Renting vs. Buying (detailed analysis) | Housing | Finance & Capital Markets | Khan Academy
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Detailed analysis of the rent vs. buy decision. Created by Sal Khan.
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Finance and capital markets on Khan Academy: Is it always better to buy than rent? What if home prices go up dramatically and rents don't? How can we compare home prices to rents to figure out what to do. This older tutorial (low-res, bad handwriting) walks us through this. It is about housing but similar thinking can be applied to any rent-vs-buy decision (spoiler alert, Sal did eventually buy a home).
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can you remake this video with better quality?
thank you. you are the best finance teacher I have ever had. you make Finance very relevant to our daily lives, easy to understand(even for first time learner) and really help us reconsider our life decisions in a brand new perspective. I can't express how much gratitude I have to you. Thank you so much!
This is a wonderful video. As a home owner and as a renter I fully agree.
What he doesn't even mention though is that as a home owner you are fully responsible for any repairs that the home needs. If one day you have a lot of leaks in your ceiling and discover that your home needs a new roof, an owner has to dig deep and pay it, while a renter just calls the landlord.
Over a long period (30+ years) owning a home will do better than renting, much better. However, it's becoming less and less common for people to stay in the same job/location for that long.
I've been playing around with the spreadsheet he made available here: www.khanacademy.org/downloads, and he does include annual maintenance and housing association dues. However, I believe that his annual maintenance is too low.
If you were playing around with it, you know you can change the annual maintenance and housing association to anything
Rodney Burton Pennymac is the worst loan company to have, if your mortgage has been placed with Pennymac REFINANCE!
They have been running an agency around for the past month for one of their clients who escrows regarding his renewal payment to the point it is now up to the client to pay the bill or his insurance will lapse. NEVER has a real mortgage company allowed this to happen, they would pay the bill twice before allowing a lapse and exposing themselves and the clients interest. Every time we called and asked for a supervisor they "transferred" us and we were "accidently" disconnected. We have been told numerous times it was overnighted, then it was sent regular mail and one of the employees actually told me I could pay it and send them the dec page. They called repetitively asking the same information to "handle" the situation and by the time we moved up to a supervisor we were disconnected. For professional as well as ease of mind if you are a client we strongly encourage you to refinance and stay away from this company!!!!
Nope, buddy. Renting is even better in the long-term of 30+ years. The stock market compounding will destroy the shitty returns from real estate.
@@hacker3191000 yup
Sal: my son's HS math teacher at a private school in DC who know's you introduced me to your site. My 11, 14 and 17 will surely benefit!
We recently had to review the Rent vs Buy but we went a step further: the equity from the sale of our house we invested in Commercial real estate. We ended up with a positive cashflow that pays for our rent in an even nicer house than we used to be in.
This is the most impartial analysis on rending versus buying. Other videos on youtube or other places have a vested interest for either realtors or other business organizations trying to sell or rent out their properties. Thanks a ton for making this video Sal.
As a much-loved professor in a quite different field let me say: you're a born teacher, generously imparting the harvest of what you know.
Now if only you could do a single vs marriage scenerio :)
Khan! I want to communicate to you that all effort and hard work you put out into making these videos is much appreciated...I will continue to watch all your videos put all these tips into practice to create my own financial independence also will assist more parties so that I can give my family and friends the link to your channel.
Thanks again Omar
great!thank you! you should post a comment on the first video renting Vs buying telling those guys you have take it a step further and actually explain,even better, what most people assumed. They sound a bit frustrated,indeed.
Hi Salman, Thank you so much for doing a wonderful job and I really am addicted to your website on everything. I first visited your website while I was googling for finance videos and once I am in your site, no looking back. You have an extra ordinarily gifted with your knowledge and teaching skills and I have recommended this website to all of my friends and family. Again great job on your commitment.
Thank you very much. Now I have something to take to the guy at work who keeps nagging me to buy his house instead of continuing to rent.
This is important to me since I like my freedom and flexibility in moving. And I noticed that you even left this valuation out of your in-depth model. As you noted in one of your prior videos - this could have a tremendous impact on employment options. 30 years is a huge range of time over one's employment lifespan.
This is the educational video I have seen so far... Great and practical analysis...How practical can it get than this one...This analysis should be in some text book for real estate students or for every citizen and this decision is important to everyone in USA especially after this crisis...We can remove a useless lesson in history an add this lesson to our textbooks so that americans are not fooled by this mortgage companies..
these videos have helped me a lot
Brilliant worksheet!
