13 ms·

Renting vs. buying a home

88 points by dctoedt 13y ago

jaxbot 13y ago
Warning flag to anyone who watches this for curiosity: the formula for interest is most certainly not (principle * ROI)
tibbon 13y ago
I've rented for my entire adult like (I'm currently 31 living in Somerville/Boston). While my sister bought her first house in Pittsburgh when she was 23, and my parents had moved between several houses they purchased by my age... I've been happy renting. I didn't want to buy a house until recently, but now I want to buy one around here. Why? For one thing, in the major cities the rents keep going up at a rate faster than what the government reports national inflation to be. Your (fix rate) mortgage shouldn't change over 30 years, but your rent will likely triple or more in that time in a city like Boston. But the biggest thing? Customization. I like building and changing things. I'm so tired of landlords that won't let me rip down walls, replace sinks, get a new fridge, repaint everything, etc... not that they should, but I still want to change things. Buying my own place will enable me to do this. Another thing I can do around here, is buy a place that has 5 bedrooms, and rent out the other 4. I've had several friends that do this, and it essentially pays for their mortgage by having roommates. Not a bad deal.
- dominotw 13y ago
  I am 31, looking to buy a home in next 6 months for the same exact reasons in Chicago. The rents are insane and they just seem to keep going up and you have to deal with douchy landlords who just dont give a fuck because the demand is so high in downtown area.
  - tibbon 13y ago
    Right, even if my monthly outlay now seems high... in even 5 years I'm guessing it will seem reasonable. The apartment I lived in Back Bay 5 years ago was $900 before, and now its $1350.
- gdilla 13y ago
  There are other costs to owning - maintenance, property taxes, closing costs, and your agents fee (when you eventually sell - unless you keep forever). I bought a condo at age 24 in LA in 2002. I hated that the HOA could do things like, we need to fix the roofs, so pay up. We voted on it. Ditto re-paving the parkinglot ever x years. Damn if my first year in the condo was somehow fix everything year. Ugh.
  - snowwrestler 13y ago
    Renters pay all these costs too; they are just hidden in the rental payment.
    - waitwhat123 13y ago
      Yes, but those are included in the rent price. Whereas, in a buying situation it would be on top of the price you think you'd be paying.
- dsr_ 13y ago
  More to the point, your 30 year mortgage has an effective rate cap. If rates go down during the time you owe it, you can almost certainly refinance. But you never have to refinance at a higher rate. You can also lower the rate by reducing the term. So far, my mortgage has been refinanced four times, each time reducing the interest rate (due to market conditions) and twice reducing the interest rate by reducing the term (20, 15, and now 10 years). Being a landlord is a whole different proposition, and I would strongly recommend that you talk to current landlords before you go into that business. MA has excellent renter protection laws... which are not so great for landlords.
- mrfowler 13y ago
  I did this in Somerville. I bought a two family in 2010. Rent from the bottom unit and one roommate back then covered the mortgage entirely. Of course, with Boston rents rising so much, and a few new carpets and appliances I've been able to raise my original rent close to 40% the last few years. Now that I've moved on and fully rented it, it's generating close to 2k a month in profit. Not bad since I got a FHA loan and only put 5% down. Dealing with tenants can be a pain, but I have no regrets. Home ownership has certainly been a path to wealth for me, though I suspect most people who buy single families or condos with no rental income won't get any real returns.
- VLM 13y ago
  "..but your rent will likely triple or more in that time in a city like Boston." Is after tax take-home pay increasing at that rate? If not, or if its declining like in most areas, you can ask for whatever you want, but that doesn't mean anyone will line up to pay it... This is why as an international discussion on the internet, the topic doesn't make much sense. Nationwide, of course, rents will be declining because nationwide the line item on the budget for rent is in long term permanent decline. Also be on the outlook for "grass is greener..." syndrome. I remember the glory days of the bachelor apartment and no matter how big the problem, the labor never exceeded a phone call to the onsite manager and the cost never exceeded one phone call. Someone else had the headache of the new hydronic heater unit for the whole building, replacing the garage door, upgrading the garage door opener to keyless from keypad, fixing the leaky water pipe, unclogging the storm drain, fixing the broken snowblower and the broken lawnmower, steam cleaning the hallway carpet, fixing the broken front door window, fixing the leaky roof, obviously not all at the same time, but I'd gladly trade all that away for "unable to paint the walls" Also note you can do all that remodeling you're planning; it will never cost more than your security deposit. In practice the LL doesn't care as long as he doesn't find out and the work looks as good or better than he could do. So, sure, I painted.
- deleted 13y ago
  [deleted]
- ig1 13y ago
  Rent is largely a function of house prices and house prices haven't been going up constantly, in most US cities house prices are still below-2006 prices. S&P House Price index: http://us.spindices.com/indices/real-estate/sp-case-shiller-20-city-composite-home-price-index http://us.spindices.com/indices/real-estate/sp-case-shiller-... Investing in a house is a gamble on house prices going up, which if you're going to make it you should do with a full understanding that historically there have been many house price crashes (typically caused by broader economic downturns), prices in an individual city can also collapse because of the local job market (Detroit) or natural disasters (New Orleans).
  - clavalle 13y ago
    I think most people in this thread are not talking about buying a house as an investment, but rather, as a value store compared to rent.
    - ig1 13y ago
      The two are inseparable, buying a house to avoid variable rent prices doesn't reduce your exposure to the housing market, it actually increases it because you're leveraging against it (because you're borrowing money to do it). If house prices drop you can be stuck in negative equity whereby you owe more money on your house than it's worth which can easily bankrupt you. If you're renting that's obviously a problem you're not exposed to and you actually benefit from a declining market as your rent decreases.
      - clavalle 13y ago
        Of course they are separable. If you are buying a home to live in rather than an investment you can ride out the odd declining market. Seems like people have a lot of 'once bitten, twice shy' syndrome when it comes to housing. Market corrections like 2008 are exceedingly rare. I am not saying prices go up forever like so many idiots did around that time, but if you buy in a non-volatile market, it is a pretty safe bet that your home price will at least retain much of its value.
ljoshua 13y ago
One of my favorite interactive pieces from the NYTimes is a Rent vs Buy calculator which is very configurable: http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...
- etanazir 13y ago
  rent v. buy is a function of the specifics; not a generalization proposition.
- nahname 13y ago
  The numbers are very inflated against buying. 10% closing cost, 1.35% property taxes, utilities only if you buy, another 1.35% annually on maintenance/renos/insurance. Who is paying 2.6% of their property value each year on those things? Who gets utilities for free with their rent. That calculator is very dishonest.
  - skorgu 13y ago
    Those numbers are configurable. Click the "Advanced settings" button.
  - ceras 13y ago
    If you're buying in a typical American market (ie, homes selling for $200k) 2.6% annually on taxes/maintenance/renos/insurance does not seem absurd at all to me. I've heard others argue it's too low.
  - pmorici 13y ago
    In Baltimore property taxes run close to 2% a year on appraisals that are usually 10% higher than what you actually purchased the property for. Those numbers are pessimistic so they don't mis lead people who don't bother to pay attention to the details. The property taxes in CA are lower than they might otherwise be if the home values weren't all so high. The government is going to get it's money one way or another.
  - chimeracoder 13y ago
jaredgeorge 13y ago
I'd LOVE to find a CD @ 4%. And I'm also glad my mortgage rate is 3.75%.
- eloff 13y ago
  That's commonplace in Panama to have USD CDs at that rate or better. But choose a very large international bank (e.g. Scotiabank) because they're not FDIC insured.
- drone 13y ago
  For direct offerings, I'm seeing rates as high as 4.5% and higher for 30 year CDs, I see a brokered 15-year CD new issue coming up at 3.5%, and several 10-years north of 3%.
- Cthulhu_ 13y ago
  Pretty much this. The interest rates on both sides seem just thought up on the spot to prove his own point. Second, if I were to buy a house, I'd first go to my bank to check what kinda mortgage I could get, see how much that would cost me a month, and only then find a house. Third, can't really compare rental homes with bought homes around here (netherlands); rentals are usually apartments and the like, while bought houses are... well, real houses. Fourth, you get more house for the same amount, or pay less in mortgage/interest when you buy a house. I choose to rent for now, because the main advantage over renting vs buying is flexibility. I can give my landlady a one month notice and I'm outta here. Not so with buying a house; you've got to sell it, and hope that you can use that money to pay off your mortgage, or whatever. You're pretty much stuck on a 25-30 year mortgage if you get one.
dmtroyer 13y ago
I think anyone will concede that depending on the location and interest rates, the math can be close. But 4% on a CD and 6% interest only loan? That is not realistic.
- blibble 13y ago
  wouldn't you pay tax on interest for that 'CD' thingy too? also it's not a fair comparison: yes with a mortgage at the beginning your payments are 99% interest, but in the last 5 years they're almost entirely principle, so you get to keep that money. if you're still renting in 25 years 100% of that money is still going to the landlord, and your rent has likely gone up by a factor of 5 too. ALSO over long periods of time real estate nearly always increases in value (more than inflation), so that's another thing to consider.
