The Case For Renting A Home Part 2
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- Опубліковано 12 кві 2018
- In my last episode of Common Sense Investing, I made the case for why renting a home deserves equal consideration to buying one. Today, I'm going to tell you how a renter can get rich.
What do you think would be a sensible reason to buy a home instead of renting? I’d love to hear about it in the comments below!
I'm Ben Felix of PWL Capital. I'll be talking a lot about other common sense investing topics in this series, so subscribe and click the bell for updates.
*Please note that at 1:03, the mortgage amount is shown as $394,000, while it should show $400,000. Thank you to Dave S for pointing this error out! This error is only in the animation. All of the calculations behind the scenes are unaffected as a $400,000 mortgage is used. The mortgage payment shown, $1,893, is accurate for a $400,000 25 year mortgage at 3%.
This is the second part of the series on Renting a Home. Watch the first episode here: • The Case For Renting A...
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One of the flaws of these type of analysis is that they start at the moment the homeowner purchases the house. But in order to buy a home, you must spend years holding cash in a crappy, low interest, savings account, while a renter would have his money in a much higher yielding investment account over those same years. In reality, by the time the future homeowner is ready to make the purchase, the renter is already ahead.
Great point, which is what I've done (saved for a deposit to buy a house), but now I realise that it's been a fool's game. So I'm switching to a rent and invest strategy. Even if I were to buy here (in London, UK), it would mean a significant drop in quality of life, since the affordable properties are mainly far away from the city center and poor quality relative to the rentals.
@reshi p Yes, in some boroughs of London rents have gone down. They even fell in 2019. Still quite a pricey city to rent and not great value for money.
Good point
@@treali No, borrowing money usually isn't the most effective approach to building wealth considering all the interest accrued.
I'm a lifelong renter. I rent cheap, and the rest of the money gets invested. Saving up for a down payment is so ridiculous. Alique, you are 100% right.
There's another aspect which is usually ignored: you rent for now, you buy for later. For example, I and my spouse may not have any plans to have any children for the next 5-6 years while we focus on our careers... but we do want to eventually have kids. Until we do, we're perfectly fine living together in a one-bedroom apartment, and pay less in rent, until we actually need to rent something bigger. However, if we were buying a house we'd go straight for the larger three-bedroom house even though we still won't be needing the extra space for quite a while. So you're paying interest, property taxes and maintenance for something you don't use fully.
Oh, you were planning on having kids right away so this doesn't affect you? Guess what, your kids will grow up and leave for college in about twenty years or so. So you might still be paying for a house that's all of a sudden too big for you and your spouse.
Valid point. Things would have been different if the house grows with you, but sadly it doesn't. In such a case one can buy a plot of land and build a small house. Later as your family becomes bigger one can add more rooms or an upper floor etc, But unfortunately now for each need we have to sell and buy a new house, which wastes a lot of money in fees. Renting is much better as the rental home kind of grows as per your need
Rent small. That's the 🗝️
People seem to be more sensible about the home that they rent. Many home buyers, however think that they need to max out thier debt and buy thier dream home.
The rental also their needs rather than what they imagine they may need in the future or what they needed in the past.
There is a hierarchy of need, may need, want, and what other people think you want. This is why Christmas is an extremely wasteful holiday.
Anyways, renters tend to be limited to the need sector and renting does a good job of cutting down requirement creep.
Sometimes, this works to your detriment. I'd personally like to tear out the POS sink in my apartment and replace it with something good. It would save time on dishes and stuff. I don't because I'm renting.
Rent small, buy small
And get a vasectomy
One more point about renting. You usually rent a smaller place than the one you would buy. Since when you buy house you want to stay there at least 5-10 years, it means you need to buy a house big enough for that period. This is especially true for young married couples buying their first home when planning to have kids. As a couple, they can comfortably live in an one-bedroom apartment but when they decide to buy they would never buy a one bedroom house/condo! By renting you can adjust to space needs more flexibly, by moving to bigger places only when needed. In my opinion this makes a huge difference for first time home owners and makes renting even more compelling for young couples.
You make great content! And thank you for not mucking up the presentation with clickbait titles or silly faces
This is truly the best financial channel on UA-cam. Thank you so much Ben Felix for your thoughtful, well explained and evidence based videos!!
This is so great to know cheers Ben. Im a 27 year old londoner confronted with the choice of renting in the city where my friends family and life are, or moving a million miles away to the sticks to afford a house. Now I know I can carry on renting + investing and not be missing out. Keep up the good work!💪
I don't know what to think, and this is why I turn to more knowledgeable people like you. You're making me question things here. See, my parents bought a property that appreciated quite substantially due to our neighbourhood's real estate bubble but you know, you make me ask hard questions. I thank you for giving me food for thought, but also curse you because this racks my brain!!!
Thanks Ben, I enjoy your videos very much, always very well made. In this case, I have a few corrections that I believe would put the home ownership in favor over renting. You say that home ownership cost 37,000 a year when only 22,716 is going towards the mortgage annually, which means that tax, maintenance, insurance is close to 15,000 a year. I will use my personal example since I am exactly the scenario you are explaining. I pay 5,500 in taxes, 800$ in insurance and only 3000 over the span of 12 years of ownership. I don't know of anyone that has put more 60,000 in 25 years of maintenance (hvac replacement, roof, driveway, etc). I don't include renovations or adding a deck, fence, since these are not maintenance and as you said they don't add value and they are a personal choices. Which means I would put the yearly cost of ownership at 32,000. 2nd point, you can't use 500,000 worth of RRSP/TFSA at 30 years old since you don't have the room at that age, which means a lot of the gains in a rental scenario will be taxable. 3rd point, you are comparing a 90% equity / 10% bond return VS 3% real estate return, that is not the same risk factor, it's like comparing bonds to equity, sure one does better but you are taking more risk. A more reasonable comparison would be 60% bond/ 40% equity and even then I am being generous since the biggest yearly negative return over the last 30 years in real estate has been -8% return. So for a 25 year scenario, instead of your 188,000 in maintenance, I've allocated 75,000 and I've put 4% of yearly return instead of your 3% for home ownership and the balance portfolio at 5% return instead of 6.6%, all of this puts it at a 200,000 advantage on home ownership compared to renting at same risk level. Not to mention that most people don't have this discipline to invest in one balance portfolio for 25 years without changing anything in the investment strategy, the discipline to not spend the remaining money after rent is paid and the tolerance to not sell a balance portfolio when we have a recession (hard to sell a house, when you need to live in it). There is a reason why most people end up at their retirement with the house being there biggest asset. Anyway that's just my point of view but thank you for giving me the chance to think about it and to pull the data to make my own assessment, it was fun!
Thanks Jonathan! These are all really good points.
First point:
I think the piece about maintenance that gets missed is that it's not just maintenance to keep the house livable, but also the maintenance required to allow the house to maintain its value. Things like updating a kitchen or a bathroom could be included in maintenance costs along with HVAC, furnace, roof, windows etc. Anyway, we could debate this one all day and there is no objective way to determine the right answer.
Second point:
For the analysis I assumed all investments were made in a taxable investment account. Taxes were accounted for on an annual basis and the accrued gains are realized and taxed at the end of 25 years. I make a comment at the end of the video that if the RRSP and TFSA are used it will make the renter look better, but I do not assume that these account types are used in the analysis.
Third point:
It's really hard to make a comparison between a diversified portfolio of stocks and bonds and a house. I agree that a 90/10 portfolio has been more volatile than average house prices, but a house has _way_ more idiosyncratic/ asset specific risk. The house also has leverage. So while I agree the 90/10 portfolio may have been more volatile historically, I do not think that we can say that the house is a less risky investment.
I agree that the discipline is a big issue. I have no rebuttal there, other than that some people (including myself) can do it.
I ran my model with your assumptions (0.75% maintenance cost, 4% real estate growth, 60/40 portfolio = 5.24% return), and home ownership wins by a large margin.
Long-term real estate returns have _not_ been 4% globally. The only country with long-run data that has returns that high is Australia. It would not be reasonable to expect the same return going forward for a given country. Check out page 26 in this report: www.credit-suisse.com/media/assets/corporate/docs/about-us/media/media-release/2018/02/giry-summary-2018.pdf
While it is true that many Canadians end up with a lot of their wealth in real estate (on average Canadians have 52% of their wealth in financial assets, presumably real estate makes up most of the remainder), I do not think that is because real estate is an inherently good investment. A lot of it is cultural. For example, most Germans do not own their home, and they are no less affluent than Canadians.
