Renting vs Buying a Home: What NOBODY Is Telling You

What's up you guys? It's Graham here. So the other day, one of my posts on LinkedIn went somewhat viral on Reddit where I said if you were to buy a million-dollar home, you would have to put $200,000 down, take on a mortgage of $5,600 a month, pay another thousand a month in property taxes, insurance, and maintenance for a grand total of $6,600 a month. Or, you could just rent an identical home for $3,900.

I honestly had no idea how controversial saying something like this would be, so I reposted it on Instagram and I got a very similar response. Like, you didn't consider rent inflation over time but you'll get a house at the end. Well, you'll get nothing renting. A million-dollar house appreciates $30,000 a year on average! No way could you rent a million-dollar house for that little. Come on, dude!

So today, I'm going to defend myself and show you with proof that renting in today's market could objectively be more profitable than buying a house. Because yes, you can indeed rent a $1 million house for $3,900 a month. The disparity between buying and renting has never been higher than it is right now. And maybe if you hear me out, you'll actually agree with what I have to say because there's a lot of misinformation floating around on the internet.

Although before we start, as usual, if you appreciate information like this, all I ask in return is that you hit the like button or subscribe because it helps the channel tremendously. And as a thank you for doing that, I'll do my best to respond to as many of your comments as possible. So thank you guys so much and also a big thank you to Magic Mind for sponsoring today's video, but more on that later.

All right, so first of all, let me preface this by saying that I understand why this concept makes some people upset. The average mortgage payment has nearly doubled in the last four years. Housing affordability is near its lowest level ever in history, and the average income needed to afford the median-priced home is now $114,000 a year.

After all, imagine paying $2,000 a month in rent with nothing to show for it while your landlord gets to enjoy all the benefits of something that should be a basic human right: shelter. But at today's levels, if you dig deeper, you'll begin to realize that at today's prices, buying makes a lot less sense than it used to.

To break that down, just consider this: overall, I found that there's this general belief that renting is always throwing away money and buying a house is always a good investment. Even though there certainly can be truth to the statements, it's not the entire picture.

So to give you a deeper understanding of exactly what's involved, let's begin with buying a house. On the surface, most people just take a look at the basic cost of a mortgage, compare it with the cost of renting, and then they think to themselves, owning is better because for a little bit more money, I'll get to call it mine. My cost is fixed, and after 30 years, I'll get to own it outright.

But as you're about to see, that's not entirely accurate. That's because first, you're going to have to consider your down payment. Now, even though some companies like Rocket Mortgage and Zillow offer 1% down payment options, in most cases, lenders require that you put down anywhere between 10 to 20% of the purchase price to get approved for the loan, which could often amount to tens of thousands or hundreds of thousands of dollars. That's completely inaccessible until you sell.

Second, you also have to consider the mortgage interest rate. This is going to be your cost of borrowing money, and unfortunately for buyers, that cost is the highest it's been in more than 25 years at just over 7%. This means that each and every year, 7% of your loan balance just goes poof straight into the abyss of monetary policy, and that adds up.

To make matters worse, third, if you put down less than 20% on a property, you're also probably going to have to pay for PMI. This stands for private mortgage insurance, and it's an extra cost on top of your interest rate that you pay to the lender to protect them in the event you stop making your payments. This cost varies, but it usually ranges anywhere between a half a percent to 2% of your mortgage balance each and every year.

From there though, fourth, you can't forget about property taxes. The thing is, with this, even if your property is completely paid off, property taxes are unavoidable, and it's usually based on your home's assessed value, reappraised each and every year. In terms of how much this adds up to, it usually ranges anywhere between 3% if you're in Hawaii to as high as 2.5% if you're in New Jersey, which again usually amounts to several thousand dollars a year, and it typically gets more expensive over time.

After that, if you thought we were done, nope! If you have a mortgage, they also require that you have insurance. In this case, the amount that you pay is based on your home's replacement value, likelihood of a claim, and your home's location. According to Bankrate, the average homeowner pays $1,428 a year for a $250,000 home. But when 66% of homes are said to be underinsured, expect that you'll pay more like $2,200 a year for the proper policy.

And just like property taxes, these amounts are also going up over time. Lastly though, there's also repairs and maintenance. That's because nearly everything in your property has a lifespan. For example, roofs need to be replaced every 20 years, usually to the tune of $12,000 to $15,000. Your water heater needs to be replaced every 10 years, and that's $2,000. Tiles will break, faucets will leak, and over the long term, it's generally recommended that you budget about 1% of your property value each and every year to just things that come up that will need to be fixed.