  - matwood 13y ago
    And early on while you are paying lots of loan interest it can lower your taxes significantly.
lsiunsuex 13y ago
As a renter, you can't do cool stuff like this http://diy.blogoverflow.com/2012/08/building-a-brick-pizza-oven-into-an-existing-space/ http://diy.blogoverflow.com/2012/08/building-a-brick-pizza-o... conversely, over the last 4 years, we've completely gutted and rebuilt this early 1900s house from all new electrical to plumbing, to insulation and windows. It helps to be handy (which I am) but it can be a money pit...
- alecco 13y ago
  For me, it can be a feature. Prevents from spending on things like that on impulse.
mempko 13y ago
I really don't think the bay area is a good choice to make an argument for the average person against buying.... $3000 a month seems too small for a house in the valley, maybe a 1,300 sqft apartment? Also, how out of touch is this guy? Who the fuck has 250k in the bank? certainly someone who would probably own property... maybe even renting it out to this guy...
- pmorici 13y ago
  I don't have any knowledge of the home market in the valley, but I will say that the numbers he uses for interest rates are very off from current real world rates. The method is instructive but the numbers used are so off they don't offer proof one way or the other.
  - fps 13y ago
    This video was made in 2008, when mortgage rates were 6% and money market accounts were paying close to 4%. Now, mortgages go for 4.5% and money market accounts pay less than 0.5%. In 2008, rent prices were low while home prices were high, too. Today, a $1M house would cost closer to $10K/month in rent. It certainly doesn't pay to rent today, but it's harder to get a loan today, too.
    - ninguem2 13y ago
      If this video was made in 2008 and all the numbers are off, leaving this video up without any caveats in a site where kids go to learn is beyond irresponsible.
- tansey 13y ago
  Well it's also unrealistic to buy a house for $750K in Mountain View. I think his point was that IF the house went for $750K, you could reasonably expect rent to be around $3K. That seems right to me-- a 1BR in SF sells and rents for about those prices. As for having 250K in the bank-- if the house costs $1M, you have to make a down payment. In the mid-2000s, that may have been a smaller percentage, but these days I think 15-20% down is not unheard of.
jbrooksuk 13y ago
What he forgot to take into consideration is that the $ coming from his savings to pay his rent isn't completely recovered at the end of the year, so his interest will go down too. At least that's how it works in the UK, fixed rates are hardly worth it.
nolok 13y ago
Your rent will probably not stay the same for 30 years ...
- e40 13y ago
  But your mortgage might go down over the course of 30 years. Mine is near 41% less than it was when I got it, because I was able to refinance. The rent for my house would be 4-5x what I'm paying in a mortgage.
- deleted 13y ago
  [deleted]
yabbadabbadoo 13y ago
The best rent vs buy calculator I've ever used - https://www.smartasset.com/first-time-home-buyer/affordability/rent-vs-buy https://www.smartasset.com/first-time-home-buyer/affordabili...
orenbarzilai 13y ago
maybe I missed something but it seems like he ignored the house value. Even if we assume that the rent & the house price remains the same of 30y, after 30y you end up with a house that worth $1M & spent ~$15K more per year. Over 30y it's $450K in cash vs owning a house of $1M, meaning buying the house was the right decision. Where is my mistake?
- dctoedt 13y ago
  > after 30y you end up with a house that worth $1M In his video, Sal Khan did an apples-to-apples comparison: He compared the net out-of-pocket costs of (i) an interest-only mortgage in which you build no equity, and (ii) renting, where you likewise get no equity. If you also want to build equity in your house, in addition to merely paying the interest, then that's an additional out-of-pocket cost (which unlike the interest payment is not tax deductible). That's not to say his numbers are realistic approximations. But his basic approach to comparison seems sound.
  - orenbarzilai 13y ago
    It doesn't make sense to ignore the fact that you ending with owning the house. Maybe the numbers still works but if he ignores that fact his entire presentation is useless.
    - waitwhat123 13y ago
      At the end of the 30 years, the buyer in the video would not own the house. He would still owe $1M in order to own the house (if the market is good, the house could very well be worth more than $1M, but that is besides the point). The amount that he was paying monthly goes towards paying off interest on the loan, property taxes, etc. only.
  - snowwrestler 13y ago
    At the end of an interest-only loan term, you have the option to buy the house at the price it sold for when the loan was issued. At the end of a rental period, if you want to buy the property you are going to pay the current price. That delta can be significant over long periods of time, and is a benefit of purchasing over renting.
mikekij 13y ago
Two issues. - I'm currently paying $2,300 for a $500k house. I think his rental rates are way off. - In a free market, rental rates are supposed to adjust to make it such that an individual is indifferent between renting and buying. If it was that much more expensive to own than to rent, the landlord would never rent the house out!
- nawitus 13y ago
  >- In a free market, rental rates are supposed to adjust to make it such that an individual is indifferent between renting and buying. I don't quite agree with that. If you're renting out, the apartment owner must pay for the risk of you destroying the apartment. If you instead buy the apartment you don't need to pay for the risk, assuming that you don't yourself destroy it.
- skylan_q 13y ago
  A free market doesn't optimize for money. It optimizes for the production of what people are willing to pay for. They don't care if they can be better off financially for renting. What they want is home ownership.
jnardiello 13y ago
I'm amazed to see how many scientists are in here. Lot of math, lot of graphs, lot of speculation but nobody even mentioned that we are, before technicians, people. We have desires, we have daily routines, we have habits and we have a psychological environment and background. Renting will effectively (as the video outlined) leave a surplus of money in your pockets. Which you will use to buy the latest gadgets, to pay the latest cool service, to take fancy trips around the globe, to hunt the last ever living rhino in Africa or whatever else. BUT, thinking in perspective, after 20 years you will anyway have 0 cash in your pockets AND no house. Until your health and job keep up, this might be fine. In case of need you will just be f---. What you are really doing, when you buy a house, is forcing yourself in saving a liable equity for you and your family. Not only it will free you from any rent after 30yrs, but you'll also have a tangible good and you'll leave something for your children and relatives. Not even mentioning that, in case of extreme need, you'll be able to sell it. Not sure how the concept of "house" might differ between Europe and the US and i realize that if you buy a really crappy built house, my arguments might not be valid. But where i live, houses are built to last centuries and they are by far the best way to responsibly spend your money. Doing a Khanacademy video advising people in renting vs buying is just SO wrong. The video itself is not only rounding numbers in a bad way (IMHO), but it's also giving a superficial and quite-not-always-true message. Horrible.
- dctoedt 13y ago
  > What you are really doing, when you buy a house, is forcing yourself in saving a liable equity for you and your family. Yes, there's a forced savings component, but it's expensive in terms of opportunity cost. It's not unlike insurance agents who want to sell you life-insurance policies that have "investment" components to them, when what you really want is to buy inexpensive term protection and put the difference in price into better-returning investments. Remember that Sal Khan's comparison is of an interest-only mortgage versus renting. If you also want to build equity, well then, that's additional money out of your pocket (non-tax-deductible).
  - jnardiello 13y ago
    > Remember that Sal Khan's comparison is of an interest-only mortgage versus renting. If you also want to build equity, well then, that's additional money out of your pocket (non-tax-deductible). That will save you tens of thousands of dollars/euros in avoided interests over the years.
nlh 13y ago
Slightly tangential: Conventional wisdom is just that - conventional, and an important thing to teach people is that there are times when convention should be broken. Back during the height of housing bubble (2006/2007), a friend of mine decided to buy his first home. It was so obviously a "bubble buy" that even before things started to get bad, it was visible from a mile away that he was making a bad decision: He was buying a new construction K. Hov. cookie-cutter apartment in Edgewater, NJ, which was just close enough to Manhattan to tempt those "I'm buying a NYC apartment!" types but just far enough away that there wasn't a real fundamental demand to live there. He got a terrible no-verification mortgage ("liar loan") that we all warned him was trouble. He paid way too much -- something like $600k for a 1BR condo (near Manhattan prices, not Edgewater NJ prices). When our friends warned him of these issues, when we pointed out that he could rent a very nice 2BR apartment a few blocks away for $2500/month that he and his wife would be plenty comfortable in, when we pointed out he was likely buying at or near the peak of a heady real estate market, he didn't care. His only refrain - over and over - was the age-old: "But I'm going to be a _homeowner_. You guys are just throwing away money towards rent every month. I don't want to do that." Fast forward a few years: Not surprisingly, his interest rate reset, his apartment is worth about $400k, and he had to go through mortgage default to get a modification on his loan. And yet he still clings to his decision - "yeah but I own my place, and it'll even out over the next few years." Sometimes buying for the sake of buying just isn't the right decision, despite what "we were all taught."
- yetanotherphd 13y ago
  >he had to go through mortgage default to get a modification on his loan. When you take this modification into account, his investment might not look so bad. But I agree with your general point. I was also taught the middle-class fuzzy thinking that paying rent is "throwing money away".
