
Renting vs. buying a home - dctoedt
https://www.khanacademy.org/economics-finance-domain/core-finance/housing/renting-v-buying/v/renting-vs--buying-a-home?utm_source=Sailthru&utm_medium=email&utm_term=Stuff%20you%20might%20like%20After%20Test%20Cohort%20Made&utm_campaign=Highlighted%20Content%204%20120413%20RentOrBuy&utm_content=Final
======
nlh
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."

~~~
3pt14159
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.

------
jnardiello
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.

~~~
tlogan
If you are buying house because it is great investment then DO NOT BUY HOUSE.
You should buy house because you need to place to live and you want to settle
down in certain area (grow roots...).

The first thing that people like me need to understand is that we are _not_
professional investors.

Normal people need to buy house on the following factors: is it affordable?
what is chance of you or your significant other moving to different area? do
you like location? do you expect to live there for next 30 years? are schools
good? etc. The excel spreadsheet comparing costs of owning vs. renting should
be also there as one of factors, but spreadsheet showing how you are going to
be rich by "owning" the house should be ignored.

~~~
espinchi
Why not buy a house as an investment?

Even if you're not a professional investor, you can consider having a fraction
of your savings on risky investments, such as stocks and real estate. I'm not
saying it's easy, not saying it's for everyone, but I'm curious to know why
you think a house is not a good investment.

------
tibbon
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.

~~~
ig1
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-...](http://us.spindices.com/indices/real-estate/sp-case-
shiller-20-city-composite-home-price-index)

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
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
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
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.

~~~
ig1
There's no such thing as a "safe bet". If housing was a safe bet then
significant amounts on money would feed into the housing money until it
stopped being a safe bet. That's just basic market efficiency theory.

Most mortgages are typically 30+ years, based on historic data you're almost
guaranteed to see a house price crash sometime over a 30 year period.

(Although it's important to remember that the future isn't necessarily going
to reflect the past)

~~~
clavalle
You are not understanding.

I am not saying it is a safe /investment/ I am saying it is a safe(ish) /value
store/. There is a big difference.

Your comment is the equivalent of saying "Saving accounts are not a safe bet.
If it were everyone would be putting money into savings accounts until it
stopped being a safe bet."

You have to pay so much to have a roof over your head whether it is through
rent or through ownership. Even if a house is a loser, investment wise, it can
be a winner value-store wise.

Now, you can totally mess that up by buying a home at the peak of a bubble and
watch it tumble to near worthlessness, no doubt. But that is not the situation
99.999% of potential homeowners face.

~~~
skorgu
It's safe-ish /as long as you continue to live there/. If you ever need to
move for whatever reason you're back to the mercies of whatever market cycle
happens to be in force.

~~~
clavalle
That's true. And the real risk in buying a primary residence is in churn costs
which are relatively huge and take years to make up.

------
ljoshua
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-
calcula...](http://www.nytimes.com/interactive/business/buy-rent-
calculator.html)

~~~
nahname
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.

~~~
VLM
"Who is paying 2.6% of their property value each year on those things?"

Nationwide the figure of a couple grand per acre is remarkably constant.
Although property costs may vary two orders of magnitude or more, a
firefighter gets paid "about" the same everywhere, ditto a new police car
costs about constant, etc. So I would guess someone living where an acre costs
about $200K would pay about 2.6%.

I would imagine in Detroit you could buy 50 houses for $100K but have to pay
$100K/yr prop tax on them if the surface area adds up to enough acres.

The only utility bill I paid in my apartment was electric and it averaged
about $10 over the course of a year. In a house you'll find its another order
of magnitude plus of course all the other utilities.

~~~
maxerickson
In Michigan property taxes are on the assessed value of the house and property
(the assessed value is not necessarily reset to the transaction price of a
sale).

In general, acreage is cheap. The millions of small lots with $X00,000 houses
on them tend to make up for all the acres with nothing on them.

------
msmith
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)

------
Mister_Snuggles
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-
calcula...](http://www.nytimes.com/interactive/business/buy-rent-
calculator.html)). 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
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
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
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.

------
lsiunsuex
As a renter, you can't do cool stuff like this

[http://diy.blogoverflow.com/2012/08/building-a-brick-
pizza-o...](http://diy.blogoverflow.com/2012/08/building-a-brick-pizza-oven-
into-an-existing-space/)

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

------
dmtroyer
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
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
And early on while you are paying lots of loan interest it can lower your
taxes significantly.

------
waitwhat123
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!

------
hillarystark
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)

------
sitharus
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.

------
methodin
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.

------
victorhooi
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-c...](http://www.smh.com.au/business/property/australian-capital-city-
house-prices-rise-10-in-2013-20140102-306tk.html)
[http://smh.domain.com.au/real-estate-news/boom-time-
sydney-h...](http://smh.domain.com.au/real-estate-news/boom-time-sydney-house-
prices-set-to-rise-strongly-20130917-2txbh.html)

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?

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

~~~
Cthulhu_
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.

