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 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.
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?
@@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.
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
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.
Biggest lesson i learnt in 2023 in the stock market is that nobody knows what is going to happen next, so practice some humility and low a strategy with a long term edge.
True, initially I wasn't quite impressed with my gains, opposed to my previous performances, I was doing so badly, figured I needed to diverssify into better assets, I touched base with a portfolio-advisor and that same year, I pulled a net gain of 550k...that's like 7times more than I average on my own.
NICOLE ANASTASIA PLUMLEE’ is the licensed fiduciary I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment.
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.
@@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.
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 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 ...
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"
@@fsociety6983 “Don’t buy a house, put your money in the stock market for a higher rate of return” seems like it would fit a fairly limited set of circumstances.
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").
@@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
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
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.
@@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.
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.
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 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.
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!
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.
No financial institution should be allowed to own 40% or more of the single family homes. This recession is paving a way for a monopoly on homes to further rid of the middle class. It would be wise for most Americans to not sell their homes if they're able to.I want to buy houses cheap in 2024 and maybe invest in stocks. When's the best time to buy stocks? Some say they make a lot, others warn the market is risky. Advice?
If you're new to investing or don't have much time, it's best to get advice from an expert. Investing without proper guidance can lead to mistakes and losses. I've learned this from my own experience.
The housing market has always had its ups and downs, but it's true that this time feels different. Having a portfolio manager will save you a lot in the market. My coach has helped me expand my portfolio by 200% over the past few months.
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.
Good point. Also take into account rising costs in regular maintenance and repairs. Contractors will raise rates and material costs will always increase.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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!
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.)
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.
Very interesting points you bring up. However, when thinking about the return of real estate versus stocks, shouldn’t we account for the proportion of debt vs equity in the home acquisition? If we buy the house using a 20% down payment, you are acquiring an asset at 1/5 of the cost, and therefore your investment is leveraged by 5x. Wouldn’t this make the return of real estate higher than traditional stocks when taking this into consideration? Of course you also have to think about the sales taxes if ever you want to realize those gains.
You could actually use 5x leverage in your stock portfolio as well, so leverage shouldn't be considered in this comparison. In fact, one thing missing here is the risk adjusted return. Since you don't have the benefit of diversification in a mortgage, the equivalent risk adjusted return for your portfolio will be much higher than average stock market return mentioned here. So your cost of equity (or cost of capital) will be way higher than 3%. I am pretty sure Ben left this part out on purpose to simplify the argument for the masses.
I agree with the general leverage point here in order to compare “apples with apples” - a house purchase will be better than the stock market unless an individual can get a large non-mortgage loan with favourable interest (and then put that into the stock market as well). Certainly, in the UK there is almost no unsecured personalloan that comes close to the low-interest rate, long term and high total borrowing amount of a mortgage loan
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!
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.
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.
@@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.
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.
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 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
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.
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.
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 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
@@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.
@@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.
For me (with only one exception so far) it’s always been much easier to buy the right home in the right market (and miss out on other “opportunities”) than it is to realize the same returns using other investment vehicles. Just that much less to worry about. For example; Our carefully chosen 1st home experienced no move in the market so after living there for 6 years we moved and rented it out as income as opposed to selling. Our 2nd home ($235K) was carefully chosen, neighborhood, school district, market, etc, we lived there for another 6 years until the market just became too irresistible and sold for a $130K profit. Our 3rd home ($300K) and carefully chosen as well, we lived in for only a year before we rented it out for income (now worth about $500K after renovations). The only home that we pay rent for and do not own is our current home as we moved back into an overpriced market and it likely won’t make sense to buy another home until at least next year or until we move into a lighter market. Along the way we have picked up other properties to use for additional rental incomes. But yes, while I probably couldn’t define when exactly those times are as well as you, there are definitely times when, for me at least, it obviously made more sense to pay rent, especially for relatively short intervals while there is no obvious “play” to make.
This is exactly what I'm struggling with right now...should I sell my house soon because the price is super inflated but do I buy another house in an equally inflated market or should I sell and rent short term until a deal strikes???
@@nicholasgilbertson7161 Buying and selling in an expensive market could just even out. The main advantage of selling a property to rent is getting a higher return on equities. But are those returns worth the unknowns of renting? Sometimes we can overthink if we're doing the right thing for the future so much that it hinders our enjoyment of what we have in the present
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.
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
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.
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.
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.
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.
@Mikardo In addition to what you said...people like myself who want to grow their own food can’t really do it while renting unless you’re growing in containers which it’s not the same as having a little piece of land.
I have be doing (and redoing) the math on this decision constantly for the last 2 years in as many different ways as possible. I kept coming to the same conclusion but I never felt truly confident until I saw this.
Interest rates can rise too. With the amount of inflation we are witnessing, transient or otherwise, some spectators predict interest rates will have to rise. If this happens, it could quite easily double the amount of interest paid (because it is so low atm) making some people’s mortgages unaffordable. He did explain that you can only base it on a snapshot of the situation at that time. If you knew your rent would increase from £1000 to £1500 next year, you would think twice about renting. Using his example, if you knew your house would substantially increase in value next year, you wouldn’t sell.
@@GoldenRivet how many people do you know with a variable interest rate on their home? This dude is spouting nonsense. Owning is always better than renting and throwing away your money. Literally 🤦🏻
@@hannesstan4066 Fixed rates don’t last forever! I think it’s fair to say it depends on your situation. If you buy a property and are content to stay in that location for a long period of time, buying is, as you say, always a better idea. If you can afford it. If you move around every 2-5 years (like me and many others) buying makes little sense - it’s a pain to buy and sell, it costs money to do so, and the majority of your early repayments consist of interest vice equity. I think buying should be when you’re ready (ie. have found a location and a home in which to settle) rather than just “getting on the ladder” like my parents always told me to do.
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
Hey Ben, I just watched this. You didn’t include leverage in the expected return on your downpayment. If it’s 3% on the dollar and you have a 20% downpayment you’d have an expected return of 5 x 3%, right?
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
If only it were that simple. Most people that rent wind up spending their investable money on entertainment. Next thing you know 30 yrs go by and that 150k home is now 300k. And instead of having a paid off home you are paying an even higher rent. Also, having a home paid off tends to make people feel better about themselves. They feel financially secure and may even take on starting their own business or buying faster growing yet more volatile companies that they would not be able to stomach if they had to keep coming up with rent every month. There's a lot more to it than math. It's very much a mental game.
