Renting vs Buying a Home [2 Reasons I Made a Financially-Dumb Decision]
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Renting vs Buying a Home [2 Reasons I Made a Financially-Dumb Decision]


Should you rent or buy a home? What are the numbers behind the decision and
which makes more sense? In this video, I’ll show you those numbers
but I’m also going to reveal two reasons why you need to ignore the numbers. I’ll show you how to make the decision based
on your personal needs and what to consider. We’re talking renting versus buying a home
today on Let’s Talk Money! Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money. Joseph Hogue with the Let’s Talk Money channel
here on YouTube. I want to send a special shout out to everyone
in the community, thank you for taking a little of your time to be here today. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. We’re talking about one of the biggest financial
decisions of your life today and as a real estate investor, one that I get a lot. Should you buy a home or is it smarter to
rent and just invest the difference. So as a big bow-tie nerd, you know I have
to go into the numbers first, look at the pros and cons of buying vs renting but then
I’m going to reveal two reasons why you might want to ignore the numbers. I’m doing this video along with Kelly of
Freedom in a Budget, a good friend of mine here on YouTube. I love the idea here. I’ll share my perspective in this video,
why I think you should buy a home instead of rent, but Kelly is going to do her best
to convince you otherwise. She makes some great points about renting
so look for the link to her video in the description below. Now you might expect as an investments guy,
I’m going to say rent and invest the difference. In fact, I’m going to start by looking at
those numbers, looking at your home as an investment and showing you why Kelly might
be right. Then we’ll get to those two reasons that
have nothing to do with the numbers and everything to do with making the right decision. So I’ve put together the investment returns
on buying a home and we’ll talk through this chart. Understand there are some assumptions here
and home ownership is local so your returns might be different but I’ve used national
averages to make these estimates. First, the S&P CoreLogic Case-Shiller National
Home Price Index shows an increase in home prices of 3.7% over the 30 years through 2017. That’s the pink bar here and about a percent
over the annual rate of inflation over the period. Now a lot of people like to say home prices
don’t rise beyond inflation and they may be right for very short periods of time and
in some places around the country but we see that overall, your home’s value does provide
a positive return just on the price itself. Back into the numbers and we can estimate
about a 1.15% benefit from being able to deduct mortgage interest from your income taxes. That’s from the interest paid on the median
loan amount of $200,000 and at a 4% interest rate. Finally on the positive side, you save about
5% a year from not having to pay rent. That’s going to depend on your local housing
market but it’s around the average home buyers save instead of renting. Of course, there are extra costs for owning
a home so we can’t ignore those. The national average for property taxes is
1.4% of the home’s value, so you’ll have to pay that. Estimates for maintenance and insurance average
another 3.2% of a home’s value each year. Take these positive returns against the costs
and you get a return around 5.25% a year for owning your home. That’s going to vary a little depending
on your taxes and local property prices but I feel confident in saying it’s going to
range between 4.5% to 6.5% for most people. Now if you consider the return on most investments,
and here we’ve got research on 20-years of returns by JP Morgan, you see that almost
all of these beat that home ownership return. You’ve got an investment in real estate
investment trusts, REITs, so investing in companies that own and manage commercial real
estate, that’s produced nearly a 10% annual return over 20 years. Stocks have produced a 5.6% return and even
a 60/40 split between stocks and bonds has produced a return about on par with home ownership
but without the hassles of fixing your air conditioning when summer hits in Phoenix. So just looking at these numbers, it seems
like a no-brainer. Rent your home, save that $20,000 down payment
and invest it to make the difference… But now I’m going to reveal those two reasons
to ignore the numbers. Two reasons to make a financially-dumb decision
and buy your home instead of renting. First though, I want to get your input. The question about buying versus renting is
