Is buying a home always better? | Housing | Finance & Capital Markets | Khan Academy
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- Опубліковано 14 бер 2008
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The math of renting vs. buying a home. Challenging the notion that it is always better to buy. Created by Sal Khan.
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Finance and capital markets on Khan Academy: Is it always better to buy than rent? What if home prices go up dramatically and rents don't? How can we compare home prices to rents to figure out what to do. This older tutorial (low-res, bad handwriting) walks us through this. It is about housing but similar thinking can be applied to any rent-vs-buy decision (spoiler alert, Sal did eventually buy a home).
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When he talked about suspecting that housing prices would revert back, I immediately checked the date it was published. March 15, 2008. Nice call, Mr Khan!
I just did the same.
+NumberThirteen so? that makes his insight even more impressive because it means he figured there was a housing bubble even earlier when no one else did.
i did the same too...houses prices did not revert back in Boston!
Damn man he dodged a fucking bullet lol
I also checked the date
It's insane that Sal predicted the December 2008 housing crash in this video. Truly shows how intelligent he is.
And it became a mess in 2021
It's also interesting to note how he remarked how all his friends were pressuring him into buying, showing exactly what no one wants to admit that everyone was guilty in the bubble, not some idiot bank that went under.
Now its Commercial Real Estate that's in trouble. What should we prepare to buy??
This video was very very smart in 2008 :)
Nice
Thank you for posting. I've done this math in my head and came up with similar conclusions despite people still telling me I'm "wasting" money on rent. They don't consider the additional sunk costs of purchasing a home.
Good video, I'm surprised you didn't bring up all the money homeowners have to pay to repair things in the house. I'd rather rent, the landlord comes in to repair. Makes my life simpler
As a land lord the rent I charge covers mortgage, property tax and potential repairs (which is not as often as renters like to claim). Rent is increased yearly. If renting is so cheap and doesnt equate to paying off a mortgage..... why would people become landlords? I certainly dont plan on being goodwill. I own homes because they make me money.
Depends who you are renting too. You underestinate the amount of crazy tenants that you rent to
Hi Khan, great video. Just few things that are wrong with watching this video in 2017.
1-) Rent on a $1m house is probably closer to $4-5k per month.
2-) Mortgage rates are down to about 4%.
3-) CD rates are down to about 1%
Would love to see a 2017 video on this topic again.
Again, great video! Very good way to compare buying vs. renting.
Love seeing this 10 year old video. I live just east of the bay area. I rent a home for $2600 but purchasing it would be at least $700k. And considering no one has 20% down paying PMI would easily make the house around 3 times what I pay in rent.
you are forgetting one extremely important factor here: your rent is now X, but in 10-20-30 years, this will be multiplied by inflation, unlike your mortgage fee!!!
I wish more people understood this! Rent prices go up - quite considerably in some cases.
Yes, but if you have assets that rent more than inflation (maybe stocks, maybe tips, maybe a participation in a diamond mine in Ruanda, whatever) or you have a wage/income that its linked to inflation, problem solved. Wages are more linked to inflation than rent, at least here in Europe. And also, in the case that you dont have that, You could move to another area, rent is a flexible cost, mortgage not.
Regards.
As they have doubled in my area alone by almost double than when this was published. People here where I live, now pay more for a 1 bedroom than what my mortgage is.
depends where you are.
You have always option to pay less rental and move to low cost areas. And 15K saving in 30 years will be around 1 million with 4% increment every year but you will be more free to move around multiple cities.
Great break down. No need to justify why you're renting. You're obviously a smart man that's doing what's best for his family. Even with 250k, you can't afford that house. Buy a house 250k cash and you'd be adding your rent to your income. Plus 4% on a cd is ridiculous. Your return on a 25k cd after a year would be about 36 bucks minus taxes lol.
It really depends on where you live. Basically where I live (rural NY) rent for a 3 bed 2 bath unit is typically ~$1,000 a month. Rent burns $12k a year. And you can get a decent townhouse for around $90k. $90,000 - $4,500(5% down) = $85,500. $85,500 * 6% APR = $5,130 + $2,850 (principal payoff) = $7,980 + $3,000 (typical property tax) = $10,980. Median Income is generally $35,000 @ 30% income tax = $10,500. $10,980 - $1,539 (income tax savings) = $9,441. Total cost of rent is $12k a year. Total cost of buying is $10k a year rounded up. For maintenance it's very minimal on a $90k house, and any that's needed can be negotiated from the price when you buy. So for that I really gave rent the benefit of the doubt by calculating the cost of the home instead of just wasted money (interest + property tax).
