- All right, so we've got a little bit of a problem here.
This little hole right here
is going to cost us about $6,000 to fix.
Historically, home ownership has been a symbol
of the American dream.
If you had a good job, 2.5 kids, and a white picket fence,
you were considered successful.
The home has represented financial stability,
physical security, and upward mobility.
Many of us want a home that we can call our own,
even if it's just to tell our landlords to (beep) off.
- Where's the rent?
- I can give you half.
- [Matt] But it's not so easy anymore.
In recent decades, the rise in cost of homes
has outpaced inflation and median household income.
- [Reporter] Moody's Analytics says
more than half of America's largest regional markets
are significantly overvalued by 25% or more.
- [Matt] As a result, home ownership rates
have trended downwards,
specifically among younger Americans
who are already crippled with student debt.
Despite these challenges,
home ownership continues to be a goal for many.
But when you really do the math, things might not add up.
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After renting for over a decade,
Nat and I decided to buy our first house.
So we searched, found, lost, tried again,
and eventually purchased the home of our dreams.
But three months after moving in
and we're starting to face the reality
of what it means to be homeowners,
and it's not all it's cracked up to be.
We've run into so many unexpected costs, headaches,
and dramas in moving into our first house
that it's forced us to ask the question,
did we make a big mistake?
When it comes to answering this question
and determining whether it's a good idea to buy a home,
the internet has a lot of opinions
and it can all make your head spin.
- The housing market is rebalancing.
- Generally, rental prices are extremely stable.
- 2023 could be a very happy new year for buyers.
- There's less ability to purchase
because people don't wanna pay 7%.
- And there should be more opportunities for buyers.
- [Matt] To help me make sense of it all.
I turned to personal finance expert, Ramit Sethi,
to get his take.
Is it better to rent or buy?
- Okay, great question.
So just so everyone knows,
I've lived in San Francisco, New York, and LA.
These are all very high cost of living cities.
In each of those cities it made no financial sense
for me to buy.
Now, this is, people hear this, it's blowing their mind.
They go, "What are you talking about?"
If you live in Oklahoma
it might make a lot of financial sense to buy.
There's not a lot of rental options
and the house prices are fairly modest.
In Manhattan, the place I was renting,
there was a unit basically next door, same size, same view,
it would've cost me over two times to buy
when you factor in insurance, taxes, maintenance,
and a variety of other fees.
- [Matt] According to Ramit, it's not as simple
as buying is always better or renting is a waste of money.
It comes down to your own specific set of circumstances.
- So just to give you an example,
let's say the rent was $3,000,
where I was it would've been over $6,000 there.
You know what I did?
I took the $3,000 difference
and I invested it in the market,
and the market has returned way better
than what I could have gotten by buying a place.
- [Matt] If that's the case,
why would anyone want to buy?
For starters, there are a lot of emotional decisions
wrapped up in home ownership.
People feel a sense of security, stability, and control
from owning a home.
But when it comes down to it,
most of us just think it's a better financial decision
and that's because of a little thing called equity.
When you buy a house, you are investing in an asset
that can appreciate in value over time.
So instead of paying rent each month,
you're throwing that money at your mortgage.
As you pay down your mortgage
and the value of your property increases,
you build equity in the home.
As a result, in the future you'll probably be able
to sell your house for a profit.
For this to work in your favor, the numbers need to add up.
If you overspend on your house, buy in a bad market,
or run into unexpected problems,
you could end up losing money.
So if you're thinking about buying a house,
how do you make the best decision possible?
- You have to run the numbers
on a rent versus buy calculator.
- Cool. Thanks, Ramit.
Let's do it.
All right. So I've found myself
a buy versus rent calculator.
Let's run the numbers on what it looks like
to buy a house where I live in Sydney.
Now, this calculator is intended
for people buying a home in the US,
but I think it'll help us paint a close enough picture.
All right, so the first thing that they want to know
is the price of the home.
So let's plug in the median home cost in Sydney,
which is $1.25 million.
And I know you might be thinking,
"Matt, that's a lot of (beep) money," and you'd be right.
That's exactly why young people aren't buying houses,
especially not in major cities.
And now the calculator asks some pretty obvious questions.
How long do you plan to live here?
What's your mortgage rate?
What's your down payment?
What's the length of your mortgage?
Now we need to rub our crystal ball
to predict our likely investment returns.
And the best way to do this
is to look at the historical trends
over the past 30 to 50 years.
These are some of the most important factors to consider
when buying a home.
So what's the annual growth rate of your home?
Sydney houses historically grow at a rate of 6.5% per year.
Now, there's always gonna be variation to that number,
but this trend gives us the closest picture.
What's your investment return rate?
So this is what you'd think you'd make
if you put your money in the stock market
instead of investing into a house.
And according to the S&P 500,
the average annual return over the past 90 years
has been around 10%.
And from here, we dive into the not so obvious,
adding the average rate of inflation, taxes, closing costs,
selling costs, maintenance, renovations,
insurance, utilities, and HOA fees.