Khanacademy rocks!!!
bless you brother.
Well, in the end, it all depends where you live and in what economic cycle. In 2016 in Germany, you had 1% fixed interest rate for 10 years mortgage loan, and at the same time, you had negative interest rates for savings. Also, inflation was below 1%.
Not used to horizontal amortization tables, but great video!
OMG you are a genius. thank you so much for sharing your knowledge. I love your videos and I think that you amazing. Thank you!!!!!!!!!!!!!!
Great video,
Another assumption you are making is that renters will actually be able to keep up that steady savings rate.
I think that is more significant of a factor then you think, as most renters are generally have nothing after 20 years of renting.
Well done!
Good information.
Sal, great videos regarding the buying versus rent analysis. I go back to them often to brush up on my knowledge to make sure I am thinking straight. I appreciate the Excel Model, too. However, I have one question: regarding the Present Value benefit of owning versus renting for 10 years, why is "n" in the equation not 120 instead of 10 (since every period in this model is a month and not a year)? Or somebody else with a educated insight please chime in. It is possible that I am misunderstanding "n" in the equation. Thanks, cheers.
hi, does this apply to condominiums too? if not, can you make a video addressing them?
a couple years ago landlords were renting at 50% below cost. They were fighting to just get people to help pay the expenses.. . Its amazing after what we just went through with the housing market, people still don't understand how renting can be more beneficial. Letting a bank hold on to a lump sum for them to profit off and then turn around charge you interest for the loan, and on top of that, its your responsibility to take care of the home even though you don't own yet. bank has a good scam
I'm a financial analyst (in Costa Rica) and I'm completely sure that there is no way that buying is better than renting. I made my own model (even more conservative) and all my scenarios results in the same conclusion. In the US, in Costa Rica, or China, renting is better.
@friendly37 It's not just rent. It is cost for keeping the house i.e. repairs, insurance, property taxes, etc. The math changes accordingly.
Where is downloads go and how to save this in excel sheet
Can you share this spreadsheet?
What happened to the assumed annual return on cash for renting you put at the beginning? You consider home value appreciation, but not growth on savings. That would widen the gap considerably.
From you spread sheet it appears that after the correction you make in the end, you actually save $21426 after 10yrs if you BUY a house compared to renting for 10yrs. Please clarify this.
Please download the spreadsheet to see this for yourself.
Gopimohan Das Pennymac is the worst loan company to have, if your mortgage has been placed with Pennymac REFINANCE!
They have been running an agency around for the past month for one of their clients who escrows regarding his renewal payment to the point it is now up to the client to pay the bill or his insurance will lapse. NEVER has a real mortgage company allowed this to happen, they would pay the bill twice before allowing a lapse and exposing themselves and the clients interest. Every time we called and asked for a supervisor they "transferred" us and we were "accidently" disconnected. We have been told numerous times it was overnighted, then it was sent regular mail and one of the employees actually told me I could pay it and send them the dec page. They called repetitively asking the same information to "handle" the situation and by the time we moved up to a supervisor we were disconnected. For professional as well as ease of mind if you are a client we strongly encourage you to refinance and stay away from this company!!!!
at 13:49 why does your cell on row 56 say 480,044 when the spreadsheet we download says 419,548
@friendly37 the video taht comes right before this one on the playlist talks about that, when he made the video he did not own a home, he rented it because it was the better choice for him.
what is the website to download the excel sheet?
Sal, If I try a higher rental payment to be more comfortable living. There is an error in the final calculation.
@johns2mc Notice the rent @13:13 It is the same over at least two months. Apparently, there was an error in the spreadsheet when he made this video.
You rock Khan,this is exactly what I need right now.Congrats on making it on CNN.
One point: The present value of buying assumes that you will sell the house you bought, at a SIGNIFICANT 6% selling cost. A more flexible, telling answer can be obtained by zeroing selling cost and figuring present value after 1month. This tells you the difference accruing per month: 'D/month' (actual math more complicated, but close enough to b linear). Then this formula tells months needed for present value of buying to equal renting (if applicable): Selling costs - (# of months * D/month) = 0
What about the costs involved in purchasing the house? Such as closing costs
Yes, very true
You really need to trip load this with better quality
I think another expense you can add for owning a home, that only occurs when owning and not renting, is property damage. Say a hurricane rips half your roof off, if you own then you have to pay to fix it, if you rent then the landlord does.