- 3pt14159 13y ago
  These types of people are irrational, irritating, and the root cause of so much social strife: "But prostitution is wrong!" So we make it illegal and cause prostitutes to get roughed up by pimps and Johns. They attract more diseases and end up straining our social support system. "But drugs are bad for the community!" So we make drugs illegal and we have gang turf wars and a "fuck the police" vibe from the poorer areas of our cities. Tell me again, what was worse for the community? "But I don't want to live in a city with lots of condos!" So we make it illegal to build new condos. Then a bunch of google employees start moving in and now the original votes are economically squeezed out. "It isn't right that Wallmart's (or McDonalds, etc) employees require subsidies from the government!" So we raise minimum wage and (through perverse incentives and lobbying) cut welfare benefits to the partially employed. Minimum wage companies replace people with machines and the government gets higher unemployment and less productivity (since engineers are creating machines to replace the unskilled, instead of the skilled). It's all the same thinking over and over again. An emotional appeal that has nothing to do with good policy. This is why Khan's video is so important. It reaches out to people and educates them without judgement. Talking to your friend he may feel like he needs to stick to his decision, otherwise his friends will see him as weak, but if he comes to these facts on his own maybe it will enlighten him.
Mister_Snuggles 13y ago
This seems to really depend on where you live and what the house/rental prices are. Where I live, you can get a variable rate mortgage that's advertised at 3%. More than likely, the bank will look at your credit rating and offer something lower. Even if they don't, that's half of what the video is showing. Likewise, a 4% return on investments seems unreasonable. The same bank with the 3% mortgage is offering a non-cashable GIC (which seems to be the Canadian version of a CD) which pays 2.3%. That's only a little better than half of what's shown in the video. As for housing prices, it's very hard to find identical houses available for rent and for buying, but here's what I found: For rent, a 3 bedroom, 1.5 bathroom, 1100 sq ft townhouse for $1500/mo. For buying, a 3 bedroom, 2 bathroom, 926 sq ft townhouse in the same area of the city for $225K. It's not apples to apples by any means. The one for purchase is smaller, plus it's a condo so there will be additional fees on top of the regular things you'd pay for in an owned house. In spite of the differences, $3K of rent does not equal a $1M house in my part of the world. I plugged the numbers into the New York Times rent vs buy calculator that was mentioned elsewhere (http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...). With these two properties, with these interest rates on the mortgage and investment, with local taxes and utility costs applied, buying is better after three years. That said, it might not be all about cost. If you like to move around a lot, maybe renting is better because not renewing your lease is easier than selling a house. Maybe renting is better because you don't have the savings for a downpayment or don't qualify for a mortgage. Maybe buying is better because you like to do the handyman type of stuff and rarely move. There's all kinds of reasons that renting or buying can be better, which is why I don't buy blanket statements that say "renting is always better" or "buying is always better".
- jrs235 13y ago
  Like you point out, how long you intend to live at a particular place has a huge impact on whether you should buy or rent. Along with that SPECIFIC [local] market conditions will also dictate whether holding short, long, or in between makes sense. You CAN make large amounts of money flipping houses (in certain markets), you CAN come out ahead in the long term, but you CAN also come out "worse" depending on how you go about things.
wyck 13y ago
I just went from owning a house for 15 years (bought at 23) to renting, and I love it. Maintenance was a huge burden and having a lot of capitol tied into the housing market was an anchor for several reasons. I also have the freedom to just get up and go at any time. I am fortunate to live in a renters market, you can get some really great deals for long-terms rentals if you put in the work. A house is not an investment for the average buyer, it's an emotional purchase.
- nawitus 13y ago
  Note that one can also buy an apartment and have the apartment company do basic maintenance. (Different countries do this differently). >A house is not an investment for the average buyer, it's an emotional purchase. I'd say the house is an investment for the average buyer, even if the average buyer doesn't buy it as an investment.
bane 13y ago
The numbers here are weird at least in my area, so it's hard to compare. But in general, in most places, over a 30 year comparison, buying is better than renting unless you get very lucky with your alternative investment decisions. A couple things to add, house payments stay exactly the same over a very long time. They don't increase at all. The absolute dollar amount is fixed. So while rent in an area might triple over 30 years due to inflation and local housing market fluctuations, mortgage payments don't. It's a time-value of money idea. It's cheaper to buy now than later. Most people buy or rent homes where the monthly payment is at around 1/3 of their take-home income. As a home owner, that percentage decreases as your pay increases (inflation, pay raises, promotions, etc.). What makes the decision difficult is the cost of servicing a loan vs. just paying for rent. [1] The problem is that, even with a low interest rate, you pay a lot of extra money towards interest. A $500,000 home with a 3% 30 year loan costs something like $750,000 in the end. You can effectively lower your rate by artificially paying down your principle. If you view the monthly payment as a minimum monthly payment, just pay extra and pay down the principle faster. One simple way to do it, as your income grows, just keep paying 33% of your take home pay towards your mortgage. If you get a big bonus, pay that as well. Most mortgages don't have a limit to how much you can pay in a month. Doing this will reduce the effective interest rate, lower the minimum required payment, and shorten the length of the loan. Even better, during months where you need lots of fluid cash, just pay the then minimum payment and different you were paying is now usable. It's like giving yourself a pay raise if you need one. Also, when interest rates drop, you can refinance and otherwise change the terms of your loan to be more favorable. You can turn equity into large sums of cash almost on demand if you need to. You can't do any of that as a renter. After a few years, if you run the numbers, you'll probably find that you can comfortably service a shorter-term loan, say a 15-year loan. Which also have lower interest rates than 30 year. As a quick example, my "minimum" mortgage payment + amortized property tax is about $1500 less per month than the current market rental rate for a similar sized home. In the end, once you finally own your house, all you are responsible for is upkeep and property taxes, which will be a tiny fraction of the then market rate for renting a similar sized property. You'll likely have more income coming in by then then you'll really know what to do with. Whereas if you had rented a similar sized property the entire time, you'll still be renting and have nothing to show for it and you'll be subject to the whims of your landlord. I know a number of families who started out renting the house they eventually bought, but if they had just bought a house to start with would be close to owning the property instead of 10 years behind. Renting those properties bought them very little. 1 - Here's a fun experiment, let's suppose I buy a home at $500,000 with a 3.25% interest rate over 30 years. My monthly payment is $2176.03. Supposing I decided to stick with that, I'll pay $783,370 for the house. Now let's say I rent the same property and I get lucky and it's an even $2,000/mo or $24,000/year. But let's say rent increases with the current rate of inflation (1.5%) for 30 years. Over that time you'll pay $900,928.40 for the same place. And the owner of the property will now own the place you live in and have made $117k off of you. Inflation rarely stays at 1.5% though, so let's say it's a more normal rate of 3%. Well now you've paid 1,141,809.977 for somebody else's to own their property. In other words, they'll have made $358k off of you and gotten a house of out it. In fact, the property owner is probably just taking the increase in payment and paying down the principle even faster like I propose above. 2 - Here is an awesome tool that sort of shows my point http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula... In my notional example, buying is better at around 6 years. 3 - and another one somebody else mentioned http://www.trulia.com/rent_vs_buy/ http://www.trulia.com/rent_vs_buy/ in my notional example, buying is almost 1/3rd cheaper than renting over 30 years.
msmith 13y ago
Realize that Sal recorded this video in March of 2008, at the peak of the housing bubble. Many of the assumptions made in the video are certainly not going to be the same in today's market. When you're modeling the rent vs buy scenario, the outcome is hugely dependent on regional factors (like average rent & purchase prices in your area), current economic factors (like mortgage rates), and also your estimates of future events (like long-term investment return, rental price growth, and home appreciation). Even small changes in these factors can make a huge difference in the outcome. If you're interested in going into more detail, I suggest downloading the model [1] that Sal was using for these videos and plugging in your own numbers: [1] https://www.khanacademy.org/downloads/buyrent.xls https://www.khanacademy.org/downloads/buyrent.xls
phunge 13y ago
Shameless plug: http://www.trulia.com/rent_vs_buy/ http://www.trulia.com/rent_vs_buy/
spiritplumber 13y ago
I bought a home in 2009. Ha ha ha.
alexeisadeski3 13y ago
Best Buy vs Rent calculator out there. http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1& http://www.nytimes.com/interactive/business/buy-rent-calcula...
systematical 13y ago
Renting costs just about as much as owning. Using my neighborhood as an example a co-worker rents a house of similar size one street over from the one I own. We both pay roughly $1,200 per month. The big difference is my interest is tax-deductible and I will always get at least something back from my investment. From a finance/economics perspective: Owning home > renting. Obviously.
