion many times. Your approach is top notch.
I have some things that I don't understand. Maybe you can help me out:
Dont we need to adjust the real estate return for the leverage that has been taken? Say you buy a house for $100 with $20 of equity. If the house goes up by 1% To $101 your equity has gone up to $21, a 5% increase!
Dont we also need to adjust the cost of debt for inflation? If you borrow $80 and pay say $2.4 interest every year (3%) but inflation is 2% ($1.6) your real cost of funds is only 1%, $0.8 per year.
Obviously I've made simplfying assumptions but because you can get so much leverage on house purchases at cheap interest rates, it changes the calculations a lot.
Rent is normally 2-3% the value of a house every year, so with the 5% rule it would almost never make sense to buy a house. This 5% rule seems to imply that the market prices houses incorrectly.
@@Daniel-fv1ff I agree. I understand he had to keep it simple for a TH-cam video and he's trying to give an easy rubric to follow. But to do this correctly, you should ideally do the projections in a spreadsheet and include the actual split monthly between principal and interest payments, tax effects, upfront costs (various taxes and fees) etc. Would it make much of a difference? Don't know but I'd have more confidence in his conclusions if he said he had done it and checked.
@@gkoshy63 Here is what I look at...
Rent --> Always increasing... Always have to pay...
Mortgage --> Fixed (assuming you were smart and chose a fixed rate mortgage)... Eventually goes away...
If you are going to be in a city or place for a short time, then renting works. There is no cost associated with getting out of a rental. If you plan to stay in one place for a long time (5 years... arbitrary...), than buying a REASONABLE home makes sense.
@@Daniel-fv1ff Where do you live that rent is only 3% of the cost of a home? In the area where I live, it's $900/mo+ to rent a 3BR apartment, or just under $11k per year in unrecoverable costs, yet a 3BR home in the same neighborhood sells for $120k. Using the 5% rule, buying the house only has a unrecoverable cost of $6k per year.
@@Golfnut_2099 Yes, that is exactly the key point that Ben missed! When you own your home, no landlord can raise your rent 10 or 20% because the market will bear it -- YOU own it. When you get a fixed rate loan, in inflation-adjusted terms, your mortgage *decreases* over time, while you bet your bippy the rent is increasing. This is a **very** important factor that he did not build in.
That said, it is certainly true that there is investment opportunity cost, cost of repairs, and property taxes, and that those should be considered before buying a home.
Home ownership gives you control over your housing costs -- while renting causes you to constantly worry if you will be able to afford (or be allowed) to stay where you currently live. That could be considered tangible (future cost of renting) or could be considered an intangible -- safety and security of home ownership.
Another intangible is the pride of home ownership, and higher societal status of home owners as compared to renters. When you include the fact that your fixed-rate mortgage constantly goes down in real terms, while the rent goes up annually in real terms, and when you include the intangibles of having control over your life, pride in home ownership, and better societal treatment, then home ownership becomes a much stronger proposition.
As a financial coach, my default recommendation is that unless a person has "rent stability" (like they pay rent to their parents, a very nice landlord, or it is in a rent-controlled city) that they should probably buy a home, ASSUMING that they can comfortably manage all of the costs of home ownership in their budget, and certainly not ignoring the cost or location of the home.
This is suppose to be a Educational video but instead i am laughing so much after reading a comment about this dude not blinking at all in this video
Me too😂😂
Like how is that even possible.
Plot twist: he blinks when you blink
Maybe he’s an android
@@TheSarge75 thriller scene
0:14... it’s not even that long of a time
For newbies, be aware that this is a grossly oversimplified scenario. For one thing, you can't get a mortgage on an investment property without at least 25% down payment. Two, it's easy to see comps for house purchase prices, but it takes a lot of research to understand the comps on rent prices. The trick is to find a place where renting is more expensive than buying, but those places are less common because of this very type of scenario. Three, you have to remember that rent number he's using is supposed to be net income, not gross. So you have to think about costs for taxes, insurance, maintenance and vacancy when you're researching investments. All that said, real estate investing is a good tool for wealth accumulation. But it isn't foolproof.
Very soon, affordable housing will no longer be affordable. So anything anyone want to do, I will advise they do it now because the prices today will look like dips tomorrow. Until the Fed clamps down even further, I think we're going to see hysteria due to rampant inflation. You can't halfway rip the band-aid off.
Home prices will come down eventually, but for now; get your money (as much as you can) out of the housing market and get into the financial markets or gold. The new mortgage rates are crazy, add to that the recession and the fact that mortgage guidelines are getting more difficult. Home prices will need to fall by a minimum of 40% (more like 50%) before the market normalizes.If you are in cross roads or need sincere advise on the best moves to take now its best you seek an independent advisor who knows about the financial markets.
But if you're shopping for an investment property it isn't a rent vs buy scenario
7:34 He literally said that it was an oversimplification. I hope everyone watching this (and being able to apply the information at some point in their lifes) will use this as an eye-opener to look into related topics more thoroughly. Which is most likely a main goal of this video.
This is about renting vs buying to live in, not about buying investment properties. That's a whole other discussion.
I already knew I would never be able to afford to buy, but this has given me the tools to understand just how far out of my reach that really is.
As an older man, the wisest thing I did was buy a humble hidden home on a large property. No way would I have the energy or money to keep paying escalating rents in my old age. Think about your future self as an old and weak person one day. You will need a place to live that is paid for.
Kenton Huges: FINALLY someone said it like I say it. Rent is FOREVER. Mortgage is NOT!! It will end. Then take that money and use it to pay property taxes and any repairs. I have no repairs on my house, but I am going to remodel, update my kitchen. I can do this with out a problem. I'm ALLOWED to do it since it's MY house.
The problem sometimes is the property taxes. I live in an up and coming area. I know of many old folks who had this in mind, bought a house and have 'paid-off'. No one anticipated that part of town to have such a big boom. Now the property taxes are higher than the cost of rent in other areas of the city. Many are being forced to make hard choices at old age.
