Renting versus Buying a home | Housing | Finance & Capital Markets | Khan Academy
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Renting versus Buying a home | Housing | Finance & Capital Markets | Khan Academy

Narrator: What I want to do in this video is give ourselves a
framework for thinking about the rent versus buy decision for a home. The key takeaway I hope
you have after this video is there’s not just a simple right answer, that it’s always better to rent or that it’s always better to buy. For full disclosure, I own a house and I bought it for a
whole series of reasons, some of them emotional, some
of them potentially economic. It depends on your personal context, where you are in your life, and what part of the world you live in, and what the economy is
doing at that moment, and what rents are versus
what housing prices are. Hopefully this video
will give you a framework for at least how to think about them. Let’s say this house in on the market, and it’s on the market for
rental at 1,500 a month. 1,500 per month, which is the
same thing as 18,000 a year. 18,000 a year; so, that’s
one option that you have. Let’s say there’s an identical neighboring house that’s on the market for sale, and you are in a position to buy it. Let’s say that house is $400,000, is the price that you can get it at. You don’t have $400,000, you’re going to have to borrow some money. You saved 100,000 for your down payment. 100,000 down payment. Down payment. You’re going to have to take
the remainder out as a loan. You’re going to take out a 300,000 loan. Now, a traditional mortgage,
one that has a fixed term; maybe it’s a 15 year fixed mortgage,
or a 30 year fixed mortgage. Every month you pay your mortgage bill, and some of it goes to,
in a traditional mortgage, some of it goes it towards
the loan and some of it goes to pay down the
interest, and the rest of it will go down to pay down the loan. For example, let’s say that
your mortgage payment is 1,800. 1,800 per month. Early on it might be
disproportionately interest. It might be, say, 1,500
a month in interest and $300 to actually pay down your loan, to actually pay down this $300,000 loan, and then as that loan is paid down near the end of the term of your mortgage it might have gone the other way where each month you’re paying much
more to pay down your loan. Maybe by that time it’s
1,500, and the interest, since it’s interest on a
lower amount by that much because you’ve paid down the loan so much, your interest might be lower. This would be a traditional
process of a traditional mortgage. To simplify our analysis, I’ll assume that you’re taking an interest-only loan; a loan where you’re only required to pay the interest portion of it, and you could pay down your loan as you want to. Let’s say that this is interest-only. This is going to help
just simplify things, and obviously if we want
to get really detailed we’d probably have to
get a spread sheet out to really analyze things and see how the interest payment changes as we go through the life of the loan. Let’s assume it’s interest-only
at 6%, 6% interest. Interest-only at 6% interest. That means on an annual basis, you’re going to pay 18,000 in interest. 18,000 in interest; 6% of
300,000. 18,000 in interest. Now, depending where you live and what your income level is, in a lot of places, you can
deduct mortgage interest from your income, so this
doesn’t mean that you get all of the 18,000 back, this
is saying if you’re making 100,000 a year, instead
of paying, say, 30% on 100,000, you’re now
going to pay your taxes on 100,000 – 18,000. Your taxable income
would go down to 82,000. You’ll save, roughly, your tax
rate as a percentage of this. Let’s say you save,
roughly, a third of this on reduced taxes; so,
that’s reduced taxes. So, your effective
interest that you’re paying after the tax break,
let’s say it’s $12,000. $12,000 is out-of-pocket,
or the effective. Effective cost of
interest. Cost of interest. We’re not done; we know that
there are costs of home ownership. You’ll have to pay, usually,
some type of property tax. Let’s say it’s 1% property
tax. 1% of 400,000 would be 4,000 in property
tax. Property tax. You, of course, have to upkeep the house. Maybe you have a gardener. maybe you have to repair things, you get things painted;
who knows what it might be. These are things that
you usually would not have to pay if you are renting; so, let’s say, although
it might be different, once again, depending on the situation. Let’s say there’s 2,000 a year. 2,000 per year in upkeep. In upkeep. Now, the reason why I
listed all of these things, and obviously we can go into more depth and more detail and
think about other things that are more particular
to different circumstances, but this is a list in
either of these cases, are the things that are essentially are going out the door. If you’re renting, that $18,000 a year, that’s just going out the door; that’s what you have
to pay for the benefit of living in this house. If you buy, things that
are just going out the door are your effective cost of interest,
your property tax, your upkeep. This will all add up to, let’s see, 4,000 + 2,000 is 6,000 +
12,000 is 18,000. 18,000. Just like that, it looks
like our annual costs that are just going out the door, given the assumptions, in every different circumstance you’re
going to have different assumptions, so this is just a framework. Your what’s going out the door