I know plenty of people renting there investment homes below mortgage cost just to hold on to their homes. I also know people who purchased homes well before market inflated and they rent at levels much lower than those who bought 5-9 years ago. I much rather have the freedom to move and upgrade, or downgrade when necessary versus being indentured for 30 years to a Mortgage. During good economies buying looks great but during a downswing I rather be a no stress renter. Swings will occur.
Why are the savings values if renting after 10 years in the actual model different than the savings shown in the video? The model shows $419,548 vs. the $480K above. The assumptions are identical. Anyone?
How can mortgage compound every month if you're paying the interest in full each month? There's nothing to compound. Can someone explain?
Living in the world that is spinning, Salman Khan is the bringer of stability and success. He snatches the sceptres from the deceivers who wish to deprive the simple-minded from their wealth.
maeon3 Pennymac is the worst loan company to have, if your mortgage has been placed with Pennymac REFINANCE!
They have been running an agency around for the past month for one of their clients who escrows regarding his renewal payment to the point it is now up to the client to pay the bill or his insurance will lapse. NEVER has a real mortgage company allowed this to happen, they would pay the bill twice before allowing a lapse and exposing themselves and the clients interest. Every time we called and asked for a supervisor they "transferred" us and we were "accidently" disconnected. We have been told numerous times it was overnighted, then it was sent regular mail and one of the employees actually told me I could pay it and send them the dec page. They called repetitively asking the same information to "handle" the situation and by the time we moved up to a supervisor we were disconnected. For professional as well as ease of mind if you are a client we strongly encourage you to refinance and stay away from this company!!!!
The marginal tax rate part of the model is not correct. You can only deduct interest if you itemize on your tax return instead of taking the standardized deduction. Even if you itemize, your marginal benefit is the excess of your marginal tax rate multiplied by the excess of your itemized over your standard deduction.
Salman,
I always have the same question on the same topic ( Buying vs Renting). I have a question with the spreadsheet, The sheet shows renting is better when you are going for a bigger home(higher price) but when I calculated the same for a 250k home and with 20k down payment, it is suggesting that buying is a better option, can you explain me on that please.
Thanks,
there are two reasons, firstly the rent should be adapted to the value of the house, secondly, as I also commented above if you change the ratio of debt to equity you are changing the leverage on the investment in the house, which makes these situations not comparable
ok for you, that might be true, but in the las vegas market, buying a house is a no brainer. rent has surpassed mortgages, because the market is ripe with foreclosures, to the tune of probably over 40% of the market is underwater and out of a home. With that, people have to live somewhere, and rents shot up. first and last, plus cleaning deposit. and no no no you pay water and electricity while renting here. The only places that you don't, you wouldn't want to live in.
The excel is gone. Can't find.
4081 Kimberly Ave
La Verne, CA 91750 up $635,000 1978 to 2011
Price History
12/3/11
Sold
$719,000 up $179,000 from 2008-2011
05/01/2008
Sold
$540,000
12/11/1978
Sold
$84,000
the idea is that you save those money in the bank, BUT as we know everybody will tell himself, "well i have 100k in the bank, lets buy a fancy car that i do not need" and in 10 yeasr your friend that buyed house will have place on his own, and you will have NOTHING
He has stated previously he rents. Even if he didn't, what does that have to do with the math he did?
When you deduct your interest, you have to itemize: you lose your standard deduction. So unless you have $17,800/year or more in interest (assume you pay 35% in taxes; lower tax bracket, higher number), you're disadvantaged. That's the break-even tax advantage. At 4.25% that's 4.337% APR, you need a $410,421 house to get a tax advantage.
You really need a financially crippling house before owning is better than renting. Put that money in your 401(k) and savings.
Hope you can give me feedback. Does this still applies in a market, for example where I am, that after 3 years my house has double in value? prices are crazy right now, I would love to sell but I can't afford it because in order to buy I have to compete in multiple biddings so I am wondering if it is the best time to rent or keep my house, or move farther away and make a profit? once again, it is sellers market right now
Let’s use Target’s sudden drop as a base, analogy:
“Its stock plunged immediately after the announcement Tuesday morning, and closed down $8.14, or 12.2 percent, at $58.77. It was the largest one-day drop since 2008”. :o)
If you think you can muster up a buyer who is willing to pay more than 12.2% of the “current assessment, value” of your property...