I agree, this banter is fun.
This is too simplistic and I don't buy it.
Your analysis doesn't factor in other aspects, such as owning a home, getting a HELOC and using it to invest in a portfolio of stocks/bonds so that you get the best of both worlds AND you can write off your interest expenses for the HELOC used for investing. This is the Smith Maneuver and should surpass the pure rent and invest strategy by leaps and bounds. Better yet, use the equity to buy more property and earn a return from rent that will act as a hedge for inflation.
Additionally, Canadian home prices have appreciated by approximately 5.5% per year over the past 30 years.
www.theglobeandmail.com/real-estate/mortgages-and-rates/renters-make-for-wealthier-investors/article17834799/
"Over 30 years, stocks made 8.5 per cent and houses 5.5 per cent."
Finally, speaking of real estate as an asset class, it was superior to equities and bonds in returns and lower risk since 1870 for 9/16 countries mentioned in the following study:
qz.com/1170694/housing-was-the-worlds-best-investment-over-the-last-150-years/
Thanks Ming,
I agree that I did not address the Smith Maneuver. To compare apples to apples, we would need to assume that both the renter and owner are comfortable borrowing to invest. In that case, the renter could use a margin account as the owner uses a HELOC to invest. Leverage is not an advantage specific to an owner. I do agree that a HELOC might have a slightly lower interest rate, but for the Smith to make sense the individual should be taxed at or near the highest rate, so in either case the interest rate is cut in half.
Leveraging one property to buy another property is definitely a good way to build wealth if you can handle the risk and assuming nothing goes wrong. I am going to do a video on investing in real estate in the future.
No doubt Canadian home prices have performed well compared to other countries. I agree with that. From 1980 to 2016 Canadian real estate (price only) returned 5.62%. Inflation over that period was 3.09%. So that's 2.53%. Better than US and UK real estate. Worse than stocks.
The paper cited in that qz article is great. I had not read it before. Unfortunately for your argument they have defined real estate returns as a combination of the price return and the net rental yield; the net rental yield made up a little more than half of the geometric average return. A home owner is not earning the rental yield, so... that argument does not really work.
I really appreciate your thoughts!
I wanted to share my experience of comparing renting vs buying a house with my parents. As we are asian living in Southeast Asia, my parents told me that it would be better off to always just mortgage a house if you can afford it than renting. They told me culturally, owning a house means you are not living in someone else's house, which would have been the case for renting. Culturally, we tend to be more comfortable owning things more than borrowing it (or renting) because in my opinion, the belief is that we have the freedom to do what we can and want with that thing, despite the financial reasoning with renting vs buying decision. However, I do like your videos very much, they are to the point and logical, such as investing in index funds and bitcoin's speculative nature. They are very informative and useful.
I bought a property that houses my bar, and has a rented out apartment above it.
Al the maintenance (for the entire property) is used as a business write of.
Also the unit that houses my business is a tax write of. After the 15 years of mortgage I will sell the business and use the 2 units as rental proparty.
Those 2 will generate enough to cover maintenance, property tax and my living expenses.
I do rent my own home because of the flexibility it provides.
On the side I use a buy and hold strategy in index fonds for diversification, and to keep a portion of my money liquid and growing over time. I will be 39 when my mortgage is due.
So for me it’s not so much about the returns. But more the potential cash flow, and as you pointed out the forced dicipline that comes from owning a home.
It definitely isn’t the cheapest way, but it is the best for me. Love to hear your opninion.
I live in Vancouver, Canada and the housing market here is absolutely nuts. It's hard to believe the real estate prices are realistic for their value and not just hyped up into a bubble. Nice to see an argument for the practicalities of renting.
You're absolutely correct, renting + investing will come out ahead of someone who buy (in california, one of the best market in the US). I ponder this same question myself 10 years ago about buying, I wasnt feeling secure about my job and being able to handle a mortgage if I lost my job at some point in the next 10-30 years. After multiple round of layoffs, I am still renting and happy with my decision.
Thanks for bursting my bubble Ben!
No bubble bursting here! Renting and owning can both be the right decision depending on your circumstance and preferences.
Great videos Ben. As a renter, one of the things that scares me is my landlord’s ability to evict me eventually for a variety of reasons. I guess homeowners don’t have to worry about this.
Depends. I live in Philadelphia an is extremely with a capitol E tenant friendly.
Hey Ben, I am a huge fan of your work. I agree with a lot of what you
said in this video. However, I am stumped when it comes to a couple
things. Have you factored in rent price hikes? A mortgage payment is
steady, although I understand the total associated costs are larger.
Also, have you factored in what the results would be if someone were to
invest the difference in their monthly house payments (including
mortgage, utilities, insurance, etc.) vs renting a similar home? I
realize this can be tricky with a lot of the hidden costs you refer to
in your video. I am curious to see a video breaking that down! It would
also be great if you provided a spreadsheet that allows people to
change multiple variables and see the cost analysis. Thanks!
Thanks for Part 2 Ben!
Excellent video Ben. Great channel. I'm 60 years old and renting at the moment. Although I would in some ways like to buy (using cash), I think renting has even more advantages for older buyers as they have less time left to hold the asset (presuming they want to sell at some point in order to spend the cash, as I would). Holding for, say 10 years, means that transaction costs have a greater negative impact. The one advantage that owning would have, which is not financial, is the security of tenure in older age (in the UK at least) - but you only get that if you live in the place until you die and so never get to spend the cash.
Thank you!
The prices of places to rent will continue to rise over time while a mortgage will remain the same. In addition, after the mortgage is paid off the costs of owning a home go down (yes there are still costs, but not as high), while the cost to rent will continue to go up as long as one needs housing (presumably until death)
True.
I guess if you’re the type of person that will be in the same location for a long time, buying makes sense. However, if you’re not going to be in the same location long term, renting is probably a better option.
Property tax is calculated as a percentage of the home value, which does go up over time.
But with ownership you have less flexibility. You're literally stuck in the same place as long as you own it. As we get older we might not want to deal with all the upkeep associated with the current dwelling. Without a house you're free to do other things with yourself and your money. You can invest your money in stocks and bonds and have more flexibility in terms of where you live and your dwelling.
I currently have a mortgage. While it's been OK, after I sell my house I plan to invest the proceeds rather than buy something else.
It depends.
The homeowner is directly responsible for taxes, maintenance, upgrades, etc. Homes are liabilities, not assets.
- Having additional cash on hand to cover these costs or pay the risk game with selling assets that may be in a downturn.
In addition, single family homes are have a poor insulation value compared to multifamily dwellings with shared walls.
- Condos and townhomes are thing.
So, it depends. It's not an easy "this is always the answer".
The biggest argument I can offer for home purchasing (and a large part of why did) is I live in a market where the cost of my apartment was increasing annually much, much faster than my income.
Then just rent something small or co-live with someone?
Hey Ben, I have a fundamental question about your argument. If we assume that renting is always cheaper than paying a mortgage+property tax+maintenance+w/e else, why would anyone ever buy a property to let if they knew they'd be making a loss? (costs-rent>0). As in, unless you pass those costs down to the renter, where is the profit motive for the landlond? Could they not instead do what you suggest the renter does and just buy more stocks instead? Thanks
Good video and I can see how your numbers make sense. I am not sure though what the annual taxes you refer to would be. Possibly a local tax. In the UK there would be council taxes but these are paid by the resident whether they are tenants or owners, so there is no difference between the two situations. Now living outside the UK, no annual taxes due on the owners here but my current place is managed by a community manager and a charge is paid by all residents. Even where there is a charge on owners, I'd expect the cost to be passed on to the tenant in a rent situation so there is some variation in your rental numbers (they certainly look low for this area).
On the maintenance costs, I'd expect them to heavily skewed to the 15-25 year part of owning so that less difference is available for investment in the rental early years. Given the possible evenness of the two scenarios, I'd prefer owning if possible because in 25 years when that mortgage is paid off I can stop earning money to pay rent (or invest the excess in a low cost investment). I have 40 years to retirement and 2 kids and if the two situations are pretty close, I'd rather be able to pass a house over which they have 25 years of memories in than a balance on a portfolio (even if the balances were similar in 25 years but I think it more likely favouring ownership).
We can expect all the running costs (13,650 p.a.) to increase in your model and the rent to increase by inflation but the mortgage fee will not. As the years go on this would decrease the benefit of renting as the rent is higher; we would be expect rent to be higher in general otherwise landlords would not make a profit.
