The Great Debate! Which is a Better Financial Decision, Buying or Renting Your Primary Home?

Hi everybody! Matt Blocki and Jamison Smith with EWA. Today we are talking in detail about owning versus renting. This is one of the biggest financial decisions most people will make, and I think something that a lot of people just put too much time into, whereas a financial plan where you’re really going to create financial independence and true wealth is figuring out what your values are and then also how to accumulate financial independence.

So as soon as possible, you can work because you want to, not because you have to. So homeownership is definitely something that gets a lot of people in trouble because they overextend themselves and there’s a justification process behind it’s, an investment.

I’m building equity. It’s okay. In reality, renting most of the time is actually a better financial choice. I myself am a homeowner, and I realize through 10,000 meetings over the last decade, plus of helping clients navigate these decisions, that it’s best just to view this as a lifestyle decision, put guardrails around it and then move on and focus on other stuff.

So today we’re going to break this down in great detail. Jameson, who’s currently a renter, is going to go through the assumptions with renting and myself being an owner, but having actually rented most of my life, I’m going to go through the owning scenario as well.

So let’s go through some assumptions here. So we’re talking today about $500,000 purchase, a 6% interest rate. Unfortunately, in today’s interest rate environment, the average is actually above 7%. We’re going to use 6%.

And the same math actually works even if you’re looking at 3%. What it used to be a couple of years ago. We’re talking about a 30 year fixed 10,000 a year in taxes with no increases whatsoever. And then 3000 a year in an insurance cost for your homeowners insurance, again with no increase ever.

And then 12,000 a year in maintenance, again with no increases ever. A lot of times we’ve seen clients put in some years, 5100, 200,000 into their houses. We’re assuming only 12,000 a year of maintenance with no cost of living adjustments ever into the maintenance cost.

So we are also assuming $100,000 down payment that goes into this, meaning that there’s a $400,000 outstanding mortgage. And then we’re also assuming extremely favorable growth rates if you’re a homeowner, a 4% Kegr compounded annual growth rate.

So 4% and then 4% of the higher amount every single year. And then we’re assuming if you sell a 6% closing cost. So just wanted to set the groundwork for our calculations. Jameson walk us through the assumptions that we’re using for the renter.

We’re assuming rent would be like a similar size, similar priced apartment, 3000 a month in rental costs, difference of $500 a month in monthly payment that you would be putting into a similar sized house that gets invested into, we’ll just say a taxable investment account.

Then we invest an additional $1,000 a month, which is the $12,000 a year for home maintenance also gets invested into the taxable investment account. And we are assuming a 6% annual rate of return in the assume equities in the investment account.

Historically, the S and P 500 has done over 9%. So that’s a very significantly discount rate. And we’ll walk through that, there’s obviously tax implications on it. We’ll. At the end. But those are the assumptions.

Lower rent cost and the difference that you would put into the house gets invested into the investment account. And then same assumption with the 100K down payment, instead of it going into the house, you have 100,000 of liquid cash.

You would also invest into the same taxable investment account in year one. Perfect. So in these scenarios, we’re assuming with all of these factors just rounded a couple of dollars, we’re assuming $3,500 a month is the payment.

If you’re a homeowner again, assuming half a million dollar home, $100,000 down, 6% interest rate, 30 year fixed, ten year thousand a year in taxes, 100,000 down payment, and 3000 a year insurance. But then we’re also assuming that 12,000 a year maintenance is not part of that $3,500 a month.

So there’s an extra $1,000 a month in maintenance here. So to arrive at Jameson’s, the renter is flushing money down with the rent. So that $3,000 a month rent is just disappearing. But the investor to get to these numbers that we’re going to show you, in 510 or 2030 years, they’re putting 100 down and then they’re investing $1,500 a month.

So where some of the assumptions we’re doing this, what I believe is consistently across the board is we’re not assuming any cost of living adjustments with the rent. Obviously there would be. But we’re also assuming that taxes never increase, insurance never increased, and the cost of maintenance never increases as well.