@@avinashl3762 and thats the worst, everyone knows old people should never have to do anything challenging! Cause breathing can be hard enough!
You completely missed the point of the video. You are failing to see that there is an opportunity cost associated with the purchase of real estate. You could have rented that humble home rather than buying it and the difference could have been put towards some other investment class which would have provided you with greater returns than your real estate. Those returns could then have funded your retirement. There's always a trade-off to every decision you make (the opportunity cost).
That's when the rich will tell you you're wrong. If you are smart I'd invest that money to make growth. Putting all that money into house you wont see unless you sell. I'd invest that money to buy property to rent out. Set yourself up. That house you will buy will never pay you!
In my case. Should I keep renting my apartment or buy a van and live down by the river?
Lifestyle choice. If I had no kids I'd take the van.
@@BenFelixCSI 😂
I seen a couple folks on youtube who lived in thier van while saving for a down payment on a house and they did very well in a year.
I lived in my car for 7 years. It’s actually not that bad. Gym, for showers and working out. Laundry mats. Good to go. Lol
The best person to ask would be Matt Foley buds.
What about the rate of increase in rent over time? Maybe I missed it, but it seems like expected annual rent increases should be considered since a fixed rate mortgage payment doesn't change.
This is a good point. If you buy at a time when fixed interest rates are cheap (e.g.,
Good point. Also take into account rising costs in regular maintenance and repairs. Contractors will raise rates and material costs will always increase.
@@flatlanderfl but far less than a rent. Also, you don't break your house every year.
@@bass_journey unless you own a house like mine that’s 100+ yrs young and full of “character”. Then, yes, you Do break your house every year hahaha
Rent is just as likely to go down as up, you can expect it on average to keep pace with inflation
This only really matters if you look at home ownership as a monetary investment, rather than a “not being homeless and dying in an alleyway because I can’t pay my constantly increasing rent” investment.
The other thing is you can get a set interest rate mortgage way easier than you can get a rent controlled apartment, and while home value generally goes up with inflation, rental costs have skyrocketed way beyond the rate of inflation and will likely continue to do so unless the government steps into prevent it.
He said the figures he talks about are after inflation. That also means that theoretically your wage and rent are increased by inflation equally. If they dont, then it effectively means that you are getting a cut in your monthly income and that is sth irrelevant with the comparison of what one option and the other offer in returns.
You can bring in the factor you talk about when his analysis, gets specific enough to include the factor of volatility in the housing and job market vs volatility in interest rates, which ofc is a big win for ownership since interest rates volatility is much lower than rent and the job market one, plus mortgage ends while rent is eternal😂
Well, yes, but at the end of the day it IS an investment, with its pros and cons. Social sacurity of owning is not included in this calculus as is not the "being on my own" feeling or being forced not to blow your cash when you get that wage, but then the cost of feeling of being in debt or the cost of no liquidity. These are all legit, not so financial reasons that afe being completely omitted ... because this is a strict investment-to-investment comparison.
I need a rent vs squatting comparison.
Overpaid power monger cops love to hurt the poorest. Long ago I got kicked out from having a terrible mother and I couldn't find a place to park and sleep as cops keep wanting to ruin my existence.
😂
What is the unrecoverable cost of becoming a heroin addict gutter punk?
LMAO. I have considered parking my car in the company underground parkade to eliminate rent/utility cost...
🤣🤣🤣👌🏽💪🏾
I accepted a job in a small city, and was encouraged to buy a house. However, I was single and didn't really want the responsibility of a house, as I had never owned any real estate. I managed to find a rather inexpensive apartment, and was left with the ability to max out my 401k and IRA, and still have plenty of money left. I was able to travel while my colleagues were mowing lawns, etc. A house simply was much more space than I needed, and although real estate prices were relatively low, properties were quite difficult to sell, and if I had lost my job (or decided to retire, which I did), I liked having the freedom to move easily as I had no desire to stay in the area after retirement. This worked out very well for me, and I'm now enjoying my retirement in another state. There is a lot to be said for living below one's means (and my salary would only have been considered "average").
Are you still renting ?
@@awesomekj5812 Yes, but this is at my sister's/BIL's place now. I pay rent, but don't have to pay any other expenses except for my cell phone. I moved here a few years ago when our parents were getting to the point they needed help, so I retired a year and half early from my job several states away, and got to spend time with both of them during their last few years. Now I'm trying to figure out where to go next, as I don't really want to stay here although there are some advantages. Between the COVID disruption, climate change, increasing crime rates and other factors, it's not as easy a decision as I had anticipated. (Where I am now is a very safe neighborhood in a nice suburb of a larger city, but I'm getting bored with it and want better weather--and have much of my stuff in a storage unit here which is a waste of money plus not good for the stuff itself.)
In my opinion, renting vs buying a home is an issue of personal philosophy. Return on investment is only one factor. For some people, the personal satisfaction of home ownership and the ensuing stability of knowing you will never be kicked out of your home is worth any additional cost. This also allows the home owner to not have to spend time in searching for rental properties if he or she is kicked out by the landlord. I know bankers who do not believe in buying their home. They are now paying huge rents because rents have sky rocketed over the years.
@@williamlau2405 Now that I'm retired, I have the freedom to find areas that are relatively inexpensive because I don't have to be near a job. However, it all comes down to one's priorities and lifestyle. However, in the US there's a certain mentality that causes some people to disparage others whose choices don't fit into the stereotypical American dream. I have a good friend who moved to a different area, rented for a while and then bought a house, but when it was time for him to move again, he lost a lot of money because the market at the point was such that he couldn't sell it for what he had paid. I asked him why he had bought a house, and he said he was basically under the impression that this is what a person is expected, or supposed, to do! He's been very bitter about it since.
