Renting Vs Buying A Home (What They Don't Tell You)

the age-old question of whether it's cheaper to buy versus rent a home is surprisingly controversial on the one hand we have people that say that renting is basically just throwing away your money and you should buy a home so you can start building equity and in their eyes that's way better than paying rent and making your landlord rich and then on the other hand we have the people that usually consider themselves a bit more financially savvy but say that owning a house is a liability they say that instead of buying a house you should continue renting and then use the money you would have spent on a home purchase to invest and continue to build wealth i mean that's what grant cardone says to do right i watched quite a few videos on youtube about buying versus renting and i must say i wasn't quite satisfied with any of them most of them made some kind of big mistake that resulted in really inaccurate comparisons for example in this video which has five million views they made a comparison between buying a five hundred thousand dollar house which cost three thousand two hundred and twenty dollars a month to own and assumed it would also rent out for two thousand one hundred dollars a month which is completely insane because a landlord would never rent out a five hundred thousand dollar house for so cheap two thousand one hundred dollars would be well below the market rent for a five hundred thousand 000 house so in this in-depth buy versus rent analysis i really did my best to make sure i was as accurate as possible so we can get to the bottom of this age-old debate and if you think that i made any mistakes in this video feel free to comment down below what that was and then once you're done commenting scroll back up and go ahead and like the video as well because it would really help me out and these videos just really take me a long time to make the first step to comparing buying versus renting a home is to actually be comparing apples to apples and by this i mean that we really can't be comparing owning a one million dollar mansion to renting out a studio apartment so to do this i found a house for sale on zillow it's located in grand prairie texas and is priced at nearly three hundred thousand dollars i then searched for a comparable home for rent in the same area i found this almost identical house that is listed for rent at around two thousand two hundred dollars both houses are eighteen hundred square feet have three bedrooms two bathrooms and a double garage so i think it's fair to say that the market rent for this 300 000 home is about 2 200 a month i know these houses haven't technically sold or rented at the listed prices yet but it will likely be close enough to the list price so let's break down the costs of renting versus buying these homes first i want to make clear a few assumptions that i'm going to be using since homeowners stay in their homes for an average of 13 years i'm going to calculate whether it's cheaper to buy versus rent over a 13-year time period i'm also going to be assuming an annual inflation rate of 2 which is how much more expensive things will get year over year over the 13 years okay so let's take a look at the costs of renting this 300 000 house and side note there's no way i can remember all these numbers off the top of my head so i'm going to be reading a few of them off of my laptop here so we worked out earlier that the market rent for this home is around 2 200 a month another cost you'll have when renting is renters insurance which i found a quote for 20 a month you'll also have one more cost when you're renting and that's all the many fees that landlords will tack onto it for stuff like smart home features parking and utility management i'm going to assume 80 a month for these fees which brings our total monthly payment to 2 300 a month but this is only our payment for the first year throughout the 13 years that we live there our rent and other expenses will continue to rise because of inflation so i'm going to assume that our rent and other expenses will increase with inflation which is 2 percent annually this means that even though we start out renting at two thousand three hundred dollars a month as rent rises over time we're going to end up paying over two thousand nine hundred dollars in year thirteen i'm going to take the average cost of rent over the thirteen years which is two thousand six hundred dollars a month so this is our total average inflation adjusted rent now we have to calculate the money we can make by investing the money that we saved by choosing to rent instead of buying the three hundred thousand dollar home the average down payment for a home in the us is 12 of the purchase price so i'm going to assume that we are the average so 12 of a 300 000 home is 36 000 if we had bought the home then we would have also had to pay around 2 of the homes price and closing costs so we've also saved an additional six thousand dollars when renting we do however usually have to pay one month's rent to the landlord as a deposit so if we total these numbers up then the amount we saved by choosing to rent versus buy a home is eight 41 dollars we can invest this money to make additional income so let's say we invest it into an s p 500 stock market index fund which has historically returned eight percent annually then after thirteen years we would have turned our initial investment of forty one thousand eight hundred dollars into one hundred thirteen thousand six hundred and eighty dollars which is equivalent to around four hundred and sixty one dollars a month in investment income we can subtract this number from our total monthly cost which gives us two thousand 2139 which is our true average monthly cost of renting this home over 13 years so now let's take a look at the numbers if we were to buy this 300 000 home instead of renting it in this case we're buying the house with a 36 000 down payment and paying six thousand dollars on closing costs which totals forty two thousand dollars the rest of the money to purchase this house will come from a mortgage loan and right now the average thirty year fixed rate mortgage is around two point eight eight percent so that means that the monthly mortgage payment will be one thousand ninety six dollars a month unlike renting this number is fixed so we don't have to worry about adjusting for inflation which is one of the benefits