I strongly believe that if you look at how much taxes, insurance and maintenance go up, that well outpaces what a rent payment would go by far, not even close. But in the short video I did, there was some feedback of, oh, you didn’t assume cost of living adjustments.

So we just wanted to make sure we’re trying to make this apples to apples, but we are making this. So far in favor of owning, because my belief is you would not get a 4% home growth with where the market is at right now, moving forward, the market has just surged post COVID.

It seems like everyone’s bought a house for a very astronomical price. So getting 4% a year for the next 2030 years, although unlikely, we’re going to assume that you do go ahead. I was saying also, so rent, if you look at rent, rent costs have not gone up the last couple of years as much as home costs.

Meaning as purchasing a home, like the price has skyrocketed, rent has not. It’s gone up, but not even close to as much as the home costs have. So not always. Just because buying increases the rent does not always correlate.

Absolutely. Okay, well, let’s look at some numbers. So again, if we were to adjust those rate of returns to 7%, these returns over a 30 year period, in some cases it’ll be like a million dollar difference.

So that 6% is just so conservative. We want to point that out, but we really want to give the owning actually a chance here. Because I was hoping with some of the comments like, owning is so much better, me being an owner, I was like, I hope they’re right.

But the reality is, looking at the numbers, renting is just such a better financial choice. But most people will own, I own. Because lifestyle wise, a lot of times it does make sense to own a house, to have a family, to have consistency, to not be told what to do with the landlord.

There’s a lot of reasons owning lifestyle wise is better, but also there’s a lot of reasons lifestyle wise like renting is better, you don’t have to worry about anything. You’re stress free. There’s lower time.

If something breaks, it’s someone else’s expense, et cetera. So we could argue this both ways, but today, let’s break down the numbers. All right, so five years from now, hypothetically, I buy this house and with assuming a 4% growth rate, five years, I’m ready to move.

I go to sell it for about 610,498. There is $372,000 left on the mortgage closing costs, which are 6% of the value of what I’m selling it for. 36,000, I would walk away with $201,000. Now, that’s after putting $100,000 down, putting in 42,000 a year in the payments itself and other 12,000 a year in maintenance.

That’s a lot of money. Put in a lot more than 200, but I get 200 back, so there’s some good feeling of equity there. Jameson, what about you? So, five years, you’ve flushed that money down. That 3000 a month, that’s gone.

But the 100 that I put down on the down payment, you invested. The maintenance of 1000 a month that I put in, you invested. And then the extra $500 a month that I paid here, you paid. So you put 100 in and invested $1,500 a month for five years.

Where are you at? The gross number again, just assume this is a taxable investment account would be $240,063. So that is before paying any taxes. That’s just the number on paper of how much the account has grown to.

If we liquidated, obviously there’d be taxes involved, but we’ll stick with this number and it’s going to continue to compound. Okay, well, I mean, just really quick math. 100 plus you’ve invested 18 a year for five years.

So we should have had this figured out before the video. That’s 170 you put in. So growth of 70. And if you’re in a capital gain rate of 15%, I mean, that’s about a $10,000 tax. If you knock $10,000 in tax off of the 240, you’re really at 230.

So you’re actually about $30,000 ahead over five years, even though you rented and didn’t do anything. If you were disciplined, which is huge, because most renters don’t invest, but if you were investing, you’d be $30,000 ahead after five years.

That’s huge. If you’re doing that in a Roth. IRA, though, that’s a different story. 6500 for you, 6500 for a spouse. If you’re in a Roth 401K, it’s 2500. So you could easily put the monthly amount. And a Roth IRA would all be tax free.

So assuming that you’re 59 and a half, all right, so let’s go out ten years. If you just Google and say, should I rent versus buy, most people will say between three to seven years is the break even point.

I strongly believe it’s seven years. If you think you’re going to be at a place seven years or less, definitely rent like, no questions asked. Because that closing cost is so big. Plus, most the money you’re paying up front in the monthly payment is primarily interest and taxes.

You’re not really starting to build principal to an aggressive amount until later on in the mortgage. So ten years out, I actually stay in the house ten years instead of five years. Assuming again a 4% growth rate, I’m now selling the house for $745,000.