This sounds like my current situation. I'm just in the process of buying a little unit which I'll have paid off before retirement. Then I'm free to travel but use the unit as a base
Always nice to watch these videos - so informational and thought through. One thing this analysis confounds is using real estate rate of return as the rate of return on your equity. You are 5x leveraged - so the rate on equity will be 5x the rate of return on the house. Leverage in real estate is a very interesting kind - you don't get a margin call if the value of house drops (in fact, other way around! people are sometimes able to renegotiate their mortgage - like 2008 meltdown aftermath). You can keep you leverage as long as you can keep paying the mortgage. So the risk adjusted rate of return on equity, despite the leverage, is 5x of rate of return of the property. (Not quite, but you get my drift. Lots of simplifications here - like assuming constant leverage over the life of investment etc.)
One thing to point out, rent isn't just the fixed cost, you pay to moving in/out and in many cases the owner obligates you to expend money fixing their own house.
The power dynamic is absolutely something to considerate
In the US, state tenancy laws vary- as with most any regulations, but tenants typically have rights to health & safety that property OWNERS are required to follow, not the renters. It’s very easy & worthwhile to online check state laws.
@@Cycology_Major again, you are assuming that the power dynamic is neutral
The state law means nothing if you have nowhere else to go
Maybe true... however, you also end up paying a lot to move when you buy a house. Usually in homes where the owner wants you to fix their house it's because the rent is pretty cheap... which is usually why the renter is still there. Otherwise, they'd move out. As such, the owner is subsidizing your rent.
Had a friend who rented their whole house for $2400 when the house was worth 1.5 million. I tried to explain that the passive income $2M would generate would FAR surpass what he's getting in fully taxable rent payments. He just said it's an investment. Few home owners actually understand opportunity cost.
@@pedrohdallaIt's way easier to move as a tenant than as an owner.
@@TheNewGreenIsBlue brother, Real estate speculation is a thing too
There is a reason for 24% of all houses in the US being owned by investors and/or big companies.
Nice video! I will watch it again until I understand it completely.
¯\_(ツ)_/¯
Me too
I am soo lost!!!!! I wish he said all this in english lol
Yeah, i couldn't understand a word either!
@@leo729717 ikr canadians with their off brand english, too polite
buy a home, rent it out to someone equivalent to your mortgage payment, then go live in a tent that's how you get ahead
Lmfao !!
Oh my fucking lord that was hilarious 😂😂😂
The general idea is to buy one house with two units. While you live in one unit, rent out the other. The rent collected will cover your household expenses. This will allow you to build up equity, but you are committed to the area for some years to come.
Max House yeh that just isn’t true. Once you take tax, Agent fee’s, maintainer and repairs, and mortgage, there isn’t that much left over.
The only time you’ll get a meaningful profit is when the property is paid off in full
If you want to live in a tent just buy a tent, fuck the house.
Forgot to include the tax benefits for owning a house.
Also, one thing always lost on these are transaction costs for buying/selling a house. Those can significantly erode the returns on a house investment.
Exactly, lets not forget over time you build equity, which creates generational wealth, or you can sell and live off that cash and rent in your golden years. Win, win.
@@ljshoreslokal or you can keep renting and just invest the difference.
@@Inc.Co. You would still lose money in the long run.
@@ljshoreslokal if you sell your house and live off the cash, you still need a place to stay so now you're back to paying rent and what is mentioned in the video still apply. The home you live in isn't really an investment. It's a choice of lifestyle. If you become a landlord, then that house is an investment because it is actually making you money.
@@brianpleshek5593 or u can be smart and buy a duplex and rent the other half
The issue is that either the renter or the owner must in some way pay insurance and property taxes if they want a "permanent roof" with utilities like electricity, gas and water. Because of this, many people-at least in California, where I currently reside-are living in tents. No taxes, rent, mortgages, or insurance. The number of people who tell me they live in their car that I meet amazes me. Its crazy out here!
this is definitely considerable! think you could suggest any professional/advisors i can get on the phone with? i'm in dire need of proper portfolio allocation
She appears to be well-educated and well-read. I ran an online search on her name and came across her website; thank you for sharing.
Legend says he's still not blinking to this day.
He did once👀
Looks like an artificial generated image, and not a real person. The real person might be talking, but a fake image is super-imposed with lip sync lip movement and realistic muscle gestures. What graphical mumbo jumbo!
Pizza 4me lol
Buying a home is like a “forced” savings as many of us would find ways to spend the savings if it were easily accessible, like in a brokerage account.
Retirement accounts are a great way to force yourself to save.
A lot of people take home equity loans. Realistically, there is no legal way to truly tie up money in a way that you can't borrow against it.
This is true - the numbers hold up if people are entirely rational and self-controlled. In reality the majority of people would benefit more from home ownership as it forces them to be good money managers. But if you ARE an excellent money manager, renting has many perks
Not true. I only got true financial freedom when I got a mortgage. I have an offset with $50k min in there, which I use to travel, shop, afford healthcare, etc. How you structure your loan is important
Only if you stay in the same house for a very long time, the savings evaporate if you keep buying and selling homes every few years due to the costs involved.
I didn't think I would like this dude but as I watched more and more I really really like they way he breaks this stuff down.
Really great teaching tool, Ben. Despite being an idiot when it comes to numbers and investing (and getting the chills every time investment jargon is used!) I feel I understood your framework quite well. Thank you for this.
This guy is like Johnny Sins of finances
Przemek Leśniak Lmaoooo
This guy is the Rener Gracie of finance.
I feel so dumb 😵
Lmao this is a serious video and this comment was the first one I see smh.
This wins
Ben,
For the US perspective the information not covered that influences the buy vs rent calculations are the following:
1- There is very good historical data here on appreciation of real estate by zip code which influences value.
This is an important assessment tool that should not be overlooked when selecting property.
2-Mortgage interest can be written off on your income tax to lower your income tax.