The possibility of sub-letting part of the house in later life when kids have left, makes the return from ownership more attractive and there is always the personal choice aspect of renovating which may not be allowed for a tenant. I extended your comparison at year 25 with 990k in balances in the portfolio or property. 5.3% average return on the portfolio, 3% on the house, and 0 mortgage costs, then while the property value falls behind the portfolio return the ownership would come out on top in the medium term(next 20 years) when you include the rent saved (16300pa) and about 0.9% from sub-letting a room both of which can be invested. Of course this model needs some renters but there are different stages of life and people may need to rent for various reasons. My parents are currently in this sub-letting stage as I am overseas; they rent out a room in the house. In the UK below a certain £7500 that is tax free.
I'd be interested on your thoughts on this. Once again good video, thanks for the content.
Hi Ben, hope you´re well and safe during the corona times. Really enjoy all of your videos, good work, mostly here for the market related stuff but I am actually working on this problem rent vs ownership now.
In my case I assume few differences, I am not from Canada so I am not sure if it´s all relevant for your case but still I´d love to hear your opinion.
1) I use inflation in the model for rent (understand you haven´t inflate the ownership costs but surely rents will rise perhaps not on monthly/yearly basis but every two years is realistic and it does add up?) On the other hand, you have fixed 25 term for 3% on the interest expense
2) I use a bit lower market return (What index funds are you using to arrive at 6.57 with 90/10 split, small cap?) Do you hold this outlook in 2020 also?
3) Just googled you can´t use the interest expense as deductible item in Canada. Yikes! So I am just putting another factor for viewers from other countries to consider:
Writing off the interest expense in the tax return would be a great factor in my country for instance. (dependable on the tax rate you receive a pretty good tax shield). Mortgage rate x (1 - tax rate) is your effective tax rate for the mortgage.
I am not really rooting for either option, just trying to clarify. Thanks and keep up the good work :)
Dave
I happily rented for 20 years. My lease came up for renewal at around the time my company was going through a rough patch, and we were all concerned about whether our jobs would still be there in a year. Per usual for a rental situation, we got 30 days notice about new terms, and this time around the landlord said they wanted an additional $1,000.00 a month (a 30% increase). I had no choice, not being able to spend a lot of time to arrange to move quickly (too busy at work, trying to make sure I remained employed), so I switched to the even more expensive month to month rate while I figured out where I could move. That experience led me to eventually buy my own home. I never want to be in that position again, of facing a huge increase in housing costs at the whim of a landlord, or needing to frantically arrange to move to a new place to get out from under such a deal.
Wow, what a story. Rising rent is definitely a risk for a renter. I suppose the parallel for an owner (with a variable mortgage or a mortgage renewal) would be a big jump in interest rates. An owner with a paid-for home could also be hit with a big jump in property tax like we have seen in Vancouver.
I absolutely agree, there are no avenues for "zero risk." As a homeowner I also now face the risk of, e.g., an earthquake or other disaster wiping out my home and the insurance company either going broke or refusing to pay out for some reason. But what I was seeing in the Bay Area made me think there was a very high probability of constantly climbing rental prices, compared to the other risks.
All great points and very interesting. Thanks for the comments.
That makes sense. Canadian provinces tend to have decent rent control in place to help protect against rapidly rising rents.
Another great video Ben!
What if you can pay cash for a home? No interest payments to the bank for one. That’s a huge savings right there. Our property tax is $2400 /yr on a 250k home .insurance is 100$/month and I don’t hire people to do maintenance on our house....I do it myself
So with a paid off house, I still have a $400/month expense...that’s a lot better than renting @50 + years old with a 1200$/month payment, if your lucky to find somthing that inexpensive.
Once again thanks for the great videos!
If you pay cash two things happen: you eliminate your interest cost, and you increase your opportunity cost by having more of your capital invested. Opportunity cost is usually the largest cost of all. If we assume real estate grows at 3% while stocks grow at 6%, then you have a 3% annual opportunity cost on $250,000. So instead of $400 per month it might be more realistic to say $1,025 per month. That's still cheaper than renting in your case, but it's not such a wide margin to make it an easy decision based on the numbers.
How many people do you think have enough cash at hand to pay for a home right away without taking a mortgage? I mean I'm happy for you that you were able to pull it off but you should be aware that few people have that privilege, especially if we're talking first-time home buyers.
I am such a hardcore renter that when I bought my first home, I bought a typical rental property to be further rented out by landlady-me when I move out. :)
Ben, thanks so much for making the videos! Yours are the best. If i want financial advice, i would want it from someone with a CFA. nobody else on youtube matches your expertise and quality in videos.
💯 agreed
What a lot of people forget, and this is a big part of it: you can almost always rent the identical home for MUCH cheaper than just the mortgage payment would be to buy it, let alone the maintenance, insurance, etc. Or rent half of a duplex from someone and this increases the ratio even more. Rent is very "cheap" in many Canadian cities compared to home ownership. You have to be willing to INVEST your extra cash in index funds and smart investments. I'm thinking the #1 issue is: most renters won't actually invest - they'll just pay their rent and spend the rest on consumables :(
Nice one. Renting also makes you more geographically flexible allowing you more easily to pursue job opportunities anywhere and move to places where your ROI on your human capital is highest.
I would say homeownership makes sense if it provides cash flow, for example you live upstairs and you rent out a basement apartment or if it a partial or complete off grid location where you have animals such as chickens and goats plus green house gardening plus own water well to provide most of your food, therefore the off grid location is cash flowing most of your food and your water, you can also have solar panels for your own electricity
Ben, I am a massive fan of your channel, as an applied statistician and researcher (in health care mind you), I really appreciate your evidence based decisions.
My questions is as follows:
Do condo fees represent an unrecoverable cost? My gut feeling tells me yes due to the elements inside condo fees (insurance, common area maintenance, water, reserve fees, etc -- I have a bias to Manitoba mind you).
On top of that, does insurance (personal possessions in a condo or apartment when you rent), or utilities get calculated as unrecoverable cost as well?
Hope to hear back!
I'm not Ben, but I'm pretty sure HOA dues and insurance are unrecoverable.
I know you mentioned it in a couple comments but I think it's hard to understate the risks of owning a house and how un-diversified that is.
Your math uses *average* home values which will vary wildly. There's always risk that a major employer will close down in the area or local politics will make the area undesired or a natural disaster will decimate the area. On the other hand, your broad portfolio is extremely diversified and heavily insulated against any such localized events.
Everyone has a different risk tolerance, but this heavily favors the renter.
BUT! I want to add that I do plan on owning a home eventually; not for the investment, but for the control. For me, I value being able to make changes to the property, especially planting gardens and trees to my personal tastes. Much harder to do that when you have a landlord that probably won't approve of such changes. Same concept with any aesthetic changes to any part of the house.
Just my two pennies. Great video though! Super informative
The monthly cost of a mortgage is generally highest in the beginning or at least the same over the term of the mortgage.
Rents almost always increase over time. Sometimes annually.
This is likely to eat into any gains made by renting over the long term.
I think your 10 year rule is probably true, with the risk to home ownership decreasing below that of renting after 10 years
Not necessarily, and their are usually restrictions to rent increases. Rent is consistent for the duration of the lease. When the lease expires it might increase. If it does, the tenant can look around to see if there are other rentals available.
I own my apartment and have for the past several years. I have seen barley seen any growth in value in my area when comparing to comparable apartments to mine. i would have for sure had a better growth of value from an index fund during the same timeframe.
The cost of living here is however quite a bit cheaper than renting would be, even when including insurance. The wait-list for a good contact in my city can be many years long, particularly for mid sized apartments like mine. Going for the less regulated and shorter waiting period contracts would ensure even higher monthly costs. I also enjoy not having landlord who has a bunch of policies i have to follow, the 'apartment owner association' or whatever is more chill about drilling in walls and what not.
Maybe if I move to a city were the housing isn't so heavily in favor of the buyers i will consider renting.
Since it's possible the geo-political situation or other factors might drastically change the return of a global investment portfolio I would think the benefit of home-ownership would be more predictable plus if you invest in the stock market besides the mortgage payments (ultimately resulting in a paid-off property) you're betting on two horses instead of one. Plus most people aren't savy investors so they're bound to mess with their portfolio resulting in significantly lower returns. If you take the average real return for US retail investors the comparison will be quite favourable to home-owners.