My argument is that it really depends on the area, and it's up to you to make a conscious decision
Finally, a person who gets it! It does depend on the area but almost always renting is just a short-term solution.
exactly and you did even add things in like closing costs, repairs, renovations, etc
did you ever become a programmer?
@@vancedapp1243 wondering here too
When you look at the bottom line this video makes a lot of sense
cheers
Your first home should never be a single family home. My tenants pay my mortgage & I still have some extra cash left over.
I think you are an amazing person with all those videos educating people......the only thing I would change is that someone with 250 K should buy a 350-400k home....instead of a 1M.
Bought in SF in 2014. Great home. Sold at a 40% higher price 6 years later. Sounds great, right? For simplicity, let's say the home was $1m when we bought it. We put 20% down, so $200k.
Well, after taxes, HOA, and maintenance, we basically had put in an extra $150k into the home over the last 6 years. So our $200k + $150k netted us an extra $250k. So a 63% return on investment. Great! Right?! (Interest alone wasn't too different than rent, so that's a bit of a wash.)
Well, I forgot to mention that the transactional costs of selling are about 7%, so about $100k when we sold. So that $250k gain really turned out to be just a $150k gain. Now we're down to about a 40-45% gain. Also, a crap ton of work, headaches, stress, etc etc.
Ultimately, had we simply invested in the stock market, we would have come out at about $300k gain from the first $200k down plus the additional investments from the $150k over the last 6 years. That is, even in the red hot SF market where our home appreciated at 6% per year, stocks were a better investment.
I rent too and relatives and friends are always telling me to buy a house... buy a house... buy a house... thanks for this vid... I know I am doing the right thing to hold out and keep my money where its at for awhile longer:)
Interesting video. One very important thing to remember is that if the interest rates stay stable then your cost of owning property yearly stays relatively constant. Rental cost however will tend to escalate every year when the landlord decides to increase rent. The short term cost is thus in favor of renting but my guess is it will start swinging significantly by year 5-7 and by year 20 ownership should be loads more economical
It turns out that interest rate is not so stable after all.
Guys please remember that this video is FROM 2008. At the time when bubble was going boom
Amazing explanation. Thank you!
thank you so much for these videos
i am binge watching all your financial videos
@khanacademy My mind is officially blown. Thanks for challenging the status quo on this one, I'd never even considered your perspective before.
+Khan Academy the nice part of buying is that at the end of 30 years you don't have to pay anything but prop taxes though and a little maintenance . While renting you are paying indefinitely. Not to mention being able to borrow against your house in case you want money for something. oh and lets not forget being able to possibly rent a room in your house to help with the mortgage...
The counter argument would be: when you rent you'd gain interest on the money you didn't pay -- towards the deposit (down payment), the ongoing monthly payments you make towards the mortgage, repairs and maintenance, property taxes, etc.
However it needs discipline; you don't make anything if you simply spend it all rather than saving or investing the money.
Subbed by the way, love how easy it is to digest your work.
Super helpful! Thank you!
The numbers are a few years old but great information as the fundamentals will stay the same.
Since we are talking 30 year time tables. How does inflation come into play?
Inflation is really good for the homeowner. The nominal value of your home will rise, and you will command a higher nominal salary, while your mortgage payment remains the same
Most valuable and pragmatic concept I've learned from watching your videos over the years.
0:30
Notice the upload date. Well done sir, avoided the housing collapse.
His numbers are way off. A million dollar house in Silicon Valley would rent for $4 - $5k. The rate on a CD is about 1% basically nothing and a loss due to inflation.
Maybe not when 07 was happening
This has been well covered. The purpose of buying a house is security. If you actually take 30 years to pay off your mortgage, you are doing it wrong.
most insightful, thanks
Thanks man. I have done these types of calculations before, but when being bombarded with pressure to "buy" I'm not very good at explaining them to people. I'm just going to email them this link... Thanks again.