That's true! Also, to get the average investment rate he's mentioning, one would have to be educated in portfolio management & investing, or hire someome else to do it. Anyhow, you would have to also consider the cost of acquiring said financial knowledge or getting an advisor.
If you have the discipline, you can invest. It also takes discipline to save money for the downpayment of a house, mortgage and maintenance. Besides if a 150k house is worth 300k, you won't be selling it as you're living there. Unless you're planning to move somewhere where the house cost is way less than the selling price of current house. Also people have sentimental, emotional value attached to a house which makes them hard to move. True, it's both math and mental game
I’ll never pay off my home. It’s the cheapest money I can borrow. See my leverage comment above. If I can’t find a return greater than my mortgage rate I’m asleep at the wheel, and allowing my money to be lazy. If my money doesn’t work... then I have to.
If you can save 20% you are disciplined enough to continue. What about the fat stacks money? It gives me the that warm fuzzy feeling too. I can move super easy if you move in next to me. I also don't need a to get loans for my cars and for my roof and and and. B=====D~~~~
I don't know what it's like there in Ontario, but here in NY brokers fee + sales tax when you sell your home could be anywhere from 5% - 7% of the value. Surprised that's not mentioned as it makes the time that you plan to stay in the home a much bigger part of the equation. That $500K house you mention will cost you 30K of unrecoverable costs just in the fees to sell it. So if you're only there for only a year, that's 2500/mo of rent that's completely outside of any of your other equations. Obviously most people don't move that often, but it's worth mentioning!
He said this is an oversimplification. You cannot generalize without missing some ridiculous situation like living in NY. I have owned a home for decades and have experienced some details of my situation this analysis cannot consider. As businessmen know - 'there are all kinds of situations.'
Robert Wiebe bad idea. Even with saving the 6% commission, statistically you lose money. You don’t know the market and timing and cost yourself more money than the realtor would earn you
Hi Ben. What I don't understand is how you can equate stock growth with house value appreciation? For the house scenario, you're missing out on stock growth of only 20%, while gaining value for the 80% amount that is the mortgage. For example, if you have 100k that you can either invest for 6.7% returns or put a downpayment for a 500k house, the whole house of 500k gets the 1.7% appreciation, not just your 100k. It's like investing with a 5x leverage, in a very safe asset. Am I missing something, or did you already address this in the video?
Leverage from the mortgage makes the math very messy. It’s not as clean as I say in the video, but it’s not as clean as your example either. Mortgages are amortized. All the cash flows that go toward mortgage principal for an owner can be invested in higher expected return stocks for a renter. When I model it, the 5% idea (though higher in 2024) still works out. If you can get an interest only loan it will look much better than renting.
9/10 the viewer is an idiot though. The majority of Americans don't even have $1000 worth of liquid assets. I saw a survey that said one third of Americans believe they would default on their mortgage payment if America went into recession (and recession could be inevitable at this point, however I am not sure the number is quite that high, it depends on a variety of factors realistically). People are financially inept. For example, my parents put down $25K on a $345K house, 7%... And that $25K was only because my great grandmother died and left my dad with stocks. So realistically they saved nothing. They struggled through the GFC, and no doubt they're going to struggle through this recession too. Unfortunately, my parents are a part of the vast majority, a group of people who believe all their problems can be solved by going into debt, whether it be through a mortgage that they realistically can't afford, or credit cards with exorbitant interest rates.
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.
Honest question: how do you factor in rising rent? Rent prices fluctuate more than increased taxes/repair bills. In my area a +5-10% increase is not uncommon year over year. - Especially with a red-hot housing market. I already own a home and am not experiencing the same 5-10% increases in my cost of ownership.
This is addressed in the part of the video where it talks about cherry-picking markets where housing has gone up. Yes, if housing prices increase rapidly, that means the Real Estate investment is paying off more than the amount estimated by the video. But, you shouldn't expect previous returns in the Housing Market to be predictive of Future Returns - nobody would sell a house for $500k if they knew it would be worth $550k a year from now. If the Housing Market isn't increasing, then Rent is also not increasing by the 5-10% you mentioned. If you expect the housing market to continue climbing at the rate that it has, then you should absolutely be investing more in real estate, but that's no different than picking any other stock that you think is going to do well, and has the same risks.
@@johnraviella6561 Not true. Plenty of places where this is false; Gary Indiana, various ghost cities built in China during the 2000s and 2010s, and the list goes on. Like I said, be wary of cherry-picking.
Excellent summary, one thing that can make a difference though is the effect of leverage, that is if I you finance a portion of the home with a mortgage, you might get a better return on investment over time, depending on the appreciation of the price of the home, and the average mortgage rate.
Some great points, however the formula does not account for the fact that a mortgage is a fixed cost per month and rent is variable and will inevitably increase. I'd like the formula to include the average increase in rent over time which will minimize the opportunity cost of buying by progressively limiting the investment capital.
Yep. I bought my home over twenty years ago. My monthly mortgage is now 15% of what I would be paying for rent if I was renting my house. "Losing" 5% unrecoverable costs is far better than losing 100% of them, and I have saved a fortune over the years. And in a couple of years that monthly mortgage payment will stop and I can live in my house for the rest of my life rent and mortgage free. The property tax and maintenance costs are a fraction of what I'd be paying in rent. If they weren't then how could the landlord afford to pay them out of my rent? Plus as an owner while I have to pay for a new kitchen or bathroom it is my decision if and when to do it, and I get to choose the colour of the tiles, the brand of appliances, the fixtures etc rather than having to accept whatever the landlord decides.
I think it depends on your life style. For example if you are buying a house to live there for say 10 years like yourself then it makes sense to buy l. However someone with money may want to invest that Money say into oroperty where they receive passive income, in theory overtime paying for their rent while gaining capital appreciation. The house you live in wont ever pay you. The houses you rent out etc do. This is wht a lot of rich people rent where they live, and buy where they dont. Just depends what's best for you.
@@eezy251able How can owning a property you rent out get capital appreciation but a property you own and live in doesn't? A house you own can certainly pay you back that appreciation. I could sell it and move to a smaller and cheaper home and keep the difference or move to a rental and keep all the cash.
Also if you rent and the owner wants you out, you have to move. Perhaps you are really confortably there (close to work, schools for kids etc). And.. you can improve your home (I love to dedicate time taking care of my house).. something I wouldnt do if I rent.
I've think you've miss understood me. Owning a any property can gain capital appreciation. Hence why people remortgage their previous rented properties in order to buy another.....and so forth..