The major argument pro renting is the flexibility if offers. Sure moving is a hassle but if you buy cheap Ikea furniture (which you can't really reassemble more than once anyway) and keep your material possessions to a minimum the inconvenience is minor and the upside to being able to move on short notice without incurring major costs enormous.
Thanks for the clear, non-biased analysis as always.
hi ben, can you make a video describing how tax deductions work when renting out a basement apartment, can you deduct against personal income? is gross rental income added to your income tax or rental income after costs?
I know this video is 2 years old but question for you Ben. Why would a landlord only charge rent to cover the interest on the loan, let alone the whole mortgage payment, let alone any other expenses?
If a person could find this place to rent, absolutely they should rent it vs buying it.
Does it matter for the analysis that rent rises over time whereas the mortgage cost doesn’t? For example, you started out with a rent and mortgage of $1,875 but after a few years, renting that same place may cost ~2K per month but your mortgage won’t likely have gone up much (maybe a small amount for taxes). I think if you account for that difference over the 25 years, the picture would change...
The best argument in favor of renting is that you can move to find better jobs.
We've all seen documentaries where people watch jobs disappear from their communities. The reporter asks why they don't sell their home and move to a city with better jobs. The answer of course is nobody will buy a house in a dying town. It's really sad. Their finances are being destroyed by forces outside their control. And it happens all the time.
It's not just jobs. Lead in Michigan, the oil disaster in the Gulf of Mexico, forest fires in California. If your town becomes unlivable, guess what, you're staying anyway. You don't owe any town that kind of loyalty. Better to rent in a city you like and then move if things start going downhill.
Poorer people rely on their family, friends and wider network to get by. Not as easy for them to just pick up and move away.
Ben, thanks for the analysis and simplifying the math involved. However, my experience shows that not many would want to go into such details, especially if they already own a home. Moreover, many home buyers are impulse driven, and fail to apply a more sophisticated analysis to their financial decisions.
Buying a home is an emotional thing. Ppl just wanna buy then bury their head in the sand like a goddam ostrich
you mentioned in the video that if the renter would invest with the same diligence in an agresive portfolio of low fee index funds, is the s&p 500 such an example, if not do you have an example?
I have owned a home in the past, and I have been renting in the last 7 years. Renting have me peace of mind. There is no mortgage debt worry. I have been able to invest in different asset classes (index ETFs, REITs, P2P lending, crowdsourced real estate funds, etc.) without having to feel guilty about investing while in debt. I am also able to give freely without the worry of debt.
I like renting!
💯 agreed
I don't understand how you have a $100000 down payment on a $500000 house but only mortgage $394000? Are you saying land transfer costs, legal fees, and other purchase costs count as a down payment? Shouldn't that be the up front costs but the mortgage still be $400000 at 3% over 25 years? If you run the numbers again renting would be a lot closer of even ahead
Good catch. That is an error in the animation. The mortgage in the calculations was $400,000. The mortgage payment in the animation, $1,893, is correct for a $400,000 25-year mortgage at 3%.
Yes. Rent will double or triple. Need 10% net in markets to win. Also. Building a home. Subdividing land or selling to developer are an even greater ROI. That's what we do out in Ruralty country.
If renting increases it's very likely that mortgage rates increase too, and also property tax will increase so I guess it depends on how long your term is on how much you have to move around for work.
Love your content Ben. I'm renting a real inexpensive house and investing 50% of my salary.
Great strategy. I have a relatively affordable mortgage and max out my ROTH contributions. Eventually I'll sell my place, invest the proceeds in globally diversified index funds, and continue to max out my ROTH.
Aurelio ..same here. Best strategy when it comes to housing. The housing shills would say otherwise
This is an interesting video, thanks Ben!
It seems to me that there might be a point in favour of home ownership, which is that you are hedging against changes in the housing market. E.g. For my situation, I know I don't want to move away from where I grew up. Given this, I am committed to always rent or own property in this market. If I rented, I'd be exposed to the risks of local housing becoming more expensive, whereas by buying I can trade that for the risk of changing interest rates, which might be preferrable. I don't actually know if that is true, historically?
FWIW, I own for a different reason: I like being able to alter my home and garden, safe in the knowledge that I will be able to enjoy the fruits of my labour for a long time.
You seem to assume property will always increase; that isn't necessarily true. The housing market is like any other market; it can go up or down, so there's risk in owning too.
@@alankoslowski9473 no I don't? But it definitely could go up, and that would increase a renter's living costs. Buying trades that risk for a risk from interest rate changes.
@@Anteater1234567 If you have a mortgage with a fixed IR it doesn't change unless you re-fiance. So much is situational. If you're reasonably certain you won't need or want to move in a few years, buying might make sense. But if you aren't and might want to move regularly, renting is much more sensible.
Modelling rent increases at the overall rate of inflation is rather naive. CPI measures include a lot of stuff that's under the average - especially tech gadgets that strongly *deflate* over time (once adjustments are factored in for the improvements in the technology, at least). Market sectors like real estate tend to take up that slack.
On the other hand, the renter has a much more flexible and liquid investment - much more control over asset allocation and risk acceptance. Also it's easier for single people to secure housing in smaller quantities via renting - houses only get so small, and subletting is complicated.
I'd add a liquidity factor in case of an emergency. Selling the house would trigger liquidity issues compared to a liquid index fund over the time period.
Nice to see you include dividend tax and capital gains as most forget for shares. It looks like Canada is just as crazy as Australia with housing. I am guessing you might hate this (market timing) but I think buying a house is better assuming you are going to stay in same area for 7-10 years and mortgage is less than renting per month. This never happens in Australia as everyone is betting that home equity will continue at the same pace so renting is cheaper as "investors" are willing to take on debt (120% of income as 27 years since last recession). Australia is worse as there is no fixed 25-30 year mortgage option as 10 years is the maximum and is expensive compared to variable so God help us it rates normalise in the next 30 years. Opportunity: I think these is a market for 30 years fixed in Australia but nothing offered. A Fannie/Freddie would do well if they can be bundled and sold. If of interest and know how let me know.
I'm just curious how the calculation stacks up when factoring in time horizons. From my understanding, the closer you get to retirement, the more conservative your portfolio becomes. Wouldn't it be unwise for someone to maintain a 90% stocks 10% bonds allocation throughout the majority of their working career? Correct me if my line of thinking is flawed, but when factoring in how a portfolio changes approaching retirement, wouldn't the difference become much closer or perhaps even swing the other way? Great videos, I'm watching them all!
You’re correct. I wrote about that here boomerandecho.com/renting-in-retirement/
And I think I mention it in the 5% rule video too.
Hi Ben, have you done analyses on the Smith Manoeuvre? Seems to be a great way to capture benefits from owning plus investing.
I have not covered it. Could be a good future video.
@@BenFelixCSI Please cover the Smith Manoeuvre! Everyone I've heard talk about it makes it sound like a real game changer for homebuyers.
I have lived in my house in an active adult community in central Texas for 13 years. If I sold it, I would realize a nominal gain of 51 percent over the purchase price. After inflation the real gain would be 28 percent. Throw in taxes, sales commissions, maintenance, insurance, etc., and I would have a real loss of nearly 25 percent based on the cost of the house. Call it the price of ownership!
On my house in Dallas, which I owned for nearly 27 years, the internal rate of return after adjustment for inflation, as well as the cost of ownership, was 5.3 percent. I did substantially better than that with my investments.
The big advantage of owning a stand-alone house is privacy. I have lived in up market apartments in Dallas and Melbourne, Australia, that turned into a nightmare because of unruly neighbors.
Great job on this awesome video! It explains a system I believe in and live by, yet most people can't understand why.
Personally, I think 'quality of life' is the only sensible reason for home ownership and the only thing that entices me to live in something that I own. We could say it's what we prioritize, or go as far as saying the expectation we have would be living beyond our means, but the reality is, it's extremely difficult to find a landlord who will treat their investment the way you want to treat your home. As a renter and a landlord, I am on both sides of this fence.
As a landlord, I continually work hard on those properties and invest on average 2% back into them (not including my sweat equity). This keeps my tenants happy and retains the long-term value of my property (not taking into account your comment of land value vs. building value which was interesting and requires more thought). But, I continually remind myself that my property business is funded by providing people with a home. Thankfully I haven't had any outrageous requests, and economically it's working out the way I had planned. My turn over rates and comments from tenants would indicate that I am probably the outlier when it comes to the quality of my rentals (for my price point).