is $18,000 a year in either case. But, we are not done yet. In this case, we didn’t even talk about what we’re doing with our $100,000. Over here we had to use
it for our down payment. Over here we still have $100,000 invested. 100,000 invested, so we’re
going to get some income from this 100,000 that we
wouldn’t have gotten here, and it depends what we’re doing with it, if we have it in a
really safe bank account, maybe we’re getting 1% or 2%, but maybe we’re investing
it in a portfolio of things and getting 4%, or who
knows what we’re doing here, but we need to think about what we could have gotten from that down payment; from investing this incremental money. Let’s just say, for the sake of
argument, that you get a 2% return. At 2% annual return; so you’re getting $2,000
in investment income. Investment income, from that $100,000. Your actual out-of-pocket,
if you were to net your income benefit
that you didn’t have to, or the investment return
that you didn’t have to use up on the down payment, that netted against your
rent and now you’re 16,000. Now you’re 16,000 out-of-pocket. 16,000 cost per year. Now, the way that I rigged
the numbers for this video, it turns out that for this individual, purely on the economics,
purely for this year, as we’ll talk about in a few seconds, things might change in the ensuing years, but purely for this year, if we can assume these numbers, it actually might
make sense to rent a house. Of course, this analysis
completely changes depending on how these numbers change; if this house were cheaper,
if you got lower interest, whatever it might be, and all of a sudden, this number might look better. If the rent was a lot higher, this number would look, similarly,
would not look as good. If your return on investing
weren’t that good, this number would be higher
and it would not look as good. The key thing to realize
is just try to analyze what your actual out-of-pocket costs are. Well, look, just psychologically, when I’m doing this mortgage, at least it’s forcing me to save; and that’s true, it is a forced
saving that’s happening here. But, in theory, you could do it here. The equivalent amount
that you would have paid for interest, or the interest
portion of your loan, that’s your rent, and
above and beyond that you could just save that $300 a month, and put it into your investment pool, and after 30 years, you might very well have a good amount of money there collecting a lot, or
generating a lot of income. There’s no very clear-cut
answer that renting is always better than
buying, or that buying is always better than renting. It really depends on the circumstances. This is a back-of-the-envelope version; in future videos we’ll do
a more in-depth version. But, other things that
we should think about beyond just the numbers
are the intangibles. Let’s just think about those in a second. Let’s think about the
intangibles that favor renting, and the intangibles that favor buying. The biggest reason, and this is why we bought a house a few years ago, is for buying their stability. There is stability. You might get a great deal on a rental, and the owner takes care of it, and it’s in a great neighborhood, but maybe they want to
rent it out to someone else or maybe they want
to move into the house themselves and then you’ve got to move. If you buy a house, as long
as you pay the mortgage, or you pay off the house eventually, you’re pretty much, and you can pay the property taxes and things, you’re pretty much guaranteed
that you can stay there. Another reason that you might want to buy is rents are unpredictable;
rents could go up. Rents could go up. If you’re in a really rapidly
rental appreciating market, say, some place like
Manhattan or San Francisco, it’s nice to be able to
say, “Oh, look, I got “a fixed mortgage payment;
this is what I got to pay. Once I pay this thing
down, I don’t have to worry about the craziness of
what rents might do because the economy is, because so many people want to live wherever
your house might be.” Then, another thing, and once again, this isn’t an exhaustive list, is that you can customize, and you
can make improvements. Back when my family was renting, I can’t tell you how many places we saw that looked really nice if they had just changed this
bathroom a little bit, or if they just changed
that kitchen a little bit, or if they did not paint
that one wall yellow. When you buy a house you can
make those same improvements. All the intangibles aren’t
just on the buying side. They could also be on the rental side. If you’re just settling down in an area and you want to figure
out the lay of the land, you might not want to
commit to one neighborhood or one house without
understanding things better, so you might want to have the flexibility. Flexibility of renting. To keep buying and selling houses, there’s a lot of costs
involved, especially when the cost of the
brokerage fees and whatnot; so, you might like the flexibility, you get into a 6 month
lease, 1 year lease. Once you understand things, then you might want to buy a house or then you might want to rent in another neighborhood, and as we saw earlier in
the 2003 to 2008 period, sometimes you have housing bubbles, and sometimes these
economics go way out of wack and housing is just over-priced. Housing over-priced relative to Housing is over-priced relative to rent. Once again, big takeaway, it all depends on the context. Hopefully this gives you a
little bit of a framework for thinking about the
rent versus buy decision.