Would you factor in hold period and friction costs? Let’s say I hold my first home for 10 years then sell it. The payments for the first few years are substantially more skewed towards interest and not equity.
Good question. Due to transactional costs of buying/selling houses, unless a house appreciated dramatically in the first say 5-7 years, then a big chunk of your money is getting eaten up by these costs. Talk about unrecoverable costs!
I hear what you're saying about house as an investment of capital, and the costs of owning a home, but in the long run there is limited habitable land and a steady increase of people. Its about values, land is finite. I think people are realizing this. Houses in Toronto bought in the 50s and left to become dilapidated are still worth multi millions because if the LAND and potential for redevelopment. They just lifted single family dwelling rules so your potential to own a small apartment complex is huge.
We also have to take into consideration the fact that the cost of rent increases drastically over time. The cost of your mortgage will remain the same for the next 30 years. 20 years ago rents were significantly cheaper than they are today. Sure I can rent now for the next 10 years but I guarantee that in 10 years the cost of rent will catch up to what my mortgage would've been if I would've bought 10 years prior.
@@bromers2971 Perhaps you're in a different country but plenty of banks will offer you fixed rate mortgages on 30 year loans here in the United States.
Not sure if he never blinked or if he blinked the same times as i did. also, the $200 on my bank would prefer option number 3. . . staying at home with my mom.
So he basically calculated the equivalent of how much money you will loose every month if you buy a house (adding taxes maintenance and interest) and then said if youre loosing (paying) less money in a rent keep renting. But he's assuming that you will use the saved money in stocks and you will deffinetly earn as much money as the price of the house you could potentially own? Bit risky no?
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 a single childless millenial that hates responsibility I am so for renting in the cheapest, smallest, room possible. Not a house just a room. Mostly I find them on craigslist. This would make a proper calculation harder since i would have to model owning a home and then renting it out. But at that point there is extra time and work involved. So i say screw it. My philosophy is i want the cheapest COL with the least headache. Again, this could be analyzed from a monetary standpoint but i just say the behavioural effects are strong and be done with it. I would eventually like to own a home though, and will do so with a large amount of equity. Even then. Cost of equity capital does make me think a lot about if renting instead would be worth it. On a side note. I actually want to make the case for the emotional aspect of renting. Outside of lack of freedom. There is something to be said for minimalism and just not letting your stuff own you. By renting, I am constantly encouraging myself to keep and have less. Yet I am still making an income. Its super liberating. I feel well insulated from the problems of life. Mostly because i know I can get by with so little. And second since i can save ever so much.
I love renting for similar reasons. The biggest difference for me is that I have a wife and three kids, so renting the smallest cheapest place that I can find does not feel right. We rent a nice house. If I were single and childless I would do exactly what you're doing,.
@@BenFelixCSI Yes I can understand that. I think it is interesting how most financial advice seems family oriented. That was hard to get used to but it makes sense since most adults that are earning and spending large amounts of money have other responsibilities than themselves. I think this is what makes the rent vs buy discussion so nuanced. If we all had to deal with as little space as possible it would be easier. But the question of how much space ot buy can differ vastly from person to person.
Dude, are you me ? I am not single but this is also how I see my life and most of my decisions come from this philosophy. My priority and what makes me happy is my freedom. And minimalism is the way I use to balance this ambition (cheap cost of life, work less, save a lot). Exactly as you said, it resolves so many life "problems" that so many people can have.
When I was young I rented rooms for 12 years. I made enough money that I was able to buy and pay for a house and still have plenty of money left. I have very quickly paid off all mortgages and invested what I would have been paying in interest. Of course things were different when interest rates were high. Today however I would prefer to rent but because may get a condo because my wife would feel more secure in a paid for condo. My mother felt the same when my father passed away, so we bought her a condo. Somehow women feel more secure in a "owned" property than a rented property. Anyway I do believe that real estate should be part of a diversified portfolio, but have found the best way to invest in real estate, strictly as an investment, is via a REIT, REIT index fund, REIT etf, or REIT mutual fund. I now view a house or condo as a consumer purchase rather than an investment.
There are positives and negatives to owning a home. My home is paid for, so no mortgage, but it will never truly be mine. If I don't pay annual property taxes for the rest of my life I'll be on the street. I'm basically "renting" from the state. Any improvement I make to the home adds to the property tax and any repairs are my responsibility. My central ac unit just went down last month. That's $3,900 out of my pocket. There are a million and one things/expenses that you never think about when you're renting. Plus, my neighborhood has went downhill so my home is worth less now than it was 20 years ago. Still, though, considering my income compared to the cost of renting these days, I'd have to live in a shithole apartment and be very frugal just to get by. In my current area (small town south Georgia) ownership is a better option as houses are cheap, generally making monthly mortgages much lower than monthly rent, but when I was living in Philly ownership wouldn't have made sense for me. I think it's mostly a choice you have to make based on where you are in life. I'm old and settled so owning is nice but if I were still a young man it would be hard to make that kind of commitment. Renting with short term lease agreements allowed me to move around whenever I got tired of where I was. I'd probably still be rambling around if it weren't for a pretty girl with bright blue eyes and a smile that still makes me feel all warm and fuzzy.
What really went wrong was the government forced lenders to take on risk by establishing quotas for lending to "disadvantaged" groups and then they inevitably defaulted en masse.
Exactly. Owning is intended as a long-term home and modest investment. Buying a home and flipping it a year later is never what mortgages or home ownership was intended to be.
Might I point out that, depending on your geographic location, the unrecoverable costs of renting can be significantly more than just the rent paid. For example, a property renter may not be allowed to fix a broken plumbing system of the house, and has to wait for the property owner to arrange for it. This can incur significant opportunity costs, intangible costs, and other costs, such as for laundry/food that are over and above what would typically be spent when the plumbing system is functional. I have lived in places where renters rights do not exist, and thus the pressure to buy instead of rent is extremely high. On top of that, with markets where renters rights do not exist, the cost of having to constantly move every year or two due to rent hikes or a horror landlord can add up very quickly, depending on the size of the household. A more careful assessment of the risks associated with your rental situation is vital to making a rational choice. Suffice it to say that my personal experience has not been very positive.
I have explored this topic many times over the past few years, this is by far the most informed, clear, data driven and methodical approach I have ever seen anyone take. Thanks Ben Felix for giving me a tool and process for calculating the investment decision. Subscribed and look forward to binge watching the rest of the channel!