As a renter, my experience with landlords is they seem to only consider the bottom line and are going short when it comes to maintenance. As an example, my current landlord (for a house in Toronto) has invested ~0.2% over the last 6 years. I have probably invested more in his house just to keep it "livable". My guess is the (common) strategy these landlords are taking is, minimize maintenance costs and then do one large reno right before selling. For me, the renter, it reduces the enjoyment of the home which then has an impact on 'quality of life'. This is the only thing that makes me consider going back to living in something I own. I think this is the biggest issue that prevents more people from following this plan.
Question... In theory, could you incorporate, buy a house using the corporation, then rent the house from your corporation? Could the corporation take advantage of the benefits of property ownership (tax deductions, etc) while you take advantage of renting (lower cost of living, etc)? Would it be worthwhile after expenses like corporate tax, cost of incorporating, etc? Something else to ponder I guess.
A side comment on "a mortgage is forced savings". In my opinion, this is also an investment illusion. LoC products like Flexline or ManulifeOne seem to be gaining popularity, and for the people I have talked to who use them (and are open enough to talk about how they use them), I find they are using the equity in their home to increase their lifestyle while paying higher interest rates, then compound the problem by only covering the interest payments each month rather than rebuilding that equity in their home. Yet somehow they still believe everything is going well because they still "own" their home. I suspect they will be quite surprised with how little profit they have (if any at all) when they sell.
Steve, thanks so much for this thoughtful comment. Really interesting to hear the perspective of someone who has real-life experience on all sides. Your comment added a ton of value to the discussion.
If you owned a home inside of a corporation you would have to pay market rent to the corporation. If you did not there would be a taxable benefit that you would have to pay tax on personally. Any net rental income would be taxed as passive income in the corporation, taxable at the approximate equivalent of the highest marginal tax rate for an individual. You would also be giving up the principal residence exemption on the eventual sale. This is definitely not a strategy that I would recommend.
Great point about the readvanceable mortgage trend. I agree that eliminates the discipline argument.
Thanks for the insight on using a corporation, I had not never really considered it until I was typing that response yesterday. Clearly, it doesn't make sense. I would have been surprised and considered it a "loophole" if there was a way to take advantage of the benefits on both sides by using a corporation.
Thanks again for the great video! I look forward to watching some of the others! Great quality, very informative, and excellent delivery.
wow indeed at those costs etc. it would make NO sense to buy, and whoever offers at that low comparative rent is a bad bad bad real estate investor.
In my country it's vice versa, your monthly costs are about the same (within say 3%) with the difference being that most of that money is going towards the principal.
Makes a lot of sense. Used to rent 2bed 2 bath for 2400 in Toronto. Bought the same unit and paying roughly 3200 per month which covers my mortgage, maintainance fees and property taxes. To make up the difference, I rented one bedroom and bathroom for 2200 a month. So I’m basically paying $800 per month on rent. In this scenario, it made more sense to me to buy than to rent. The rest of my supposed rent goes into my TFSA portfolio. Owing a home can be liability and technically not a performing asset. In my scenario it’s a performing asset more than a liability. What are your thought?
Makes sense on the surface, but the piece that you need to keep in mind is the cost of capital. It is not your mortgage payment that you need to compare to rent, but your cost of capital. That is mortgage interest + opportunity cost of equity.
For example, a $1m home with 20% down and 80% financed with a 3% mortgage: The opportunity cost on the $200,000 down payment might be 3% (6% expected return on stocks minus 3% expected return on real estate); that's $6,000 per year. The interest cost on $800,000 at 3% is $24,000 per year. Add on another 2% total for estimated property tax and maintenance and you have $50,000 in total annual unrecoverable costs. Subtract from that the rental income (before tax), and you have $23,600 of unrecoverable costs, or about $2,000 per month. Once you take taxes off of the rental income you might be back closer to the $2,400 that you were paying in rent. Now I don't know if the house you bought was $1m, so my example may be way off.
How does the result change if you factor 10% annual rent increases over the 25 years which is typical for my area.
What's your opinion on the viability of buying a house and renting out the extra rooms to friends/others. Someone I know is doing this and is able to have 3 extra people paying him 500$/month.
Ben, could you comment on how rising interest rates could change this scenario? In this example, you use 3% as a constant rate for 25 years.
Hi Brad, all else equal, rising interest rates make renting look better because the mortgage becomes more expensive to repay. However, rising inflation makes ownership look better for fixed mortgage borrowers because the mortgage is being repaid with dollars that are worth less. Landlords increase rent with CPI, so renters will tend to have less available for savings during high inflation.
Ben, I am seriously thinking about “forever renting” and putting remainder of income on my taxable brokerage as I already max my tax deferred accounts. There is one aspect that I feel was not addressed in your otherwise enlightening video. What about the steady increase in rent vs a fixed mortgage of 30 years let’s say? How does that play into rent vs own? Also capital gains from real estate sale are not taxed up to 500k for married filers. Was that factored into the returns you mentioned in the comparison?
I did another video titled the 5% rule which I think does a better job explaining this. Inflation on rent is included in the analysis.
Hi Ben. Love your videos. I am a real estate investor, I own 3 properties: one stand alone house that I live in, and two condos that I rent out. I often wonder how much better off I will be in the end by investing the rent that I collect from my rental properties into the mortgages of those rental properties for 25 years. I wonder if I wouldn't have been better off just owning one home, or renting an even cheaper place, and pumping money into RRSPs, my TFSA and taxable stock market accounts.
Do you think you would consider making a video with reasonable data and expectations - like the typical data that you use in all your videos - to figure out how much better off a typical real estate investor will be in the end?
Perhaps some numbers that could be used could be: property taxes for all 3 properties individually: 175 per month. Condo fees for the two rental properties: 350 per month. Mortgage for the 2 rental properties: 1250 per month, mortgage for my own place, also 1250 let's say. No condo fees for the home I live in since it's a stand alone house.
It doesn't have to be this exact scenario but surely you know what I'm saying - just a theoretical scenario of a real estate investor with 1 or 2 rental properties that are rented out let's say 90% of the time, with simple numbers. I often wonder. And, if it turns out that a real estate investor will indeed be better off in the end, then perhaps this could be an answer to your question at the end of the video, which was I believe: "Can you find a good reason to own a home?" Perhaps owning more than one home and renting them is a good reason, but you'd have to do the math.
Oh and also, assume that the real estate investor will never sell his rentals by the way. Rather than cashing out on the equity later in life, I would rather just keep collecting the rent and pocket it or invest it instead of collecting a finite lump sum.
Thanks man, keep up the great work! I've been investing in index mutual funds for a long time, I have some of the cheapest ones, but the rates are still .33% for the ones I have in my TFSA and RRSP. I thought I was doing really well, because I know that keeping fees down should be priority number 1, but I had no idea about ETFs and what they are. Thanks to your videos I am switching to ETFs ASAP!
Hi Barwin. It's great to know that you enjoy the videos! Your question is excellent. Funny enough, my next video (on June 22) is about this exact topic. The upcoming video is based on a paper that I recently wrote. If you want to read that, here it is: www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/WhitePaper_BenjaminFelix_Housing-Investment_05-2018.pdf?ext=.pdf.
In summary, buying residential real estate and renting it out has historically had better returns than stocks, even before leverage is considered. If you could capture that global housing return then investing in residential real estate would be *extremely* attractive.
The problem is that very few, if any, investors can capture the global housing return. They will typically own one or two properties, probably in the city or region that they live in. This leads to an extremely unreliable result. You are unlikely to get something that resembles the global housing return, and are much more likely to get something either much better or much worse without any way of predicting what to expect.
In the paper I also ran a hypothetical real estate investment for a house in Ottawa under the current market conditions and reasonable expected future returns. I found that it might be reasonable to expect a return approximately equal to stocks. Getting a similar return to stocks with the addition of substantial asset-specific risk seems like a scary prospect to me.
Hi Ben, thank you for replying. Yes, I agree with you. I will read your paper. I own 3 properties in Alberta, of which 2 are rental properties, and I have told myself that if I were to buy more property, it will no longer be in Alberta, because I don't want to have all my eggs in one basket (which, in Alberta, happens to be the oil basket, and that's getting hammered right now and with solar and battery storage becoming so mainstream, who knows if oil will ever recover, it could literally go to zero in 50 years).
So, I am originally from Europe, and if I were to buy an another property, it will be there. Or in Montréal, but 3 in Alberta is enough eggs in the Alberta basket for precisely the reason you quote.