3- When you purchase your property for $500k at 20% down your $100k down leverages four to one so when your property
appreciates (in our case) at 4% annually this is a 20% return on the $100k investment or $20,000 increase on the $500k.
This in turn is compounded annually which is also not factored into your analysis. SO at the very least a 20% return subtracting the
6.9% stock average is outperforming the stock market by 13.1%.
4- Then US law provides a $500k non taxable profit for married couples and a $250K non taxable profit limit for singles at the point of sale while a
stock sale requires a 20% tax on profit and will probably be going up under President Biden.
Best to realize how to present to the US market as well.
5- The additional factor would be to introduce how the math changes if you purchase a multiple unit property to live in.
We purchased a duplex, live upstairs & have income from the second unit that covers 75% of our mortgage plus allowing tax depreciation
on 50% of the value of the property plus tax write offs for improvements/ replacements.
Also on mortgage interest deduction, you are in reality getting 20% of the payment deducted because it isnt a credit
I think a major factor you’re not including is rent appreciation vs Property tax appreciation.
This video misses the fact that you’re purchasing an asset that you LIVE IN and borrow against. Renting sucks
rent goes up and so does taxes, but renting will never build any equity to anything you have. Property taxes will go up but at least the amount of money left post interest/post taxes will go directly to the property's principal... don't forget that property values go up as well.
the questions is "what is the true cost between renting and buying?" I can tell you without getting into a rabbit hole that renting is never going to make sense unless you are someone that works in different places very often, in which hotels make sense.
@@DTFFP agreed!
@@DTFFP The money you use to pay mortgages, a renter uses to invest in stocks; that's their equity. They can sell it or use it as collateral to take out a loan exactly the same way you would with a house. You pay property tax forever, a renter also have to rent forever. It's the same thing. However, stocks always have bigger ROI because it's riskier. Nothing about it doesn't make sense.
@@DTFFP Renting is actually cheaper than buying in most high-cost cities (New York, Toronto, San Francisco, etc.). You're better off financially renting and investing the difference (total cost of buying minus renting cost) in a stock index fund
Brilliant - the type of detail loved around real-estate investment decision making. It's not a small thing to go out and buy property, best to be fully informed.
Nice format and without too much shilling or saying “here is what I do, buy my book you mouthbreather -etc” appreciate your effort and unbiased information
I begin my work day with education. I go to TH-cam and select something from the many business style offerings, and today I began my day watching this video. And I am so glad I did!
First, the video production was excellent on many points. The person speaking was a great speaker. The editing was done well. Also, the style used to put words and graphics up really added to my ability to easily follow what I know is complex territory. Great Job!
Now, to content. My wife and I have studied real estate investing for about a decade now, and this is the first time I have ever heard this means of comparing the difference between buying and renting. I think it is an excellent tool you can carry with you everywhere to see if a potential deal is even "in the ball park" so to say.
Wonderful video, thank you. You raise a very important concept and explain it very well despite the concept being fairly complex. Fantastic.
the concepts in this video are amazing!! and shoutout to the graphics
One of the other factors to consider is flexibility. When you rent, you have the ability to move for a very small cost. If you have kids and want to move to a better school district, or if you have a job change and want to move closer to work, if your neighborhood deteriorates or your neighbors change; you can even upsize and downsize based on your needs, you may need a larger home if you have a few teenage children, then 5 years later when they go to college/university, you may only need a small home or condo. If you are a homeowner, the cost to move (real estate fees, legals, land transfer taxes) could be in the neighborhood of 6-7%.
There is also the diversification factor. With a house, you are heavily invested in one small area of the world, the investment grade of the area you have a house could change. With Equities, it's relatively easy to be globally diversified and industry diversified.
Ben, your math looks correct. Obviously, there are so many input factors. People in Ontario that believe real estate will increase at 5-10% long term are fooling themselves. The last 20 years, the driver of appreciation has been the fall of interest rates and the influx of Asian investors.
Tax is definitely a consideration. If a couple maxes out their tax-free accounts every year, the decision is likely a no brainer. A mortgage is definitely forced savings for many people, so it is a bit of protection for the undisciplined because they typically have an asset that has appreciated come retirement time. In theory, if that's all they have in the way of assets, they could sell it, rent and use the 4% rule to subsidize their pension.
I think the point you are trying to make is home ownership is not a no brainer decision. I would agree, especially at the inflated prices currently in Canada.
All good additional points. Thanks RazoRock.
Yes the main point here is that renting and buying can be equivalent from purely a financial perspective.
Not only is a home not a diversified investment, it probably covaries with your employment income. A localized recession in your city or province could mean not only losing your job, but also a good portion of the value of your home. Just look at Detroit.
A couple of things the video neglected to mention would be strata fees and utility fees.
The video does a good job of explaining the basic financial considerations. I'm glad to see a CFA making finance videos rather some of the less knowledgeable folks out there.
Razarock good points. Although buying a property vs renting could be considered less liquid/transient it depends on the mindset. I bought a 2 bedroom flat to live in with the intention to never sell it. When I out grow of the flat I will rent it out and partially offset my renting a bigger mid sized place. When I my family outgrows that I hope to buy our forever home. I plan to pay down my flat mortage in 8-10 years with 100% offset account rather than 30 years saving 100s of thousands in interest on the mortgage. While living in the flat offset return is equivalent to interest currently 4% tax free here in Australia and when renting out will be 4% less tax but then tax is deductible against income of the rental.
Not really an issue in the USA. If you decide to move then you can simply turn it into a rental property. Or you can sell the house if it would be profitable which it often is.
i was thinking about the transaction fees and taxes as well.
Buying a home and not having to deal with crummy rental companies and landlords = priceless! Rented for 13 years before purchasing a home. Any extra cost is worth it.
Good point. If you're in an area with limited or shady rentals owning might well be better or at least more secure and comfortable.
HOA is not much better...