There’s $334,000 left in the mortgage. Based upon amortization table we built, closing costs are $44,000. So I now net $366,000. We’ll just round up $366,000. That is all tax free. Because if you are married filing jointly, you can have a gain in your house.

If you’ve lived there two of the last five years, up to $500,000 of a gain tax free. If you’re single, you can have a gain up to $250,000 tax free. So there’s absolutely no taxes. Even though I have a huge gain of $245,000, I’m walking away with 366 tax free Jameson.

There’s no way you’re going to beat me by being a renter. Right or wrong? No, I’m wrong. Okay. Over ten years, we’ve 100,000 down. We’ve put 180,000 in contributions, 18,000 a year for ten years. 6% growth rate.

We’re at $428,987. We’ve put in 280. It’s about 150 of growth. Assume 15% capital gains would be just. Call it 20,000, 20,000 off. So net 400. Yeah. 408. You’re still way ahead of me. You’re like $45,000 ahead of me.

In reality, high level math. $45,000 ahead. And peace of mind, if not and peace of mind of renting. But the cost of living went up with the rent paying. Oh, wait, taxes, we’re assuming oh, yeah. Stayed flat.

No way. Taxes are going to be way more at a $750,000 house. The maintenance is going to be way more. The insurance is going to be way more. We’re assuming this all stay flat because we’re trying to give owning a fighting chance to be the right financial move.

And it is not and it never will be unless you’re getting into Austin, Texas, before it became Austin, Texas, where the house values doubled in five or six years. So there are pockets in the US. Where you can get extremely lucky.

We’re just talking about in generalities, but this really is a case by case analysis, and it depends on what city you live in. But we’re just talking generalities owning versus renting, really. We don’t care what you do, but I think it’s really important that you’re educated on how the numbers work and then just really do what’s best that’s going to suit your family, your lifestyle needs, your values, your stress levels, et cetera.

Again, the majority of our clients own a home, but when we share these numbers, we can put guardrails and make sure that they’re not doing stuff that’s going to make their net worth prohibitive from them retiring and be financially independent.

They’re making smart decisions when they own the home and then also not feeling any stress if they’re essentially wasting money by renting. So let’s go out to 20 years. James, are we going to say something?

Um, I was going to say the Austin, Texas comment. There are plenty of cases where people have made a lot of money in, like, Hot Pockets of real estate. But we think about like most people that we’re dealing with are busy in their career.

They’re very career oriented. That’s where a lot of their time is going. So for you to take the time out of what you do to make money. To research the real estate market to try to find that. You probably lose more money in the long run to do that anyway, unless you’re a real estate professional that you’re so in tune with the markets.

Yeah, we have some clients here in Pittsburgh. They invested 100 grand here, 100 grand here, 100 grand here. They have many houses, and the houses they’re now selling, like 20 years down the line, are worth $400,000.

And we added up what would have needed to take place, an investment account to give you the same results of this real estate. And it was like 7% 7% rate of return. And they literally bought at the hottest area of Pittsburgh in the last decade.

Decades. Decades. 30 years ago, before it became the hottest spot. And they could have just put the money in the S and P 500 and beat it without stress, though. So we asked them, Would you do this again?

They said, absolutely not. That was the best real estate decision I’ve personally ever seen, and they would not go back to do it again. It’s crazy. So, again, many examples out there. I think real estate is a good investment because a lot of people just won’t get that return in the market, because if you don’t stay in during the ups and downs, you’re not going to get 6%.

The average person will get 4%. That’s assuming you have the discipline to stay in and see the market go up, see the accounts go down. That’s not a guarantee. That’s a long term growth rate. Assuming that you stay in, stay disciplined, asset, allocate diversify keep saving.

It takes a lot of discipline. So neither of one of these are easy. It’s not easy here to invest that money. It’s not easy here to keep your maintenance cost that low or your home improvement cost that low.

It’s just probably not going to happen. So 20 years from now, I’m going to sell. The house is appreciated now, 1.1 million. There’s $216,000 left. The closing costs are now 66,000. And so I’m netting $828,000 if I sell this house in 20 years.