- jrs235 13y ago
  Unless Congress doesn't keep the mortgage interest deduction and you renting friend doesn't have to pay if the furnace, water heater, or AC breaks. He also doesn't have to think about and set up a sinking fund/account for replacing the roof.
waitwhat123 13y ago
I agree, as others have pointed out, that the exact numbers differ based on location as well as situation (mortgage size, etc.) and in some cases it is better to buy vs. rent. However, I think it was a good video because it does an apples-to-apples comparison and clears up a misconception that many people have about buying. In part 2 of the video he sums it up pretty well "You are not a home owner until you have no debt. Until then, you are a paying rent on the money you owe instead of the place you live - you are a money-renter". Evident from the comments here on HN as well as the blog post, many people mistakenly believe that monthly payment in a buying situation all goes towards equity or "savings". But after 30 years, the buyer would still owe $1M on the house - he hasn't saved any money at all. Reading some of the comments, it's almost scary that people about to spend a huge amount on a home don't understand this!
laichzeit0 13y ago
The worst assumption here is that you're gonna pay your bond off over 30 years. I payed my house off in 5. It's also an access bond, meaning, even though it's "payed off" it's not closed and I can use the money in there like a savings account, withdrawing and depositing back in later as I want. Essentially I'm my own "bank" now paying whatever interest my bond currently has, which is usually a whole lot lower than a credit card. If I had to calculate the interest I'm saving over the next 20 years which I can now freely speculate with it trumps renting.
sitharus 13y ago
As someone who recently bought, if the decision is an investment in housing vs an investment in other things don't buy a house! On the other hand, if what you want is a place to live that you can redecorate, remodel and change however you like then you can't beat buying. Where I live you can't do anything to the fittings and fixtures without the landlord's permission. Given my local housing market I tripled my floor area buy buying for same monthly payment, but that's not true everywhere.
joeblau 13y ago
When it comes down to it, there are way to many variables to consider in anyones equation. Some people prefer owning and others prefer renting and whatever you think is better might be better in your situation. I've been around a lot of "owners" telling "renters" that they are throwing away their money. I've never heard a "renter" say that to an "owner" even though this video points out that it could be the case in certain scenarios. It's just a different perspective based on the time that the video was recorded.
yetanotherphd 13y ago
I always thought the main difference between buying and renting was tax, since mortgage payments are tax deductible.
- jrs235 13y ago
  Mortgage payments are not tax deductible. Currently the interest is. Congress could change that. But as it stands now it is something one needs to consider in the cost comparison. (You might be paying $1000 to save $250)
hillarystark 13y ago
The link submitted to HN lands on video 2 of 4 which was created was uploaded Uploaded on Mar 15, 2008 where Sal was renting and the video is pro renting: http://www.youtube.com/watch?v=YL10H_EcB-E http://www.youtube.com/watch?v=YL10H_EcB-E Interestingly, it looks like on Dec 31, 2013 new video was added as 1 or 4 where Sal said he bought a house and now is neutral on rent. vs. buy: http://www.youtube.com/watch?v=JNL6f1xkie4 http://www.youtube.com/watch?v=JNL6f1xkie4
hillarystark 13y ago
The link submitted to HN lands on video 2 of 4 which was created was uploaded Uploaded on Mar 15, 2008 where Sal was renting and the video is pro renting: http://www.youtube.com/watch?v=YL10H_EcB-E http://www.youtube.com/watch?v=YL10H_EcB-E Interestingly, it looks like on Dec 31, 2013 new video was added as 1 or 4 where Sal said he bought a house and now is neutral on rent. vs. buy: http://www.youtube.com/watch?v=JNL6f1xkie4 http://www.youtube.com/watch?v=JNL6f1xkie4
switch007 13y ago
I'm in southern England. I have no idea what to do. House prices are insane. I have a sizeable deposit (20-25%) but I would still need a large mortgage. I want to buy because I know rent is going to through the roof as this tiny island becomes more and more populated. However, I don't want to be tied to a job/location. Commuting to London for work is always an option but it comes at a cost of £350-450/mo in travel. Not to mention the time involved. I want the flexibility of renting but I also want a paid-off house when I'm in my 40s/50s. AFAIK most mortgages (non buy-to-let) do not permit letting out your property, so I'd need to re-mortgage to do that.
- g8oz 13y ago
  The Economist's house price index for the U.K in 1990 was 628, in 2013 it was 2042. That is a 325% increase. Between 1990 and 2013 the Compound Annual Growth Rate (CAGR) of the S&P 500 market stock index was 9.46%, yielding an 875% return. My advice: rent and be a fanatic about investing the difference in the mortgage payment for a property exactly equivalent to what you'd been thinking about buying. Over the long time horizon you're planning for you should be all right.
  - switch007 13y ago
    the mortgage payment would be at least £200 less each month because of my large deposit. interesting stats though, thanks.
methodin 13y ago
If you could transfer your mortgage exactly as it stands if you decide to move around then buying would be in all ways superior. Since that is not the case, if you aren't in a place that you've been for a while and intend to stay in for the foreseeable future then buying is really just a nuisance and prevents you from attaining things like better jobs unless you want to sacrifice your lifespan in the form of a long commute.
deleted 13y ago
[deleted]
michaelochurch 13y ago
Homeownership is about psychology. Taking out reckless drug use, the #1 predictor of whether a person will have mental health issues (from depression to schizophrenia) is the number of involuntary moves due to adverse economic circumstances. That feeling of being "chased", when coupled with low social status and economic failure, does psychiatric harm that takes decades to recover from-- especially in children. Owning a home makes people feel safe. Renters know they can be priced out at the end of a lease cycle. (Most of the yuppie "luxury" buildings, because they target people who work obscene hours, pack an automatic 15-20% increase in the first year, just because people hate moving.) Owning may be a worse deal on average (expectancy) but it doesn't pack as much volatility. The error is in the idea that homeownership provides protection. As the OP points out, a mortgage is just renting from a bank. If you have a catastrophic income loss, you're just as exposed to eviction. This can even be true if your mortgage is paid off-- if you lose the ability to pay property taxes. I don't like being an involuntary renter (read: I made too many bad calls in my 20s) but homeownership in a city is almost always a bad idea. It's an investment that (a) you cannot move and (b) other people can fuck with by, say, building ugly things near it. The obscene cost of housing in most cities has far more to do with NIMBYism than natural supply/demand issues, when the real problem is just that urban homeownership is a pretty raw deal. This analysis didn't even cover upkeep and transaction costs, or (even worse) the career-altering loss of geographic mobility. Urban homeownership is entirely about prestige and emotion; it makes no sense otherwise. But it's an enormously expensive hobby, making boats and cars look like childrens' toys. Renting is throwing money away, but so is owning in most cases. The best we can do is to make housing a commodity (what suburbia originally intended to accomplish, but at horrific costs) or, more accurately, to accept the fact that that's what it is. That is, we need to tell the NIMBYs to choke on a dick and build high-rises (i.e. solve the supply crisis that is making housing more expensive than the natural $125-175/ft^2 level-- price of new house construction-- at which it belongs) yesterday.
brianmcconnell 13y ago
Buying property is a long term decision. People in my family tend to buy a home and then get dragged out feet first 50 odd years later. I bought my place 15 years ago in San Francisco. It seemed like an unreasonable shitpile of money at the time. My mortgage on a three story single family home plus land on top of Twin Peaks is three grand and change. I rent a couple rooms out and that covers a good part of the mortgage. A one bedroom apartment next door just rented out for more. Granted SF is an unusual market, but California's population is forecast to nearly double, so the housing supply/demand imbalance is likely to only get worse, and if you don't live in a rent controlled unit, your rent is only going to increase in spades. Plus I have the added advantage of being able to paint my house anyway I like, put pink flamingos and garden gnomes out front, and yell, "Get off my lawn!" when the mood suits me.
QuantumGood 13y ago
As everyone points out in different ways, this is a terrible example. Leaves out a lot, and many ways to reslice the pie, for example, by taking on renters. Not to mention factors like easier job mobility from renting (easier to move to where a better job is).
victorhooi 13y ago
This is actually quite interesting, I'm from Australia (Sydney - one of the major capital cities) - and house prices here have basically been rising continually for the past few decades. House prices are predicted to rise 10% per annum in most capital cities (less in smaller cities): http://www.smh.com.au/business/property/australian-capital-city-house-prices-rise-10-in-2013-20140102-306tk.html http://www.smh.com.au/business/property/australian-capital-c... http://smh.domain.com.au/real-estate-news/boom-time-sydney-house-prices-set-to-rise-strongly-20130917-2txbh.html http://smh.domain.com.au/real-estate-news/boom-time-sydney-h... Hence, investing in a house is seen as a solid investment - most people will tell you to get a mortgage, and put your money into a house - to do anything otherwise is seen as silly, since the prices only go one way, and interest rates are incredibly low. Occasionally, you'll get one or two people talking about "bubbles", but they're regarded as a bit kooky by most - and there doesn't seem to be any fundamental reason prices would shift. What are people's thoughts on this?