a personal one and I want to get your opinion. What are the pros and cons from your perspective? What have you considered in the decision,
maybe some of the things outside the numbers, that have helped you make the decision? So scroll down and tell us in the comments,
what are your reasons for buying or renting your home. Again, home buying is always going to be a
personal decision so I want to cover a few reasons or circumstances why you might rent
instead of buy. Then I’ll show you those two reasons that
most people don’t think about and mean you want to consider buying even if it’s a terrible
investment. So if your job isn’t very secure or maybe
if the city where you live has an unemployment rate that’s much higher than the national
average, you might consider renting for that flexibility to pick up and move to where the
jobs are. According to the National Association of Realtors,
it takes an average of 68 days to sell a house, and that’s in a pretty good market this
year. When jobs get scarce and a recession hits,
it can take years before you get out of your home and can take a job offer somewhere else. Another reason to rent instead of buying could
just be personal preference. Remember it takes about 10 years for the numbers
to come out on home ownership so if you’re not ready to stay in one place for at least
a decade, it might be better to forego those closing costs and fees of home buying. Finally, if your credit score isn’t going
to get you an affordable rate. So if you’re only getting mortgage rate
offers that are a few percent above the advertised rates, maybe you want to consider renting
while you increase your FICO and then get a cheaper loan. Now it’s time for those two reasons that
scream buy instead of renting, two practical reasons why I think home buying is best for
most people. First, that five and a quarter percent return
we saw in the home ownership example, that’s a solid return and actually beats what the
average investor makes in the market. This research is by DALBAR, which studies
the actual returns investors make each year. Here we see that despite the stock market
averaging a return of 7.4% annualized in the decade through 2013, the average investor
earned just 2.6% a year on their money. That’s not just cherry-picking a bad set
of ten years. DALBAR updates this research regularly and
the results are the same each time. The average investor earns between 3% to 5%
a year on their investments, well below the return on stocks and even on safer bonds. Why? Because investors are horrible at…well,
investing! We make all the bad investing decisions like
jumping in and out of hot stocks, panic-selling when prices fall and just everything else
that eats away at returns. The result is that 2.6% average annual return,
far below what we would get on home ownership. So yeah, that 5.25% percent return on buying
a home might seem like a bum deal against a market posting higher returns, but many
investors aren’t getting those sweet stock returns. The other reason to consider buying versus
renting goes to that idea of saving your money by renting and then investing it. I had a Master Sergeant in the Marine Corps
that liked to say, “Show me an income and I’ll show you how to live above it.” It’s true isn’t it? It’s true whether you’re a grunt corporal
making $2,300 a month or a Hollywood actor making $55 million per movie. We always find ways to live beyond our means,
spend more than we have and then have to face the financial consequences. People just don’t seem to be able to save. A Bankrate survey shows 57% of households
don’t have enough savings to cover a $500 emergency expense. So real life is that instead of taking the
extra after paying rent to invest, most people are going to spend it on that mocha-coca-chino
latte or on avocado toast. But buying a home is a forced-savings plan. You don’t have the excruciating decision
of whether to buy those new iPhone ear buds or invest the money, you’ve got a mortgage
payment that forces you to save. Think about it this way. Buying a $200,000 home with a $20,000 down-payment
and financing at 4% a year over 30 years means a payment around $860 a month. Within ten years, your homes value will have
increased to approximately $288,000 and you’ll have paid the loan down to $142,000 with regular
payments. That’s $146,000 in equity, nearly a hundred
and fifty grand you’ve saved. Considering the average American household
has just over $200,000 saved for retirement, I’d say buying a home is a pretty good start
and a darn good financial decision. Click on the video to the right to see Kelly’s
perspective and why you might consider renting instead of buying. Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button and clicking the bell notification.