About James Carlton

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100 thoughts on “Renting versus Buying a home | Housing | Finance & Capital Markets | Khan Academy

  1. I need to watch the rest of this video, but the guy is right. I rent a £300)  bedsit( which I am happy in), my mother said I should buy, renting is is throwing money away) . Unfortunately, there are no houses and apartments in London or surrey where the month payments are £300, and extra expenses are of buying a house are going to be at least £150.    

  2. some factors i can think of…

    $18000 interest on loan / (divided) by the foreseeable life of the house 20 years atleast?  = $900 / year.

    property tends to appreciate in value.

  3. when you buy a house, you become a cash cow for government and other groups. every time they need more money, they raise the tax on home owners. and then you have the legal mafia with kickbacks to politicians and they call it association fee. that's another 700-1000 a year they will take from you and it goes on and on.
    that's just for starters.

  4. Hey Sal, I'm a finance student and find your channel really useful. I was just wondering why in each of the buying versus renting videos you have made you don't take into account the expected savings you would make for the years after you have paid off your mortgage (ie. once full mortgage repayment has occurred, in the indefinite future renters would still have to be paying rent whereas homeowners would have comparatively considerably less expenses since no more mortgage repayments are required). Taking into account the time value of money these savings may not be very significant in present value terms because it takes considerable time for these savings to be realized, but nonetheless should these savings be considered when deciding to buy or rent with a long term perspective in mind, or am I missing something (probably the case)? Can anyone help me out here?

  5. When I was looking for a new home I found it so stressful and than I found the "My Ideal Home" app which made my life so much more easier. Check it out via the following link:
    It's well worth the small investment.

  6. population is increasing in my city and we're not building enough houses according to some articles I've read, so the rent is bound to go up where I'm living. I wish I could buy a house for that matter but I'm just too poor. 

  7. At the end of 20-30 years, I own the house if I decide to buy house.. in other case I dont have anything. 🙂 Buying is better if you have money.

  8. I think financially speaking they are really close to equal. You should really put most of your considerations to the "intangible" things he mentioned since those are the biggest differences. For example I am planning on renting for a while since unemployment is correlated with owning a house (since you are less likely to look for jobs in other cities if you own a house). Renting gives me the flexibility to move around and take better and better jobs. The pay increase of switching companies every few years is usually better than the yearly pay increase that you get sticking around in one company. Since that kind of flexibility is important to me I would prefer to rent. You should think about your lifestyle and make your decision on that. Don't make your decision based on speculation on whether you expect housing prices to rise and drop. Because you can't predict the future.

  9. Buying or renting a home really depends on a person or a family’s needs. Great video for showing a comparison between the two.

  10. I would buy my own house to live in,but  if I had $400,000 to invest in a rental property, I would purchase 4 $100,000 houses—bread and butter properties(thank you Carlton Sheets), the rent would be 1% of the purchase price at minimum  so my income would be $4,000 a month and the math would change for the better.

  11. Here's the number:
    Los Angeles
    $400K, $80K down at 4%.
    $2044/mo including tax&insurance
    x12x30yrs = $735,840 paid for life of the loan, tax, and insurance.
    Not including 30 years of repairs/maintenance, and factor in closing cost, you'd have to sell for more than 2x your original purchase just to realize minor profits.
    $6K saved on tax write-of vs. 80K investment–if you're savvy you can come out way ahead.
    Buy after 30 yrs: $735K + maintenance
    Rent after 30 yrs: $540K
    Look at it another way, buyer's 30yr cost of living vs renter's 30yr cost of living.

  12. 347,514 $ … Thats how much you pay in INTEREST on a 300,000$ loan at 6% over 30 years… Thats only interest, not capital… overall payment for the house is over 647,280$…

    Just sum to think about…

  13. Its almost better to rent a cheap place while you save to buy cash… unless you dont mind giving banks the same amount you paid for your house…

  14. What about the equity you built by buying the house and when it appreciates? What about tax savings on the gain when you sell the house? What about inflation?