Alright I have some reading to do tonight and I look forward to viewing your video about this! Keep up the great work, it is giving a lot of people a lot of value I am sure.
Hi Ben. Just finished reading your paper on real estate. It's an excellent paper. One thing that I didn't find in your paper about real estate investing is the argument that you made for buying a house to live in: people say it's a good investment, even when it's not really (if they only own the one they live in), but for them it actually is a good investment because the mortgage is forcing them to invest, and if they didn't have that mortgage, then many people wouldn't be investing anything.
Every mortgage on a rental property constitutes a forced investment, and the investment that is forced is the rent that is collected from the properties, which goes toward those mortgages, like in mine. So, let's say that my 3 mortgages are 1500 per month for instance, and I collect 1500 per month from both my rentals, that is a forced investment of 4500 per month, and only one of those 1500 dollar mortgages needs to come from my salary. The other 2 are forced investments at 3000 per month that come from my tenants, or from me managing them, same thing.
If I had to force-invest 4500 per month into the stock market, without the ability to take money from other people and invest it, I would not have that much money left at the end of the month, whereas now I pay 1500 for my "own" mortgage (principal residence) and some other costs like property taxes and utilities, but apart from that I get to keep the rest of my salary, which I invest in the stock market, while still investing 4500 total per month in morgages. So let's say that what's left of my salary to invest is for instance 1500 per month as well. That leaves me investing 6000 dollars per month in various assets, whereas if I didn't have rentals I would only be investing 3000. Also, like you said in your paper, I do deduct the interest of those 2 mortgages from my taxes, and I also do CCA, which is really just a tax deferral into the future, similar to what one does with an RRSP, but in the meanwhile it leaves me with even more of my salary at the end of the year, which is then either spent or also invested.
Anyway, the lack of liquidity and the lack of diversification around the world due to the high unit costs of real estate investments is certainly a concern of mine, especially since I am scared that Calgary is going to go the way of Detroit. Then again, the reason why there is a downturn in any asset class is because people's perception of the future of that asset class is negative, and right now people see Calgary's oil future as negative, so we're in a downturn. But if one wants to buy low and sell high, one needs to buy in a down turn, or at least hold in a down turn, because if one were to buy or hold only when people had a positive view of that investment class, one would always be buying high, or holding high.
You know what I mean. So here I am holding my real estate in Calgary forever, and hopefully Calgary doesn't become Detroit 2.0!
In my opinion, the best investment a Canadian can make is still to never get married. A divorce sets a person back so much more than any bad investment decision ever will, haha. You could make a video on that, but I don't think it would be appropriate in today's political climate, the Facebook mob would come for you before your channel even gets going!
Good luck brother, I am going to tell all my friends to subscribe to your channel. I am tired of seeing old ladies in Canada working at Tim Horton's because they don't have a penny. People should realize now that the government is not going to take care of them in retirement, we have to do it ourselves!
Thanks for the support, Barwin! I agree financial literacy is important, especially in a country like Canada where government pensions (CPP/OAS/GIS) are relatively small.
To answer your question, I think that you need to look at another paper www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2017-07-07_Felix-Benjamin_The-Case-for-Renting_FINAL.pdf?ext=.pdf
This paper addresses owning a home as an investment, and compares it to renting and investing in financial markets. Your question is about owning a home and also owning rental properties, so the two papers I have given you should answer the question.
I would summarize my answer to your question as follows: 1. whether you rent or own your home should not be expected to make a big financial difference assuming that you can be a disciplined saver when renting. 2. investing in individual properties might result in an expected return greater than investing in stocks, but unless you are able to diversify globally you are very unlikely to get the expected return of the asset class.
i think, that home ownership have not only an economic value, but also a subjective value, that is harder to quantify, because you are not limited in what you can do wit your home.
if you own the home, you can upgrade it, change the layout of the rooms to some extend or, maybe, even expand it.
That’s true for some people. Renting likewise has a subjective benefit for many people because it is hands off, flexible, and low risk for short time horizons.
Very nice video.
It's really hard to do an meaningful apples to apples comparison unless one is looking a particular location at a particular date. So many things are moving parts or differ significantly by location. Taxes and insurance vary wildly depending on where one lives. I'm in the US, and where I live my property taxes are about 0.6%, however go to another US location and taxes could easily be triple or more that for a home of the same value. Insurance is the same way, insurance in Iowa or Kansas would be vastly different than Florida. The current interest rate and future inflation rate also can have a big impact. If you expect interest rates and inflation to rise significantly, it may be better to buy now vs rent. Where we are at in the RE cycle also makes a big difference. If you buy at the bottom of the cycle you will likely come out ahead, but if you buy near the top of the cycle you would be *much* better off renting. The take away is there not simple answer to buy vs rent, it requires significant analysis at the time and place of interest.
My view on financial decisions is that they are best made on long-term evidence as opposed to short term expectations. Trying to time the RE cycle or anticipate inflation is, in my opinion, a losing game.
I would never expect a CFP or similarly credentialed person to recommend RE investing. It's not something they are trained for and can talk about with authority, it's not something they can get paid for, it's not something most have real life experience with, and it's not predictable like long term securities investing.
If you or any CFP were promoting RE investing, it would be completely inappropriate. Similarly if someone wants to make money by forming a new technology company or franchising a restaurant chain, I wouldn't expect a CFP to be giving them advice on how to start. It's completely outside their area of expertise and is more speculative than the path offered by long term securities investing.
HOWEVER, If the world didn't have people forming technology companies, investing in RE, and franchising restaurant chains, the economy would be dead, and there would be no securities to invest in. So that doesn't make any of those things bad, just high risk/high reward paths that are appropriate for very few and not mainstream.
I agree anticipating inflation or predicting where the RE cycle is going to go is impossible. However, I've found that knowing where one currently is in the RE cycle isn't terrible hard. It didn't take any genius in 2008-2010 to know we were in a down RE market. Did anyone know exactly where the bottom was, nope. Did anyone know how long it would be down, nope. Could anyone predict exactly when it would go up again and how fast, nope. But you don't need to make any of those predictions to make considerable money.
The RE down period of 10 years ago certainly isn't the first time this has happened, I've watched several (although that one was the worst). When it goes down it usually happens fairly fast (12-18 months) and is obvious. Finding the absolute bottom and top is just about impossible so those shooting for that will get people burned, but it's not necessary to know that to make a good profit.
RE investing has made many fortunes, but it's not for most people. It's complex, it requires a lot of effort, and unlike securities, there is no one you can pay to do it for you. Those that are good at it, do it for themselves, not others (with the exception of REITs but those won't make one high profits). Getting an "education" on it can be expensive. One can start out with securities making very small investments so if mistakes are made they don't necessarily have to be costly (unless one is speculating on margin or other stupid things). RE is dealing with much larger sums so mistakes tend to be amplified.
Agreed on all accounts. It is not only the large numbers, but the large numbers and a tendency to use leverage, that amplifies both wins and losses.
Thanks for the videos, I've enjoyed watching many today. Though I tend to find all of your presentations academically compelling, I wonder about the applicability of this argument for Torontonians in particular who are in the early stages of their careers, have the requisite down payments, and watch both real estate prices and rents for available and empty units increase dramatically. Of course, not everyone lives in a crazy real estate market but do you have advice specific to those that do? Also, could it be that real estate markets are inherently different in 2018 than they historically have been (international flow of money being a driver of that) such that the historical data is less relevant? Thanks for commenting!
There's always a point of indifference. For example, you might be indifferent (financially) between buying a $1M home vs renting for $2,800 per month. In other words, as long as you rent for less than $2,800 per month you are better off financially renting compared to owning. The challenge is that the point of indifference moves based on a lot of variables. My initial example of indifference assumed investments taxed at the highest marginal tax rate. If instead you are using RRSP and TFSA accounts, the point of indifference on a $1M home is closer to $3,500 in rent. In other words, renting will put you ahead of buying financially as long as you stay under $3,500 per month.
My conclusion is that most people, including in Toronto, should max out their RRSP and TFSA accounts with long-term low-cost investments before considering buying a home. You can play with the calculator here (excel file) www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/Rent-vs-Buy-Calculator.xlsx
It is possible that Toronto and Vancouver are different now due to foreign flows, but there are other cities that have had similar situations in the past so I don't think we are in uncharted territory.
@@BenFelixCSI Hi Ben! Does the PWL rent vs buy calculator still exist?