of buying a home versus renting but there are so many more costs to owning a home and these costs will increase with inflation you have to pay things like property taxes and for this home i worked out that the average taxes paid over 13 years will be 610 a month you also have to pay homeowners insurance which will average 110 dollars a month and one expense that many people forget to factor in when buying a home is the cost of repairs and maintenance on the home for example let's say that every 15 years you have to replace your roof and that this will cost you 15 000 then you have to set aside one thousand dollars each year to budget for this repair so for repairs i'm going to assume that it's going to cost on average 200 a month we also have to pay mortgage insurance which is 130 a month this is an extra payment that you have to make in order to secure the mortgage lender when you have a down payment that's less than 20 and since ours is 12 we have to pay it this brings our total monthly out-of-pocket housing expense to 2145 but here's where it gets interesting when you make monthly payments towards paying off your mortgage a portion of that goes towards paying off the interest of the mortgage and the rest of that goes towards paying the mortgage principal during the 13 years we own the house we will be paying off around 560 a month in principle which is equity we're building in the home so it's not really a cost it's more like a forced savings account that's trapped in your home until you sell it or refinance it another form of savings that we receive by owning a home versus renting is tax savings as a homeowner we're allowed to deduct our taxable income by the amount we spend on mortgage interest payments and property taxes so in this case we'll spend 1146 dollars a month on interest payments and taxes so we'll be able to reduce our taxable income by this amount and if we assume that our marginal tax rate is 22 that means we're going to be able to reduce the amount of taxes we pay by 252 dollars a month another form of income that we'll gain by owning a house is appreciation over a long time horizon housing has historically always increased in value i know that the real estate market has increased around 18 this year but this isn't sustainable data has shown that real estate has historically kept pace with inflation so we'll assume that our house will go up in price around two percent a year so in 13 years our house will actually be worth 388 000 so on a monthly basis we'll be gaining around 565 dollars in appreciation which is a gain we can subtract from our housing expense but we're not done yet we also have to factor in how much it cost us to close on the home which we said was six thousand dollars as well as the cost of selling the home after thirteen years i'll assume that this will cost seven percent of the sales price since the typical realtors fee is six percent and you also have to pay for a few other different things when selling a home even though we pay these expenses when we actually go to buy or sell the home i'm going to stick to calculating everything on an average monthly basis so this will cost us 213 dollars a month this brings our net monthly cost of owning a house to 981 dollars a month but there is one final step that i feel is only fair to include since in the rent example we calculated how much we could make through investing our housing down payments it's only fair in this buying example to also include the extra money we can invest monthly since our housing payment is lower than our rent payment since our out-of-pocket rental cost is 2 600 a month and our out-of-pocket housing cost is 2145 dollars a month our out-of-pocket housing cost is 455 dollars less than renting which is money we can invest into the stock market at an eight percent annual return this will actually make us a massive 117 364 dollars over 13 years which is equivalent to 752 dollars a month in extra income so i know this sounds ridiculous but if we take this into account then the true cost to own this 300 000 home is actually and twenty nine dollars a month and i know it's crazy to go from an out of pocket housing cost of two thousand one hundred and forty five dollars and somehow end up at a true cost of two hundred and twenty nine dollars but that really is the power of tax advantages house appreciation equity build up and investing the difference so in this scenario buying a house is actually 1 910 cheaper than renting that same house for 13 years with that being said though there are just so many factors that can change the results of a buy versus rent analysis to name just a few your tax rate how long you stay in the home whether you invest or not how much the housing market appreciates and the rate of return on your investments are all things that can change the result of what's cheaper just because in this scenario it's cheaper to buy a house doesn't necessarily mean that it doesn't make sense for you to rent if you don't want to worry about housing repairs buying and selling a home and want to have the flexibility to be able to move whenever then renting is probably a better option for you than buying another thing that's important to note is that as our analysis showed us buying and selling a home is expensive so if you only plan to live in the home for a short time then you won't have as much time to recoup these costs so it would make more sense to rent overall it will usually make more financial sense to buy if you're planning on living in the same place for three to five years or more so that's the analysis i did on buying versus renting and i hope it was helpful for you and i hope it helps you decide whether to buy or rent like i said if you think that i missed anything feel free to drop that in the comments down below and i'll see you in the next one take care

Channel: Karson Gaule

Views: 600,906

Keywords: renting vs buying a home, rent vs buy, real estate, buying vs renting a house, buying vs renting apartment, renting vs buying, renting vs owning a home, dave ramsey, renting vs owning, is it cheaper to rent or buy a house, buy vs rent house, buy or rent a house, rent or buy a house, real estate investing, real estate investing for beginners, personal finance, graham stephan, should i rent or buy a home, should i rent or sell my home, should i rent or buy a home in 2021

Id: -A_31pId-hY

Length: 10min 51sec (651 seconds)

Published: Mon Oct 04 2021