27 Comments

  • Let's Talk Money! with Joseph Hogue, CFA

    Wow! Don't miss Kelly's perspective and why you should RENT instead! šŸ  https://youtu.be/xBSk8G1m9f8

  • AussieMoneyMan

    I certainly am renting! My main reason, however, is mainly for the freedom that comes with it. I don't even rent a house, just a room!

  • Passive Income Tom

    I currently own 4 homes, 3 are rentals. These were picked up while I was in the military. So I had the decision to rent or buy with the money the government gave me for my living expenses. I only wish I would have bought more homes. šŸ˜‰

  • Gradual Financial Freedom

    Avocado Toast Shots fired at Graham Stephan šŸ˜›

    Honestly though I am down for buying but currently renting. One of the pushes for me to own is the want to have something that is mine and not be paying someone else for the opportunity to use their property.

  • Freedom In A Budget

    Thank you so much for teaming up with me on this video! Now that we are homeowners there is something amazing about owning your own home! The emotional connection, the sense of pride and accomplishment! Awesome video!

  • Chase Ziegler

    I live near a city with two universities, and rent prices are significantly higher per square foot than ownership in my area. Nearly 50% higher! Even after including taxes, insurance, and maintenance, we spend nearly the same amount of money each month to have a 3 bed, 2 bath house on .3 acres in town as what we spent on a 2 bed, 1 bath apartment. Add to that the accruing equity and appreciating market price, and in this area the only reason to rent is if you expect to move in a year or two. Sure I can invest better, but I still have to spend this money for a place to live. I might as well get a little growth from it.

  • John Wolf

    Buying is renting.. No one owns their property.. You only get rights. Slaves not allowed to own property.. No? Don't pay the tax

  • Miguel Castillo

    I believe that you should try and put as much $$$ into an Roth IRA as possible. After five years you would be eligible to pull out your contributions out and make that 20% down payment on a house. The 20% down will provide a better interest rate and get you out of other fees. I think the Rent vs. Buy argument is circumstantial and depends on whether a person can afford at least 20% down and be able to make payments on 15 year loan. If not then you're not ready to buy a house.

  • GenExDividendInvestor

    I have followed a strategy of buying a house I (we) love at a great deal, living in it for a few years, and then selling it for a significant profit. Rinse, repeat. A good amount of my net worth came from owning these 'liabilities' šŸ™‚ (so I giggle when someone says a house isn't an asset.. as I've made a lot of $ from owning my 'non-assets' over the years)… Then I take my profits and dump that into quality dividend companies (leaving enough $ for the next down payment). The key for me has been finding great deals on houses that my family would love to live in. YMMV.

  • GMan

    They way I look at it is, if you're paying rent, you're helping your landlord pay his mortgage, property taxes, insurance, utilities, hoa fees, etc, on that property you're renting. And don't forget any profit he may want to collect. I'd rather pay all that and own that property myself. When I decide to sell, I walk away with any equity I've built up. If I were renting, I walk away with nothing. And, depending on how much down payment you put down, rental rates can be as high or higher than the monthly mortgage payment.

  • Jack Buchanan - F.I.R.E. and Personal Finance

    Age also plays a big factor. The only way I'd buy a house is if I knew I could get some roommates and pay little to no rent. Don't need all the space at the moment and would rather rent for more mobility

  • Kibatsume1

    Well for me it was better to buy. My mortgage payment/taxes/insurance was $440 a month for a 3/2 on half acre.. the average cost of rent for 1-bedroom 1-bath Apartments was $850 at the time.. cost to rent a small room in someone's house $550… heck I rented out my master bedroom for $700, small room for $500. House was paid off at 29… have a client who purchased three houses mortgage 500 per house ,she rents out two for $1,500 a piece and lives in the third.. she continues to add 1500 herself to the bank account as if she was still paying rent , and saves as much as she can from the rentals… depending on your area paying rent just means you're paying off someone else's mortgage or in this case one house is paying for 3….

  • tomzphone

    How do these number and advise work when buying a house where my total mortgage (excluding maintenance— 3.5% down) is $1150 per month but renting the same house would be $1600. That is $5400 per year more renting vs buying.

  • Dr. W.H. Ale

    Great video as usual. I've heard you mention the data on the average investors returns before. What kind of return are the top 10% of investors seeing? Well above S&P?

  • Mike Greb

    BUY BUY BUY – With only a 3% down required for FHA loans, it costs very little to actually get into a home. I've owned homes since the mid 80's when FHA rates were at 13.5%. In early 2000's we rented out our over sized home for $1200 a month (new tenants paid off our home in 5 years) and moved into a smaller town home which we rented for $800 a month. 5 years ago we decided to purchase another home and move out of the rental. Monthly cost with Taxes, principal, insurance and PMI was $650. Since then the value of the home has gone up over 100%. My advice to my kids is buy a bad home in a great neighborhood with as little money down as possible, live in it for a year while you fix it up. Then sell it and repeat the process.

  • Louise Taylor

    Where I used to live I rented for a while but I wanted a 2 bedroom apartment and it was cheaper for me per month including mortgage payments and all other costs to buy rather than renting. On top of that, I made about 90000 dollars in profit when selling it just a few years later when I moved to another country! Now I am renting and have invested my profit on the stock market, mainly in dividend shares šŸ™‚

  • G.E. Stroud

    I'm in the "do both" camp. Form an LLC, use it to buy the property, rent it to yourself, and pay the LLC that you own. It's not a tactic suitable for everyone, though.

  • Kels Finance

    I'm renting but moving to our new home next year. Inflation was the main reason we buying and we are ready for that step.

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