If I had 250k spare I would buy a house outright I think this is unrealistic for the average person. I would rather waste money buying a house than renting and paying somebody elses mortage. Plus I would want to leave something for my children. And also different banks do different deals.
+Omarr Omar haha fair enough. I suppose everyone has different ways they want to live their life
+Gracestasia If you rent you have the option to move to other houses, and you don't need to pay to fix the things in the property. Your debt free
I know but I think I just love the idea of owning something and I can decorate it how I want and I wont have anyone telling me how I should live in my own home
+Gracestasia Buying homes is plausible based on the home and location but a place like Silicon valley is expensive because people who live there are wealthy engineers, mathematicians and scientists who actually do have 250k sitting around.
Either way bank makes money
150k home, fix it up... finally pay it off & then rent it too people & make buy a bigger home.. thanks alot for that lesson
Aug 27, 2022 right now: Mr. Khan, thank u
This is a very good example of when it's best to rent. Typically (in normal housing markets) monthly rent should be close to 1% of the home's value. Therefore a $100K property should rent for $1K/month. If you're paying rent of $3K/month and that same house is listed at $1M - definitely stay renting!!
In comparison I live in Regina SK and my 3 housemates pay me $1,700/month to share my 4 bedroom townhouse with them. Yet I'd be lucky to sell my place for $200K in our current market.
while I agree with the statement that sometimes renting is better than buying, the figures used in this video are very distorted. rates of interest earned on CD hover around 0.5 to 2% maximum. not 4%. whereas interest charged by the bank on mortgages are 2-3.5%
Almost as in interest rates change and you commenting about current interest rates when a video is already 4 years old...
Ignoring the other flaws in this video, I think the most obvious is the comparison of a $1m property to a $3k/m rental.
If you use more realistic rental figures ($5 or 6k) for a $1m property, then the rest of the video can simply be ignored.
Okay thank you for confirming this. About 90 seconds of back of the napkin math told me that he was either over estimating the "identical house" price by literally 60%+ or he has egregiously underestimated (at a fundamental level) what landlords do and what rent costs compared to the value of the property.
This is a useful conversation about doing the math before you purchase or rent a home. I don't think most buyers look into the financial market this much. In some markets it is important to realize the buying is not the best choice, Waiting for the right time to buy and finding the right home to buy are the most critical elements fo the home purchase process.
good video, but i love how u predicted house prices would revert and they did. you rock
I find your explanations awesome. Remark: At the end of 30 years you'll own the house, isn't it?
Don’t pay your property taxes and you will see who owns the house!
But you pay wayyy more for that house than rent.
where im from there is no way a 1 million dollar home is renting for 3k a month. Most lower middle-class homes priced around 200k rent for about 2-2.5k a month. So his house would rent for like 10k a month, and over the 30 years would raise up to probably 25 k a month maybe even more. Not trying to be a hater, but i feel like this guy tweaked a lot of variables to support his argument.
It doesnt matter if he tweaked the variables or not. hes trying to make a point that based on your situation, renting could make more sense than buying. Of course you would have to do the math and see for yourself what makes sense for YOU.
Great video. Consider buying down the interest rate with discount points. This would lower the amount paid towards interest. Also, we should look at how this fares in the long-term and when you would end up being net positive compared to renting.
Thanks it helps me a lot
Where can you rent a million dollar house for 3k per month?
bay area
This doesn't take into account inflation at all. Savings accounts and other investments work to maintain your money's value, as the value of money is always depreciating over time. Rent prices increase every year, food prices, gas prices, etc. The interest gained from an investment is not actually increasing your money but helping to keep it the same. Also, there is no such thing as getting 4% of interest anywhere!!! If you know of any, please let me know!!! Interest rates usually range from 0.80% to just a little over 1%... I understand that in the short term renting seems like a good choice, but in the longer term, for a consistently working individual, buying a home is a better choice so that you have something for keeps in the end rather than nothing. Buying a home is a smart investment as houses and property maintain their value, but the dollar becomes more and more worthless every year.
Love ya... You just made my day
what software did you use for this board video? I wanna make one too
Dang, 250K in the bank. I say buy a house in a different part of the country for 100K and never have to work again in my life or be able to choose when I work.
Lol good one
You would
Most likely smoke it all up
That`s nowhere near enough to retire even if you bought a 100K house cash.