  15. Find out if your credit can hurt your chance in owning a home! Click Here-

  16. Buying is better overall (If you have a good sized deposit):

    1. Value of your properly generally increases over time
    2. Rent generally increases over time, unlike your mortgage repayments, which go down over time
    3. Your mortgage will not go up unless interest rates increase significantly, but then so will rent at the same time
    4. You will own a house at the end, with renting you will own nothing
    5. You will end up paying more taxes if you rent in general

  17. Okay, right off the bat this is wrong.  There is NO WAY you could rent a $400000 house for 1500.  There is actually a rental formula you can google and the price for rent would be more like $3000!  That would change all of this considerably.

  18. 400k home is not renting for $1500 a month. More like 4k a month. Another video by Khan Academy with skewed/fake numbers in order to benefit their argument. I wouldn't be surprised if they are landlords and are simply trying to keep people renting LOL

  19. I have experience with both renting and owning.  There are definitely pros and cons to both.  My husband and I rented a nice house for almost 7 years from 2001-2008.  We stayed there for that long because the rent was very cheap, especially for the location, and it was a nice 3-bedroom house in a great, quiet neighborhood.  Plus, our landlord was great and literally never bothered us at all and didn't mind that we had pets.  In 2008, we finally decided that it was really time for us to start thinking about buying our own house.  I was in my mid-20s and my husband in his mid-30s, so we were getting older and we both had good, stable careers and could afford to buy.  We were lucky enough to be able to secure a mortgage with no money down, so we started looking.  Long story short, we bought our house in May of 2008 and we officially became homeowners for the very first time.  It was a bit sad to leave our old rental as we had many good memories there, but we were definitely ready and excited to move on to this new stage of our lives and be "more grown up."  While renting does give you more financial freedom and a bit less responsibility as far as maintenance and repairs go, there is nothing like owning your own home.  It's yours to do whatever you want with.  After 30 years of mortgage payments, you're done and you own the house outright.  If you pay a little extra each month, you'll be done in less than 30 years.  That's what we've been doing as often as possible and we've already knocked about 5 or 6 years off our mortgage by doing that.  All you'll have to pay for at that point are your property taxes and insurance.  However, when you're renting, you never stop paying and you're just lining someone else's pocket and, in most cases, building THEIR equity since your rent payments will probably be paying their mortgage.  You'll never see that money again and you'll never have any equity of your own.  With a mortgage, every payment you make builds your equity.  The downside to owning is that if something major breaks or if something in the house needs to be repaired, it's your responsibility.  There's no landlord to call and say "this needs to be fixed."  It's all on you.  We've been there several times in the past 7 years!  It's not fun and it's not always easy, but it's just a part of being a homeowner.  If you're renting and something happens, it's the responsibility of your landlord to have taken care of and you're off the hook.  

    Overall, I would say that If you are in a position where you are able to afford to buy your own home and are ready to settle in one area for at least several years, then do it.  The pros of owning far outweigh the pros of renting, in my opinion.  The only time I ever miss renting is when something expensive breaks and we have to pay to repair or replace it.  LOL

  20. what painting software and hardware did you use to create this lecture?
    I want to create video lectures in Vietnamese like yours. I tried Smooth Draw and Wacom Small as you suggested in one of your videos (how to make a Khan Academy video). But I still dont get used to them.
    This video is great.

  21. Do you have one on the Formula calculation a they used in the process of know what you may have to pay..Before Buying Any home….Becoming Aware of any Financial Calculation a Before hand can help me decide before call or making a appointment..the steps or the process.

  22. In Pittsburgh the real estate market didn't crash like the others.  So a rent for 2 bedroom in the city of Pittsburgh was around 500.00.  A Nice one bedroom  between 400-475.  After the crash which avoided Pittsburgh (Real estate stayed mostly stable not up or down)  Now they are turning old schools into luxury apartments.  (Pgh is a older city not much young people or kids so they closed many schools)  They are building luxury apartments with studios around 800 plus utilities.  With a large down payment  you can buy a house with the mortgage cheaper than what they charge for these a one bedroom  apt.

  23. If the interest earned from savings is case of renting is taken into account, then the appreciation of the value of house should also be considered.