So with all of that information out of the way, here's how much it's actually going to cost you to buy the average home in America and whether or not you're secretly getting ripped off. To start, let's take the example of buying a $400,000 home. Because at 10% down, you would be out of pocket $40,000. You would then be receiving a loan for $360,000, which at a 7% interest rate brings your monthly payments to $2,400 a month. If you pay PMI, by the way, that would be an extra $150 a month on the low end.

From there, you're going to have property taxes at an average of 1.15% a year or $383 a month. Insurance is probably going to cost you about $200 a month, and if we assume you spend about 1% of the property's value each and every year in repairs and maintenance, that's an additional $330 a month.

This brings your total out-of-pocket cost to own the average home here in the United States at $3,463 a month, with $40,000 down. Finally, if you'd like to take this a step further, that $40,000 down payment could be earning a 5% return in a high-yield savings account, meaning you'd be missing out on an extra $166 a month in income, bringing your total out-of-pocket cost to own a $400,000 home to $3,629 a month.

In a location like Nashville, that means you could buy a place like this or this or this, or you could just rent a similar home for $2,100 a month, which is $1,500 a month less, without tying up $40,000 as a down payment and without locking yourself into a property that costs you 5% to 6% to sell. Now, I get it, I'm sure it's around this point of the video that somebody's going to say, "But GR, you're an idiot because with renting, you're making your landlord rich and you're left with nothing." But if you buy it, you're going to own the home after 30 years and then you pay nothing.

And sure, that is true, but remember, in the first year of paying down your mortgage, you'll have only gained about $3,656 in principal or $34 a month, which is way less than you would have saved just by renting. In fact, you really don't start to see any mortgage savings over renting until about year 20, at which point it starts to become a break-even.

Like, just consider this. Option one is that you could buy a house for $3,643 a month, tie up $40,000 as a down payment and slowly pay off the mortgage over time, or option two is that you could rent a house for $2,100 a month, invest $40,000 in the market, and continue saving and investing $1,500 a month from the money that you're saving by renting.

At that point, assuming you'd be able to generate a 7% return in the stock market over 15 years, that savings would have amounted to over $600,000 in cash, which would likely be enough to buy a home outright in cash when you're done renting. On the other hand, if you purchased a property during that time, even though you're paying down the mortgage, your mortgage balance after 15 years is still $256,000 on an original $360,000 loan, meaning over 15 years your savings is only $104,000.

However, I get it, it's also easier said than done, so let's bring up some other comments that bring up some really good points, like this one: "You didn't consider rent inflation over time." Although before we go into that, all of this really goes to show just how important it is to stay focused and take in as much information as possible.

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And now with that said, let's get back to the topic at hand: rents. All right, so in terms of rent inflation, admittedly this one is very true. It's no surprise rents do go up over time. After all, it's impossible not to see headlines like "LA apartment rents hit record highs", "Rents back at record highs with more increases expected," and "Rents are rising faster than wages across the country."

However, even though this makes it seem like rent increases are absolutely out of control, once you dig deeper, the reality is that across the United States, it was found that less than 50% of all landlords raised rents by more than 3%, with the other half raising rents by less or even nothing. In fact, when you really dive into the data, one analysis explains that most of these headline rent increases we see are simply from tenant turnover, not increases on existing tenants. And most of the rent increases we do see were landlords wanting to have rental rates closer to the current market value.

Now that of course doesn't mean that landlords aren't raising rents at all, because they found that 75% of landlords intend to raise rent at least something. But they also point out that smaller landlords are less likely to raise rents during the renewal period, since a vacancy would have a large financial impact on them than an institution where rent is spread throughout hundreds or thousands of units.

This means overall, if you're a tenant who stays in the same place, your rent is unlikely to be increasing by more than 3%, and over the last year, rent growth actually went down by 8% nationally as more homeowners just chose to become landlords in an effort to keep their low interest rate mortgage. That of course doesn't mean that you're never going to see a massive rent increase, or that a landlord can't increase your rent 50% one year because they feel like it.

But even if we do assume the long-term national average of a 3% rent increase every single year, renting is still found to be $289,000 cheaper over 15 years than buying, assuming that you invest the difference. But you know what? We're still not done yet, because it's time to address this comment: "A million dollar home appreciates $330,000 a year on average!" This comes from the belief that homes generally appreciate by 3% a year, so how true is that?

Well, when it comes to home appreciation, the fact is, there are a lot of variables to consider, like your home location, condition, desirability, interest rates, and inflation, which all play a significant role in determining how much your home actually goes up in price. For example, even though home prices usually go up each and every year, most of that is the result of inflation, and once you adjust for this, you'll be able to see that home prices stayed relatively flat for nearly a hundred years and didn't meaningfully start to rise until 2001 when interest rates began to decline and affordability improved.