It does if you invest 50k into a mutual fund and leave there until your 60-65
@@marcoscampos9565 Do you live off of like 10k/year?
It's not just inflation but you're not earning your whole life. So when your stop earning if you're a renter your cost of living keeps going up with inflation, if you've spent 30 years paying off a mortgage while you earn then your cost of living when you retire drops dramatically.
You would have to save the difference every year so you can afford to live when you're older. But most people would just spend the difference. It's actually pretty bad advice in the long game
That's only provided you don't get sick and lose you equity to medical expenses - ending up with a 'mortgage' (at the current value of money) anyway!
We do exactly this - rent, save the difference and don't worry about rates/insurance/maintenance etc. Of course in Australia, houses are 500k+ (expensive+++)
This video comes in handy in 2022.
Did I misunderstand something here? He seems to be wildly underestimating the cost of rent here.
I noticed that to. He also doesn't project the costs over 5, 10, and 30 years. Home Ownership becomes more cost effective over the long run. That -41K that he said you lose every year with home ownership goes down every year.
This video is from 2008
Im gonna say Khan is right
Very biased numbers here, also very unrealistic. Plus lets take it down a notch and look at the majority of Americans who are not looking at 1m homes but instead looking at 250k homes. So now you pay cash for your 250k home and are free and clear vs renting a 250k home (which here in Denver is about $2,500 in rent. So roughly 30k a year in rent. That means in just over 8 years, you could have owned a 250k home. The real important picture here is not Renting vs buying BUT paying cash vs financing.
hes not trying to prove that buying a house is bad. The message of the video is buying may not always be better
Julian Lai right......... so if buying a house is not better.... than what would it be? Bad right? wtf lol you didn't really think that one out huh? Also, buying is almost ALWAYS better, anyone who says otherwise doesn't have a clear understanding of finance.
Life's A Game I never said it was not better. It just MAY not always be better.
I capslocked the MAY part for emphasis
Julian Lai *facepalm*
Life's A Game
better if you have the money... how does access to finance bid housing prices up?
thans Khan, u make everything easier to understand
Phenomenal video! Two questions:
1. In the case where you mortgage the house, do you not get any interest on your bank account? I realize that the cash in the bank in that scenario is less than $250k, but still. 2. I know a lot of (not necessarily true) assumptions need to go into this, but what would a long term analysis of this (e.g 45 years) look like?
Where can u rent a $1m home for 3k/month?
+Pete Currington north dakota.
+Pete Currington Good question!
Our landlord said we could purchase our duplex for 2 million. We rent for 2300, our neighbors pay 2900. It's Southern California- also they are 3 bed 2 bath town homes!
Kayla D But renting is ALWAYS better than buying because you are not paying maintenance.
Ownership requires maintenance. If a person values the pros of ownership more than they dislike the cons maintenance, then it's worth it for that person. In the converse scenario, it isn't. "Always" better simply doesn't exist. It comes down to priorities.
After the 30 years the owner should have paid off the 750k and owns the 1 million dollar home. And after 30 years that house could be worth 2 or 3 million. Where as the renter has an extra 25k a year (25k x 30 = 750k) in the bank, even with accumulated interest wouldn't even be close to the value of owning a million dollar property after 30 years. Property may drop in short term but not after 30 years.
25k a year compounded over 30years with an interest of 4% gets you around $1.5m - so far more than you think.
Guessing that the $1m property will increase two or three fold in value over 30yrs is also a big assumption, whereas having $1.5m in the bank after 30yrs is a far more feasible assumption.
Property value doubles every be 5 - 10 years in the UK. Fact. Unless you are not paying attention to where you are buying.
Andrew K That's not a fact. Where did you get your numbers from?
From 1990-2000, average prices increased by around 30% (adjusted for inflation).
Now the video doesn't take into account rent increases so I think his calculations are fundamentally wrong (I also believe that buying is the better option). It's helpful to stay realistic in our numbers.
It's an average. With majority being around 9-10 yrs and taking into account some will not change value and others will triple in value after 10 years. But if you look over 30 years average rather than a 10 year average. The late 80s had negative and has been increasing since on average. My parents house sold for 67k in 1988 was sold again 5 years later for 260k, and today is worth over 500k. That is over 28 years. Don't under estimate how long 30 years is. And sure don't expect double over 10 years. But look at total averages over the last 30 years. Assuming your an above average buyer/investor then you will get the above average results after 30 yrs.
