Buying vs Renting the home you live in? Please explain why
Trinity, FL · Member since 2016 · 209 posts · 57 votes
Hello All,
I am trying to make sense of something that keeps being brought up on numerous investment media I have listened to or watched on youtube, but I just don't understand the reason behind it that makes it better. Last night I was watching one of the latest youtube videos from Morris Investing on FIRE movement and he brought up in the live stream that it's stupid to own the place you live in, that it makes more financial sense to buy rentals and rent the place you live.
Can someone explain the math or reasoning behind this please.
Hey - first of all - don't buy anything from Morris Invest. Look him up here in the forums and you will find out why.
There's a lot of math that goes into whether you should buy your home or not. What this is probably referring to is the RTV (rent to value). It all really comes down to opportunity costs and if you could do better investing your money out of market vs in your own home. You really have to do the math on your own individual market.
For me for instance, I live in the Bay Area where I could buy a home for $1M+ with a $5k+/month mortgage, or I could rent that same home for $4k/month. The opportunity cost is that gap in how much I'm spending on a monthly basis to buy my home (in addition to the down payment). I could get a significantly better return if I were to invest that money outside of the Bay Area and continue to rent here.
The other factors involved are how mobile you want to be. Is there any chance you want to move? Do you want to potentially be forced to incur a 5-6% agent fee when you do?
Just some things to think about.
Hey - first of all - don't buy anything from Morris Invest. Look him up here in the forums and you will find out why.
There's a lot of math that goes into whether you should buy your home or not. What this is probably referring to is the RTV (rent to value). It all really comes down to opportunity costs and if you could do better investing your money out of market vs in your own home. You really have to do the math on your own individual market.
For me for instance, I live in the Bay Area where I could buy a home for $1M+ with a $5k+/month mortgage, or I could rent that same home for $4k/month. The opportunity cost is that gap in how much I'm spending on a monthly basis to buy my home (in addition to the down payment). I could get a significantly better return if I were to invest that money outside of the Bay Area and continue to rent here.
The other factors involved are how mobile you want to be. Is there any chance you want to move? Do you want to potentially be forced to incur a 5-6% agent fee when you do?
Just some things to think about.
So if I am understanding you then in my market it would benefit to buy over rent based on these numbers...
If I go on the MLS and search for THE CHEAPEST 3/2/2 to rent I get the following:
$1625
$1675
$1700
If I go on the MLS and search for THE CHEAPEST 3/2/2 to buy within that same 5 mile range i get the following:
$199,000, FHA 3.5% down, roughly $1267 for the mortgage, insurance, and taxes.
$214,000, FHA 3.5% down, roughly $1437 for the mortgage, insurance, and taxes.
$225,000, FHA 3.5% down, roughly $1469 for the mortgage, insurance, and taxes.
Am I understanding this correctly? so the opportunity difference would be roughly $350 saved each month.
@William Huston Nick gave a good response. Your interpretation is correct assuming you will be owning the house for a while. If you are going to be moving in a year or two, you might find they are similar due to financing and costs associated with buying and selling. If you don't know if you will be there for a while, you can also look at renting the house once you move. If you do that, there are other factors to look at when purchasing a home.
So if I am understanding you then in my market it would benefit to buy over rent based on these numbers...
If I go on the MLS and search for THE CHEAPEST 3/2/2 to rent I get the following:
$1625
$1675
$1700
If I go on the MLS and search for THE CHEAPEST 3/2/2 to buy within that same 5 mile range i get the following:
$199,000, FHA 3.5% down, roughly $1267 for the mortgage, insurance, and taxes.
$214,000, FHA 3.5% down, roughly $1437 for the mortgage, insurance, and taxes.
$225,000, FHA 3.5% down, roughly $1469 for the mortgage, insurance, and taxes.
Am I understanding this correctly? so the opportunity difference would be roughly $350 saved each month.
If your goal is numbers (savings) then it "makes sense" to rent.
If your need is "emotional" then you buy.
When you buy a home to you live in, you replace the roof, you replace the water heater, you replace the AC Unit, you pay the plumber for repairs, you pay the electrician for repairs, and on and on. When you rent the owner takes care of all of those.
But, when you own you can also paint the kids bedroom any color you want. You don't have to worry about the landlord selling the house out from under you when the market is hot or his circumstances change and he needs to sell.
Americans used to change residences every 7 years on average, that has dropped to every 5 years. When you rent you can move without having to sell saving realtor fess of 6% and another 2% ($12,000 - $18,000) in closing costs. When you rent if the neighborhood declines you can easily just move. If you live in a house you own in a declining neighborhood, it is more difficult and more expensive to move when the time comes. People move for lots of reasons, job loss, divorce, health issues, family needs them "back home", job transfer, etc.
It's more a matter of preference and lifestyle, not just numbers for most people.
Owning a home is a lot like going to college. Everybody says you have to do those two things to achieve the American dream, but that ain't necessarily the best use of your money, time, talents, resources and goals.
@William Huston I hear this debated all the time and think a LOT of people make the mistake of assuming it is always better to own than to rent. The previous poster explained it well - you have to do the math yourself...if it is cheaper to rent than to own and you don't want to be tied down to one location, then rent. If the cost of your mortgage and expenses is less than the cost it would be to rent in the same target area, then it makes sense to own.
When evaluating whether to buy or rent, I also look at exit strategies...so in addition to PITI being less than the cost to rent something similar, I'd only buy if I know I could become a landlord if needed and rent the place out cash flow positive if I decide to move.