Renting vs Buying A Home: Which Is ACTUALLY Cheaper?

What's up you guys? It's Graham here. So, you really got to see this. Today, it takes more income to buy a home than at any other point in history. Mortgage demand has also fallen to a 27-year low, and the housing shortage is continually getting worse. So, that begs the question: with today's prices, is it cheaper to buy or rent? And which option is going to save you the most amount of money long term?

Well, to answer that, we're going into the trenches and looking up the true cost of ownership throughout each option across the United States. I promise by the end of the video, you're going to be completely surprised by the results because it goes against almost everything you've probably ever heard.

Although before we start, if you find these videos helpful, all I ask in return is that you hit the like button or subscribe. That's it! It helps with the channel tremendously. And as a thank you for doing that, I will do my best to respond to as many of your comments as possible, so thank you guys so much. Also, big thank you to Experian for sponsoring today’s video, but more on that later.

All right, so as a bit of a background, there's a general mindset that renting is throwing away money, while buying a home is always a good investment. Even though there can be some truth to those statements, it's not the entire picture. So, to give you a better idea of exactly what's involved, let's start with owning a home.

I think most people on the surface just compare the basic cost of a mortgage and compare it with that of renting, and immediately think that's it. Owning a home is just a little bit more expensive, and therefore renting is bad. But as you're about to see, that's not entirely accurate.

See, when you buy a home, you're first going to have to consider your down payment. Now, even though some companies like Rocket Mortgage or Zillow offer options with payments as low as 1% down, in most situations, lenders require a deposit anywhere between 10 to 20% of the purchase price to get the loan, which usually amounts to tens of thousands of dollars.

Second, you also have to consider your mortgage interest rate. This is going to be your cost of borrowing money, and today that cost is going to be the highest it's been in more than 20 years at just over 7%. This means every year, 7% of your mortgage balance is being eaten away into the abyss of monetary policy, and it adds up.

As you're about to see, that's because third, if you put less than 20% down on a property, in a lot of cases, you're also going to be responsible for PMI. This stands for private mortgage insurance, and it's an extra cost that you pay on top of your mortgage to protect the lender in the event you stop making your payments. The cost of this varies depending on your lender, but it usually ranges anywhere between half a percent to 2% of your mortgage balance every single year.

From there, though, fourth, we also have property taxes. In terms of how much this adds up to, it could be as low as 0.3% of the home's value if you're in Hawaii, to as high as 2.2% if you're in New Jersey, which again usually adds another several thousand on top of your existing payments.

After that, though, if you thought we were done, nope, because you then have insurance. Home insurance like this is necessary in the event of an earthquake, fire, natural disaster, or flood. According to Bankrates, the average homeowner pays about $1,428 a year on a $250,000 home. But when it's found that 66% of homes are said to be underinsured, expect that you'll pay more like $2,200 a year for the proper coverage.

On top of that, you also have to consider repairs and maintenance. That's because almost everything in your home has a lifespan. For example, your roof will need to be replaced every 20 years at the cost of about $12,000. Water heaters need to be replaced every 10 years at $2,200. Tiles will break, garbage disposals will have to be replaced every month. That was a joke, but over the long term, it's recommended that you budget anywhere between 1 to 2% of your property's value each and every year for repairs that will eventually come up.

So, with all of that information, here's how much it'll actually cost you to own the average home here in the United States. Let's just take the example of buying a $400,000 home at 10% down. That means you'd be coming out of pocket $40,000. You'd then be receiving a loan for $360,000, which at a 7% interest rate brings your monthly payment to roughly $2,400 a month. If you pay PMI on that, you're then responsible for another $150 a month on top of that on the low end.

From there, you're also going to have property taxes, which at an average of 1.15% comes to an additional $383 a month. Insurance is also likely to run you another $200 a month, and if you spend another 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 for the average $400,000 home in the United States to $3,463 a month with $40,000 down. However, if you think it stops there, oh no, it's just the very beginning. That's because every month you make your mortgage payment, a portion of that payment pays down your loan balance, almost like a forced savings account.

In the first year, that amounts to a $3,656 savings or $34 a month. You're also able to deduct the mortgage interest that you pay against your income up to the first $750,000 of a loan. Although since doing this makes you choose between the standard deduction and the itemized deduction, the true net cost of savings is more like $2,500 a year, or more like $24 a month.