Ryebanana 4% is also a non-existent interest rate. more like 0.4%
There is no right answer for all cases.
Lowest annual cost is not the complete picture for some people. For example, stability, flexibility, liquidity, predictable cost and other factors matter at varying levels to different people.
Let's assume for a second that the favorable scenario is purely determined by lowest annual cost. Renting will not always be the lowest annual cost.
The video comparison depends on numbers that are linked. They move together across scenarios. The lowest annual cost can shift the other way with different numbers plugged in. Current CD and interest rates are very different from the numbers used by the video. A renter/buyer would need to plug in *actual* numbers to use this method to identify the favorable scenario for the given situation.
If the annual costs are close to even, I'd argue that eventual ownership of an asset tips the scale in favor of ownership.
Wow this was actually very helpful and informitave. You have a very lively voice that makes it easy to pay attention aswell :)
Owning a house gives us peace of mind. No one can ask us to leave it.
eminent domain
Until a pipe bursts.
maybe take average incomes, average savings, average home/rents
keep up the great work...
thanks good info
mortgage is often cheaper than rent lol...
But then there are the many additional expenses related to owning.
then you have utilities for a large(r) house, repairs, upkeep, taxes, interest, etc. Not to mention dealing with closing costs, selling costs, etc ask which are non returnable costs.
Renting an apartment is a much better choice.
I tell people I rent for X, and they tell me that their mortgage is 75% of my rent. then I ask about the above costs, and then the light bulb guess on. Add to the fact that they're essentially renting from their bank... they start crying.
How silly is this! If I'm the Landlord I'm gonna make sure that the rent covers the mortgage, maintenance, and operating expenses PLUS a percentage for profit or a rate of income.
Exactly!!!
Not if no one is will to pay the rent. Then you'll take what you can get.
The point of this video is not to talk about how much a million dollar home rents for, he's just talking about renting vs. buying and the places your money goes. For all you simple minds, this brilliant man rents his houses instead of buying them. So that means do whatever the fuck you want to do and stop trying to argue points of the video that don't even matter.
Wow....thats crazy!
Sal assuming we have 250K in the bank
135 people are realtors
I used a value of 4% interest and the difference in the end was $500. Add in the equity in your home and it seems that buying is the clear winner. Plus, after 30 years the home should appreciate in value. I guess the lesson is to not get a home loan with an atrocious interest rate like 6%?
Please do a update video and add things like roof repairs , maintenance, insurance, commission, layer fees, etc, for owning a home. From what I understand the bank owns the home for at least 7 yrs. Now I've been told its better to put your deposit in Gold for example and rent. You don't have any headaches and stress, with ownership responsibilities and come out ahead with the profit made on Gold minus inflation.
im confused, with the buy option sure you're paying more but you're eventually going to own a 1 million dollar home
+President Evil over 30 years the 250k you saved will also grow into a substantial sum of money
+Killuminatismd But how much faster can your money grow when you could invest the $ you would've been paying in rent every month once you own it? Or how much further can that investment go when your monthly expenses drastically drop from not having rent? You can invest $ while paying a mortgage too (& more once paid in full), but the mortgage can appreciate & also be given to posterity. Also, rents can drastically fluctuate & you can be kicked out at any time.
Very biased video. You don't have to put the whole $250k down for the house. Does the same house that costs 3000$ to rent is worth 1 million to buy? I would highly doubt it.
It would probably cost between 5-6k.
exactly!
welcome to san jose lol
From a monetary value only. There's more to it. I sold up and started renting, then found I was able to chase the work that paid. Swings and round abouts. (UK term)
Are cd rstes still paying 4%? I havent seen that in atleast 3 years! I am looking to buy a house but in the 200k range. Im wondering if that scenario only applies to higher prices homes?
This whole video is based on a false premise. Where do you live that rent cost LESS than a mortgage payment? I have never even heard of that.
+Amy Knoll Right. I live in London. On most properties, whether it be a flat or a house, usually (95% of the time), rent is higher than the amount you'd pay monthly in a typical 25-year mortgage plan.
Plug your own local numbers in it will still work out better
+Amy Knoll Turns out that he was correct to rent rather than buy as the financial crisis wiped out property prices.