Then this means that you’re in the neutral, zone.
...Agree?
Sal's the head of Landlords union. So he is basically driving up the number of customers... MUHAHAHAAAAHAHAAAA
Who else is watching it in 2020?
Yo
Me
12:38 this came true
this is kind of a big deal because if we use your "reasonable assumptions" owning a house is better than renting a house after 1.5 years.
I believe there's a mistake in the formula to calculate the "Monthly mortage payment" on the video and hence also the spreadsheet he gave. Used instead the "Monthly mortage payment" that he used on his other video here (th-cam.com/video/y-1Gh4ewklY/w-d-xo.html), whose spreadsheet also available for download.
2552 Foothill Blvd APT 107, La Verne, CA 91750
For Rent: $1,900/mo
Beds: 2
Sqft: 1076
Baths: 2.0
to pay 2k rent need 3k to be taxed 1st!
But on a sidenote - I would not have the job that I have now if I was tied down with a mortgage, etc. I would not have even had the nerve to consider risking that move. And the new job, that I was able to take, boosted my income by 50 to 70% within the first year. It's a bit scary to think that I'd likely be broke or bankrupt (tied to a mortgage) making half what I am now - if I bought a home 5 years ago.
You have added the cost of selling i.e. the brokerage cgarges as well but if you really want to compare renting and buying after 10 years you should also include what is cost(brokerage charges) of buying a house with the saved money from renting beacuse at the end of the day you did all this to have a house, becaue if you dont then what is use of doind all this. so either exclude the brokerage charges for selling or include it in for buying the house after 10 years as well.
Here is the link to the spreadsheet www.khanacademy.org/downloads/buyrent.xls
thanks :)
I think you should redo this video with current prices. A $750K now you better pay cash! $750K is way to expensive for a roof and one should re-evaluate their lifestyle if they think they need to borrow $600K for a house... I'd hope they have strong job security, no debt, and making great money 250K+
@hmongpabhmong Or maybe he said that renting is better for his situation, and that you should do the math for yours.
Do the math. Rent insurance is like $10 a month vs. $100 for home owner. Most renters have water/garbage collection covered, home owners don't. I rent and have taken out business loans with no issue, as long as you can show you have steady income and savings. I would say most people in general, renters and mortgage borrowers (you are not a home owner until you paid it off) don't save.
where goes the depreciation ? because depreciation is also tax deductible and in a house is 27.5 years
It says your total cash after 10 years of owning is 445,666 and 480,044 for renting. So why is the owning vs renting number not a NEGATIVE number?
For certain number formats in excel a number in parenthesis means it's a negative number, which is the case in this video
Robert Hill Pennymac is the worst loan company to have, if your mortgage has been placed with Pennymac REFINANCE!
They have been running an agency around for the past month for one of their clients who escrows regarding his renewal payment to the point it is now up to the client to pay the bill or his insurance will lapse. NEVER has a real mortgage company allowed this to happen, they would pay the bill twice before allowing a lapse and exposing themselves and the clients interest. Every time we called and asked for a supervisor they "transferred" us and we were "accidently" disconnected. We have been told numerous times it was overnighted, then it was sent regular mail and one of the employees actually told me I could pay it and send them the dec page. They called repetitively asking the same information to "handle" the situation and by the time we moved up to a supervisor we were disconnected. For professional as well as ease of mind if you are a client we strongly encourage you to refinance and stay away from this company!!!!
Thmbs up if you thought of blockbuster,redbox,Movie renting kiosks at first :] i did lol i felt stupid
Buying I pay my mortage and then let Uncle Sam calculate my taxes, My taxable basis is directly reduced by my mortage amount, So I rent a $1650 apt, = $20k a year, to have $20k I need to earn $29,000 to pay $20,000! While if my mortage is $1,650 on a 15 yr mortage, my amount of income required to pay $20k is $20k!!! not $29k, 15 yrs renters out $435,000 buyers house worth $400k plus now!
rent is from taxed income, buying isnt!