Finally, there's also the state and local tax deduction of $10,000, but since this also applies to income and only 30% of Americans even use it, we're just going to be excluding this from the numbers since it's not going to make a substantial difference anyway. That means at $3,463 a month, once you account for net tax savings and mortgage equity, you're left with a payment that's more like $2,955 a month, which seems a lot more reasonable.

Except we're still not done yet. Since you put $40,000 down, you also have to account for the opportunity cost of that money since you're tying up $40,000 in a property that otherwise could have been invested elsewhere. At an average of a 6% opportunity cost, that's $200 a month in investment income that you're foregoing for the sake of buying a property.

That means when all is said and done, the true cost of owning this home, when accounting for mortgage equity, tax savings, and opportunity cost, is $3,155 a month. Of course, you also have the more nuanced factors to consider, like long-term home appreciation, which tends to keep pace with inflation. But since everything else, like property taxes, insurance, labor, repairs, and maintenance, also tends to go up in price alongside with it, let's just assume a more reasonable number—that your home will go up in value on average net in your pocket by 1% each and every year, or for purposes of this calculation, $330 a month.

This means the real cost of owning a $400,000 home, out of pocket after expenses, after deductions, and after long-term appreciation, is likely going to be about $2,825 a month. However, this is where things get interesting. But before we go into which option is actually cheaper, let's talk about rent.

Fortunately, this one is fairly easy. The price you pay is the price you pay. There's really nothing fancy about it. So that then begs the question: can you rent a $400,000 home for less than $2,825 a month? Well, according to this chart here, the answer is yes. In fact, in all but four major U.S. cities, renting is the cheaper cost than buying.

To show you a few examples, just take a look at this: in Las Vegas, you have this home available for $400,000 to buy, or you could look at this one down the street, which is almost double the size for rent at $2,600 a month. Or how about in California? Here in Bakersfield, we have a 2,000-square-foot home asking $415,000, or a larger 2,200-square-foot home renting for $2,595. These aren't just cherry-picked examples either. Go ahead and take a look at $400,000 homes across the country and then look at comparable homes for rent less than $2,900 a month, and you'll be surprised.

In almost every city, the cost of renting is going to be substantially less than the cost of buying, and that leads me to wonder, in what scenario does buying a home even make financial sense right now? Although before we go into that, I think it's really important to mention that regardless of whether you decide to buy or rent, it is essential to build a good credit score. That's why one of the best ways that you could build your credit is with our sponsor, Experian.

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And now with that said, let's get back to the video. All right, so in terms of which option is actually cheaper, whether that be buying or renting—here's the kicker: the average American only stays in their home for 13 years before moving. That means we need to compare that timeline with the cost of renting to see which really comes out ahead in this case.

Assuming the same $400,000 home, after 13 years of making mortgage payments, your loan balance would be reduced to $276,000, and at 1% appreciation, your home value would be worth $450,000. This means you would be left with $423,000 after paying 6% in closing costs, of which $276,000 is your loan balance, and that leaves you with a cash back balance of $147,000. You could then subtract that amount by the 13 years that you're spending out of pocket $2,825 a month, and that leaves you with $298,000 left out of pocket.

To say that you own the home over 13 years, that also works out to be $1,910 a month. Now, of course, to come to that number, we are making some general assumptions that property values are going to be rising over the next decade and that you don't encounter any unforeseen repairs. But that also means renting is the cheaper option at today's prices if you don't intend to keep your home for longer than 10 years.

Although, just like our last example, things still don't end right there. Unfortunately, these examples aren't so black and white because there are so many variables that could occur that are outside of our control, like interest rates, insurance rates, property taxes, and inventory. But across a wide spectrum, here's been my experience of why renting is better.

First, if you don't tend to stay in your home for at least 7 years, then renting is cheaper. That's because you're not going to have to come out of pocket for closing costs, commission, escrow costs, title fees, and a whole bunch of miscellaneous expenses that quickly add up, which usually amount to about 6% of the purchase price. So, unless your home goes up in value a lot in a short period of time, it's unlikely that you're going to recoup those costs anytime soon.

Second, renting is also better if you could make a higher return from your down payment. For example, if you're running a business, tying up $40,000 would wind up making you significantly less money than that's a case against buying. Third, this might sound self-explanatory, but renting is also better if you believe the market's going to be going down or remaining entirely flat for the next decade.