88 points by dctoedt 13y ago

Warning flag to anyone who watches this for curiosity: the formula for interest is most certainly not (principle * ROI)

I've rented for my entire adult like (I'm currently 31 living in Somerville/Boston). While my sister bought her first house in Pittsburgh when she was 23, and my parents had moved between several houses they purchased by my age... I've been happy renting. I didn't want to buy a house until recently, but now I want to buy one around here. Why? For one thing, in the major cities the rents keep going up at a rate faster than what the government reports national inflation to be. Your (fix rate) mortgage shouldn't change over 30 years, but your rent will likely triple or more in that time in a city like Boston. But the biggest thing? Customization. I like building and changing things. I'm so tired of landlords that won't let me rip down walls, replace sinks, get a new fridge, repaint everything, etc... not that they should, but I still want to change things. Buying my own place will enable me to do this. Another thing I can do around here, is buy a place that has 5 bedrooms, and rent out the other 4. I've had several friends that do this, and it essentially pays for their mortgage by having roommates. Not a bad deal.

dominotw 13y ago
I am 31, looking to buy a home in next 6 months for the same exact reasons in Chicago. The rents are insane and they just seem to keep going up and you have to deal with douchy landlords who just dont give a fuck because the demand is so high in downtown area.
- tibbon 13y ago
  Right, even if my monthly outlay now seems high... in even 5 years I'm guessing it will seem reasonable. The apartment I lived in Back Bay 5 years ago was $900 before, and now its $1350.
gdilla 13y ago
There are other costs to owning - maintenance, property taxes, closing costs, and your agents fee (when you eventually sell - unless you keep forever). I bought a condo at age 24 in LA in 2002. I hated that the HOA could do things like, we need to fix the roofs, so pay up. We voted on it. Ditto re-paving the parkinglot ever x years. Damn if my first year in the condo was somehow fix everything year. Ugh.
- snowwrestler 13y ago
  Renters pay all these costs too; they are just hidden in the rental payment.
  - waitwhat123 13y ago
    Yes, but those are included in the rent price. Whereas, in a buying situation it would be on top of the price you think you'd be paying.
dsr_ 13y ago
More to the point, your 30 year mortgage has an effective rate cap. If rates go down during the time you owe it, you can almost certainly refinance. But you never have to refinance at a higher rate. You can also lower the rate by reducing the term. So far, my mortgage has been refinanced four times, each time reducing the interest rate (due to market conditions) and twice reducing the interest rate by reducing the term (20, 15, and now 10 years). Being a landlord is a whole different proposition, and I would strongly recommend that you talk to current landlords before you go into that business. MA has excellent renter protection laws... which are not so great for landlords.
mrfowler 13y ago
I did this in Somerville. I bought a two family in 2010. Rent from the bottom unit and one roommate back then covered the mortgage entirely. Of course, with Boston rents rising so much, and a few new carpets and appliances I've been able to raise my original rent close to 40% the last few years. Now that I've moved on and fully rented it, it's generating close to 2k a month in profit. Not bad since I got a FHA loan and only put 5% down. Dealing with tenants can be a pain, but I have no regrets. Home ownership has certainly been a path to wealth for me, though I suspect most people who buy single families or condos with no rental income won't get any real returns.
VLM 13y ago
"..but your rent will likely triple or more in that time in a city like Boston." Is after tax take-home pay increasing at that rate? If not, or if its declining like in most areas, you can ask for whatever you want, but that doesn't mean anyone will line up to pay it... This is why as an international discussion on the internet, the topic doesn't make much sense. Nationwide, of course, rents will be declining because nationwide the line item on the budget for rent is in long term permanent decline. Also be on the outlook for "grass is greener..." syndrome. I remember the glory days of the bachelor apartment and no matter how big the problem, the labor never exceeded a phone call to the onsite manager and the cost never exceeded one phone call. Someone else had the headache of the new hydronic heater unit for the whole building, replacing the garage door, upgrading the garage door opener to keyless from keypad, fixing the leaky water pipe, unclogging the storm drain, fixing the broken snowblower and the broken lawnmower, steam cleaning the hallway carpet, fixing the broken front door window, fixing the leaky roof, obviously not all at the same time, but I'd gladly trade all that away for "unable to paint the walls" Also note you can do all that remodeling you're planning; it will never cost more than your security deposit. In practice the LL doesn't care as long as he doesn't find out and the work looks as good or better than he could do. So, sure, I painted.
deleted 13y ago
[deleted]
ig1 13y ago
Rent is largely a function of house prices and house prices haven't been going up constantly, in most US cities house prices are still below-2006 prices. S&P House Price index: http://us.spindices.com/indices/real-estate/sp-case-shiller-20-city-composite-home-price-index http://us.spindices.com/indices/real-estate/sp-case-shiller-... Investing in a house is a gamble on house prices going up, which if you're going to make it you should do with a full understanding that historically there have been many house price crashes (typically caused by broader economic downturns), prices in an individual city can also collapse because of the local job market (Detroit) or natural disasters (New Orleans).
- clavalle 13y ago
  I think most people in this thread are not talking about buying a house as an investment, but rather, as a value store compared to rent.
  - ig1 13y ago
    The two are inseparable, buying a house to avoid variable rent prices doesn't reduce your exposure to the housing market, it actually increases it because you're leveraging against it (because you're borrowing money to do it). If house prices drop you can be stuck in negative equity whereby you owe more money on your house than it's worth which can easily bankrupt you. If you're renting that's obviously a problem you're not exposed to and you actually benefit from a declining market as your rent decreases.
    - clavalle 13y ago
      Of course they are separable. If you are buying a home to live in rather than an investment you can ride out the odd declining market. Seems like people have a lot of 'once bitten, twice shy' syndrome when it comes to housing. Market corrections like 2008 are exceedingly rare. I am not saying prices go up forever like so many idiots did around that time, but if you buy in a non-volatile market, it is a pretty safe bet that your home price will at least retain much of its value.

ljoshua 13y ago

One of my favorite interactive pieces from the NYTimes is a Rent vs Buy calculator which is very configurable: http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...

etanazir 13y ago
rent v. buy is a function of the specifics; not a generalization proposition.
nahname 13y ago
The numbers are very inflated against buying. 10% closing cost, 1.35% property taxes, utilities only if you buy, another 1.35% annually on maintenance/renos/insurance. Who is paying 2.6% of their property value each year on those things? Who gets utilities for free with their rent. That calculator is very dishonest.
- skorgu 13y ago
  Those numbers are configurable. Click the "Advanced settings" button.
- ceras 13y ago
  If you're buying in a typical American market (ie, homes selling for $200k) 2.6% annually on taxes/maintenance/renos/insurance does not seem absurd at all to me. I've heard others argue it's too low.
- pmorici 13y ago
  In Baltimore property taxes run close to 2% a year on appraisals that are usually 10% higher than what you actually purchased the property for. Those numbers are pessimistic so they don't mis lead people who don't bother to pay attention to the details. The property taxes in CA are lower than they might otherwise be if the home values weren't all so high. The government is going to get it's money one way or another.
- chimeracoder 13y ago

jaredgeorge 13y ago

I'd LOVE to find a CD @ 4%. And I'm also glad my mortgage rate is 3.75%.

eloff 13y ago
That's commonplace in Panama to have USD CDs at that rate or better. But choose a very large international bank (e.g. Scotiabank) because they're not FDIC insured.
drone 13y ago
For direct offerings, I'm seeing rates as high as 4.5% and higher for 30 year CDs, I see a brokered 15-year CD new issue coming up at 3.5%, and several 10-years north of 3%.
Cthulhu_ 13y ago
Pretty much this. The interest rates on both sides seem just thought up on the spot to prove his own point. Second, if I were to buy a house, I'd first go to my bank to check what kinda mortgage I could get, see how much that would cost me a month, and only then find a house. Third, can't really compare rental homes with bought homes around here (netherlands); rentals are usually apartments and the like, while bought houses are... well, real houses. Fourth, you get more house for the same amount, or pay less in mortgage/interest when you buy a house. I choose to rent for now, because the main advantage over renting vs buying is flexibility. I can give my landlady a one month notice and I'm outta here. Not so with buying a house; you've got to sell it, and hope that you can use that money to pay off your mortgage, or whatever. You're pretty much stuck on a 25-30 year mortgage if you get one.

dmtroyer 13y ago

I think anyone will concede that depending on the location and interest rates, the math can be close. But 4% on a CD and 6% interest only loan? That is not realistic.