+macspud28 Except that I just sold my house for a mere 1k less than I bought it for in late 2007 . . . Even without the property gain, I only spent a total of 51k on it (mortgage, taxes, insurance, maintenance, etc.) in which I recovered 36k of (lost closing cost and interest). If I were to rent a modest $1000 per month apartment for the past 8 years, I would have spent 80k instead of 16k. . .
You just proved the added to the arguments AGAINST this guy. You're comparing a $1000/month apartment to a $300,000 home, which are nowhere near equivalent standard of living.
1) Rent goes up year to year, mortgage payment does not. 2) Rent for the same property is going to be higher than the monthly mortgage payment (the landlord is looking to make a profit, so higher than his mortgage, prop taxes, insurance, and maintenance/repairs)
There are lots of factors that go into determining which is better on a case by case basis. These include (but are not limited to) personal finances, macro and micro economic conditions, current and future tax laws, and life style preferences such as stability vs flexibility (both have value which vary person to person). There is not one clear winner.
It's like making an argument that leasing a car is better than buying one. There's no free lunch. The expenses of owning a building + profit is factored into your rent.
In the UK house ownership is a ongoing & growing Ponzi scheme - yet if you want housing stability you have to buy…I’d like a updated video on this, taking in the current context - would appreciate guidance 🌟
Definitly doesn't apply today.
I typically like these videos, but this one is so far off its crazy. Where I live you will pay the same to rent or buy a home. So in his scenario a $3000 rent payment vs. $3000 mortgage payment would only purchase you a home worth roughly $600k with a 4% apr for 30 years (much more realistic). That is assuming you put nothing down. So you could still invest your $250K and get the same $10k return. The annual cost would be the same, the property tax and insurance may increase over the term of the loan, but not nearly at the rate that rent will increase(the owners of the rental property still pays property tax and will raise the rental cost to account fot this). Then after 30 years you would only pay property tax and insurance. Better yet if you take your $10k return and put it toward the house each year it will be paid off in 18 years. You may incur some repair costs, but it is very unlikely that it will add up to the amount you will spend on a lifetime or rent. Assume you're 30 when you buy and you live to be 80 and you pay it off in 18 years you will avoid 32 years of rent and even if there was no inflation (impossible) you would save over $1.1 million dollars. Say you continue to invest the $10k annual return and pay it off at the age of 60 you get 20 years rent free and save $720k.
Great video!!!!
Where do we find a CD that get 4% growth?
If you actually think renting is better than owning a home you're crazy....9/10 owning is better than renting. Plus you wouldn't get 4% on a CD a year (1.3% at the most). There is so much wrong with this video.
+brittany mcbride, In 2008 when this video was created, the return on a CD was different.
+brittany mcbride, The turn on CD's are often based on the numbers that the Federal reserve create. Which changes over time.
Not to mention a 6% interest rate is absurd
Instead of CD's, invest in REIT'S...Actually the yield will be much higher.
who's watching in 2021 ?
Humans!
Awesome video!
good point joshalenka....
how the f$3k on earth did you get $250k in the first place?
By living below his means, and investing in himself.
Its an example....he is using numbers that are easy to understand
Very misleading and perforated. Buying is almost always better than renting from a financial standpoint. First off no million dollar house rents for only $3000 per month. You can buy a $1 Million house and live on the top floor while renting the basement suite for $3000 per month. The entire house would rent for between $5000 and $7000 per month in Vancouver, Canada (where I live). Now if your mortgage is $4000/month and you are renting your basement for $2000-$3000 per month you are only paying $12,000 - $24,000 per year. They are paying more than half of your mortgage for you. Now imagine being the person in the basement, who 30 years down the road has nothing to show for their money, but paid more of the home owner's mortgage than he did. The home owner then sells the house and gets a lump sum to buy another house with no mortgage.
***** I am sorry but you just sound like a crazy conspiracy theorist. I really hope you look and see the many flaws in this guys calculation and use some common sense. If it were cheaper to rent than buy, there would be no landlords to rent the home from you. In order to make a profit, they charge more in rent than they have to pay for mortgage, taxes, insurance, upkeep etc.