Honestly I lucked out with no HOA. There is a city park across the street but my neighborhood doesn't offer any pools or parks so I guess there is nothing to charge for.
@@MBrewah04 I am in a condo and they take 197 a month for HOA. I moved in last October and there was a leak into my unit within the first week during a storm (hasn't leaked since for some reason). Im not the top floor and it is an HOA thing. It is late May and I still haven't had it fixed because the HOA is slow. Will bring it up next meeting and get a new management company. They are just sitting on our money.
@@jrg305
Like any most organizations it depends on the members. I have an HOA and it doesn't seem to make much difference for most of us.
With most HOAs there are usually two vocal and opposing minority perspectives at odds with each other while most of us don't care either way.
In you're in a bad rental situation you can leave when the lease expires. It's not that easy with an HOA but at least you have some say since it's a democratic organization.
Not having to deal with a bloody landlord is a joy that itself is worth a lot.
Great video and lots of easy to understand arguments. But I think it's more useful to someone with investing in mind than just having a place to live.
Great video.The one thing not accounted for is time. For most people, myself included, I can't afford landscapers and all the professional help to maintain a home, plumbers electricians, mason etc. The amount of time you have to spend maintaining a home properly is huge. Re-caulking the tub, cleaning the gutters, fixing the leaky pipe, adding an outlet, all the damn landscaping, the AC filters, water filters, furnace maintenance, chimney maintenance, appliance repair or replacement etc. etc. After owning two older homes in decent shape for a total of 15 years and renovating both and now renting after a move to a new state, the time and aggravation saved is priceless. I have not seen the inside of a HomeDepot or Lowes in a year and I LOVE it! Time is a real unrecoverable cost. I now can use that time to do something I really love. Some people love maintaining their home all the time and all the projects. I do not. It's always something. Not one project was ever just one trip to the hardware store. Even in new homes, its always something. There are plenty of nightmare stories of new homes being a disaster. If you decide to buy a home, new or old, ask yourself how much your time is worth. If you care about your house you will be spending a LOT of time maintaining it.
Since you are on TH-cam I will assume that you are lazy and can't have responsibility of taking care of your house, and just justifying your theories of time unrecoverable cost
Omar Abalkhail no that isn’t the case. I was just trying to add a variable to the conversation. Both my homes I renovated the entire house and sold for a profit. I wouldn’t consider that lazy. I was simply reflecting on my experience of owning, maintaining and upgrading two homes compared to renting and wanted to add to the conversation. If you are someone that loves constantly working on a house, great. After a certain point for me constantly working on your house becomes a drag. I would rather spend my time doing more enjoyable things in life.
Audio junkie...well put. Time is the biggest unrecoverable cost. My landlord just spent beaucoup dollars on installing a new two-door gate. Old gate was rotting away.
I looked at the gate, and as a non-handy man, hell I could have done that job for way less $$$.
But it would have taken me 4-5x the amount of time to do it, multiple trips to Lowes, headache and aggravation, etc. You are 100% correct, time is a the biggest unrecoverable cost.
Yes! I love that any work that needs to be done is my landlords problem, not mine. (I have a good landlord.) The relief I felt the first few years of renting after owning (and being a landlord) was worth it's weight in gold.
After a lifetime as a renter in NYC, I returned to the city where I grew up and was encouraged to buy a house. A small old house with a large garden. I'd always wanted a big sunny garden. And for a few years, I had it. But the house basically needed a gut renovation - new heating, plumbing etc. Windows, doors, floors replaced. I couldn't afford it...and my handyman skills are limited to things like painting. Can't do plumbing! The big garden was too big - and mostly on a hillside - for me to maintain, and I couldn't afford regular lawn maintenance etc.
I sold, at a loss, to a flipper this winter. I will never buy anything again.
Never wanted to deal with the whole mortgage thing let alone home maintenance and repairs. It's a matter of personal preference. Happy as a renter.
I just found your channel and it is a wealth of knowledge.
Love this video. In the Netherlands we can finance a house up to 100% including future renovations.
I appreciate the breakdown, how you elaborated on tangents to explain your reasoning. I like the comprehensiveness of this video. Thank you!
You did not calculate the likelyhood of moving. Moving costs eat us alive when relocating and that greatly impacts return. Don't buy if you won't stay put for at least 5 years.
Try living with less stuff, it feels great. I can move with my small car with 2 to 3 rides for practically nothing.
@@whatsupbudbud he is talking about the cost of selling the house bud, not the cost of moving your small amount of shit
Yeah, the transaction costs (e.g. realtor comission) will easily add another 3% to the costs of the home. So the rule should be 8%
@@Wise_That The transaction costs would be a once-off cost, while the 5% represents recurring annual expenses, so the two can't be added together.
This. My wife and I want to buy rather than rent, because when we have kids we want to raise them in our own house. But we're also planning on moving across the country within the next five years so we're throwing money into the rental hole for now
Hi Ben, very short and informative video. Thank you for this
This is an excellent breakdown - exactly what I was looking for. Thanks
Ben's Wife: Honey, I think I'm going to buy a new dress
Ben: But have you considered the unrecoverable cost of owning that dress ?
One of the best financial channels out there !!
I’m crying!!! That was so funny 😂
Ben’s wife:
If I consider unrecoverable cost , I wouldn’t have marry you in the first place 😡 So I buying this dress
@@hkchan1339 🙆🏻♀️
Love it!
Yeah, new clothing depreciates even more than a new vehicle. If you can, avoid owning a vehicle and if you can't get a used one in decent condition. The same principle applies to clothes; if you need them, buy them used at a thrift-shop.
No gimmicky intro. Excellent credentials. This guy knows what he's talking about.
He makes money off you, how is that good credentials? If you dont spend, he makes no money and is homeless.
Do you really want me to be homeless, Kirk? Where is this animosity coming from?