blibble 13y ago
wouldn't you pay tax on interest for that 'CD' thingy too? also it's not a fair comparison: yes with a mortgage at the beginning your payments are 99% interest, but in the last 5 years they're almost entirely principle, so you get to keep that money. if you're still renting in 25 years 100% of that money is still going to the landlord, and your rent has likely gone up by a factor of 5 too. ALSO over long periods of time real estate nearly always increases in value (more than inflation), so that's another thing to consider.
- matwood 13y ago
  And early on while you are paying lots of loan interest it can lower your taxes significantly.

lsiunsuex 13y ago

As a renter, you can't do cool stuff like this http://diy.blogoverflow.com/2012/08/building-a-brick-pizza-oven-into-an-existing-space/ http://diy.blogoverflow.com/2012/08/building-a-brick-pizza-o... conversely, over the last 4 years, we've completely gutted and rebuilt this early 1900s house from all new electrical to plumbing, to insulation and windows. It helps to be handy (which I am) but it can be a money pit...

alecco 13y ago
For me, it can be a feature. Prevents from spending on things like that on impulse.

mempko 13y ago

I really don't think the bay area is a good choice to make an argument for the average person against buying.... $3000 a month seems too small for a house in the valley, maybe a 1,300 sqft apartment? Also, how out of touch is this guy? Who the fuck has 250k in the bank? certainly someone who would probably own property... maybe even renting it out to this guy...

pmorici 13y ago
I don't have any knowledge of the home market in the valley, but I will say that the numbers he uses for interest rates are very off from current real world rates. The method is instructive but the numbers used are so off they don't offer proof one way or the other.
- fps 13y ago
  This video was made in 2008, when mortgage rates were 6% and money market accounts were paying close to 4%. Now, mortgages go for 4.5% and money market accounts pay less than 0.5%. In 2008, rent prices were low while home prices were high, too. Today, a $1M house would cost closer to $10K/month in rent. It certainly doesn't pay to rent today, but it's harder to get a loan today, too.
  - ninguem2 13y ago
    If this video was made in 2008 and all the numbers are off, leaving this video up without any caveats in a site where kids go to learn is beyond irresponsible.
tansey 13y ago
Well it's also unrealistic to buy a house for $750K in Mountain View. I think his point was that IF the house went for $750K, you could reasonably expect rent to be around $3K. That seems right to me-- a 1BR in SF sells and rents for about those prices. As for having 250K in the bank-- if the house costs $1M, you have to make a down payment. In the mid-2000s, that may have been a smaller percentage, but these days I think 15-20% down is not unheard of.

jbrooksuk 13y ago

What he forgot to take into consideration is that the $ coming from his savings to pay his rent isn't completely recovered at the end of the year, so his interest will go down too. At least that's how it works in the UK, fixed rates are hardly worth it.

nolok 13y ago

Your rent will probably not stay the same for 30 years ...

e40 13y ago
But your mortgage might go down over the course of 30 years. Mine is near 41% less than it was when I got it, because I was able to refinance. The rent for my house would be 4-5x what I'm paying in a mortgage.
deleted 13y ago
[deleted]

yabbadabbadoo 13y ago

The best rent vs buy calculator I've ever used - https://www.smartasset.com/first-time-home-buyer/affordability/rent-vs-buy https://www.smartasset.com/first-time-home-buyer/affordabili...

orenbarzilai 13y ago

maybe I missed something but it seems like he ignored the house value. Even if we assume that the rent & the house price remains the same of 30y, after 30y you end up with a house that worth $1M & spent ~$15K more per year. Over 30y it's $450K in cash vs owning a house of $1M, meaning buying the house was the right decision. Where is my mistake?

dctoedt 13y ago
> after 30y you end up with a house that worth $1M In his video, Sal Khan did an apples-to-apples comparison: He compared the net out-of-pocket costs of (i) an interest-only mortgage in which you build no equity, and (ii) renting, where you likewise get no equity. If you also want to build equity in your house, in addition to merely paying the interest, then that's an additional out-of-pocket cost (which unlike the interest payment is not tax deductible). That's not to say his numbers are realistic approximations. But his basic approach to comparison seems sound.
- orenbarzilai 13y ago
  It doesn't make sense to ignore the fact that you ending with owning the house. Maybe the numbers still works but if he ignores that fact his entire presentation is useless.
  - waitwhat123 13y ago
    At the end of the 30 years, the buyer in the video would not own the house. He would still owe $1M in order to own the house (if the market is good, the house could very well be worth more than $1M, but that is besides the point). The amount that he was paying monthly goes towards paying off interest on the loan, property taxes, etc. only.
- snowwrestler 13y ago
  At the end of an interest-only loan term, you have the option to buy the house at the price it sold for when the loan was issued. At the end of a rental period, if you want to buy the property you are going to pay the current price. That delta can be significant over long periods of time, and is a benefit of purchasing over renting.

mikekij 13y ago

Two issues. - I'm currently paying $2,300 for a $500k house. I think his rental rates are way off. - In a free market, rental rates are supposed to adjust to make it such that an individual is indifferent between renting and buying. If it was that much more expensive to own than to rent, the landlord would never rent the house out!

nawitus 13y ago
>- In a free market, rental rates are supposed to adjust to make it such that an individual is indifferent between renting and buying. I don't quite agree with that. If you're renting out, the apartment owner must pay for the risk of you destroying the apartment. If you instead buy the apartment you don't need to pay for the risk, assuming that you don't yourself destroy it.
skylan_q 13y ago
A free market doesn't optimize for money. It optimizes for the production of what people are willing to pay for. They don't care if they can be better off financially for renting. What they want is home ownership.

jnardiello 13y ago

I'm amazed to see how many scientists are in here. Lot of math, lot of graphs, lot of speculation but nobody even mentioned that we are, before technicians, people. We have desires, we have daily routines, we have habits and we have a psychological environment and background. Renting will effectively (as the video outlined) leave a surplus of money in your pockets. Which you will use to buy the latest gadgets, to pay the latest cool service, to take fancy trips around the globe, to hunt the last ever living rhino in Africa or whatever else. BUT, thinking in perspective, after 20 years you will anyway have 0 cash in your pockets AND no house. Until your health and job keep up, this might be fine. In case of need you will just be f---. What you are really doing, when you buy a house, is forcing yourself in saving a liable equity for you and your family. Not only it will free you from any rent after 30yrs, but you'll also have a tangible good and you'll leave something for your children and relatives. Not even mentioning that, in case of extreme need, you'll be able to sell it. Not sure how the concept of "house" might differ between Europe and the US and i realize that if you buy a really crappy built house, my arguments might not be valid. But where i live, houses are built to last centuries and they are by far the best way to responsibly spend your money. Doing a Khanacademy video advising people in renting vs buying is just SO wrong. The video itself is not only rounding numbers in a bad way (IMHO), but it's also giving a superficial and quite-not-always-true message. Horrible.

dctoedt 13y ago
> What you are really doing, when you buy a house, is forcing yourself in saving a liable equity for you and your family. Yes, there's a forced savings component, but it's expensive in terms of opportunity cost. It's not unlike insurance agents who want to sell you life-insurance policies that have "investment" components to them, when what you really want is to buy inexpensive term protection and put the difference in price into better-returning investments. Remember that Sal Khan's comparison is of an interest-only mortgage versus renting. If you also want to build equity, well then, that's additional money out of your pocket (non-tax-deductible).
- jnardiello 13y ago
  > Remember that Sal Khan's comparison is of an interest-only mortgage versus renting. If you also want to build equity, well then, that's additional money out of your pocket (non-tax-deductible). That will save you tens of thousands of dollars/euros in avoided interests over the years.

nlh 13y ago

Slightly tangential: Conventional wisdom is just that - conventional, and an important thing to teach people is that there are times when convention should be broken. Back during the height of housing bubble (2006/2007), a friend of mine decided to buy his first home. It was so obviously a "bubble buy" that even before things started to get bad, it was visible from a mile away that he was making a bad decision: He was buying a new construction K. Hov. cookie-cutter apartment in Edgewater, NJ, which was just close enough to Manhattan to tempt those "I'm buying a NYC apartment!" types but just far enough away that there wasn't a real fundamental demand to live there. He got a terrible no-verification mortgage ("liar loan") that we all warned him was trouble. He paid way too much -- something like $600k for a 1BR condo (near Manhattan prices, not Edgewater NJ prices). When our friends warned him of these issues, when we pointed out that he could rent a very nice 2BR apartment a few blocks away for $2500/month that he and his wife would be plenty comfortable in, when we pointed out he was likely buying at or near the peak of a heady real estate market, he didn't care. His only refrain - over and over - was the age-old: "But I'm going to be a _homeowner_. You guys are just throwing away money towards rent every month. I don't want to do that." Fast forward a few years: Not surprisingly, his interest rate reset, his apartment is worth about $400k, and he had to go through mortgage default to get a modification on his loan. And yet he still clings to his decision - "yeah but I own my place, and it'll even out over the next few years." Sometimes buying for the sake of buying just isn't the right decision, despite what "we were all taught."