  24. I think the biggest thing the author isn't talking about is the potential increase in housing price.  Which generally happens, though not always.  Plus the leverage from the mortgage really juices the returns.

  25. Good video, but….I don't understand why you did not add equity to your equations.  Your equity will always go up – always. 

    If you buy a heavily leveraged loan (which is not a great idea), and your property value goes down, AND you decide to sell, you will lose your equity (because if you owe more money than you sell it for, you have to pay that back).  That's called being upside down. 

    Also, rent will always – under all circumstances – go up.  Unless you are willing to lower your standard of living, which virtually nobody is, your rent will always go up. 

    As the years go by, your equity will become a bigger and bigger bank account.  Also, you can depreciate the value of your home on your taxes.

    In general, property values go up.  If you are going to live in an area for 5 or more years, then buying a home makes sense.

    If you want to move every year or two, don't buy a house — or better yet — buy a house and do house swaps.

    One big thing to consider.  If you buy a house, try to put down as much as you can, and pay off the loan as early as you can.  Due to interest, a small $100k loan, for a 30yr fixed rate mortgage will end up costing you about $350k.  Therefore, if you can loan from a family member do it, or if you can buy a super cheap house as a first time home-buyer, do it.  As you build equity and your property value goes up, sell the home after 10yrs and upgrade your home if that is your desire.

    Rental properties are also a very good idea if you can swing it.

  26. Lets say I have $ 2 Million. And the house costs 500 $ is it better to buy the house without borrowing money or just paying a monthly rent.
    I make about 150k a year.

  27. in Canada, interest can not be deducted.
    when buying a home, he hasn't factored in that a lot of people do not pay it off soon; many overextend themselves and remortgage time and time again to pay off other debts only to find out 20 years later they have no equity.

  28. equity is only an idea until you liquidate. equity is dependant on the market and is out of your control. it isn't yours until the last payment is made-many people do not get this.
    it is an asset immune to market changes only when you owe no money on it.

  29. This video isn't making a case to rent instead of buy. It's solely looking at the numbers, and depending on the context those numbers are put into, they would tell a different story.
    The biggest advantage of renting is the lack of direct responsibility to the property, though the tenant definitely shares in that burden through increased monthly rent.
    My biggest wake up call to how much money I had been literally throwing away on rent was after 5 years of residency in the last rental I was at.
    I was curious and had requested a print out from the management company showing how much money I had spent on rent to date. Through regular rental increases, that number ended up being roughly $70,000 within the 5 years I was living there. That's $70,000 that I would never see again in any way shape or form. I was immediately motivated to make the move toward home ownership. I've since found a home I loved for a price I could afford, locked in a decent rate, and have never regretted the decision.
    Though my monthly mortgage is almost $200/month higher than my rent, I get a portion of that back at the end of the year through tax breaks and equity, and eventually outright ownership of the home. A good portion of my mortgage goes back into my pocket, as opposed to absolutely nothing coming back through renting.

  30. This is really stupid. I mean REALLY stupid. This makes a lot of bad assumptions. For instances, it assumes that the rent will be $18k a year on a house worth $400K, however, who is going to rent out their house $18K a year if their cost is $18K a year after a 25% down payment and an interest only loan? The only way the landlord will make any money is if you continue to rent out the house for many years till the value of the house increases enough that he can sell it for a small, tiny profit which would be about the worst investment of $100,000. But, if this guy thinks that $100,000 invested at 2% interest (below inflation rate) is good, why am I even watching this video.

  31. This video is a good exploration of the maths behind house buying as opposed to renting. It's the basics. It's not necessarily making a case for one over the other. Whether to buy or rent is a complex decision which most people make without understanding fully the implications behind each choice. It's a place to start one's education in this area.

  32. What happens to your portfolio after 25 YRS in both cases factoring in inflation and real-estate appreciation ?

  33. 9:54 Rent ALWAYS goes up. If the market is flat it goes up 3%. When the market boomed, I had my rent go up 25%. There's no "could go up". I lived in a community where renewing your lease meant a 3% hike, but if you moved to another same-sized apartment in the same community, your rent would stay the same. That was the only time I've heard of rent not going up. Everyone knows owning a home is the way to go. The mortgage payment stays the same, and the dollar depreciates over time. If everyone had $100,000 for a down payment, no one would rent.