This means, according to the K. Schiller index, home prices increased by 3.4% annually from 1987 to 2009 during a time when inflation averaged 2.9%, suggesting that home prices actually only increased half a percent a year when adjusted for inflation. But of course, to be fair, much of this really depends on when you start tracking the data.

Like, if you start looking at this from 2013, we could see that more recently, home prices have outpaced inflation by 2.4 times, even though low interest rates and a lack of inventory is said to be the main culprit of this. Now rents, on the other hand, have been shown to generally keep pace with inflation over time. Since 1960, nationally, they've simply balanced out.

However, here's where things get interesting. Even though housing values have gone up 250% since 1990, the S&P 500 has gone up 2,818% during that same period with dividends reinvested. So if you have to choose between a lump-sum purchase in a house or the S&P 500 as an investment, the stock market is a clear winner.

Although I will say, as a realistic guy myself, I understand it's not as easy as a calculation as just that since you're going to have to live somewhere and that's going to cost you money, so that has to be considered. On top of that, with a house, in most cases, you're not buying it outright in cash. Instead, you're putting in a small down payment and then leveraging your money for the rest while you get to reap the benefits of owning the entire thing.

Because of that, one could certainly make the argument that a low down payment on a leveraged home would provide similar returns to that of the stock market, and you have the stability of being able to live there long-term. But does that still ring true at today's prices? Well, to answer that, let's talk about renting. Fortunately, this one is fairly easy to calculate. The price you pay is the price you pay, that's it. There's no hidden cost of maintenance, rising property tax values, higher insurance costs, or repairs. It's just a fixed cost every single month, then you could come and go as you please.

So given how simple this calculation is, that then backs the question: Can you rent a $400,000 house for less than it would cost to own $3,629 a month? Well, according to this chart here, the answer is yes! At today's prices, renting is now cheaper than buying in all major 50 U.S. cities.

To show you some real examples, just take a look at this. Here's an 1115 ft² home in Las Vegas asking $400,000, or you could rent a much bigger home nearby for $1,995 a month. Here's a 900 ft² home in Nashville, Tennessee for $390,000, or a home double the size just blocks away for $2,000 a month. And here's my favorite: a $1.1 million home in San Francisco, where you could just rent something similar nearby that's bigger for $3,350 a month.

These aren't just cherry-picked examples either. Take a look for yourself across the country, and then compare those homes with similar homes nearby for rent, and I think you'll be surprised that renting a home today is significantly cheaper than buying it.

And that makes me wonder, in what situations does buying a home financially make any sense right now? And what do I say to the comments that you basically lose the rent money, with a mortgage you at least pay some of the loan back in interest? Well, here's the issue: The average American stays in their house for only 13 years before moving, and this means we need to compare that time frame with that of renting to determine which actually comes out ahead.

In this case, assuming the same $400,000 home after 13 years of making mortgage payments, your mortgage balance would be reduced to $276,000 at a 1% net appreciation a year, which takes into account rising property tax values and higher insurance costs. That means the home would eventually be worth $450,000. This means after 6% commissions and closing costs, you're left with $423,000, of which $276,000 is the mortgage, leaving you with $147,000 left over as profit.

However, since you're required to continue making those average mortgage payments of $2,400 a month, plus property taxes, plus insurance over 13 years, that equates to $465,000, leaving you with a net cost of $318,000, or $2,038 a month on average to say you own the house. And we are making some general assumptions that the real estate market is going to be going up over the next decade and that you don't have any unforeseen repairs or maintenance. But that also means that unless you plan to keep your home for at least 10 to 15 years, at today's prices, renting is the cheaper option.

Although just like our last examples, it still doesn't end quite there. Unfortunately, buying a home is not a black-and-white decision since there are so many variables outside of our control, like interest rates, insurance rates, cost of building, property tax increases, rent increases, and inventory. But across a wide spectrum, here's been my experience and when renting is better.

First, if you don't intend to stay in your home for at least 10 to 13 years, rents tend to be cheaper. That's because you're not going to have to come out of pocket for closing costs, escrow charges, title fees, and commissions that quickly begin to add up. You're not going to have to pay a 7% interest rate on your mortgage balance, and you're not going to have to lock yourself into a single property.

Second, renting is also better if you could earn a higher return from your down payment. For example, if you're running a business, tying up $40,000 results in substantially less income — that's a case against buying. We're also at a tipping point where 7% mortgages are about on par with what you'd expect to earn in the stock market, so if you could get higher returns somewhere else, your money might be better suited outside of the home.

Third, this one might sound self-explanatory, but renting a house is a lot better if you believe the market's going to be going down or staying flat. As of now, housing prices have completely defied the odds and kept going higher despite rising mortgage rates, but that doesn't mean this will continue to be the case over the next decade.