@@BenFelixCSI You arent so good at reading, I was proving a point that your credentials are pointless. You literally live off other peoples money. With your response to me though, i am guessing you voted and support Trudope. White priviledge and a racist.
Kirk I may be wrong here, but I'm pretty sure that every single human that earns an income is living off of other peoples' money. I provide a service that people are willing to pay for. This is no different than any other service provider, whether they are providing professional services or labor.
What do you do for a living, Kirk?
Kirk Wilson these days everyone has equal opportunity. the opportunity cost of his schooling (YES, it takes TIME to become a professional) not only that, but loads of money as well. Some people can just blab on about nothing.
Based on your hypothesis, a positive differential between the capital gain from stocks vs borrowing cost, we can reduce the cost of borrowing by using the Smith maneuver. We borrow back the equity we pay every month (as principal) via a revolver home equity line of credit and invest in stocks. The borrowing cost becomes tax-deductible. It's now a recoverable expense.
If Smith's maneuver is too complicated (many banks do not like it anyway as it's introducing a risk factor - they prefer to give you a normal/non-revolver HELOC), to some extent you can achieve a similar effect by downsizing.
You sell your home from the city and move to a smaller/cheaper place. But you do not use the whole equity as a downpayment for the newly purchased home. You only use the minimum required. You extract some cash and use it to invest in the stock market.
Hi, we calculated the cost of debt. However, I think it is fair to include the expected returns of the borrowed debt. Let's say, if you expected return was 1.3% (net of inflation). Then you would get a net cost of debt of 1.7%. (3% - 1.3%) which makes the unrecoverable costs of owning a house lower. Any feedback is welcome!
This has to be one of the best videos on this topic yet. You did an incredible job at explaining the nuance between the two. Great job!
So, if I understood:
-if you have no money, rent
-if you have some money, rent and invest
-if you have lots of money, buy
if you have too much money, buy and invest
If you had bought your home during this video, you would have the options to skip payments up to 365 days due to this pandemic... If you are renting then you better have a very empathic landlord
Always buy real estate... Look at my avatar 😂😂😂😂
Go ahead and rent just remember your landlord dosen't love you. If your landlord could repair everything with duct tape and still keep you paying rent he would do it.
I am in contract now, I have been renting the last 14 years and it stinks. In two cases, the owner decided to sell so I had to move my family with 30 days notice. You are always in someone else's house, you cannot have anything they way you want it. My house now has dripping shower the owner refuses to fix. It makes sense if you are a young professional and want to stay mobile but it is a lousy long term lifestyle.
@@3timesiller the entire valve needs to be replaced smart guy
@@3timesiller what kind of idiot are you? Yes I can fix. No I am not going to do it. It's not my house or responsibility.
What a rocking outro to a video loaded with different percentages and financial advice.
I'd like to see you revisiting this with latest developments: housing depreciation and increased interest
And also consider the massive increases in rent prices during the pandemic
with the land prices getting unaffordable by the day, and boats being out of reach, I wonder if a hot air ballon living would be cheaper...
It's so much cheaper until you realise that you need to keep a flock of owls to receive mail. It's Harry Potter on steroids. You may be thinking, why not just lower the balloon? But everytime you cross the 200m (vertical) threshold you are required to pay a toll, which means you pay two tolls everytime you drop down to receive mail. And don't even get me started on the amount you'll fork out for beans. You'll go mad with all the beans required to produce enough gas to stay afloat.
Jai Shetty they will start to tax airspace for anyone with the ingenuity to make the sky a livable place.
It's unaffordable only in major cities due to demand.If you really need a place there is plenty on earth itself.
Yeh I read an internet article last night on surviving homelessness. They had a good idea of keeping a gym membership so they can shower & a PO box so they can have an address. Not all homeless are mental cases, alcoholics or drug addicts. Some are people with jobs who fell on hard times. Hope I don't have to make any of those decisions!
The cost of propane to keep your balloon in the air 365/24/7 would make buying and renting property look very cheap.
Tip: Don't buy a house with large swaying trees immediately beside it.
Solid advice right here.
@@BenFelixCSI Learned that the hard way. Trees are very expensive to maintain and can cause damage to the house. Also never buy a house with wood siding or T11 plywood siding. I made that mistake too.
@@stuarthirsch why wood siding is not OK?
@@AlexManiacPavlenko Have you ever had a house with wood siding? It needs to be stained and painted. Insects eat it including carpenter bees and termites. Woodpeckers peck holes in it. Squirrels, mice, rats, and rodents chew holes in it and can get in the house. Hope there is never a fire near the house. I have a house with wood siding, never again.
Mayhem & Chaos waiting to happen
🌬 🌳🍃🏡
Another more practical opportunity cost (which can have economic implications): the way it affects your living situation. Renting is a lot more flexible than ownership as changing residence doesn't involve selling a huge asset in one go. This flexibility can result in higher salaries even relative to COL in bigger cities. Alternatively it can lower costs if you're currently working in a city but going fully or mostly remote.
On the other hand there's an emotional cost to renting, you'll be limited in what you can do to the home, a landlord may be able to evict you depending on local laws and your contract.
These issues are highly local and personal so I wouldn't expect this video to cover them, but it's important for people to still be aware of valuing these things
Really great, thanks!
Another unrecoverable cast of homeownership is Insurance, which is higher for homeowners then renters. However, mortgage payments force a financial discipline that is hard to match with discretionary saving - the psychological component of this doesn’t appear in the numbers.
In addition to the price difference, only 50-60% of renters have insurance at all
Oh yea once you own a house always something to spend money on.
The only reason I have good savings habits was because I purchased a home and have to pay a mortgage, this outweighs potential higher returns elsewhere in my personal situation
Homeowners insurance and mortgage insurance if you didn't put 20 down. It adds up ridiculously 😔
Homeowners insurance and mortgage insurance if you didn't put 20 down. It adds up ridiculously 😔
The piece of mind of owning your own place, the ability the grow a large garden, put up a workshop, repair vehicles etc make owning far more enticing than renting to lousy landlords any day
Excellent point. The non-financial factors. The ability to keep pets and animals, establishing residency for college tuition (OK, that last one, completely financial)...
