Which is Cheaper: BUYING or RENTING a house? (DEBUNKED)

What's up you guys! It's Graham here. So let's answer the age-old debate: is it cheaper to buy a house or rent a house? Now, I think there's a common misconception out there that renting is just automatically throwing money out the window, but you can't deny there are a lot of very high-profile people out there that just decide to lease instead of own. Now, why is this?

So let's actually do the math behind this, find out which factors matter the most, and that way you can figure out how to best deploy your money—whether it's actually to rent something or to buy something.

Now let's first talk about owning a home. Most people look at the rent and then look at the mortgage and they think, "You know what? The mortgage is only a little bit more than renting. This means that renting is an automatic waste when I could just own it and build equity and have it paid off in 30 years for just a little bit more." However, the actual cost of ownership is much more than just the mortgage itself. Instead, it's also property taxes, insurance, repairs, and anything else that goes along with owning that property.

This doesn't even take into account the opportunity cost of your down payment that you're now tying up in the property instead of investing it elsewhere. So, as an example, let's just say we're buying a $500,000 home with 20% down, and that is $100,000. This will be our example of what's better— to buy or rent.

Now, your most obvious expense when owning a home like this is your mortgage payment. Now, in a 30-year loan at four-and-a-half percent interest, your loan is going to be about $2,000 per month. Then you also have your property taxes. Now, here in California, that's about one and a quarter percent of your purchase price, which works out to be about five hundred and twenty dollars per month.

Then you have insurance in case your home burns down. Or, in California, we have earthquakes. So, you don't get tornadoes, we don't get tsunamis, we don't get hail storms—we get earthquakes. So let's assume all of that insurance is an additional $150 per month.

And then we have one of the things that many people miss, and that is repairs. Let's say a roof is going to cost you fifteen thousand dollars every 20 years. A new water heater might be an additional $2,500 every ten years. A new HVAC system could be an additional ten thousand dollars every twenty years. And then finally, I left to say you spend an additional 20 dollars per month over the course of 20 years on average for things that just wear out and need replacing over time.

This brings your total cost of ownership to seventy dollars per month on a five hundred thousand dollar home with $100,000 down. And in 30 years, you own this home outright! But that's not the total picture here, because even though it looks like on paper you're out of pocket two thousand eight hundred and seventy dollars per month when you pay your mortgage, part of that is going towards interest and part of that is also going towards equity by paying down your loan.

In the first year, you've paid down your loan by sixty-four hundred dollars, or five hundred and thirty-three dollars per month. You could then also write off the interest that you pay on your mortgage up to seven hundred and fifty thousand dollars against your income. This means in the first year of paying your mortgage, you can write off seventeen thousand eight hundred and sixty-seven dollars against your income.

And if you're in a twenty-three percent tax bracket, this means that you could save about four thousand four hundred and sixty-seven dollars in taxes in your first year. So this means that even though on paper you're spending twenty-eight hundred and seventy dollars per month, you're paying down your loan by five hundred and thirty-three dollars per month, and you're realizing a net tax deduction of three hundred and seventy-two dollars per month.

This means that your net cost of ownership for owning a five hundred thousand dollar home is only nineteen hundred and sixty-five dollars per month. This took me forever to memorize all of this and do this in one take. Hit the like button!

So anyway, now it looks like we're at a net cost of ownership at nineteen hundred and sixty-five dollars, but that's still not the entire picture. Because in order to get that price, you had to put 20% down, or one hundred thousand dollars down, and that one hundred thousand dollars has an opportunity cost. Because you could then go and invest that hundred thousand dollars elsewhere, and instead you're tying it up in that property.

So let's just say, for purposes of this, you're investing it in a Vanguard S&P 500 index fund that has historically given about eight percent return. So that means your one hundred thousand dollars really has an opportunity cost of eight thousand dollars in the first year. This works out to be six hundred and sixty-six dollars per month that needs to be added to the total ownership cost of the property.

So this brings the actual cost of ownership to own this property, including the opportunity cost, all the tax deductions, and building up equity. Your net cost of ownership of this property is twenty-six hundred and thirty-one dollars per month.