@@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.
Living in a rental place for 29 years of my life... owning is better. You do what you wish with it and have no one to answer if you want to redecorate or change anything.
Great video but one thing to consider is that the gain on real estate is not only on the equity that you put in with your down payment, but with the whole value of the property. Let´s assume that you have 100k to invest in something. Buying your dream home will be expensive, but let´s assume that you´re comparing it with renting it instead. You´ll get 5200$ with 100k at 5,2% return. If we assume that the same average for real estate as you mentioned (1,3%) you´ll get 1,3% on 500k instead (because you would buy a property that´s worth 500k with your 100k). You are now getting 6500$ with your 100k instead of the 5200$ from stocks while owning your dream home. I know that the leverage with the home comes with more risk, however we are talking averages here, so it evens out. If we include the nominal return (with inflation), then we´re looking at 15 000$ yearly on the property and 6900$ yearly on the stocks. Just my two cents.
yes, but then I think the point he is making is that home ownership comes at a cost of maintenance, insurance, tax etc. So those better yearly financial returns you mention via buying are significantly reduced. Moreso, those financial returns of home owning are not in cash (not a liquid asset) - they are tied up in the house value. In which case you have to find cash to pay for the aforementioned costs - no?
but are you assuming -> (because you would buy a property that´s worth 500k with your 100k) that you payed 100 for something that is worth 500? I dont get it.
@@Richard.Cabeza No because it basically works on both investments. If the value of the property goes up by 10% from 500k, then you now have a house worth 550k. Those 50k are taxable because they are "profit". Another 10% on that is 55k and so on. The "same" goes with stocks even if they pay dividends and it's also interesting to compare stocks that pay dividends because they still return less than other companies who focus on growing instead of paying dividends to their shareholders.
Great to get clarity on the financial aspect. Still, the reasons I lean towards ownership are less numerical. I don't want to be at the mercy of a landlord for _anything_ at all.
Yes, I truly think that is the greatest advantage of ownership. The greatest disadvantage of ownership is being stuck in a more inflexible situation, such as having terrible neighbors or a declining neighborhood with decreasing property values.
Of course the flipside is it’s great to call somebody and say hey come fix this and they come without asking you to pay $100 for the first 25 minutes (plumber and electrician) Or having to take out another loan To pay off the $7500 new HVAC system you had to put in
AdonisGaming93 where i like most people are spending 50-60%of their income on rent and a 1 bed apartment in a shitty area can be 1million dollars and 2 million in a nice area
@@skywalker6648 the thing is you have to live in your house. It's something you can readly see constantly. The threat of losing your home is a pretty big deal. The threat of losing your stock is an abstract concept. Most Americans are horrible at using their expendable incoming on investments outside of tangible goods.
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.
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.
RENT increases yearly. Mortgages don't. I bought my home 15 years ago. Now i am mortgage free. MY friend is still renting. His Lives in an apartment. been there over 15 years. the Rent increased from $950 to now $1850 over that period.
Matthew Orloff we know, but not really though. Just don't buy super expensive house that you cannot afford. My APR is only 3.8% of 200k house. Im paying $1.275/month that includes all(principal,interest,property tax and insurance) it is a 3 bedroom house. While renting cost 900-1,500 on a 3 bedroom apartment. And also it's a 30yr mortgage fixed rate.
@@mattorloff3400 i don't pay a mortgage,. so my housing cost is 80% less than my friend's. I pay only $350 for Taxes and Insurance. where my friend is paying $1850. no brainer.
@@lordbaron104 Even if that's true, rent is determined by the local market, and is consistent during the lease. Homeownership costs are often unexpected and unpredictable.
@@alankoslowski9473i think there shouldn't be “unexpected” expenses when younare owning a house. That is why you have an emergency fund. The bottom line is homeownership is a huge responsibility.
What about leverage? The ROI on real estate is usually heavily leveraged (mortgage) over quite a long time. Wouldn't you lose opertunity cost on $100k/500k, but the remainder 400k leveraged gained offset that.
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!
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
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
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.
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?
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
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 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.
Biggest lesson i learnt in 2023 in the stock market is that nobody knows what is going to happen next, so practice some humility and low a strategy with a long term edge.
True, initially I wasn't quite impressed with my gains, opposed to my previous performances, I was doing so badly, figured I needed to diverssify into better assets, I touched base with a portfolio-advisor and that same year, I pulled a net gain of 550k...that's like 7times more than I average on my own.
NICOLE ANASTASIA PLUMLEE’ is the licensed fiduciary I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment.
begone bots!
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…?
"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
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.
Takes a shot every time he blinks.. still sober
LMFAO
Genious
You a fool😂😂😂
Holy shit..hes a robot
🤣🤣🤣
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 ...
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"
@@fsociety6983 “Don’t buy a house, put your money in the stock market for a higher rate of return” seems like it would fit a fairly limited set of circumstances.
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
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
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.
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?
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!
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.
No financial institution should be allowed to own 40% or more of the single family homes. This recession is paving a way for a monopoly on homes to further rid of the middle class. It would be wise for most Americans to not sell their homes if they're able to.I want to buy houses cheap in 2024 and maybe invest in stocks. When's the best time to buy stocks? Some say they make a lot, others warn the market is risky. Advice?
If you're new to investing or don't have much time, it's best to get advice from an expert. Investing without proper guidance can lead to mistakes and losses. I've learned this from my own experience.
The housing market has always had its ups and downs, but it's true that this time feels different. Having a portfolio manager will save you a lot in the market. My coach has helped me expand my portfolio by 200% over the past few months.
Rebecca Noblett Roberts is the licensed advisor I use. Just search the name. You’d find necessary details to work with to set up an appointment.
I searched her up, and I have sent her an email. I hope she gets back to me soon. Thank you
@@crystalcassandra5597 These are all bots, and Wolfe is a scam. Ignore.
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.
@@JJPelszynski 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
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.
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
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.
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
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.
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.
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.
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.
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
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!
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.
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.
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.
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.
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
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
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.
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.
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.)
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...
🤣🤣🤣👌🏽💪🏾
Very interesting points you bring up. However, when thinking about the return of real estate versus stocks, shouldn’t we account for the proportion of debt vs equity in the home acquisition? If we buy the house using a 20% down payment, you are acquiring an asset at 1/5 of the cost, and therefore your investment is leveraged by 5x. Wouldn’t this make the return of real estate higher than traditional stocks when taking this into consideration? Of course you also have to think about the sales taxes if ever you want to realize those gains.
