Renting vs. Buying a Home: The 8.71% Rule (2023)

you do see the tax money- it goes to the community. you see the maintenance cost, it is not gone it improves your home, quality of life, and home value. That is not money you don't ever see again, it's still investing

A nice updated video! Though there's a few assumptions that kindof tip the balance in favor of renting, you covered the straight line interest effect, but another big one is:

You didn't account for capital gains taxes. When shares are sold you'll be taxed on the increase in value, and on any dividends paid, where a house you live in will be sold without any capital gains. That 7% gain on market is much closer to 4-5% after taxes.

I feel like two factors would lower that number significantly: one being 80% leverage that turns a 2% gain in price to 10% profit and the other being the fact that rent inflation (which was mentioned but not taken into the calculation). It probably makes sense to add 1-2 percentage points to the 8.71% figure just for the rent inflation in the first few years of ownership.

Great video...thanks for the info and spreadsheets

You did not account for leverage. 5% was the "difference" berween s&p vs median home appreciation but the buyer is earning 1.97 on the 500k not just the down payment so in reality it would come out to 9.85% real estate vs 7.19% s&p 500.
Please correct me if I'm wrong

The example home is a 1/2 million dollar trailer. We are in a bubble.

Why do you compare only the first year of home ownership and renting? What will the rent be in 30 years? Also, where do you get this tax-free 7.whatever% return from the stock market? Of course, buying is not always the smart choice, principally because of transaction costs. But the idea of comparing a fixed 30 year cost with the first year's rent is ludicrous.

He forgot to include home insurance. And yard work LOL

VRAU.500.million./$/CHES/TASFER.END.MY.TIMISARA.ROMANIA.LAS.NAME.VARGA.SANDOR.ADRESS/GLORIA/NR/92/LOC/GIROC/JUD/TIMISOARA.ROMANIA.

one more thing that could go into calculations is if the rent is lower and you can put the money in stock, how much you get

Hello and thank you for you educational videos. I was wondering why the interest rate is not factored into the opportunity cost of a down payment. If stocks return 7% and homes return 2%, but the interest rate is 7%, would the math not be 7-2-7=-2%?

Consider rent out a room of the home you purchase -- then it heavily favors owning a home.

You’re missing the benefit of the leverage on buying the property. The 2% gain isn’t on the $100k you put down, it’s on the $500k that the property was worth. Meaning 5 x 2%.

One thing I noticed is you had the cost of capital / opportunity cost in there for the down payment but didn’t include it for the principal payment. Would the same opportunity cost not apply? Apples to apples a renter could in theory take that principal payment and put it in the stock market and out perform.

Secondly, most FAs don’t include your home as an asset because you need somewhere to live, even if it appreciates and you sell you have to live somewhere so that money goes right back into another home in a market that has also appreciated.

Isn’t the mortgage interest cost tax deductible?

The most important thing to consider is whether you plan on staying in that area or not for the next 7 years. Raise that number of years or lower it depending on the interest rate and base asset price. Opportunity cost can also hit you if you have an opportunity to earn double or triple the amount you make now, but you're anchored because of the mortgage.

the link for the calculator is broken

For those that can itemize, the int. deduction tips the scale in favor of buying

I started investing when I was 27, mostly through sweat equity. I just turned 33, and this last month was the first time that my passive income broke $100,000 for the month. This is solid advice! DO IT

The only way buying in my high property tax city makes sense is if we could Airbnb or rent some rooms to pay the mortgage. Another thing to factor in is that landlords oftentimes pay for water/sewer/trash, lawn care/snow removal or other utilities. They pay for insurance and assume all the risk, which is high if you live in Florida.

Not the home, the land
Not the home, the land
Not the home, the land

Please understand that your house does not really hold value it is the land

What you can do versus what you actually do with the money you have saved should never be factored in. If people decide to be foolish you can not have that factor built in anu formula

I told my friends and family if you could buy a house, they were co fused and said, "You can't buy a house. You gotta rent it first. That confused me and now I don't how to get a house or apartment

You have to figure in that the typical timeframe people live in their homes before selling is 7-8 years. Many are not paying their homes off anymore. The saying that it’s cheaper to own then rent just isn’t true anymore.

So if I own a home like we’re told successful people do, I get rewarded with state tax every year and pay an extra $70,000 in interest if I have a mortgage. Does people really not see a problem with that?

I'll buy a straw house in Cambodia before I buy a home in San Diego.

How did you leave insurance out of the equation? In California I pay Fire and Earthquake insurance. Over $3k and rising annually.