02/21/2012
Sold
$2,375,000
Public Record
12/26/2002
Sold
$1,375,000
$1,000,000 OVER 10 YRS = $100,000 A YEAR APPRECIATION NET!!
EQUIVALENT TO A $130,000 A YEAR 2ND JOB!! WOW!
No one is in rent business to loose money.
Lose. Not loose.
tranbryant Thank you
John Samuel Pennymac is the worst loan company to have, if your mortgage has been placed with Pennymac REFINANCE!
They have been running an agency around for the past month for one of their clients who escrows regarding his renewal payment to the point it is now up to the client to pay the bill or his insurance will lapse. NEVER has a real mortgage company allowed this to happen, they would pay the bill twice before allowing a lapse and exposing themselves and the clients interest. Every time we called and asked for a supervisor they "transferred" us and we were "accidently" disconnected. We have been told numerous times it was overnighted, then it was sent regular mail and one of the employees actually told me I could pay it and send them the dec page. They called repetitively asking the same information to "handle" the situation and by the time we moved up to a supervisor we were disconnected. For professional as well as ease of mind if you are a client we strongly encourage you to refinance and stay away from this company!!!!
Nobody's in the "give other people money to buy homes" business to lose money either.
VIDEO QUALITY IS PAINFUL!
From 2008 genius....
What are your friends houses worth now compared to 5 years ago? If they tried to sell it they would lose their asses. No argument. Takes a long long time just to regain the 40% lost the last ~3-5 years. Given the last 20 years and the downfall, I have to say Im right. Theres no argument once again. Better bet is treasury bonds. 4-5% growth if I remember right. If your friends would have rented from start to finish and invested in those theyd be millionaires and wouldnt have to deal with renting.
HOUSE #3
3598 Alta Mesa Dr
Studio City, CA 91604 UP $779.000 IN 9 YRS
10/20/2011
$1,849,000
SOLD IN LESS THAN 2 MONTHS
09/08/2011
Listed for sale
$1,849,000
UP $779,000 OVER 9 YRS ALMOST $90K A YEAR UP
04/02/2002
Sold
$1,070,000
--------------------------------
I can't wrap my head around why he wants to sell the idea that renting is better. The renter pays: principle, interest, taxes, insurance AND profit, along with all the utilities in their name. The renter can't deduct any of that.
He also neglects to state the fact that a bank will talk to a person that owns a home, about taking out business loans, home improvement loans, etc etc. Renter can't do any of that.
And, most renters don't save, am i right? That's why we have negative savings.
recorded with a potato ?
recorded in 2008...
They had bad quality potatoes back then?
Hey, want to co-author with me on this book The Housing Conspiracy! Download it at: Lulu.com
240p 😪
So you are saying you are a millionaire yet you are watching "renting vs. buying?" Go troll somewhere else please.
It has nothing to do with his explanations, but this video didn't age well. At all. Back then, all this video needed to say is that you'll lose your shirt by buying right now.
Why is the detail so bad
I have buyed an appartment and i am so happy that i am obligated to pay to the bank instead of waiting to accumulate the money i need for buying appartment. I have friends that say that they will marry when they have their own home, but they do not want loan, so they "save" money and, 5 years later they do not have anything saved .. i am not sure if they ever gonna marry
Burden of proof is still on you.
Dude, you go to totally boring parties
Sal, love all your work but your assumption on renting a million dollar home at $3,000 is not possible. Here in CT a home valued at $175,000 will rent all day long at $1,500. You are not renting a million dollar home for $3,000.
I do. Actually 2k
at the time the video was made, yes you could in northern California
Glen Boggini Pennymac is the worst loan company to have, if your mortgage has been placed with Pennymac REFINANCE!
They have been running an agency around for the past month for one of their clients who escrows regarding his renewal payment to the point it is now up to the client to pay the bill or his insurance will lapse. NEVER has a real mortgage company allowed this to happen, they would pay the bill twice before allowing a lapse and exposing themselves and the clients interest. Every time we called and asked for a supervisor they "transferred" us and we were "accidently" disconnected. We have been told numerous times it was overnighted, then it was sent regular mail and one of the employees actually told me I could pay it and send them the dec page. They called repetitively asking the same information to "handle" the situation and by the time we moved up to a supervisor we were disconnected. For professional as well as ease of mind if you are a client we strongly encourage you to refinance and stay away from this company!!!!
go chase some girls or something