The home owner can borrow against equity and invest in a aggressive portfolio. Over time, the scale will tilt heavily towards the home owner. Not to mention it creates tax deductible interest to save taxes, recapitalize the payments using heloc to minimize the Cash out flow. The ability to borrow at low cost is a huge advantage for home owners. I do get your point though and your videos are awesome!!!
The renter can similarly borrow against their portfolio to invest which will even things out. This also creates a deduction. Margin loans are comparable in cost to HELOC. Max HELOC is only 65% of LTV of the home. Margin on an ETF is typically capped at 70%. Margin calls are an issue for the renter, but a HELOC is also callable at the discretion of the bank. I don't think this is a valid argument for the owner. The biggest difference is psychological where the owner is likely more comfortable with mortgage debt than an investor would be borrowing to invest. In both cases there is a ton of risk.
Thanks for commenting, and it's great to know that you enjoy the videos!
@@BenFelixCSI I am sure you know more about margin loans, but the best I can find is Prime + 1.25 from itrade, while I can invest my home equity with a closed variable mortgage at sub 3%. I am sure you get my point. Besides all the points you mentioned, I think renting is extremely favourable in markets or segments with a low rent relative to house prices.
I do agree that there is a case to be made for the renters, at least in some circumstances.
sdzbwxp equities are more liquid however. A shareholder can sell shares to get cash while a homeowner almost has to go into debt to liquidate a portion of the equity in their property.
@@exgamer07 the amount of capital tight up is just the down payment. You can borrow against your equity once your house appreciated enough. Then you can use the borrowed fund to invest in equity. Interest is tax deductible. Now you have your house, and a equity portfolio that's liquid. Key is that you have borrowing power, meaning high and steady enough income.
sdzbwxp There is more than just the value of a down payment that is tied when mortgaging a property. The principle portion of the mortgage payments is also tied up as well.
Borrowing against equity is an option, but it is still inferior to not borrowing at all. One does not need to borrow money or go into debt in order to liquidate shares or bonds.
Tax deductible interest is also a moot point, because this only speaks to the amount you owe in taxes. It does not change the fact that you are still paying interest.
I'm not sure long term real estate returns are indicative of near term future returns. Consider limited land in the GVA and GTA and increased building costs and scarcity of building materials.
Two intangibles too: 1. Renting enables you to be more mobile and more likely to accept a promotion or new job in another location and 2. Owning a house means you have to furnish it with things and things to maintain it. Keep a simple lifestyle as a renter and there's no need to own a lot of "stuff", saving even more money
Exactly. There are many expenses to home ownership renters don't incur. Someone was telling me about all the remodeling they did recently, spending several thousand dollars for purely aesthetic reasons. I was thinking, 'That's throwing away more money than people tell me I'm throwing away by renting.'
💯 agreed. Instead of stuff, you can now go on trips which is better. You can go on trips because you're free from yardwork, maintenance, etc
Renting sucks. I couldn’t stand it. Someone else having the keys to my home for starters. Having to ask permission for every little thing. Never knowing when my land is going to sell and I’ll be evicted (in Australia landlords sell pretty frequently). I couldn’t never feel truly at home in a rental.
Yea but when buying, you're essentially "renting" the house for 30 years or the length of the mortgage. You don't own it until it's paid off. It's risky because what if you lose your job or lose you way to make money for awhile.
One important factor that should be considered in the calculation is that rent goes up every year. Mortgage payments tends to move with interest rate only, up or down. Sometimes down. That factor will cause a huge advantage to owning over a 25 year period.
Not necessarily. Rent can actually decrease depending on market circumstances. With a rental you usually pay a fixed amount for the duration of your lease. When the lease expires you can move if there are less expensive places to rent.
In the US most mortgages are *fixed interest rates* so your rent won't change unless you refinance. Property taxes and other expenses can increase for home owners.
I'd like to see an example using a more realistic home price. I live between Milwaukee and Chicago...a highly populated area. A $500,000 home is a residence that would be taken up mostly by the 1%. An example around 180-200K would be more reasonable for a nice, 3 bedroom home.
Take a look at the 5% rule video. It works (with some tweaks depending on the details) in any location.
My home came with a rental unit and I bought it at a discount. It is in walking distance to our jobs, shops and everything else we need. Renting a home equal to this one would be impossible with an equal or better location.
If quantitative analysis shows similar returns between real estate investment and stock investment, I'd prefer owning a home.
One thing you didn't mention is a person's ability to manage money and himself. To get that kind of return in the stock market, one must learn to control their greed and fear when the market booms and falls. Majority people can be successful real estate investors as they tend hold the property a very long time, while majority people lose money once they become greedy or fearful in the stock market. It's hard to invest like a robot when you have that much money to invest.
Just another perspective on knowing the type of person you are.
I disagree. I currently have a mortgage on a small home. When I retire in about 10 years I'll have about $150K of equity in my house. At that point I plan to sell it and invest that money roughly 80% stock/20% bond mutual fund. When I retire I don't want deal with all the headaches and responsibility of house and want the freedom to live seasonally. Liquid investments like stocks and bonds offer flexibility that owning a house does not.
You are the MVP
Big advantage to renting, you can pick up and leave the area if a better work opportunity arises elsewhere. A good advantage for owning is, instead of risking the stock market and your own resilience to fluctuations(I scare easy) Buying a home gives you the feeling of "whatever happens I have a place to hang my hat"
I agree. Owning is also forced savings which is a necessity for some people.
Probably renting is even better in comparison when you take into account that people don't rent a house of equal size. At least, they don't need to the whole time. When you buy a home, it has to be as big as possible because you need space for your future family, especially children. And it will stay a big house after your children move out. On the other side, if you rent a home, you can save money by renting a smaller appartment before and after your children live together with you.
What about a mini home or a condo? I’ve been looking at those recently and they cost around 150K. I feel like buying in this case would return much better, especially after paying down the mortgage.
There are still unrecoverable costs. I think it depends on the area as well. While I'd prefer to rent, I live in a semi-rural area with limited rental options, so I have a mortgage on a small house. At some point I'll sell and return to renting though.
Here in the Netherlands renting costs 50 - 100% more than mortgage payments. If you rent here you don't have any money leftover to invest.
Forever renter here! I also have a large investment portfolio
Thank you for the video. I have one question. It doesn’t looks like the calculation accounts for the rent expenses increase over time, so the additional investment will be shrinking and potentially will be negative. I would be curious to know your opinion on how it would affect the eventual returns.
Mortgages increase concurrently w property tax increases.
@@alankoslowski9473 yeah plus renting is relatively predictable. Owning a home comes with wide swings on maintenance
@@holdencawffle626
Exactly. While much depends on local laws, most areas I'm familiar with the rental rate is locked in for the lease duration. When it expires you can stay or go if you want. As an owner you're stuck there until you sell.
The problem with buying a home is you sacrifise a lot of flexibility. If you care about money, just find ways to keep the rent down. I always stay in hostels when i travel for work or leisure.
This model assumes the home owner does not move? How many people live in the same house for 25 years? Renting has the advantage of flexibility should your career or priorities change. Plus RE is illiquid.
Correct it assumes the owner never moves. As soon as they move, even once, the renter starts to get a big advantage.
@@BenFelixCSI Agreed many people move within 5 years. The other case for the investment scenario instead of buying is diversification. Equity investing is diversified to multiple markets through investing worldwide. Real estate in homeownership is to the specific market. This can have significant market risk that can affect return negatively if sale is not at a good time. Mortgages are a form of leverage and accentuate gains/loses on the investment.
@@BenFelixCSI But it also assumes the renter signed a 25 year lease.
So they end up with the same, despite the huge difference in annual growth? Is that because of the leverage of borrowing money?
Yes. Controlling for leverage we would expect the renter to do better than the owner.
Very informative as usual, i think regional rates effect this equation as certain periods are expensive or cheap on either side but i think that the biggest factor is the discipline of a renter. home ownership is a forced savings plan in essence, the seduction of extra cash in the hands of the renter and them Being diligent enough through the 20 year period is unlikely.
That is a really good point, Lorenzo. The rent/buy decision is a little different in each city based on the relative costs of renting and buying. CMHC has lot's of good data on this www03.cmhc-schl.gc.ca/hmiportal/en#Profile/1/1/Canada
true but if they are directing investing the savings it's not exactly like the cash is in hand. it's a little more difficult to get out than just swiping a debit card and eliminates those impluse buys as it would take a couple days to sell the asset and withdraw the funds. although people could just swipe the credit card and pay when the bill comes.