  34. His exact same lecture in 2008 was much more pro-rent. It just goes to show how when factors change — both economic (compare 2008 to 2013 housing markets) and emotional — your analysis can change.

  35. This why interest is not permissible in my religion. Them loan sharks suck your money over the years, you end up paying 10X worth your home's real cost.

  36. Rich people buy houses because of equity and in case they ever get sued
    or if any legal actions go against them. If you own a home, then you are
    not forced to sell your house if someone sues you and wins a ton of
    money from you. But if you have investments that are non-retirement
    accounts they can take the money from those accounts.

  37. I think a major point your forgot is one needs to be a home owner. You need to be passionate and want to spend time on your home. Yes you can hire a gardener, a repairman, and a maid; but you are throwing money out and eventually you will just be the hell with it. You typically pay a maintenance fee in renting which is fantastic. I've lived in rentals throughout all of NY and my family and its members are fortunate to have purchased apartments and houses with quite expensive price tags. My immediate family has a 380K house which is the lowest in comparison but my family runs it like a well-oiled machine. My stepdad takes pride in repainting the house and walls every 2 years, mowing every few days, fixing the crown molding, putting marble throughout the house, cleaning every 2 days from top to bottom, etc. My family with million dollar homes has not vacuumed in 2 weeks or fixed the damages their kids and themselves have made. Sure, they live an expensive neighborhood but only a sucker would buy their property for average cost. The laziness and lack of care for their property demonstrates they aren't suitable for being home owners/apartment owners. Personally, I don't have my stepfather's dedication after work to put that level of care into my living, so I will likely not purchase a home but rather invest that money. Everyone's houses which is immaculate from the front takes pride in it. You can tell where the higher ups in finance companies live in Long Island, because you can see very little care in the minor details.

  38. Question: What if you buy a house and it is just for investment (means it is just for leasing, you don't live there). The house condition is not bad (means the quality of the house is good, and there is no big accident), and the local economy is stable. Will you or your tenant gain more benefit? If so in long term or short term?

  39. Great insight. Thank you. Correct me if I'm wrong, but in the Rent scenario wouldn't you have to pay taxes on the interest $2k earned with the $100,000 investment? Certainly a percentage based on your tax bracket –not the full $2k, but still something to consider….

  40. So if I buy a house I can keep it forever but the only thing I have to pay now is my bills for water,electric,phone and all that

  41. The market is unpredictable, and as time moves forward becomes more and more unpredictable. Jobs don't pay what they use to and a lot of people are not in a position to buy a home. Buying a home is nice if you know you're going to be at your job long enough to pay off the mortgage, or if you invest wisely or create a solid business all of which are gambles. In today's economy education is becoming outdated much faster than it used to be, so you can expect people to last much less time at their jobs unless they keep up with the new age educational demands. Also, there are various illnesses you can get for no damn reason if you are unfortunate and this happens across the economic board and it only continues to get worse. Renting is safer, and buying is a gamble. My advice is to live a modest life, with all the work that comes with owning a home I think it's better to own a nice apartment. People are weird, they want a living room, a dining room, a kitchen, an entertainment room, a video game room, individual bedrooms for all their children and a huge backyard where the kids can go out and play. Reality is most kids are on their phones all day, on the internet, or playing video games. If you want them outside send them to the local park and let them play there it's much better than your lame ass backyard, give them some money and let them go to the arcade, mall or movies with their friends. You've got this big ass house for the sole purpose of trying to be like everyone else and don't think about how many other options there are for your family. Most people make around 45k a year…what world is everyone living in where buying a house actually makes sense on that kind of income lmao I guess if you believe in self fulfilling prophecies you can take the gamble, but life is a roller coaster and unless you've got a supportive family you'll find yourself in sticky situations so it's just better to play it safe and make the most of what you have.

  42. Why is he assuming that you are going to pay only the interest to the bank each month, instead of the loan itself? If you pay only the interest, you will still have to pay $300k in 20 years or so if you want to actually buy the property that you borrowed from the bank to live there. Sounds like you are getting all of the downsides of owning with none of the perks of renting?

  43. If you are going to talk about the investment income on the $100,000 of unused money that was saved for the down payment on the renters side you need to balance that with the appreciation of the $400,000 asset (the house) on the buyers side. That down payment IS an investment in itself. It also lets you get appreciation on the amount you borrowed which (in addition to the tax credit) lets you offset the expense of interest even further.