As of now, housing prices have completely defied the odds and have continued going higher despite rising mortgage rates, but it's way too soon to say if that'll continue to be the case. Fourth, renting is also better because you have very little responsibility and very little upfront cost outside of paying for things that you directly damage. The landlord's responsible for paying all the increased property taxes, higher insurance rates, and anything else that goes wrong with the home. You, as the tenant, just pay one fixed price every single month, and you're done.

Finally, renting is better because you have flexibility. The thing is, with renting, you get up and leave as soon as your agreement is over. There are no commission costs of moving, and when there's a lot of competition on the market like there is right now, you have a lot of leverage as a tenant if you're offering a quick move-in with good references.

Of course, the downside of renting is that: number one, you're at the mercy of the landlord. This means if the landlord wants to abruptly raise your rent for no reason at all after the first year, an absurd amount—even if it's above market rate in most places—they can. Second, your rental cost is also not going to be locked in, and you're at the whims of the market. Even though that might work in your favor if prices go down, that's not guaranteed to happen, and prices could very well continue going higher, even outpacing that of home ownership.

Third, you also have no freedom to customize the home as you like. This means no painting walls crazy colors, no building your own patio deck, no redoing all the landscaping and adding sculptures to fit the aesthetic. Although, just like there are some negatives, we also have to talk about some of the positives when it comes to owning.

First, long-term owning still tends to be the better choice even though the market could certainly go down in the short term. Long-term housing prices have proven to be fairly resilient, and because of that, the longer you wait, the more likely it is that you're going to come out ahead.

Second, by owning a home, you're going to be locking in your monthly cost until the home is eventually paid off. Now, even though things like property taxes, insurance, and ongoing maintenance are going to get more expensive as time goes on, your fixed monthly costs are going to be the exact same.

Third, when you buy a home, there's just this psychological element of the home being yours. This one is kind of hard to explain, but there's a sense of freedom that comes along with owning your own home, being able to do whatever you want and not being at the beck and call of a landlord. If you want and value stability, owning a home is priceless.

But even though it's priceless, there is a bit of a cost. Like one, you'll be tying up a lot of money by making a down payment. What you're really doing is locking away money in a property that's completely illiquid, with no way to get it back without actually selling the property or doing a cash-out refinance.

Number two, your area is also not guaranteed to go up in value. Just look at some of the worst housing markets in the United States. In these 20 cities, home prices have underperformed the overall market by a lot, and there's a strong likelihood that your area may not see any appreciation at all over the next decade.

And three, you're going to be locked into your home for better or worse. Like, just consider that a 5% decline in property values would leave more than 200,000 households underwater on their mortgage. If that's the case, you would have to come out of pocket to bridge that difference between what you owe on the home and what you could actually get for it in the event that you want to sell.

This means if you want the “too long, didn't read” summary, this is all you need to know: If you intend on living in your home for less than 10 years, then renting is usually the cheaper option. If you want to manage your cash flow without coming out of pocket a significant amount of money, then renting is also usually the cheaper option. This also applies to the flexibility if you want to pick up and move on short notice.

However, if you plan on living in the same place for more than 10 years, then buying is usually better. If you want to remodel or upgrade your home, then buying is also better. And if you want to lock in your payments to invest in the area, then buying is better.

My personal preference with this is that if you're going to buy something, at least buy something that needs a little bit of work. Fix it up and use that equity as a bit of a buffer in the event you need to sell and you don't want to come out of pocket in the event property values didn't go up as much as you expected.

Obviously, every situation is different, and every area is going to have different numbers, but overall, this rule of thumb should hold true. And if you want more information on this, then I’m able to include in a YouTube video. Feel free to check out my newsletter down below in the description, and that'll include the New York Times rent versus buy calculator so that way you could plug in your own unique options and see which one is really better: renting or buying.

So, with that said, you guys, thank you so much for watching! As always, feel free to hit the like button, subscribe, and don't forget that you can get some free stocks with all the way up to a few thousand when you make any deposit using the paid affiliate link down below in the description. Let me know which free stocks you get! It takes you like 10 minutes to sign up; it's a pretty good ROI. Let me know on that. Thank you so much, and until next time!