Khan Showed with severally skewed data in order to "prove" his argument. The rent would be more like 6k. Plus he doesn't take into account that after 30 years, you can sell that 1 million dollar home and put it in your pocket
"SHOCKING" as opposed to what you pay in rent? on a 100k mortgage, you will end up paying about 40k in interest lost over 30 years. for the same house, rent would be around 1500/month, losing 18k/year. So by renting, you will lose 36k in 2 years as opposed to 40k in 30 years. Including property and school tax of about 4k per year, it will take about 4 years to make owning the home worth it over renting.
No I did not because at the realistic rate of 0.5%, you will gain a whopping $100 in year 1 and slighter higher than that in future years. And no I was not assuming a 5% increase. I'm assuming the home is worth the same 30 years from now. that is why I only talked about the interest. If I was assuming the home would increase in value, it would mean that the interest paid to the bank is basically null because the increase in home value would help offset it.
Justin Maloney Of course this is very simplified. There are things that weren't included on both sides, e.g., the maintenance costs of owning a home. For example, having to buy a new refrigerator when it dies -- you don't have to do that when you're a renter. However, there is huge financial stability to owning a place. You can get loans if you have financial capital whereas if you're a renter, well... good luck.
Hey Khan,
What do you think about buying a house now around 400~500k in the Silicon Valley now (August 2011) vs renting? Thanks
great information
Why is no one mentioning the most *CRUCIAL* point?!
He is comparing a *TOTAL* interest payment of $45k to a $36k *YEARLY* cost. If you look at a time horizon longer than a year, his points make no sense.
Additionally, he’s deducting $10k from the rent saying it’s interest he makes on having $250k in the bank, but he’s not taking into account that every month that $250k is decreasing by the $3k rent in addition to living expenses, so even if he were to get 4% interest, it would by no means amount to $10k
you pay that interest every year. you're forgetting he earns money. btw this video is from just before the 2008 credit crisis and the housing bubble collapse. You'll have to calculate yourself to determine what is best.
my neighbor rents a house that is identical to the one I bought. he pays $800/mo for rent. I pay $500/mo for my mortgage. I also am a licensed real estate agent, and I know for a fact that a $3000/mo rental doesn't compare to a $1m home. In fact, the owner of the rental has to pay off his mortgage with the rental money in most cases and therefore has to charge MORE for rent than his monthly payment. This video is rubbish.
Christopher brown you are not factoring in insurance and maintenance which or something you do not pay with a rental. Those can close that $300 a month gap quite easily.
First, let me say thank you for writing out what I argue about on a regular. Renting burns less money! However, the true benefit to home ownership of often it's latent benefit. It's essentially a poor savings plan, but a savings plan nonetheless. Let's keep in mind that Americans have reputations for spending 115% of their annual income. And thus, we see results whereby people own some actual assets instead of smothering themselves in Louis Vuitton etc. Renting rocks if you know what to do with your cash!
This is sparta !
Will people ever learn from the poverty of america?
People lose their jobs and suddenly cant pay the mortgages on their homes.
The end up homeless. Then what? Start renting of course..
The same would happen if they were renting too smarty pants. Their rent payment would be more than they would pay if they owned it. Think about it, the landlord charges more in rent than what he has to pay the bank. Duh. Otherwise he's not making money
Justin Maloney There is a market price, the rent is only supposed to pay for the landlords mortgage. If the market rent is too low he wont even bother to buy the house.
Rent pays for every expense of the landlords payment. Otherwise he's losing money. If not, then I must be the only smart landlord.
Justin Maloney
yes ofc, you dont want any negative cashflow do you?
(advice not applicable for low-income families)
What do you mean? This is especially applicable for low-income families, the lower your income the less risk to rent. I guess you can see not buying as an opportunity cost or something but the less money you earn and own the more risk you have buying a home. If you buy a home with a teaser adjustable rate mortgage you are living way way beyond your means - it means you live a middle to upper middle class live while earning a lower class income, guess how high the chances are for that working out for you.
@azfarmb He was talking about the very hard to rent area of Ventura
CA and a 1million dollar home would rent for $3,000. I live in WA state where a $25o,ooo
home in a little town would rent for 12,000. The mortgage at less than 6% with no money
down is $2,ooo a month. Then there is property taxes, plus neighborhood community fees,
must keep your yard looking good-costs more money. Plus as the years go buy you replace
the roof, furnace, hot water heater, duct cleaning expenses. He is right on.
Wow Khan’s production value really improved