I think it’s not that simple since you don’t actually leverage 5x in this scenario. The mortgage payments overtime reduce the leverage.
You could actually use 5x leverage in your stock portfolio as well, so leverage shouldn't be considered in this comparison. In fact, one thing missing here is the risk adjusted return. Since you don't have the benefit of diversification in a mortgage, the equivalent risk adjusted return for your portfolio will be much higher than average stock market return mentioned here. So your cost of equity (or cost of capital) will be way higher than 3%. I am pretty sure Ben left this part out on purpose to simplify the argument for the masses.
Ben, could you help answer this leverage question please?
I agree with the general leverage point here in order to compare “apples with apples” - a house purchase will be better than the stock market unless an individual can get a large non-mortgage loan with favourable interest (and then put that into the stock market as well). Certainly, in the UK there is almost no unsecured personalloan that comes close to the low-interest rate, long term and high total borrowing amount of a mortgage loan
@@iceman.83 name a bank that'll lend me six figures for stocks at an interest rate of 3% a year
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
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.
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.
I appreciate the breakdown, how you elaborated on tangents to explain your reasoning. I like the comprehensiveness of this video. Thank you!
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 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.
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.
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 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
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
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
🌬 🌳🍃🏡
For me (with only one exception so far) it’s always been much easier to buy the right home in the right market (and miss out on other “opportunities”) than it is to realize the same returns using other investment vehicles. Just that much less to worry about. For example; Our carefully chosen 1st home experienced no move in the market so after living there for 6 years we moved and rented it out as income as opposed to selling. Our 2nd home ($235K) was carefully chosen, neighborhood, school district, market, etc, we lived there for another 6 years until the market just became too irresistible and sold for a $130K profit. Our 3rd home ($300K) and carefully chosen as well, we lived in for only a year before we rented it out for income (now worth about $500K after renovations). The only home that we pay rent for and do not own is our current home as we moved back into an overpriced market and it likely won’t make sense to buy another home until at least next year or until we move into a lighter market. Along the way we have picked up other properties to use for additional rental incomes. But yes, while I probably couldn’t define when exactly those times are as well as you, there are definitely times when, for me at least, it obviously made more sense to pay rent, especially for relatively short intervals while there is no obvious “play” to make.
This is exactly what I'm struggling with right now...should I sell my house soon because the price is super inflated but do I buy another house in an equally inflated market or should I sell and rent short term until a deal strikes???
@@nicholasgilbertson7161 Buying and selling in an expensive market could just even out. The main advantage of selling a property to rent is getting a higher return on equities. But are those returns worth the unknowns of renting? Sometimes we can overthink if we're doing the right thing for the future so much that it hinders our enjoyment of what we have in the present
No click bait title, no annoying screeching TH-camr sounds, clear concise well thought out explanation. Instant sub from me.
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 😔
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.
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.
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.
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 🤦🏾♀️
@Mikardo In addition to what you said...people like myself who want to grow their own food can’t really do it while renting unless you’re growing in containers which it’s not the same as having a little piece of land.
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
I have be doing (and redoing) the math on this decision constantly for the last 2 years in as many different ways as possible. I kept coming to the same conclusion but I never felt truly confident until I saw this.
Do you mind me asking if it was rent or boy in your case?
sounds like a ad for investing.
also doesn’t mention rent may go up yearly, this might offset maintance cost?
Interest rates can rise too. With the amount of inflation we are witnessing, transient or otherwise, some spectators predict interest rates will have to rise. If this happens, it could quite easily double the amount of interest paid (because it is so low atm) making some people’s mortgages unaffordable.
He did explain that you can only base it on a snapshot of the situation at that time. If you knew your rent would increase from £1000 to £1500 next year, you would think twice about renting. Using his example, if you knew your house would substantially increase in value next year, you wouldn’t sell.
Why do you talk like property tax and maintenance costs don't go up yearly if you own a home?
If you are in a fixed rate mortgage, rising interest rates will not affect your mortgage payments.
@@GoldenRivet how many people do you know with a variable interest rate on their home? This dude is spouting nonsense. Owning is always better than renting and throwing away your money. Literally 🤦🏻
@@hannesstan4066 Fixed rates don’t last forever!
I think it’s fair to say it depends on your situation. If you buy a property and are content to stay in that location for a long period of time, buying is, as you say, always a better idea. If you can afford it.
If you move around every 2-5 years (like me and many others) buying makes little sense - it’s a pain to buy and sell, it costs money to do so, and the majority of your early repayments consist of interest vice equity.
I think buying should be when you’re ready (ie. have found a location and a home in which to settle) rather than just “getting on the ladder” like my parents always told me to do.
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
Hey Ben, I just watched this. You didn’t include leverage in the expected return on your downpayment. If it’s 3% on the dollar and you have a 20% downpayment you’d have an expected return of 5 x 3%, right?
He accounts for cost of capital whether it's debt or equity. He eventually arrives at a similar cost for both.
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
If only it were that simple. Most people that rent wind up spending their investable money on entertainment. Next thing you know 30 yrs go by and that 150k home is now 300k. And instead of having a paid off home you are paying an even higher rent. Also, having a home paid off tends to make people feel better about themselves. They feel financially secure and may even take on starting their own business or buying faster growing yet more volatile companies that they would not be able to stomach if they had to keep coming up with rent every month. There's a lot more to it than math. It's very much a mental game.
That's true! Also, to get the average investment rate he's mentioning, one would have to be educated in portfolio management & investing, or hire someome else to do it. Anyhow, you would have to also consider the cost of acquiring said financial knowledge or getting an advisor.
If you have the discipline, you can invest. It also takes discipline to save money for the downpayment of a house, mortgage and maintenance. Besides if a 150k house is worth 300k, you won't be selling it as you're living there. Unless you're planning to move somewhere where the house cost is way less than the selling price of current house. Also people have sentimental, emotional value attached to a house which makes them hard to move. True, it's both math and mental game
I’ll never pay off my home. It’s the cheapest money I can borrow.
See my leverage comment above.
If I can’t find a return greater than my mortgage rate I’m asleep at the wheel, and allowing my money to be lazy.
If my money doesn’t work... then I have to.