This video isn't arguing those points, its for the people who believe that renting costs you more financially then owning via a mortgage. A decent amount of home owners choose owning for the non financial reasons, so this video is not for them. The audience for this video are those who are looking for the most financially wise option, which might still be owning, it depends on the local areas listings.
There are also benefits to renting. A huge one is mobility, you can move cities whenever you like. mortgages put significant barriers and youre commited to the same area for a big part of your life.
Peace of mind*
Also the fact you can make money off your home by renting it. Some people are even willing to pay your mortgage for you.
Thank s for this rule of thumb, that has some variations, if a person wants to do the research to adjust for them. By showing how it was achieved, it gives a tool to relate, sorta, apples to oranges, and make a more informed decision--- easier to weigh the differences, and therefore easier to make a decision.
Great video! I appreciate the insights provided. It would be interesting to see an updated version of this video that takes into account the current state of the Canadian housing market, specifically in Ontario and BC.
This is so excellent that it beats out the majority of TH-cam videos out there for this subject matter. It's intelligently thought through and uses tremendous discipline to give an objective analysis. The best I have seen on the subject. Deserves a thanks on behalf of all of us viewers. Keep it up.
I'm watching this while sipping a dollar coffee from a 7-11 store.
Enjoy ☕️
7/11 coffee still $1 in Australia and consistently better than Coffee Club or Mcdonalds at $4.20 for small cup.
I'd be more concerned if you were sipping a $7 starbucks coffee.
@@reasonableattempt1918 Agreed. That kind of Coffee would require you to live in a converted van parked in the back of a Starbuck's Parking Lot.
Great video , really helps having a global view of the rent vs buy decision , thank you
Really well done, well explained, to the point video. Excellent.
Great information presented in a wonderful, accessible format. You earned another subscriber.
When I’m sat in a home that I’ve lived in for 15 years without a landlord telling me that I can’t paint my kids bedroom, can’t change the ugly tiles in the bathroom, he’ll fix the mould problem soon (just open the windows for now), he’s thinking about selling the house so better start looking for something new, renegotiate rent from a stupidly high anchor price EVERY DAMN YEAR..... that’s when I know the VALUE of owning my own home, not how much it’s cost me.
Can I ask you a serious question. If it’s that bad why have you stayed there for 15 years? There will be other rental options within minutes from where you live currently.
A you’ve completely missed my point. The reverse of what I’ve said mate.
Again, that depends on where you live. If you have a good landlord, you're pleased with your place, and you don't want to change anything, renting is a good option. As for the value of owning your home, I can understand that. However, it takes actual money to pay for it so how much it costs has to be a consideration for people. Otherwise, they either become house poor or lose the home when they can't afford the mortgage, the taxes, or the repairs.
Miss Priss a good landlord is VERY hard to come across, that’s the problem. They may seem great in the beginning, when really all they want is your money.
I personally don’t like the responsibility’s of owning a home it’s too much damn work 🤦🏾♀️
This video is amazing, clear, and concise. Thanks!
The interest rates just four years ago are amazing. Totally different video today!
This is a pretty good video. Opportunity cost of the 20% downpayment -- it used to be that stock markets went down and there was a risk of borrowing to invest, but that lesson has largely been forgotten.
This is an excellent analysis. Good work. I’m certain this took a lot of learning and research.
What an absolutely top-notch video on the topic. Rational, thorough, informative, and accessible. Bravo sir, and thanks.
I think one really should look at the demand for their area and the expected rate in which housing can likely grow in that area. That will determine if prices will likely keep going up, level off, or go down. And that can inform one on whether it’s a safe bet to buy a house in that area.
It’s obvious but also important to remember that if you buy, you can lock down your mortgage costs for up to 30 years in the USA and you could eventually outright own the house and only have to pay property taxes and maintenance. You can also use a house as a business by renting out the extra space that you don’t use to further cut your costs or even cashflow an appreciating asset.
If you rent, you can’t pay off the property and your rent price will typically go up In according to the supply and demand for your area as time goes on. You might be able to sub-lease what you rent but your landlord will likely increase your rent payments or not allow you to sublease if the price is below market rent. Renting also doesn’t include all of the closing costs necessary to transact a home sale/purchase which is an advantage for renting. Especially if you aren’t expecting to remain in your area long term.
Also each area has different rules on property taxes, rent control, and different weather conditions which will effect your likely expenses. I think the square footage, land area and age of a property and HOA fees are much more useful indicators of expected maintenance costs than a percentage of the home’s value.
Love the theory, thank you!
Keep in mind that there are also other non-financial reasons as to why it might make more sense to own or rent. If you own, as long as you pay your bills, no one can force you to move. If you want the flexibility move due to your job or say you need more space or just get bored easily, there’s far less transaction costs when you rent.
This, the decision to rent vs own is more about your job and lifestyle than about pure financials. I was once told you should only consider buying if you plan to live there for at least 5 years. Any less than that isn't practical for home ownership, not to mention you are more likely to lose money overall.
The 3% equity return on the house is leveraged 5x (20% down) compared the assumed alternative of an un-leveraged stock purchase. So it's really more like 15% compared to 6% expected return.
This is exactly what I was thinking when watching the video. You cannot direct compare a return of 500k x 3% = 15k per year VS 100k x 6.57% per year 6.57k per year. Basically you have borrowed a whole lot more of money to invest in the property to gain 5 times more, also having the benefit of locking future inflation rate on the house too. I hope Ben can reply to this...this makes a huge impact on this 5% rule.
When you’re leveraged 5x you lose 5x as much too. You can easily leverage 5x in stocks too through futures contracts.