That's just to name a few.
And now, after plugging in these numbers
this calculator is telling us
that if you can rent a similar home
for less than $1,048 a month,
then it's better to rent.
And having looked myself,
I can promise you that there are no homes
for rent in Sydney for $1,000 per month.
So that makes buying the best decision.
Now, you just need to save up
a small upfront cost of $300,000
to afford the down payment and stamp duty,
and you've got yourself a stunning one bedroom condo
with no natural sunlight
in one of the most beautiful cities in the world.
One thing is for sure,
running these numbers is so much more complicated
than you might have realized.
And there are a lot of hidden costs to buying a house
that hopeful homeowners usually brush aside.
And even if you do your best to calculate potential costs,
you may get it completely wrong.
And that's what happened to us.
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Ta-da.
Buying a real home might not be
such a straightforward decision,
but getting an internet home is a no-brainer.
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So to get the most of what we wanted from a home,
Nat and I bought an old house, a very old house.
It was built back in 1890.
On the listing, they called it charming.
To give you a reference point
that was around the same time that cars were invented.
Also, the ice cream cone, which apparently has a patent.
So yeah, it's old.
And as with all old things, it requires upkeep,
maintenance and repairs in order to keep it standing.
Even in the best case scenario
this can be time consuming and expensive.
In the worst case scenario, it can become a money pit,
especially if the previous owners cut corners.
This was our rudest awakening
when it came to home ownership.
We had prepared for higher interest rates, new furniture,
and some small renovations, but we just weren't prepared
for how much the bills would add up.
We thought, hey, we'll add a little bit of paint,
polish the floors,
maybe do some cosmetic work on the bathroom.
Next minute, our house turned into a construction site.
For every problem that we tried to fix,
we'd find five more in its place.
Take the floors, for example.
So these floors are beautiful.
We really love the way that they turned out,
but they cost 15 times what we budgeted for.
It's a lot of dough.
When we bought the house the entire first floor
and most of the second floor were covered in carpet.
So we thought, no sweat.
Let's remove the carpet
and reveal the beautiful hardwood floors underneath
because surely there are beautiful,
pristine hardwood floors underneath, right?
Incorrect.
What you find under the carpet is a complete mess,
and the floor is quite dramatically sloped to one side.
No worries though.
Let's pull up that subfloor and redo it.
Easy fix, right?
Incorrect again.
What you find under the subfloors
is that the bearers and joists are installed poorly,
and they are rotting from termite damage.
You also learn what a bearer and joist is, which is cool.
They're basically the thing that separates your floor
from the ground.
Unfortunately, the floors weren't done betraying us yet.
So this little hole leads directly down into our subfloor.
So whenever it rains, it floods the bottom of our house.
With no drainage system here,
there's really nothing we can do to stop it.
This wouldn't have been a crazy fix,
but when they looked at our connected storm drain
they found tree roots had broken through
and filled half the pipe.
So you fix everything from scratch doing it right this time,
and in the process discover why the previous homeowners
cut so many corners.
Doing it the right way is expensive as hell.
When you factor in everything
a $2,800 job just turned into a $50,000 job.
These are just some of the expenses that we faced
within the first three months of owning our home.
And while these costs might be extreme
because our house is 130 years old,
most homeowners fail to accurately account
for all the additional costs that add up.
And if this is starting to give you pause
as to whether or not you should buy a home, it should.
But it doesn't mean that you should rule it out completely.
- My message is not you should only rent.
That's not my message.
My message is for the biggest purchase of your life,
you better run the numbers.
You should decide if renting versus buying makes sense.
You should decide on when you would buy
and can you afford it?
And you should have certain parameters
like your housing cost should be less than 28%
of your gross, ideally.
These are things you need to know before you go out
and make the biggest purchase of your life.
- All of this means that you can't
and shouldn't make home ownership
a purely emotional decision,
which let's be honest can definitely happen
as you're touring homes, scrolling Zillow,
and falling in love with houses
that are just outside of your price range.
It's easy to keep compromising financially
as you get caught up in the dreams
of what your future might look like in any of these homes.
But to make sure that you're making
the best decision for your future,
you need to be realistic
with how much it's actually going to cost.
After running the numbers for ourselves,
Nat and I found out
that it in fact does make financial sense
for us to buy as opposed to rent,
which is great 'cause that would've been really awkward
if we invested all that money into a house and realize
that the numbers that we initially calculated were off
because we didn't do a thorough enough job.
Now, we might have underestimated
how much it would cost to fix our house
and also how stressful it would be in the process,
but we still don't regret the decision
since we didn't sink our entire life savings
into this purchase,
and since we had plenty of money saved up
to cover all of the additional renovations
and repairs that we didn't foresee.
We weren't really financially stretched
through this process,
which means that we can really lean into all the joy
and excitement that comes with owning our first home
as soon as we get that drainage fixed.
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