@anthony patterson so is it better to be 70 and rent? Lol
If you can save 20% you are disciplined enough to continue. What about the fat stacks money? It gives me the that warm fuzzy feeling too. I can move super easy if you move in next to me. I also don't need a to get loans for my cars and for my roof and and and. B=====D~~~~
I don't know what it's like there in Ontario, but here in NY brokers fee + sales tax when you sell your home could be anywhere from 5% - 7% of the value. Surprised that's not mentioned as it makes the time that you plan to stay in the home a much bigger part of the equation. That $500K house you mention will cost you 30K of unrecoverable costs just in the fees to sell it. So if you're only there for only a year, that's 2500/mo of rent that's completely outside of any of your other equations. Obviously most people don't move that often, but it's worth mentioning!
He said this is an oversimplification. You cannot generalize without missing some ridiculous situation like living in NY. I have owned a home for decades and have experienced some details of my situation this analysis cannot consider. As businessmen know - 'there are all kinds of situations.'
You could 1031 exchange it and not pay taxes on the capital gains of the property. You would still pay the broker commission
Don't use a realtor
Robert Wiebe bad idea. Even with saving the 6% commission, statistically you lose money. You don’t know the market and timing and cost yourself more money than the realtor would earn you
@@ryanbianchi6582 where can I see the statistics?
Hi Ben. What I don't understand is how you can equate stock growth with house value appreciation? For the house scenario, you're missing out on stock growth of only 20%, while gaining value for the 80% amount that is the mortgage. For example, if you have 100k that you can either invest for 6.7% returns or put a downpayment for a 500k house, the whole house of 500k gets the 1.7% appreciation, not just your 100k. It's like investing with a 5x leverage, in a very safe asset. Am I missing something, or did you already address this in the video?
I came here to say this. His example regarding the return on real estate only makes sense if you paid with 100% cash.
Leverage from the mortgage makes the math very messy. It’s not as clean as I say in the video, but it’s not as clean as your example either. Mortgages are amortized. All the cash flows that go toward mortgage principal for an owner can be invested in higher expected return stocks for a renter. When I model it, the 5% idea (though higher in 2024) still works out. If you can get an interest only loan it will look much better than renting.
This may be the only video out on TH-cam that doesn’t assume that the viewer is an idiot. Thank you!
9/10 the viewer is an idiot though. The majority of Americans don't even have $1000 worth of liquid assets.
I saw a survey that said one third of Americans believe they would default on their mortgage payment if America went into recession (and recession could be inevitable at this point, however I am not sure the number is quite that high, it depends on a variety of factors realistically). People are financially inept.
For example, my parents put down $25K on a $345K house, 7%... And that $25K was only because my great grandmother died and left my dad with stocks. So realistically they saved nothing.
They struggled through the GFC, and no doubt they're going to struggle through this recession too. Unfortunately, my parents are a part of the vast majority, a group of people who believe all their problems can be solved by going into debt, whether it be through a mortgage that they realistically can't afford, or credit cards with exorbitant interest rates.
@@jacobday3826 Your rent payment is also a debt, you just don't gain wealth from it, like your parents are with their mortgage
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.
Honest question: how do you factor in rising rent?
Rent prices fluctuate more than increased taxes/repair bills.
In my area a +5-10% increase is not uncommon year over year.
- Especially with a red-hot housing market.
I already own a home and am not experiencing the same 5-10% increases in my cost of ownership.
This is addressed in the part of the video where it talks about cherry-picking markets where housing has gone up. Yes, if housing prices increase rapidly, that means the Real Estate investment is paying off more than the amount estimated by the video. But, you shouldn't expect previous returns in the Housing Market to be predictive of Future Returns - nobody would sell a house for $500k if they knew it would be worth $550k a year from now.
If the Housing Market isn't increasing, then Rent is also not increasing by the 5-10% you mentioned.
If you expect the housing market to continue climbing at the rate that it has, then you should absolutely be investing more in real estate, but that's no different than picking any other stock that you think is going to do well, and has the same risks.
@@coolcreep curious, have you seen a market where rent has gone down vs property values? [maybe detroit?]
@@mcavity in most markets rent is starting to soften by about 5-10%
@@coolcreep rents always go up.
@@johnraviella6561 Not true. Plenty of places where this is false; Gary Indiana, various ghost cities built in China during the 2000s and 2010s, and the list goes on. Like I said, be wary of cherry-picking.
Excellent summary, one thing that can make a difference though is the effect of leverage, that is if I you finance a portion of the home with a mortgage, you might get a better return on investment over time, depending on the appreciation of the price of the home, and the average mortgage rate.
What about having the tax benefits from the property tax and mortgage interest tax deductions?
5% is an oversimplification of comparing a rental rate to fixed rate 20 year mortgage payments with no interest and no rent changes over time.
Mortgage interest is not tax deductible in Canada. Neither are property taxes.
This isn’t USA. Plus the deduction is based on the total mortgage against the standard deduction.
Some great points, however the formula does not account for the fact that a mortgage is a fixed cost per month and rent is variable and will inevitably increase. I'd like the formula to include the average increase in rent over time which will minimize the opportunity cost of buying by progressively limiting the investment capital.
Yep. I bought my home over twenty years ago. My monthly mortgage is now 15% of what I would be paying for rent if I was renting my house. "Losing" 5% unrecoverable costs is far better than losing 100% of them, and I have saved a fortune over the years.
And in a couple of years that monthly mortgage payment will stop and I can live in my house for the rest of my life rent and mortgage free. The property tax and maintenance costs are a fraction of what I'd be paying in rent. If they weren't then how could the landlord afford to pay them out of my rent?
Plus as an owner while I have to pay for a new kitchen or bathroom it is my decision if and when to do it, and I get to choose the colour of the tiles, the brand of appliances, the fixtures etc rather than having to accept whatever the landlord decides.
I think it depends on your life style. For example if you are buying a house to live there for say 10 years like yourself then it makes sense to buy l. However someone with money may want to invest that Money say into oroperty where they receive passive income, in theory overtime paying for their rent while gaining capital appreciation. The house you live in wont ever pay you. The houses you rent out etc do. This is wht a lot of rich people rent where they live, and buy where they dont. Just depends what's best for you.
@@eezy251able How can owning a property you rent out get capital appreciation but a property you own and live in doesn't? A house you own can certainly pay you back that appreciation. I could sell it and move to a smaller and cheaper home and keep the difference or move to a rental and keep all the cash.
Also if you rent and the owner wants you out, you have to move. Perhaps you are really confortably there (close to work, schools for kids etc). And.. you can improve your home (I love to dedicate time taking care of my house).. something I wouldnt do if I rent.