yetanotherphd 13y ago
>he had to go through mortgage default to get a modification on his loan. When you take this modification into account, his investment might not look so bad. But I agree with your general point. I was also taught the middle-class fuzzy thinking that paying rent is "throwing money away".
3pt14159 13y ago
These types of people are irrational, irritating, and the root cause of so much social strife: "But prostitution is wrong!" So we make it illegal and cause prostitutes to get roughed up by pimps and Johns. They attract more diseases and end up straining our social support system. "But drugs are bad for the community!" So we make drugs illegal and we have gang turf wars and a "fuck the police" vibe from the poorer areas of our cities. Tell me again, what was worse for the community? "But I don't want to live in a city with lots of condos!" So we make it illegal to build new condos. Then a bunch of google employees start moving in and now the original votes are economically squeezed out. "It isn't right that Wallmart's (or McDonalds, etc) employees require subsidies from the government!" So we raise minimum wage and (through perverse incentives and lobbying) cut welfare benefits to the partially employed. Minimum wage companies replace people with machines and the government gets higher unemployment and less productivity (since engineers are creating machines to replace the unskilled, instead of the skilled). It's all the same thinking over and over again. An emotional appeal that has nothing to do with good policy. This is why Khan's video is so important. It reaches out to people and educates them without judgement. Talking to your friend he may feel like he needs to stick to his decision, otherwise his friends will see him as weak, but if he comes to these facts on his own maybe it will enlighten him.

Mister_Snuggles 13y ago

This seems to really depend on where you live and what the house/rental prices are. Where I live, you can get a variable rate mortgage that's advertised at 3%. More than likely, the bank will look at your credit rating and offer something lower. Even if they don't, that's half of what the video is showing. Likewise, a 4% return on investments seems unreasonable. The same bank with the 3% mortgage is offering a non-cashable GIC (which seems to be the Canadian version of a CD) which pays 2.3%. That's only a little better than half of what's shown in the video. As for housing prices, it's very hard to find identical houses available for rent and for buying, but here's what I found: For rent, a 3 bedroom, 1.5 bathroom, 1100 sq ft townhouse for $1500/mo. For buying, a 3 bedroom, 2 bathroom, 926 sq ft townhouse in the same area of the city for $225K. It's not apples to apples by any means. The one for purchase is smaller, plus it's a condo so there will be additional fees on top of the regular things you'd pay for in an owned house. In spite of the differences, $3K of rent does not equal a $1M house in my part of the world. I plugged the numbers into the New York Times rent vs buy calculator that was mentioned elsewhere (http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...). With these two properties, with these interest rates on the mortgage and investment, with local taxes and utility costs applied, buying is better after three years. That said, it might not be all about cost. If you like to move around a lot, maybe renting is better because not renewing your lease is easier than selling a house. Maybe renting is better because you don't have the savings for a downpayment or don't qualify for a mortgage. Maybe buying is better because you like to do the handyman type of stuff and rarely move. There's all kinds of reasons that renting or buying can be better, which is why I don't buy blanket statements that say "renting is always better" or "buying is always better".

jrs235 13y ago
Like you point out, how long you intend to live at a particular place has a huge impact on whether you should buy or rent. Along with that SPECIFIC [local] market conditions will also dictate whether holding short, long, or in between makes sense. You CAN make large amounts of money flipping houses (in certain markets), you CAN come out ahead in the long term, but you CAN also come out "worse" depending on how you go about things.

wyck 13y ago

I just went from owning a house for 15 years (bought at 23) to renting, and I love it. Maintenance was a huge burden and having a lot of capitol tied into the housing market was an anchor for several reasons. I also have the freedom to just get up and go at any time. I am fortunate to live in a renters market, you can get some really great deals for long-terms rentals if you put in the work. A house is not an investment for the average buyer, it's an emotional purchase.

nawitus 13y ago
Note that one can also buy an apartment and have the apartment company do basic maintenance. (Different countries do this differently). >A house is not an investment for the average buyer, it's an emotional purchase. I'd say the house is an investment for the average buyer, even if the average buyer doesn't buy it as an investment.

bane 13y ago

The numbers here are weird at least in my area, so it's hard to compare. But in general, in most places, over a 30 year comparison, buying is better than renting unless you get very lucky with your alternative investment decisions. A couple things to add, house payments stay exactly the same over a very long time. They don't increase at all. The absolute dollar amount is fixed. So while rent in an area might triple over 30 years due to inflation and local housing market fluctuations, mortgage payments don't. It's a time-value of money idea. It's cheaper to buy now than later. Most people buy or rent homes where the monthly payment is at around 1/3 of their take-home income. As a home owner, that percentage decreases as your pay increases (inflation, pay raises, promotions, etc.). What makes the decision difficult is the cost of servicing a loan vs. just paying for rent. [1] The problem is that, even with a low interest rate, you pay a lot of extra money towards interest. A $500,000 home with a 3% 30 year loan costs something like $750,000 in the end. You can effectively lower your rate by artificially paying down your principle. If you view the monthly payment as a minimum monthly payment, just pay extra and pay down the principle faster. One simple way to do it, as your income grows, just keep paying 33% of your take home pay towards your mortgage. If you get a big bonus, pay that as well. Most mortgages don't have a limit to how much you can pay in a month. Doing this will reduce the effective interest rate, lower the minimum required payment, and shorten the length of the loan. Even better, during months where you need lots of fluid cash, just pay the then minimum payment and different you were paying is now usable. It's like giving yourself a pay raise if you need one. Also, when interest rates drop, you can refinance and otherwise change the terms of your loan to be more favorable. You can turn equity into large sums of cash almost on demand if you need to. You can't do any of that as a renter. After a few years, if you run the numbers, you'll probably find that you can comfortably service a shorter-term loan, say a 15-year loan. Which also have lower interest rates than 30 year. As a quick example, my "minimum" mortgage payment + amortized property tax is about $1500 less per month than the current market rental rate for a similar sized home. In the end, once you finally own your house, all you are responsible for is upkeep and property taxes, which will be a tiny fraction of the then market rate for renting a similar sized property. You'll likely have more income coming in by then then you'll really know what to do with. Whereas if you had rented a similar sized property the entire time, you'll still be renting and have nothing to show for it and you'll be subject to the whims of your landlord. I know a number of families who started out renting the house they eventually bought, but if they had just bought a house to start with would be close to owning the property instead of 10 years behind. Renting those properties bought them very little. 1 - Here's a fun experiment, let's suppose I buy a home at $500,000 with a 3.25% interest rate over 30 years. My monthly payment is $2176.03. Supposing I decided to stick with that, I'll pay $783,370 for the house. Now let's say I rent the same property and I get lucky and it's an even $2,000/mo or $24,000/year. But let's say rent increases with the current rate of inflation (1.5%) for 30 years. Over that time you'll pay $900,928.40 for the same place. And the owner of the property will now own the place you live in and have made $117k off of you. Inflation rarely stays at 1.5% though, so let's say it's a more normal rate of 3%. Well now you've paid 1,141,809.977 for somebody else's to own their property. In other words, they'll have made $358k off of you and gotten a house of out it. In fact, the property owner is probably just taking the increase in payment and paying down the principle even faster like I propose above. 2 - Here is an awesome tool that sort of shows my point http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula... In my notional example, buying is better at around 6 years. 3 - and another one somebody else mentioned http://www.trulia.com/rent_vs_buy/ http://www.trulia.com/rent_vs_buy/ in my notional example, buying is almost 1/3rd cheaper than renting over 30 years.

msmith 13y ago

Realize that Sal recorded this video in March of 2008, at the peak of the housing bubble. Many of the assumptions made in the video are certainly not going to be the same in today's market. When you're modeling the rent vs buy scenario, the outcome is hugely dependent on regional factors (like average rent & purchase prices in your area), current economic factors (like mortgage rates), and also your estimates of future events (like long-term investment return, rental price growth, and home appreciation). Even small changes in these factors can make a huge difference in the outcome. If you're interested in going into more detail, I suggest downloading the model [1] that Sal was using for these videos and plugging in your own numbers: [1] https://www.khanacademy.org/downloads/buyrent.xls https://www.khanacademy.org/downloads/buyrent.xls

phunge 13y ago

Shameless plug: http://www.trulia.com/rent_vs_buy/ http://www.trulia.com/rent_vs_buy/

spiritplumber 13y ago

I bought a home in 2009. Ha ha ha.

alexeisadeski3 13y ago

Best Buy vs Rent calculator out there. http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1& http://www.nytimes.com/interactive/business/buy-rent-calcula...