------
mempko
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
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
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
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.

------
brianmcconnell
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.

------
bane
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-
calcula...](http://www.nytimes.com/interactive/business/buy-rent-
calculator.html) 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.

~~~
hhw
Except your example conveniently leaves out:

1) Property Taxes Between 0.18% to 1.89% in the US. Let's assume the mean of
the two for 1.035%. In the first year, that would be a payment of $5,175. Over
30 years, using the same 3% inflation to calculate the future value of an
annuity, that works out to $246,202.78

2) Opportunity cost of down payment. Assuming a 20% down payment of $100,000,
the future value of that money would work out to $100,000 x 1.03^30 =
$242,726.25, or a gain of $142,726.25

Note that this is already quite a conservative return. A well-balanced
portfolio over the last 10 years, even taking into account the disaster of
2008, would have easily exceeded 6%.

3) Maintenance/Upkeep At $2,000/yr and 3% inflation, the future value of the
annuity would work out to $95,150.83

So, the cost of owning in your example is actually: $783,370 + $246,202.78 +
$95,150.83 = $1,124,723.61

and the cost of renting is: $1,141,809.977 - $142,726.25 = $999,083.727

~~~
pudquick
... And in the end, for that trivial difference of $125,000 over 30 years
($350 a month) - you get to _stop making mortgage payments on the house_. And
you can sell your investment in the house at any point during or after those
30 years.

You _never_ stop making rental payments.

Worth it.

~~~
hhw
See my follow-up comment, the difference is actually $1,635,215.78 -
$999,083.727 = $636,132.053

Depending on the residual value of the building and the land value in 30
years, that may or may not be worth it. My point was just that the example was
highly biased, not whether it's better to rent or to buy.

Note also that if you sell, you will have to pay realtor commissions and a
capital gains tax on the nominal value.

~~~
bane
Can you provide any examples of homes that aren't worth at least the original
purchase price in absolute dollars 30 years later? Most of the homes, at least
in my area, that are 30 years old are worth _multiples_ of the original price
in absolute terms. In fact, my first home was about 40 years old when I
purchased it and even after the housing crash was worth about 15x what the
original owner payed in absolute dollar terms.

~~~
hhw
Many homes can end up being teardowns after 30 years. That means that not only
is the house itself worth nothing, but there'd be significant expenses to
demolish it as well, effectively making the value negative. So it's possible
to just end up with land value less demolition costs. How much of the current
value is based on building and how much is based on land, depends on the
property. There's also many circumstances where a house can be sold below
'market' value or forced to sell under poor market conditions such as divorce,
death etc. Many people greatly overestimate the liquidity of housing. The
paper value of a house is meaningless until it's actually sold for that
amount.

15x what the original owner paid in nominal dollars doesn't give nearly enough
context as to the real return. How many and which years was that over? What
was the rate of inflation over this period? How did the Dow, S&P, or <insert
stock market index here> do over that same period? And that's kind of beside
the point.

Like I said earlier, I'm not arguing in favour of either owning or renting.
I'm just making the same point as the submission, and that is to use full,
accurate numbers to make informed decisions. If more people did (and everyone
should), we probably wouldn't have such extreme bubbles and crashes.

------
mikekij
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
>\- 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.

------
switch007
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
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
the mortgage payment would be at least £200 less each month because of my
large deposit. interesting stats though, thanks.

------
laichzeit0
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.

------
joeblau
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.

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

~~~
e40
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.

------
systematical
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
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.

------
phunge
Shameless plug:
[http://www.trulia.com/rent_vs_buy/](http://www.trulia.com/rent_vs_buy/)

------
jaxbot
Warning flag to anyone who watches this for curiosity: the formula for
interest is most certainly _not_ (principle * ROI)

------
QuantumGood
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).

------
jbrooksuk
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.

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

------
alexeisadeski3
Best Buy vs Rent calculator out there.

[http://www.nytimes.com/interactive/business/buy-rent-
calcula...](http://www.nytimes.com/interactive/business/buy-rent-
calculator.html?_r=1&)

------
orenbarzilai
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
> _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
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
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.

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

~~~
jrs235
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)

------
spiritplumber
I bought a home in 2009. Ha ha ha.

------
michaelochurch
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.