@@ThomasFoolery8 that wasn't the scenario he was supposed to be comparing though....
The leverage is declining over time, the cost of the leverage is paid by the home owner (unrecoverable cost), and equities have substantially higher expected returns than the unlevered real estate asset. The expected return on the levered house is 15%-3%=12% in the first year, and declining thereafter due to decreasing leverage. If you need to see how this plays out in a side-by-side comparison I suggest this paper: www.pwlcapital.com/wp-content/uploads/2018/06/2017-07-07_Felix-Benjamin_The-Case-for-Renting_FINAL.pdf
@@BenFelixCSI You already accounted for the 3% interest in your prior calculation so it is 15% vs. 3% not 12%. I agree that is the starting point and deleverages with time. Still means this basic assumption for your video is wrong and messes with the results.
Ben, this is the first of your videos I've seen. Good stuff! It's nice to see videos where we are spoken to as adults who actually have a brain
Thanks for the video! Was quite informative. Though you covered purely financial part of the question, I would call the "non-financial" part still a financial one. What I mean is having a home as your property gives a lot in terms of just realizing it's your home and you are an owner, not a guest. You yourself establish the rules you live there etc. And at least for me, that is a great foundation for earning more, though it is hard to estimate that in exact numbers.
That's a good point! On the other hand, renting is nice if you want the flexibility to be able to move with relatively short notice and like having someone else take care of the property maintenance, which is what I value at this stage in my life.
And you don't risk legal trouble with landlords.
This vid has nothing to do with emotional decisions. Purely based on financial. Often times the best feeling decision isn't the best financial decision. Which is why you have to use the maths to decide financial decisions not your feelings.
@@JLfpv well, from purely mathematical point of view you don't even need a house or flat. It is cheaper to live on streets, wash in the nearest puddle, etc. But for some reason you still want a house.
@amegatron07 well, no, that is also not the case. If you invest and expect a 10% return on investment that means that you will not only get all of your money back eventually (i.e. the same as "not having spent anything") plus 10% of the amount. So in the end it IS better to invest and it makes complete sense to look at a property as a sound financial investment and to pay for it. Don't get me wrong, I understand the previous commenters' idea that the emotional value of owning a house is important, but this video is not about the emotional value of a property, it is about purely the financial aspect of it.
I inherited my house mortgage free. Its a small house in a very nice neighborhood. All I have to pay is taxes and very small maintenance. Since I am already retired, I think maybe I'm better off continuing to live in the house myself.
Ravensonng yea, no interest for you.
that's swell! you're all set!...others are not. hence the video.
Makes sense unless you live in a big city where rents have been increasing more than 7% every year.
So if your rent in 2009 was $800/month, in 2019 it will be $1,600.month.
Hi Mike,
In Ontario rental increase is capped by statute. Last year it was 1.8% and this year it is 2.2%. As long as you rent the same place your rent will stay relatively the same.
I do think that was something missed by the video though, but again it was round numbers.
Your comment applies to me as I rent in California. The numbers are about 98% accurate.
Basically
My first year in the apartment, rent was $785 a mo, not including utilities and insurance.
3 years later, it was raised to $1400, again, not counting utilities or insurance. Landlords are lousy.
@@BedtimePasta Got to move to Ontario. They are legally not allowed to do that. Rent increases are set by the government. As long as you live in the same place they can only raise rent in small increments.
Other elements to take into account are mobility (property tends to hinder you moving to find a better job etc), stability (rental agreements are temporary by nature, rent can be increased and you might get kicked out…) and retirement (as your income decreases, renting may become less affordable; but there is more flexibility to move to cater for your needs…).
I would generally think it is not good to buy something early in life (unless it is a good investment property); once you are fairly confident that you are settled, in particular as a family, buying makes sense (if you can).
Finally someone who has done the calculation properly.
What a joke, his "calculations" are such an oversimplification; no increases in rent, not taking in the factor that you use a mortgage instead pay it down whole.
As someone who lives near Vancouver bc and is a young adult the housing market was pretty much ripped out of my grasp as prices skyrocketed when I was a teenager. I’m now 3/4 done an apprenticeship to become an electrician and plan on living in a van for a few years to save up enough for a solid down payment and rent out whatever I buy, I can’t stand how home ownership was stolen from our generation without being forced to have zero cost of living in order to save up
A more advanced extension of this problem would be to factor in consumer risk aversion and how that interplays with the higher variability in stocks. V. Housing. Also a liquidity premium for stocks because houses are not liquid.
Thank you for bringing so much clarity
Thank you for making this video. This is helpful and accessible.
So much of it has to do with emotional pride of ownership and being able to do whatever you want on your own property. Also a feeling of stability and not being a slave to your landlord.
I always remember flying into Phoenix Arizona after the 2008 debacle. 1/3 of the suburbs still had green lawns, but the other 2/3rds was a brown dustbowl. Half of the houses were in foreclosure, with another 1/6th underwater. Large swaths were brown because they had all stopped watering their lawns.
@@robertschill2686 and now you will return to see the homeless tent cities from the apartment leased skyrocketing up 200% while the the homeowner rides inflation
Yeah, do you know anything about HOA?
Grant cardone says buying a house for your own use is an emotional thing, and although I don't always agree with professor GC, he is right about this
Q: What is the unrecoverable cost of having NO LANDLORD(S)?
A: Priceless.
Unless you live in an HOA, that's like landlords on sterioids
# Your name and picture are priceless too 😆😆😆
\* laughs in property taxes of the municipality/city/country, province/state and national if applicable \*
My landlord is great
I was going to comment
Thank you mister hashtag
A very good presentation that crystallises some ideas I had less expertly tried to work out for myself. I wish more TH-cam videos were like this; clear, articulate and well reasoned.
Hey Ben, I think we need an updated version of this video ;) kuddos
Finally, a video I can understand..! Blessing on you and your kin..!!