systematical 13y ago

Renting costs just about as much as owning. Using my neighborhood as an example a co-worker rents a house of similar size one street over from the one I own. We both pay roughly $1,200 per month. The big difference is my interest is tax-deductible and I will always get at least something back from my investment. From a finance/economics perspective: Owning home > renting. Obviously.

jrs235 13y ago
Unless Congress doesn't keep the mortgage interest deduction and you renting friend doesn't have to pay if the furnace, water heater, or AC breaks. He also doesn't have to think about and set up a sinking fund/account for replacing the roof.

waitwhat123 13y ago

I agree, as others have pointed out, that the exact numbers differ based on location as well as situation (mortgage size, etc.) and in some cases it is better to buy vs. rent. However, I think it was a good video because it does an apples-to-apples comparison and clears up a misconception that many people have about buying. In part 2 of the video he sums it up pretty well "You are not a home owner until you have no debt. Until then, you are a paying rent on the money you owe instead of the place you live - you are a money-renter". Evident from the comments here on HN as well as the blog post, many people mistakenly believe that monthly payment in a buying situation all goes towards equity or "savings". But after 30 years, the buyer would still owe $1M on the house - he hasn't saved any money at all. Reading some of the comments, it's almost scary that people about to spend a huge amount on a home don't understand this!

laichzeit0 13y ago

The worst assumption here is that you're gonna pay your bond off over 30 years. I payed my house off in 5. It's also an access bond, meaning, even though it's "payed off" it's not closed and I can use the money in there like a savings account, withdrawing and depositing back in later as I want. Essentially I'm my own "bank" now paying whatever interest my bond currently has, which is usually a whole lot lower than a credit card. If I had to calculate the interest I'm saving over the next 20 years which I can now freely speculate with it trumps renting.

sitharus 13y ago

As someone who recently bought, if the decision is an investment in housing vs an investment in other things don't buy a house! On the other hand, if what you want is a place to live that you can redecorate, remodel and change however you like then you can't beat buying. Where I live you can't do anything to the fittings and fixtures without the landlord's permission. Given my local housing market I tripled my floor area buy buying for same monthly payment, but that's not true everywhere.

joeblau 13y ago

When it comes down to it, there are way to many variables to consider in anyones equation. Some people prefer owning and others prefer renting and whatever you think is better might be better in your situation. I've been around a lot of "owners" telling "renters" that they are throwing away their money. I've never heard a "renter" say that to an "owner" even though this video points out that it could be the case in certain scenarios. It's just a different perspective based on the time that the video was recorded.

yetanotherphd 13y ago

I always thought the main difference between buying and renting was tax, since mortgage payments are tax deductible.

jrs235 13y ago
Mortgage payments are not tax deductible. Currently the interest is. Congress could change that. But as it stands now it is something one needs to consider in the cost comparison. (You might be paying $1000 to save $250)

hillarystark 13y ago

The link submitted to HN lands on video 2 of 4 which was created was uploaded Uploaded on Mar 15, 2008 where Sal was renting and the video is pro renting: http://www.youtube.com/watch?v=YL10H_EcB-E http://www.youtube.com/watch?v=YL10H_EcB-E Interestingly, it looks like on Dec 31, 2013 new video was added as 1 or 4 where Sal said he bought a house and now is neutral on rent. vs. buy: http://www.youtube.com/watch?v=JNL6f1xkie4 http://www.youtube.com/watch?v=JNL6f1xkie4

hillarystark 13y ago

switch007 13y ago

I'm in southern England. I have no idea what to do. House prices are insane. I have a sizeable deposit (20-25%) but I would still need a large mortgage. I want to buy because I know rent is going to through the roof as this tiny island becomes more and more populated. However, I don't want to be tied to a job/location. Commuting to London for work is always an option but it comes at a cost of £350-450/mo in travel. Not to mention the time involved. I want the flexibility of renting but I also want a paid-off house when I'm in my 40s/50s. AFAIK most mortgages (non buy-to-let) do not permit letting out your property, so I'd need to re-mortgage to do that.

g8oz 13y ago
The Economist's house price index for the U.K in 1990 was 628, in 2013 it was 2042. That is a 325% increase. Between 1990 and 2013 the Compound Annual Growth Rate (CAGR) of the S&P 500 market stock index was 9.46%, yielding an 875% return. My advice: rent and be a fanatic about investing the difference in the mortgage payment for a property exactly equivalent to what you'd been thinking about buying. Over the long time horizon you're planning for you should be all right.
- switch007 13y ago
  the mortgage payment would be at least £200 less each month because of my large deposit. interesting stats though, thanks.

methodin 13y ago

If you could transfer your mortgage exactly as it stands if you decide to move around then buying would be in all ways superior. Since that is not the case, if you aren't in a place that you've been for a while and intend to stay in for the foreseeable future then buying is really just a nuisance and prevents you from attaining things like better jobs unless you want to sacrifice your lifespan in the form of a long commute.

deleted 13y ago

[deleted]

michaelochurch 13y ago

Homeownership is about psychology. Taking out reckless drug use, the #1 predictor of whether a person will have mental health issues (from depression to schizophrenia) is the number of involuntary moves due to adverse economic circumstances. That feeling of being "chased", when coupled with low social status and economic failure, does psychiatric harm that takes decades to recover from-- especially in children. Owning a home makes people feel safe. Renters know they can be priced out at the end of a lease cycle. (Most of the yuppie "luxury" buildings, because they target people who work obscene hours, pack an automatic 15-20% increase in the first year, just because people hate moving.) Owning may be a worse deal on average (expectancy) but it doesn't pack as much volatility. The error is in the idea that homeownership provides protection. As the OP points out, a mortgage is just renting from a bank. If you have a catastrophic income loss, you're just as exposed to eviction. This can even be true if your mortgage is paid off-- if you lose the ability to pay property taxes. I don't like being an involuntary renter (read: I made too many bad calls in my 20s) but homeownership in a city is almost always a bad idea. It's an investment that (a) you cannot move and (b) other people can fuck with by, say, building ugly things near it. The obscene cost of housing in most cities has far more to do with NIMBYism than natural supply/demand issues, when the real problem is just that urban homeownership is a pretty raw deal. This analysis didn't even cover upkeep and transaction costs, or (even worse) the career-altering loss of geographic mobility. Urban homeownership is entirely about prestige and emotion; it makes no sense otherwise. But it's an enormously expensive hobby, making boats and cars look like childrens' toys. Renting is throwing money away, but so is owning in most cases. The best we can do is to make housing a commodity (what suburbia originally intended to accomplish, but at horrific costs) or, more accurately, to accept the fact that that's what it is. That is, we need to tell the NIMBYs to choke on a dick and build high-rises (i.e. solve the supply crisis that is making housing more expensive than the natural $125-175/ft^2 level-- price of new house construction-- at which it belongs) yesterday.

brianmcconnell 13y ago

Buying property is a long term decision. People in my family tend to buy a home and then get dragged out feet first 50 odd years later. I bought my place 15 years ago in San Francisco. It seemed like an unreasonable shitpile of money at the time. My mortgage on a three story single family home plus land on top of Twin Peaks is three grand and change. I rent a couple rooms out and that covers a good part of the mortgage. A one bedroom apartment next door just rented out for more. Granted SF is an unusual market, but California's population is forecast to nearly double, so the housing supply/demand imbalance is likely to only get worse, and if you don't live in a rent controlled unit, your rent is only going to increase in spades. Plus I have the added advantage of being able to paint my house anyway I like, put pink flamingos and garden gnomes out front, and yell, "Get off my lawn!" when the mood suits me.

QuantumGood 13y ago

As everyone points out in different ways, this is a terrible example. Leaves out a lot, and many ways to reslice the pie, for example, by taking on renters. Not to mention factors like easier job mobility from renting (easier to move to where a better job is).

victorhooi 13y ago

This is actually quite interesting, I'm from Australia (Sydney - one of the major capital cities) - and house prices here have basically been rising continually for the past few decades. House prices are predicted to rise 10% per annum in most capital cities (less in smaller cities): http://www.smh.com.au/business/property/australian-capital-city-house-prices-rise-10-in-2013-20140102-306tk.html http://www.smh.com.au/business/property/australian-capital-c... http://smh.domain.com.au/real-estate-news/boom-time-sydney-house-prices-set-to-rise-strongly-20130917-2txbh.html http://smh.domain.com.au/real-estate-news/boom-time-sydney-h... Hence, investing in a house is seen as a solid investment - most people will tell you to get a mortgage, and put your money into a house - to do anything otherwise is seen as silly, since the prices only go one way, and interest rates are incredibly low. Occasionally, you'll get one or two people talking about "bubbles", but they're regarded as a bit kooky by most - and there doesn't seem to be any fundamental reason prices would shift. What are people's thoughts on this?