Fourth, renting could also be better because you have very little responsibility and very little upfront cost. Like, outside of fixing anything that you directly damage, a landlord's going to be the one who's responsible for all repairs, maintenance, higher property tax bills, higher insurance costs, and anything else. You're just responsible for your monthly rent, and that's it.

And finally, fifth, renting could also be better if you value flexibility. The fact is, with renting, you could up and leave as soon as your agreement's over. You could pick any place that you want to live, and changing houses is very inexpensive. Plus, when there's a lot of rental competition in the market like there is right now, you have way more leverage than you think to offer a lot less and potentially score a really good deal.

But if you're in the "buying a home is better" category, I will admit long-term, over the next 20 to 30 years, buying is still the better option. Even though the future of the housing market in the short term is fairly uncertain, over the long term, housing has proven to be a fairly resilient investment. So the longer you hold and wait, the higher the likelihood of coming out ahead.

The second by owning, you'll be able to lock in your monthly cost until the home is eventually paid off. Now, even though property taxes, insurance, and maintenance could vary wildly and they tend to only get more expensive, your fixed costs will remain the exact same throughout your entire ownership, so at the very least, that won't change.

And third, anytime you buy a house, there's a psychological benefit of just being able to say it's yours. This one is a bit harder to quantify, but there is some sense of freedom that comes along with saying you own something, having it be yours, having total control over it, and not being at the beck and call of a landlord.

Look, to be honest, as someone who's worked full-time in real estate since 2008 and who owns multiple properties, there is something to be said about the fact that a mortgage forces you to save every single month through making the payments. For many people, extra money is spent, not saved. And in those circumstances, buying a property is going to be the only way they'll build meaningful equity in something.

On the other hand though, if you're purely looking at the numbers, the stock market has provided a higher return. It's more diversified than plowing your entire net worth into a single property, and it gives you the ultimate liquidity in the event that you need it.

In the past, I'll admit buying made a lot of sense. Inventory was plentiful, interest rates were low, and it was really easy to find a good deal. But today, with such a massive disparity between buying and renting, I struggle to find anything that makes any financial sense to purchase unless you're looking for a primary residence that you intend to keep for a very long time.

Even on the ownership side, I'm very much a numbers guy, and I'm shocked at how much my own expenses have gone up over these last few years. For example, my mortgage is probably the only monthly payment that's not gone up in price. Everything else on the other hand has, like property taxes — I'm paying 15% more. Insurance — I'm paying 25% more. And labor, repairs, and maintenance — I'm paying 50% more across the board.

Now sure, rents have also somewhat gone up, but when I look at the numbers and I compare a house to rent versus a house to buy, if I were to move anywhere in the next few years, I would probably just end up renting it. It would save a lot of money.

The issue I see today is that you have a lot of homeowners out there with very low monthly payments because they happen to lock in a very low interest rate mortgage. Those homeowners could easily afford to rent their properties out at a discount because even if they break even, that is better than giving up a low interest rate mortgage by selling it.

That's why, in my original post, this hypothetical owner would only lose $2,700 a month if they bought it at today's prices. But if they've already owned it for a few years, they're probably still making out with a pretty decent profit.

That's why I don't want this video to be taken the wrong way, because under the right circumstances, buying still has a lot of advantages and it makes sense. But unless you're certain that you want to be tied down to a specific property for a minimum of 10 to 15 years, renting has a lot of advantages and saving money there and investing the difference could have a better financial outcome.

A great way to calculate this is with the New York Times buy versus rent calculator, which used to be free. Now they're charging for it, so I went and paid for it just so I could use this as an example. But consider this: Let's say you're looking to buy a $550,000 house that would cost you $2,500 a month to rent. If you plan to stay there for 13 years with a 7.25% mortgage, a 10% down payment, 3% home appreciation, 5% rent growth, 8% investment returns, and a 3% inflation rate, renting ends up saving you $159,000 over that time frame.

Believe it or not, in this circumstance, buying doesn't even begin to break even until year 29, and it isn't until year 37 that you see any substantial savings. On the other hand, if interest rates were 3.5%, buying starts to save you a substantial amount of money as early as 8 years, which is a massive difference.

This is why buying today is a completely different calculation than you had to look into a few years ago. Now, obviously, there's a lot of variables that could change in the future, and there are aspects of buying a home that aren't purely financial. But from a numbers standpoint, it's more important than ever today to consider why you're buying, how long you're going to live there, what the cost of rent is, and if you could invest the difference.

Because as you just saw, there's a lot more to the equation than just means to die. So with that said, thank you so much. As always, feel free to hit the like button, subscribe, and until next time!