  44. Typically you can get a much better house by buying…..remember the owner of the rental is doing it for a profit…rents WILL go up….and when you finish renting you have nothing but receipts…no equity, nothing

  45. I say Im sick of renting" rent gose up, but not my wages,,, its bullshit,,,, yes buy a house,,,,,! stop making other people rich! think about your own future "

  46. People who rent don't have 100K to invest at your 2%. I like your vids Khan. When you buy you HAVE to put cash down. There are all different walks of life. Renting can be attractive to well to do people. Anyhow I'm drunk and rambling.

  47. My post on mortgages
    Title: Mathematical proof as to how usury destroys wealth and how abstaining from usury increases wealth.
    Alan: Whenever most people want to go buy a house, they do not have $100k ($100,000) or $200k in the bank.
    Ben: So what do they do if they want to buy a house?
    Alan: They go to the bank and as them for help.
    Ben: How?
    Alan: Well it is like this. The bank will ask them qualifying questions:
    How much do you make and what are your obligations. Just to keep things simple let say the person makes $33k. The bank will say that based on a ratio of 1 to 3 you can buy a $100k house and lend the money.
    Ben: So what, most people do this and it is a custom or tradition to buy a house in this way.
    Alan: What you need to realize is this, the biggest single output of a person is the living expense that is the rent or mortgage. So let say that you get a 3% raise in your salary next year but rent or the price of a home goes up $10% did you get a 3% raise or a 7% pay cut?
    Ben: On paper I got a 3% raise but in inflationary terms, I got a 7% pay cut being that that is my biggest expense.
    Alan: This is where the problem lies. So people work very hard for their money and it seems that they are getting ahead but in reality they are struggling. That is because the value or power that their money commands is being reduced year after year.
    Ben: So Alan, know all of this, what can be done to reverse or fix this situation?
    Alan: Let's say that out of your paycheck you transfer $40/week to your savings account and don't touch it and you do this week after week after week. How much money are you going to have in your savings account after a year assuming a 50 week year.
    Ben: $40 * 50 weeks = $2000
    Alan: how much would you have if you continued this process for another 19 years?
    Ben: $2000 + $38000 = $40000. Alan where are you going with this? I don't see the connection.
    Alan: Imagine if you did this and at the same time you decided that you will not buy a home until you have the entire amount for the purchase price of a house in your bank and that you will keep renting. Also, you decide to tell everyone on social media that you are doing this. What will happen to the price of a house if no one borrowed money to buy a house and every single person did this exact same thing. What would happen to the price of a home over the next 20 years?
    Ben: The house price will drop.
    Alan: If no one borrows money to buy a home and a $200k house drops at a rate of 7.5% every year, what would be the price of a house after 20 years?
    Ben: year 1= $200,000 x (1-0.075) = $185,000
    year 2= $185,000 x 0.925 = $171,125
    year 3= $171,125 x 0.925 = $158,291
    year 4= $158,291 x 0.925 = $146,419
    year 5= $146,419 x 0.925 = $135,437
    year 6= $135,437 x 0.925 = $125,280
    year 7= $125,280 x 0.925 = $115,884
    year 8= $115,884 x 0.925 = $107,192
    year 9= $107,192 x 0.925 = $ 99,153
    year 10= $99,153 x 0.925 = $ 91,716
    year 11= $91,716 x 0.925 = $ 84,838
    year 12= $84,838 x 0.925 = $ 78,475
    year 13= $78,475 x 0.925 = $ 72,589
    year 14= $72,589 x 0.925 = $ 67,145
    year 15= $67,145 x 0.925 = $ 62,109
    year 16= $62,109 x 0.925 = $ 57,451
    year 17= $57,451 x 0.925 = $ 53,142
    year 18= $53,142 x 0.925 = $ 49,157
    year 19= $49,157 x 0.925 = $ 45,470
    year 20= $45,470 x 0.925 = $ 42,060
    Alan: Which is about $40k. Now you take the $40k that has accumulated over 20 years and go buy that house cash. Now you don't have a rent payment or a mortgage and you are still 10 years ahead of the cat who got a 30 year mortgage today.
    Also, let say that you have a salary of $40k. What is the ratio of that salary to a $200k house.
    Ben: 1:5 or 5 times greater than the salary.
    Alan: Let's say you were to do all this and your boss froze your pay for the next 20 years. What would the ratio of your $40k salary to that $200k house that has now dropped to $40k?
    Ben: 1:1
    Alan: So wouldn't you agree that the value of your $40k salary in 20 years would be the equivalent of you making $200k today. Not only that but you are also not in the higher tax bracket of those making $200k.
    Ben: That is amazing. Then I would truly be prosperous. Then I could enjoy my life and be at peace with myself.
    Alan: For centuries people have be duped by the super rich and have got themselves into serious problems and have only made the elites rich at the expense of the simple people by making them believe that progress and prosperity can only be achieved by pawn their souls to the bank. The only people laughing all the way to the bank is the bank themselves and no one else.