I've think you've miss understood me. Owning a any property can gain capital appreciation. Hence why people remortgage their previous rented properties in order to buy another.....and so forth..
Would you factor in hold period and friction costs? Let’s say I hold my first home for 10 years then sell it. The payments for the first few years are substantially more skewed towards interest and not equity.
Good question. Due to transactional costs of buying/selling houses, unless a house appreciated dramatically in the first say 5-7 years, then a big chunk of your money is getting eaten up by these costs. Talk about unrecoverable costs!
I hear what you're saying about house as an investment of capital, and the costs of owning a home, but in the long run there is limited habitable land and a steady increase of people. Its about values, land is finite. I think people are realizing this. Houses in Toronto bought in the 50s and left to become dilapidated are still worth multi millions because if the LAND and potential for redevelopment. They just lifted single family dwelling rules so your potential to own a small apartment complex is huge.
We also have to take into consideration the fact that the cost of rent increases drastically over time. The cost of your mortgage will remain the same for the next 30 years. 20 years ago rents were significantly cheaper than they are today. Sure I can rent now for the next 10 years but I guarantee that in 10 years the cost of rent will catch up to what my mortgage would've been if I would've bought 10 years prior.
Wrong, Your mortgage will reflect the interest rate at the time. No bank will EVER offer a fixed rate home loan for a 25-30 year period
@@bromers2971 WRONG, I just bought a house with a 30 year fixed rate .
@@bromers2971 Perhaps you're in a different country but plenty of banks will offer you fixed rate mortgages on 30 year loans here in the United States.
since when has property tax remained fixed ? #fknIDIOT
@@bromers2971 They do but at a higher rate than what you would get if going a variable indexed one.
Not sure if he never blinked or if he blinked the same times as i did.
also, the $200 on my bank would prefer option number 3. . .
staying at home with my mom.
So he basically calculated the equivalent of how much money you will loose every month if you buy a house (adding taxes maintenance and interest) and then said if youre loosing (paying) less money in a rent keep renting. But he's assuming that you will use the saved money in stocks and you will deffinetly earn as much money as the price of the house you could potentially own? Bit risky no?
We both blinked at 0:37
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
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 a single childless millenial that hates responsibility I am so for renting in the cheapest, smallest, room possible. Not a house just a room. Mostly I find them on craigslist. This would make a proper calculation harder since i would have to model owning a home and then renting it out. But at that point there is extra time and work involved. So i say screw it.
My philosophy is i want the cheapest COL with the least headache. Again, this could be analyzed from a monetary standpoint but i just say the behavioural effects are strong and be done with it. I would eventually like to own a home though, and will do so with a large amount of equity. Even then. Cost of equity capital does make me think a lot about if renting instead would be worth it.
On a side note. I actually want to make the case for the emotional aspect of renting. Outside of lack of freedom. There is something to be said for minimalism and just not letting your stuff own you. By renting, I am constantly encouraging myself to keep and have less. Yet I am still making an income. Its super liberating. I feel well insulated from the problems of life. Mostly because i know I can get by with so little. And second since i can save ever so much.
I love renting for similar reasons. The biggest difference for me is that I have a wife and three kids, so renting the smallest cheapest place that I can find does not feel right. We rent a nice house. If I were single and childless I would do exactly what you're doing,.
@@BenFelixCSI Yes I can understand that. I think it is interesting how most financial advice seems family oriented. That was hard to get used to but it makes sense since most adults that are earning and spending large amounts of money have other responsibilities than themselves.
I think this is what makes the rent vs buy discussion so nuanced. If we all had to deal with as little space as possible it would be easier. But the question of how much space ot buy can differ vastly from person to person.
Dude, are you me ? I am not single but this is also how I see my life and most of my decisions come from this philosophy. My priority and what makes me happy is my freedom. And minimalism is the way I use to balance this ambition (cheap cost of life, work less, save a lot). Exactly as you said, it resolves so many life "problems" that so many people can have.
When I was young I rented rooms for 12 years. I made enough money that I was able to buy and pay for a house and still have plenty of money left. I have very quickly paid off all mortgages and invested what I would have been paying in interest. Of course things were different when interest rates were high. Today however I would prefer to rent but because may get a condo because my wife would feel more secure in a paid for condo. My mother felt the same when my father passed away, so we bought her a condo. Somehow women feel more secure in a "owned" property than a rented property. Anyway I do believe that real estate should be part of a diversified portfolio, but have found the best way to invest in real estate, strictly as an investment, is via a REIT, REIT index fund, REIT etf, or REIT mutual fund. I now view a house or condo as a consumer purchase rather than an investment.
I thought the same, until I rented a below standard big house, did a makeover myself over a couple of weeks.
I make money with the space.
There are positives and negatives to owning a home. My home is paid for, so no mortgage, but it will never truly be mine. If I don't pay annual property taxes for the rest of my life I'll be on the street. I'm basically "renting" from the state. Any improvement I make to the home adds to the property tax and any repairs are my responsibility. My central ac unit just went down last month. That's $3,900 out of my pocket. There are a million and one things/expenses that you never think about when you're renting. Plus, my neighborhood has went downhill so my home is worth less now than it was 20 years ago. Still, though, considering my income compared to the cost of renting these days, I'd have to live in a shithole apartment and be very frugal just to get by. In my current area (small town south Georgia) ownership is a better option as houses are cheap, generally making monthly mortgages much lower than monthly rent, but when I was living in Philly ownership wouldn't have made sense for me. I think it's mostly a choice you have to make based on where you are in life. I'm old and settled so owning is nice but if I were still a young man it would be hard to make that kind of commitment. Renting with short term lease agreements allowed me to move around whenever I got tired of where I was. I'd probably still be rambling around if it weren't for a pretty girl with bright blue eyes and a smile that still makes me feel all warm and fuzzy.
Aw ......the bottom line: women make men better 💕. All the best to both of you.
how is that any different from China where people can't own property? People rent from the state.
@@isaaczaiek487 No different. Governments everywhere are blood suckers.
What really went wrong in the housing market is it became an investment not a home.
you mean it's fairly priced and not an easy auto profit anymore.
Nicely said.
housing and land ownership have been investments fore almost 2 thousand years i dont think that is the problem here
What really went wrong was the government forced lenders to take on risk by establishing quotas for lending to "disadvantaged" groups and then they inevitably defaulted en masse.
Exactly. Owning is intended as a long-term home and modest investment. Buying a home and flipping it a year later is never what mortgages or home ownership was intended to be.