Back in the 40's and 50's a simple milk man can afford a home for his family without having the wife to be working at all. Now a two income family making over 100k a year cant even afford a two bedroom condo in California. What a lovely time we living in.

Except for the times we are living in, buying is always the best option ever, do not even question it.
those calculations are wrong in so many ways, because , except for this crazy today market, usually no one who is 1st time buyer will buy a 500 k home,but a 250k home, and historically the mortgage payment is less than the rent. second , interest will gradually decrease over the time of the loan, and not everyone needs to put 10% down on a home, take VA loans for instance.
third : most homes tend to increase in value and even if that was not the case you will at least keep what you have paid for so far, and regardless of that ,you will always need a home to live in.

Rather have root canals performed than move. Factor in the cost and time lost due to that

Quick question... why did you use the median home price appreciation rather than the mean/average?

If you're planning to buy a house, we've developed Home Buying Guide, a free scientific calculator that considers all the important factors; your income, current rent, house value, and interest rate allowing you to make the best decision based on your personal finances. The tool is both handy and easy to use

Definitely Buy. Yesterday there was a discussion how some states have become impossible to live in due to Social security not being enough to cover rent. Well idk about you but in 30-40 years I don’t plan to rent and if you still are that’s on you. Most people buy a house which will appreciate itself with time and in 30 years max they’re done paying it off which leaves that SS check for just your normal living expenses. I bought my house a year and a half ago for 230k (4bed,2.5bath) and it’s already priced at 300k and if I do some cosmetic repairs I can get 400k without a problem.

The price to rent ratio is super busted in most markets right now. The fed is paying attention to that and are looking for further "price corrections". Buying is just a bad idea right now unless you absolutely have to.

that 400k scenario at 2900 a month, rents for 2400-2650 in my area. It's bonkers.

Sadly, if home prices don't adjust soon, rents will just go up as they always lag a bit behind home prices. Hopefully we don't get to that point.

We are set to close in a week. Our mortgage (principal interest tax insurance) will be 3x our rent. But we can comfortably afford it and simply want to own. That was the driving factor.

I wish property taxes were that low in Illinois...

Taking early notes from Warren as to the importance of sound asset diversification and risk management It can’t be overstated. I’ve been trying to grow my portfolio of $300K for sometime now, I would greatly appreciate any other suggestions.

I do understand you can't cover everything. Most the people won't open they sheet and actually do the calculations. These numbers just arnt realistic in most cities. A 150k-200k house around the area I'm in is 6500 avg taxes. And that maintenance number is way too low. The average water heater and one appliance is 5k. I appreciate the calculations and idea but that doesn't represent most areas. And I'd be willing to bet people actually putting 20 percent down is less than 5 percent of home buyers. Which brings on pmi. In order to stop people from making stupid decisions they need to actually understand the real costs involved.

The cost of capital calculation is slightly skewed because the real estate is actually returning you 2% on the $500,000 property value, not just on your $100,000 investment, which is effectively 10% return on your 100,000. Because the entire property value increases whereas the money of the stock market is only the 7% on your 100,000

If you control your home, you will be more wasteful

This was interesting. Thanks for sharing. Accruing equity is fine, unless the market drops.. right now (August 2023) it seems things are going to do a slow slide for the foreseeable future.

In Florida how do you add HOI which is 6-8k? Add in another percentage point?

@humphrey what would be the numbers for GTA - canada?

There are other factors. One is, if you are skilled or hardworking and brave and willing to fail sometimes and learn, you can buy distressed homes and fix them up. A few years of very hard work, and you can live in a very nice home, customized to your tastes and needs. And, your taxes will be low because the previously assessed value will be low, and your mortgage payment will be low. Next, as an owner, you can make other income streams off of your home. It is easier to rent out rooms. This is a great way especially for young people to afford mortgage payments. Or, Ive built very nice mother in laws and ADUs into homes. These ideas are risky, yes. But you can redo a kitchen yourself for $3,000-$9,000. People who hire contractors would pay four times that.

Another issue is that 5% cost of opportunity on 100k down payment is 5k and that's it. A 2% home price annual increase is on a 500k asset, which is 10k per year. This post is missing leveraged nature of homeownership....

This calculation misses insurance. This can easily add another 1% cost to home ownership

A quick recap of the rule would’ve been nice. Your original explanation weaved exceptions and notes, etc throughout and it would’ve been nice to had a 30 second recap with a whiteboard at the end.

You forgot to mention quality of life, being able to lay down roots somewhere vs renting a mold infested slum and dealing with a landlord