Renting vs Buying
I can't stop meeting people who time to time, try to convince me that renting is an absolute
waste of money.
It's like burning money.
You are paying someone else's mortgage.
Why would you waste a fortune on rent when you can take a mortgage and end up with a
house even if that means you have to wait 30 years.
To be honest, this is dumb logic, even if we assume that buying a house is cheaper in
the long run.
When you rent, you are not throwing away money.
You are getting something in return.
When you get an Uber, you don't get the car.
You don't get the driver, you are not getting the company either, you are just getting a
service.
The uber is going to take you from point A to point B, which is the whole purpose of
a car, so does when you rent a house.
The point of the house isn't to own it but to have a roof over your head, so when you
rent, you are getting a place to stay.
But you always need a place to stay, that's why most people still assume that renting
is a waste of money, especially when you have an option to buy a house for the exact same
money.
And that's where the misconception starts.
Most people do not compare all the cost that comes with buying a house and only take into
account the usual price tag and compare it directly to renting.
But in this video, you will find out how you can end up with millions of dollars if you
rent instead of buy.
But before we do that, let's thank Skillshare for sponsoring this video.
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And now, lets get back to the video.
Just to be clear, We are not talking about buying a house for investment purposes because
that's a whole different story.
Let's say your friend going to take his parent's advice and take a mortgage because his parents
told him that renting is a waste of money, and you are going to rent.
Let's find out how your net worths would look like 30 years later assuming everything else
stays the same.
A 300K dollar house can be rented for around 1800 dollars, but if you take a 30-year mortgage,
even if we take pre-pandemic mortgage rates, it would be around 4.5 percent , so your total
monthly payment would equal to $1216.
That's principal plus interest.
If you base your decision solely on these two figures, a mortgage is clearly cheaper,
and renting is undoubtedly a waste of money.
Unfortunately, that is not the whole story.
Everything starts to change once you factor in other expenses.
If you count in insurance and property taxes, that amount would equal around $1707.
Even at this point, buying seems a better deal than renting, and I couldn't agree more.
But we have to be realistic and count in other expenses that come with owning a house.
Maintaining a house is sometimes more expensive than the house's actual price, especially
if we are talking about 30 years.
The land under your feet might appreciate, but everything else starts losing value.
The kitchen might need to be replaced every 10, 15, or 20 years.
Every piece of furniture has an expiration date; the couch can't last 30 years.
You gotta change the roof every 10 or 15 years.
The bathroom needs to be replaced every X number of years.
If you ever owned a house, you know that maintaining a house is not cheap!
But When you rent, you don't have all of these expenses!
Usually, the cost of maintaining a house is between 1 to 5 percent of the price of the
house annually.
Let's take an average of 2.5%.
Our monthly maintenance cost would equal to $625.
You are not necessarily going to pay $625 every month, but if we round it up over the
course of 30 years, that's a realistic number, and in some cases, it could be even higher
than that.
So your total cost of ownership raises to $2332 a month while renting is $1800.
But even if you compare these numbers, buying still seems like a better deal.
Yes you are slightly overpaying, but 30 years down the road, you will end up with a property
that would worth hundreds of thousands of dollars if not millions while your friend
who was renting all this time will be left with nothing.
But let's do the math.
Assuming your house appreciates by 3 percent a year, the future value of your property
would equal to $728,179 30 years later.
Assuming anything higher than that is too unrealistic, to say the least, since home
prices can also go down.
The only thing that is missing from this equation is the opportunity cost.
When taking a mortgage, you had to make a 20% downpayment which equals to 60K dollars.
You could have spent that money to start a business, a corner shop, or anything else
that would generate income but in this hypothetical example, let's assume you would invest it
in the stock market.
And since we are talking about a period of 30 years, it’s fair to say that we can expect
at least an 8 percent rate of return since the average rate of S&P500 over the long-run
has been 10 percent.
Your monthly mortgage payment is $2332, but renting a similar house is $1800, so there
is an opportunity cost of $532 every month.
Lets assume you will invest that money as well.
With the power of compounding, 60K with a monthly contribution of $532 at a rate of
8 percent over 30 years would equal $1,353,108.
Your friend who has been renting all this time and investing the difference will end
up with 1.3 million dollars while you with a house that would worth $728K.
What do you think is better, 1.3M of liquid assets or a house worth 728K.
When you look at it from this perspective, things start looking completely different.
However, even these are not the most accurate number because we didn't take into account
at least a 2 percent rent increase annually.
But so does the cost of your maintenance would grow with inflation.
You can be frugal with your house and only spend 1% of the value of your house on maintenance.
We also didn't into account the interest deduction you get with purchasing a house.
Or you might need to renovate your house, but you might not have the means to do that,
so you end up paying with a credit card, for example, and pay an astronomical interest
on top of it.
But the point is, buying a house isn’t always the best investment and renting isn’t always
a waste of money because it gives you an opportunity to invest elsewhere, especially if you are
planning to live there for just a few years since the cost of selling that property and
getting a new one would easily make it even more expensive.
Even if you get a mortgage now when interest rates are so low.
The equation isn't going to change much because if it's adjustable, then your mortgage rate
would increase in a year or two once life gets back to normal.
if it's fixed, the market is slightly overvalued, as we have explored in a previous video, which
means there could be a correction in the next few years, and your final net worth be less
than $728K. And if, for some reason, interest rates drops further in the future since that’s
where they seem to be moving in the long run, you won't be able to take advantage of that.
Thirty years is a long period of time.
I can't imagine how my life, for example, would look like in 30 years, a lot could change,
and the pandemic is real time evidence of that.
Those who were renting and were able to work from home all this time had the opportunity
to move to a more affordable city and save a fortune on rent, while those who purchased
a house had no other option but to stay.
The world is changing so rapidly that locking yourself in a single neighborhood isn't always
the best option, especially when we have more effective tools to build wealth that our parents
didn't have access to, such as the opportunity to invest in the stock market from the comfort
of your smartphone cost-free.
That doesn't mean you should not buy a house, in your case, maybe buying a house is a better
option since it aligns with your goals.
So should you buy or rent?
It dependence on your circumstance.
Dont forget to check out our sponsor skillshare, they really have some amazing courses, including
on how to invest in the stock market.
The link is in the description.
Thanks for watching and until next time.