So now we have one more factor when it comes to owning to consider, and that is appreciation. Now, this is a really tough one to calculate because it really depends on your area. Areas like Los Angeles, or the west coast, or anywhere near a beach, or anywhere that's highly desirable, or in a big city tends to appreciate at a higher rate than other cities that don't have that or have more land to build on.

But let's just say on average we're going to get about a 3% return annually—just an appreciation. And I feel like this is a pretty conservative number because it just barely beats inflation. So this means that on a $500,000 home, if it goes up in value 3%, this works out to be $15,000, or it also works out to be twelve hundred and fifty dollars per month.

This means that when you factor in appreciation to the total cost of ownership, your real cost of ownership is only thirteen hundred and eighty-one dollars per month.

Now here's the kicker here, because the average person only lives in their home for about seven years. Now, at a three percent growth rate, this means that after seven years, the home is now going to be worth six hundred and fourteen thousand dollars. But when they go and sell it, they're gonna have to pay about six percent of that towards closing costs and commissions.

This means that you're going to net five hundred and seventy-seven thousand dollars after paying six percent closing costs, and your loan at the time will be three hundred and forty-eight thousand dollars. This means that over the course of seven years, your out-of-pocket loss is going to be one hundred and forty-two thousand dollars. This also works out to be twenty thousand two hundred and eighty-six dollars per year, or sixteen hundred and ninety dollars per month as a net loss for cost of ownership.

Now I'm sure I lost the majority of you guys here. I'm sure only a small percentage of you were really able to follow along with all of that and truly understand it. But the most important thing with all of this is that as long as you understand that over the course of seven years, your net loss and the net cost of ownership for owning a property over seven years is really only an average of sixteen hundred and ninety dollars per month.

So now let's talk about the cost of renting. Now given our $500,000 home, over the course of seven years, calculating this should be pretty straightforward. So like I said, the out-of-pocket costs for owning a home every single month is twenty-eight hundred and seventy dollars per month, plus tying up a hundred thousand dollars at an eight percent opportunity cost, which works out to be an additional six hundred and sixty-six dollars per month.

Now even though yes, it is true, you're gonna be getting a lot of that money back in the form of tax benefits, paying down your loan, and appreciation when you sell the property, just for cash flow purposes, your real out-of-pocket cost every single month is going to be thirty-five hundred and thirty-six dollars per month.

Now realistically, depending on where you are in the United States—because every place is going to be a little bit different—you should be able to rent a five hundred thousand dollar home for about three thousand dollars per month. And you could then go and invest your one hundred thousand dollars in the stock market, making it, let's say, an eight percent interest rate instead of tying it up in the property.

This means that it's going to be generating you on average about six hundred and sixty-six dollars per month, which brings your total cost of ownership for renting to only two thousand three hundred and thirty-four dollars per month, or almost twelve hundred dollars cheaper than owning.

Because remember, your rent is three thousand dollars. You invest one hundred thousand dollars—that gives you back six hundred and sixty-six dollars per month. And that's how we come to two thousand three hundred and thirty-four dollars per month.

Now, not only is renting cheaper for cash flow purposes every single month, but it also gives you the mobility to pick up and leave as soon as your lease is up. And with this, you're not responsible for any repairs or maintenance. You don't have to replace the roof, the water heater, or anything else that wears out over time.

You're also not responsible for selling it and paying a commission and closing costs when you leave. You could pretty much just pick up and go, and you could also invest that down payment elsewhere that could potentially make you more money. That makes it more advantageous to rent than it does to buy and have your money tied up in a property.

But in terms of net out-of-pocket costs over a period of seven years, leasing will be more expensive, costing you one hundred and ninety-six thousand dollars. This means that over seven years, renting is going to cost you fifty-four thousand dollars more, or that works out to seventy-two hundred dollars per year, or six hundred and forty-three dollars more per month.

So in this, renting is actually more expensive over the course of seven years. Now, this calculation also doesn't take into account rent increases because your rent realistically will increase by about three percent per year, and that will be an additional cost that I did not calculate in this.