  48. Understood, but the big difference after the 30 years of rental or paying on a mortgage, in this case 1 million house. At the end of 30 years you would now have an asset free and clear worth 1 million dollars whereas if you were a rental you would have nothing?

  49. Thank you for saving my life AGAIN! I used you as my math curriculum when I was homeschooled, I used you to survive organic chem and physics, and now you'll help my with my living situation in grad school ( on campus housing is few and far between) From the bottom of my heart, thank you!❤

  50. are you taking in account that after paying the house you own it? that means you will have $400k+appretiation at the end, and with renting you will only have $100k+(2k*30years=60k) at the end because you are using your returns to pay for the rent.

  51. Why does the government give you a tax break for mortgage interest payments if they're gonna pretty much add it right back in property tax?

  52. Only 2% return?!?!? You can get 3.9% GIC or 10% with an index ETF. Renting blows buying out of the water.

  53. How much can you afford? Renting is fixed monthly. Mortgage includes property taxes, insurance and other expenses including maintenence. You can build equity with a mortgage vs renting you just give your landlord money to live there.

  54. Way too simplistic. 1) with a mortgage you now have a balance sheet with a massive debt on it. 2) with a mortgage you have 4+ landlords: the bank in huge interest, the government in property taxes, multiple insurances home owners, flood, fire, wind/hurricane, earthquake, sinkhole… , and lastly often the HOA in fees and fines. In some cases these alone are as much if not more than renting. 3) true you have certainty with a mortgage: certainty that you will be in debt forever, when life's disasters happen. Certainty that systems will break and need to be replaced. Certainty you'll need to replace the roof. Certainty you'll have to repaint. Termites. sewer clogs. tree roots destroying drain pipes. These costs are not cheap. realistically, you need to save $500 to $1,000 per month just to account for these inevitable expenses.

  55. BTW… How's that 'certainty' of buying going for all of you 'owners', now that Trump has taken away the mortgage interest tax deduction, and property tax deductions?

  56. I'll destory Ken in one word.
    My countries inflation is 2.7%. instrest rates for one year is 3.5%. 3.5 – 2.7 = .8% real instrest. .8% is not enough to make a difference.

  57. When you buy a house, it's an investment. You can sell it later and get the same amount you bought it for or more. If you rent, it's just flushing money down the toilet. I calculated that over the course of an adult lifetime, say about 60 years, renting in the ghetto for $525 a month vs. buying a house in a nice neighborhood for $150,000, the person renting an apartment in the hood actually spends over double the cost of buying the house in the nice neighborhood in the adult lifetime.

  58. I understand a mortgage comes with interest as well but let's just say you have enough money to buy the house upfront. Live in your parents' home until you can save up for your own house in full. Then it's just always cheaper to buy.

  59. Another thing is many states protect your primary house as an asset- meaning you can't be sued for your house, just like you can't be sued for your retirement. You can, however, be sued for money you have in a bank account or non-retirement stocks/bonds. Thus, you can invest a large amount into your home and retirement and never lose those investments from being sued.

  60. You gave an interest rate nearly double what is realistic and didn't factor in the value of the house appreciating. If you're factoring in investment income on the down payment, you have to consider the house value going up (also, you should note that investments and house prices can also go DOWN).

  61. Am i the only one that caught that the principle isnt touched at all? Or is the amount included then it isnt interest only?

    If its not then its more like 20k+. You also save more renting and can accrue interest on the difference

  62. Tell me if I wrong. When you buy you can always sell and get your money back and may be move to a nice cheap retirement area while still able to enjoy the rest of the money, while the same is not true for renting.

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