Recently I had an argument with a friend about whether you should rent or buy.
He did his best to convince me that renting is absolutely waste of money, it's like burning
money because why would you rent when you can take a mortgage, you might overpay a little
bit but you will end up owning the house at the end.
first of all, I really don't understand why do people think that renting is a waste of
money, I mean you are actually getting something in return for your money, a place to live
in, its like a service, when you are getting a cab, for example, you don't think of it
as a waste of money because you are getting a ride.
So renting a place to stay is a service as well, But the point that most people make
is, you have an option of buying that house so why on earth would rent.
What I have realized is that most people do not consider all the factors when they are
comparing renting to buying.
Of course, it's going to be different for everyone because we all live in different
countries and cities.
Interest rates and house prices are different everywhere and it's impossible to generalize.
However, there are certain factors that would affect everyone, regardless of where you are.
There is an opportunity cost that most people simply ignore although that its one of the
most important factors to consider when buying a house.
And its probably the reason why buying a house seems like a much better option.
Let's say you are buying a house for a half a million dollars that you could rent for
2000 dollars.
First of all, you will have to make a downpayment of let's say 20 percent which is going to
be 100K dollars in this case.
Let's say it's going to be a 30-year mortgage with a monthly payment of 2430 dollars.
At first look, it seems like there isn't much of a difference between buying and renting,
buying obviously seems like a better deal, but when you consider other expenses, such
as taxes, insurance, maintenance and so on, it will easily cross 3000 dollars.
and now let us take a look at the opportunity cost.
First of all the 100k downpayment that you made could be invested.
To make matters simple, we will assume that you will invest in an index fund with an average
rate of 8 percent.
On top of that, since you will be paying only 2000 if you are renting, you will invest the
remaining 1000 dollars.
Here is a little calculator that will help us do the math.
Let's enter the numbers and submit the results.
With the help of compounding, you will end up with almost 2 and a half million dollars
and all the benefits that renting comes with.
Such as mobility, In my case, for example, I don’t wanna be tied to a certain place,
or even a city, at least for now.
As long as I am liking it here, I am staying, the moment I realize that there is a better
opportunity elsewhere, I am moving there.
But here is the catch!
That will work out only if you invest every penny that you would otherwise pay for your
mortgage.
But what usually happens is that, when you decide to rent, you probably will skip your
saving payment because every time you will have an emergency or a reason to spend that
money elsewhere.
Let's be honest, it's much easier to skip your monthly contribution into your savings
account than your mortgage payment.
That's exactly why buying is much better than renting for most people.
Most people aren’t much into investing so what happens at the end of the day is that,
your friend who took a mortgage will end up with at least something while you will have
nothing at the end of the day.
Of course, these numbers aren’t 100 percent accurate, your rent, for example, isn't going
to stay like that for 30 years.
It will increase by at least 3 percent, so does your other expenses.
There are a lot of interesting video on this matter on youtube where they show you the
exact math, but to be honest, when it comes to your case, you should look at the numbers
in your city and do the math and most importantly, if you chose to rent, are you confident that
you have the discipline to keep investing the remaining amount.?
Why don't you let me know in the comments below?
Thanks, guys for watching and I will catch you in the next one.