So if this is actually the case and renting is really fifty-four thousand dollars more over the period of seven years than owning the home, what are the advantages of actually renting a home to begin with? And why do so many high-profile people seem to rent their homes instead of owning them?

First of all, in this example, it assumes that the market continues to go up in price every single year over the course of seven years. If the market stays the same or actually drops in price, renting could actually come out ahead and be more advantageous than owning.

You'll also come out ahead by renting instead of buying if you can consistently make more than a twelve percent return investing your down payment instead of tying it up in the property. You'll also come out ahead significantly by renting if you only plan to live in the home for one to three years and then plan to move somewhere else.

Instead of going and selling and paying at six percent closing costs when you own a home, unless you get really lucky and happen to buy it in a rapidly appreciating area where you buy a home and then three years later, it's worth like forty percent more. But besides that, if you plan to sell the home or only live there for one to three years, renting comes out ahead.

So it really takes a lot of assumptions and advantages to really decide which is better in terms of renting versus buying. The biggest downside I see when buying is that you pretty much just tie up your down payment that could be deployed in a business that could generate you much higher returns.

Also, for somebody who wants to buy but only live there a few years and then sell it, it's a little dangerous to assume that the market will continue going up in such a short period of time to a point where you can either break even or make a profit when you sell.

So in most situations, the cost of renting is significantly cheaper than the cost of buying something and then selling it after only a few years. And also, in a multi-million dollar price point, sometimes there are situations where renting is just significantly cheaper than owning that property.

For instance, I've seen an eight million dollar home that you can rent for twenty thousand dollars per month. Just to give you an idea, the cost of ownership for an eight million dollar home, including property taxes, mortgage, insurance, and everything else, is close to forty thousand dollars per month.

That means rent is fifty percent cheaper than owning, and you don't have to tie up a twenty percent down payment! You're also not tied down to that home in the event you want to pick up and leave after a year or two. This is often why you see people like Tai Lopez or Grant Cardone renting their home instead of buying it; it's a lot cheaper for them to spend twenty thousand dollars per month and then pick up and go whenever they want and deploy their money in other businesses than it is for them to be tied down in a home, tie up the down payment, have a higher monthly payment, and for cash flow purposes, it just works out a lot cheaper to rent instead of buy.

But generally speaking, for those that plan to live in their home for more than seven years, almost always buying is the better, cheaper route to take. When you go and buy a property, you really just lock in the monthly cost of owning that home. You're not gonna have any rent increases, you're not gonna have any crazy landlords out there, you're gonna have total control over your property, and thirty years from now you’re gonna own it outright.

You also get all the tax advantages of owning real estate, and you can build up equity in an appreciating asset. However, when you buy, you're really tying yourself down to that property. You're tying up your money, and if you need to sell after a year or two, you're really at the mercy of the market, where you might sell at a loss unless the home price goes up higher than your closing costs and what you're into it.

The long term owning a property tends to be a lot cheaper just the longer you live there. So like I said, determining which one is cheaper really depends on quite a few variables. If you intend to only be there a few years and you want to move on to something else, generally speaking, renting is going to be cheaper.

If you have a better use for your money—let’s say in a business or something that generates you a higher return than about twelve percent—then also renting tends to be cheaper. But if you intend to buy something and stay there a long time, owning tends to be a lot cheaper. Or, if you're in a market that's rapidly appreciating, or in a big city where prices are just continually going up, also buying tends to be a lot cheaper.

So it really depends on your individual situation to determine which is the best for you. Again, my preference with all of this considered is really to buy something that needs work, fix it up, add equity to it, live in it for a few years, then move on to something else, rent out the first home, and do the same thing with the next home, and then you build up a whole bunch of rental properties. That is my number one piece of advice, that's my biggest recommendation, and that's what I do as well.

It's great for building cash flow, it's great for building equity, and all that sort of good stuff. But if you have a better use for that money, if you have a business, or don't want to tie up the money in a property, again sometimes renting is actually the cheaper route to take.

So, as always you guys, thank you so much for watching! I really appreciate it. I hope this was helpful, and I hope I didn't confuse too many people with all the numbers. If you're confused, just comment below and I'll do my best to answer as many confusing questions as possible.

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