Justin Williams good point. This is even better if people are putting the savings in their RRSP.
Ben Felix for sure. for me an RRSP dosent have much value because I pay into a pension plan and i would be paying the same amount of tax on the money in an RRSP either way. assuming the pension is still around in 25 years when I retire lol
I wouldn't overlook the RRSP in your situation. The maximum pension benefit will typically be 70% of your best years, and you can split your pension benefit with your spouse for tax purposes. Between those two factors it would not be unreasonable for you to be taxed at a lower rate in retirement than now, so the RRSP is still useful!
I work in Toronto but I absolutely hate the city and would never live there even if I could afford it. that's why I chose to buy out of town and commute. although I work for a company that is province wide so I'll be getting closer to home this year as I have enough seniority in my union to get where I want to be this year. finally 8 years later lol a good video would be comparing buying a newer car compared to a older one. as I said i commute about an hour a day but I bought a 04 Jetta TDI for 5k cash and have drove it for years and hundreds of thousands of kilometers without major issues. I've funneled the money I would have been paying in car payments into my TFSA and it's grown so much i could buy 30 Jettas cash in the same amount of time I would have paid off a new car.
That’s a good idea. I think the hardest part will be finding good data on vehicles. I will see what I can find!
Ben Felix hope it works out!
well here in Norway in Oslo its quite different. Here all housing double in price every 6-8 years it seems like for the last 30 years. So a 500 000 house would get to 1,800,000 dollars here. 2mill would propably be more correct.
Toronto and Vancouver were like that for the past few years (cooled off now), but that does not mean that you should expect this forever.
Another thing you forgot to mention, many people DO NOT a. put down 20% on a home or b. go that long without selling their home
And when that's the case it's often an even worse financial path.
So renting only makes sense if the person maintains a disciplined investment schedule in excess of 20 years?
You need to include in your calculation the percent of the increase in the rent every year and the restrictions that the landlords imposed on the renters. Owning a house is still the best decision especially when you buy it in cash. You have more freedom when you own the house and you have more control over your property. Bottom line, buy a house when you are financially ready not when you can afford the monthly amortization. When you are not ready, most of the time owning a house is a curse rather than a blessing.
Rent increases are included in the analysis. Here it is in full docs.google.com/spreadsheets/d/1iDBncgxr20-AmP8l9Ox3beOs5T574B9otsortDbJW9k/
Paying cash for a home is one of the *worst* financial decisions you can make. Let's say you buy a home for $300,000 cash. While you don't have a mortgage you still have property taxes, utilities maintenance, and possibly HOA dues. All this costs at least several hundred a month.
If instead you invest that many moderately after taxes you'll return about 6% annually or $1200 per month. This will give you more flexibility in terms of where you live and the type of dwelling you have. I'm 49 with a mortgage and when I retire I plan to sell my house and invest rather than buy something else. Getting a mortgage hasn't been terrible for me, but if I had to do it again I wouldn't.
Is there a way to access 80-95% leverage with low rates as a renter? I'd love to rent but also aggressively build wealth using leverage.
If you watched both videos, he factors everything in. So it seems you don’t need to leverage yourself to build the same level of wealth.
@@jbmop I know it's 2 years later but I think Op wants to push the risk further
Ben in the comparison you failed to recognize the fact that over the period of paying off the home the mortgage payments acts like a hedge against inflation due to the fix cost of the payment and in the renter's case they will have less to invest over time due to the rent increases.
Inflation is taken into account throughout the model. rent increases annually for the renter while mortgage payments remain constant.
Ben, love your videos but I agree almost every renter I know does not have the forced discipline to save diligently every single month. Also in your calculations you do not account for rental increases and assumed the rent will stay the same for 25 years. Really appreciate all the videos that you do though. Thank you and great job!
Thanks Wei-Kun Chung! I agree the discipline is an issue for a lot of people. There are definitely disciplined renters out there though, myself included. I did not say it in the video, but rent increases annually with inflation in the model that I used to do the calculations.
Do you consider that rent prices may increase during the 25 years, in line with home prices (assuming no rent control)? Meanwhile, the homeowner would have locked in their monthly mortgage payments.
Mortgages increase concurrently w property tax increases.
When you buy a house you also have to pay a lot of interest charges if you're getting a mortgage.
There is a cost of capital whether you pay cash or borrow the money to buy a house. If you borrow you pay interest. If you pay cash, you incur the opportunity cost of not using that cash to invest in something with a higher expected return.
Hello Ben,
If one does not have a tax free investment account is it better to invest in a home? Thank you.
Not necessarily better, but on the financial side the equivalent amount of rent to be comparable to the cost of owning would be lower.
Thank you for the prompt answer. It seemed from your video that without a tax free account a house owner would be in the advantage. I understand that the variables are different in every situation.
Curious to hear your thoughts about a situation where someone has enough saved to pay 100% of the house, no mortgage involved.
From what I have learned from Ben, you have to consider the opportunity cost of not investing in other things with higher expected return.
@@vin_2620
Exactly. Investing in stocks or a combo of stocks and bounds for those adverse to volatility is will probably produce better returns and certainly offers more flexibility. Even if someone owns a house outright, there are significant expenses. Historically stocks produce higher returns than real estate, and stocks don't have all the ongoing expenses of a house.
With a house you're stuck with one asset in one location with significant ongoing expenses. Since stocks aren't a physical asset they're aren't a potential hindrance like owning real estate.
Hm, how does this change if we factor in increases of rent over the 25 years?
That is factored into this analysis at 2%.
I wanted to the see the numbers for investing in TFSA and RRSP for renters! what the total return would be.
The numbers are crazy. I detailed a bunch of iterations of the model, including having all investments in the RRSP and TFSA, on page 10 of this paper www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2017-07-07_Felix-Benjamin_The-Case-for-Renting_FINAL.pdf?ext=.pdf
Ben Felix thanks! Fantastic video. Wow renter’s NW exceed by 348k with use of only RRSP and TFSA! These 2 investment vehicles provide me with enough contribution room every year that I don’t need to use margin/unregistered accounts to buy equity. Although I utilize lending loop account and buy crypto as well.
Ya I think it's particularly challenging to financially justify home ownership for anyone with unused RRSP and TFSA room. Once they're both maxed out it becomes a bit of a toss-up.
The one assumption you make in this example that I do not agree with is that that initial rent of I think $1875 will remain the same over years and years. At least in my country, rent can go up quickly or less quickly, but I don't think there's been a period in time where it has ever come back down again. If you take that into account, the case for homeownership becomes a lot stronger (especially with a fixed mortgage rate). Of course, the flexibility of renting might still make that a better option for you if you want to be able to move elsewhere or adjust how much house you need.
Rent increases with inflation in the model.
@@BenFelixCSI Ah ok, I missed that somehow :-) But that is still not a reasonable assumption over the last decades in the Netherlands as rent prices have increased by much more. Is it in Canada?
@@Snowshowslow rents have not kept pace with prices in Canada, or most developed countries. This is a cool chart: infographics.economist.com/2017/HPI/index.html
One non trivial aspect of home ownership is the feeling of "owning" and being able to make home as you like it - but that incurs in further costs rarely reflected in value appreciation.
Yeah, I hear that a lot. But as someone with a mortgage, I'm looking forward to eventually selling my home and renting again. To me home ownership is overrated.
@@alankoslowski9473 I think you are the first home owner i hear saying that. Usually people are so deep in their purchases and in their denial. Kudos!
@@panyc10 Unfortunately most people, esp older people, are highly resistant to change. But change is a fundamental component of life.
I'm very much a fundamentalist/minimalist. The necessities (food, shelter, and basic clothing) are all anyone needs. To expect much more seems greedy to me.
Yes, you need shelter, but you don't need a large dwelling, a yard, a car, etc. But so many people become accustomed to those things they consider them essential; they aren't.
@@alankoslowski9473 Amen!
The calculus seems to change for someone with a higher income and higher tax rate. That person is probably already fully funding their tax-advantaged accounts, and that person’s higher marginal tax rate means they can benefit more from the tax advantages of home ownership-no taxable capital gains on sale of personal residence, mortgage interest deduction, etc. Would you agree? This would seem to go against the conventional wisdom that home ownership is the ticket to the middle class and the middle class’s best way to accumulate wealth.
Max contributions to tax-advantaged accounts should be prioritized to owning a house if you can only do one or the other.