Jameson, how did you do renting? So we’ve put in 100,360 over ten years in contribution. 20 years? Over 20 years, yeah, we’ve. Put in total 460. We’re a little bit over a million, so call it half a million at gains 15% tax, 75,000 in tax.

So you’re looking at 950. So you’re still $125,000 ahead of me, even though you rented for 20 years, wasted money, and I’ve owned for 20 years, been the most disciplined homeowner ever by not doing any.

A crazy improvement. And you’re still ahead of me by over $100,000. And I still have a peace of mind from rent. All right, so 30 years, this thing is paid off. It’s done a 4% growth rate. My half million dollar house is now worth $1.65 million.

No mortgage left. Closing cost of almost 100,000. Now, there are taxes here because anything over half a million dollars, if you’re married, filing jointly, would be taxed at a 15% capital gain rate.

So we’re assuming out of that growth, half million is my basis tax free? Half a million is a credit tax free, and only 656 is getting taxed at a 15% rate. That would not be correct. It’d be a higher rate, 23.8%.

But assuming very conservatively, we’re trying to give the homeowning a fighting chance here. $83,000 in taxes. I’m walking away with $1.47 million Jameson. There’s no way I’m finally going to win. You’re wrong.

I’ve contributed 100,000 investment monthly contributions. 640,000 has gone into the account. Total account balance is a little over 2.1 million. So that is round up, we’ll say a million and a half of capital gains.

We liquidate the entire account. We realize all the gains pay 23.8% in taxes. About $350,000 goes to the IRS in taxes, and we net about 1.7, ground up to 1.8 million at the end of the day. So the reality here, after 30 years, though, I don’t have a house payment, my insurance.

My taxes and my home maintenance are probably, hopefully less than your rent. Actually, probably not less than your rent even 30 years from now. Even though I have like a no mortgage here, jameson is still ahead by several hundred thousand dollars because he has a bigger investment account.

His rent is going to be, at that point, even 30 years. He doesn’t own anything other than the investments. His rent is still going to be similar or if not less than what my taxes will be on a $1.6 million home.

What my insurance is going to be on that home, and what my home maintenance will be on that now very old home. So again, we hope this video was helpful and welcome any questions you have. Hopefully it’s a good resource for a lot of people out there.

Again, home ownership versus renting. We see. Unfortunately, there’s a lot of talking at each other if you’re not a homeowner, and a lot of people feel bad if they don’t own a home. They feel like unsuccessful.

There’s no competition here. Both are good decisions. Our job here, our approach, is just to financial literacy to make sure people understand the difference. And then depending on which path, there’s no right or wrong, just make sure you’re making right decisions around.

If you’re renting, have the discipline to invest alongside the rent. If you own, have the discipline to own a house that fits within your budget. So, generally speaking, we recommend two stress tests because a bank will approve you for like one and a half times more of a value than what we tell you you can afford.

Because to make a financial plan work, if you have kids and you’re trying to send them to college, if you have retirement goals, if you have vacation that you like to take every year and just generally like to have some discretionary money, if you’re netting 10,000 a month, your payment shouldn’t be more than 3000 a month.

For example, 30% of your net take home is the maximum we’d recommend in taking on that payment, or two times your gross income. So, for example, if someone’s making 250 between spouses for their household, the maximum value of a house.

Should be 500,000. If you’re making a million as a household, maximum you could afford would be 2 million. So there’s two stress tests would want to make sure that you pass both stress tests. One is 30% of your net after tax income.

That’s what your monthly payment should not exceed. And then secondly, two x your gross income. Typically, those work out to be the same in what value of a house you can afford, and then many stress tests with renting as well.

But overall, it’s a very big decision. A lot of people in America are house poor, and there’s a statistic the median net worth in America is under by the age of 65. So you’ve had your entire life to work and save, including your house equity, including everything.

It’s under $400,000, which is crazy. So I think financial literacy is a very, very important thing. And just investing a little bit every month in the right way and staying disciplined can lead to dramatic results positively for you, your family, your loved ones.

Reach out if you have any questions. Thanks for watching you.