Might I point out that, depending on your geographic location, the unrecoverable costs of renting can be significantly more than just the rent paid. For example, a property renter may not be allowed to fix a broken plumbing system of the house, and has to wait for the property owner to arrange for it. This can incur significant opportunity costs, intangible costs, and other costs, such as for laundry/food that are over and above what would typically be spent when the plumbing system is functional. I have lived in places where renters rights do not exist, and thus the pressure to buy instead of rent is extremely high. On top of that, with markets where renters rights do not exist, the cost of having to constantly move every year or two due to rent hikes or a horror landlord can add up very quickly, depending on the size of the household.
A more careful assessment of the risks associated with your rental situation is vital to making a rational choice. Suffice it to say that my personal experience has not been very positive.
I have explored this topic many times over the past few years, this is by far the most informed, clear, data driven and methodical approach I have ever seen anyone take. Thanks Ben Felix for giving me a tool and process for calculating the investment decision. Subscribed and look forward to binge watching the rest of the channel!
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.
Living in a rental place for 29 years of my life... owning is better. You do what you wish with it and have no one to answer if you want to redecorate or change anything.
Heard of HOAs?
@@bluekeybo Don’t buy with an HOA……?
Good luck on that, almost any house in a subdivision is overseed by an HOA
@@alexland7747 80% of new builds in the US are in an HOA
But you do have someone to answer for maintenance and repairs
Great video but one thing to consider is that the gain on real estate is not only on the equity that you put in with your down payment, but with the whole value of the property.
Let´s assume that you have 100k to invest in something. Buying your dream home will be expensive, but let´s assume that you´re comparing it with renting it instead.
You´ll get 5200$ with 100k at 5,2% return.
If we assume that the same average for real estate as you mentioned (1,3%) you´ll get 1,3% on 500k instead (because you would buy a property that´s worth 500k with your 100k). You are now getting 6500$ with your 100k instead of the 5200$ from stocks while owning your dream home.
I know that the leverage with the home comes with more risk, however we are talking averages here, so it evens out.
If we include the nominal return (with inflation), then we´re looking at 15 000$ yearly on the property and 6900$ yearly on the stocks.
Just my two cents.
Over what period of time and are you including dividend reinvesting and compounding?
yes, but then I think the point he is making is that home ownership comes at a cost of maintenance, insurance, tax etc. So those better yearly financial returns you mention via buying are significantly reduced. Moreso, those financial returns of home owning are not in cash (not a liquid asset) - they are tied up in the house value. In which case you have to find cash to pay for the aforementioned costs - no?
but are you assuming -> (because you would buy a property that´s worth 500k with your 100k) that you payed 100 for something that is worth 500? I dont get it.
@@petervad I get that but the numbers that both I and he used are including those costs
@@Richard.Cabeza No because it basically works on both investments. If the value of the property goes up by 10% from 500k, then you now have a house worth 550k. Those 50k are taxable because they are "profit". Another 10% on that is 55k and so on. The "same" goes with stocks even if they pay dividends and it's also interesting to compare stocks that pay dividends because they still return less than other companies who focus on growing instead of paying dividends to their shareholders.
Great to get clarity on the financial aspect. Still, the reasons I lean towards ownership are less numerical. I don't want to be at the mercy of a landlord for _anything_ at all.
Yes, I truly think that is the greatest advantage of ownership. The greatest disadvantage of ownership is being stuck in a more inflexible situation, such as having terrible neighbors or a declining neighborhood with decreasing property values.
Of course the flipside is it’s great to call somebody and say hey come fix this and they come without asking you to pay $100 for the first 25 minutes (plumber and electrician) Or having to take out another loan To pay off the $7500 new HVAC system you had to put in
@@latsnojokelee6434 too bad maintenance never shows up
@@haylxx1 then take it out of the rent and go for the most expensive option
Is that really worse than being at the mercy of a bank…?
All this assumes that, if you rent and not buy, you'll spend your money wisely.
Yeah, right...
Yes I agree, I always looked at a mortgage and home ownership as a kind of forced savings plan...
@@ralphet9416 Or credit card. You can never look at a rental that way.
I mean I'm pretty good at it. I save over 50% of my income to invest for my future. So i seem to have good self control lol
AdonisGaming93 where i like most people are spending 50-60%of their income on rent and a 1 bed apartment in a shitty area can be 1million dollars and 2 million in a nice area
@@skywalker6648 the thing is you have to live in your house. It's something you can readly see constantly. The threat of losing your home is a pretty big deal.
The threat of losing your stock is an abstract concept.
Most Americans are horrible at using their expendable incoming on investments outside of tangible goods.
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.
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.
RENT increases yearly. Mortgages don't. I bought my home 15 years ago. Now i am mortgage free.
MY friend is still renting. His Lives in an apartment. been there over 15 years. the Rent increased from $950 to now $1850 over that period.
Matthew Orloff we know, but not really though. Just don't buy super expensive house that you cannot afford. My APR is only 3.8% of 200k house. Im paying $1.275/month that includes all(principal,interest,property tax and insurance) it is a 3 bedroom house. While renting cost 900-1,500 on a 3 bedroom apartment. And also it's a 30yr mortgage fixed rate.
@@mattorloff3400 i don't pay a mortgage,. so my housing cost is 80% less than my friend's. I pay only $350 for Taxes and Insurance. where my friend is paying $1850. no brainer.
@@mattorloff3400 Well that's because accountants are bean counters not analysts.
@@MiguelGonzalez-py5ud i pay less then 100$ a month to rent i dont see your point
A mortgage is the least you will pay. Rent is the Most you will pay!
Great analysis… two things missed out are inflation, which causes annual rent increases and the inconvenience cost of moving homes when renting
Rent doesn't always increase, sometimes it decreases.
@@alankoslowski9473 rarely.
@@lordbaron104 Even if that's true, rent is determined by the local market, and is consistent during the lease. Homeownership costs are often unexpected and unpredictable.
@@alankoslowski9473i think there shouldn't be “unexpected” expenses when younare owning a house. That is why you have an emergency fund. The bottom line is homeownership is a huge responsibility.
@@Balbinix123 Yes it is, which is why it's not the necessarily a good option for many people.
What about leverage? The ROI on real estate is usually heavily leveraged (mortgage) over quite a long time. Wouldn't you lose opertunity cost on $100k/500k, but the remainder 400k leveraged gained offset that.
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!