0:00 I'm a multi-millionaire and I rent my house in fact I've rented for 20 years and I've made more money renting then I would have owning a place but should you do the same in fact should you rent or buy your house a lot of us have been told buying is the best thing ever build equity renting is throwing your money away I think that for the biggest purchase of Our Lives we need to go into more detail so in this video I'm going to give you four specific steps to break down if you should rent or buy with an exact address so you can follow along with the analysis and I'll give you a clear set of rules to make sure you make the right decision for you starting with step number one change your mindset
0:45 around renting the first thing I want you to do is to accept the fact that yes renting can make Financial sense in a lot of cases and if you're going to truly use this video to come to the right decision I want you to understand why people do not like to even think that renting can be a good financial decision because we have been told renting is throwing your money away but I'm going to prove this to you with actual numbers let's take a look at a specific unit that has been both bought and rented 776 Bryant Street in Palo Alto California this is a two- bed two bath 1,521 ft condo it was sold in 2018 for $2.15 million now this is pel Alto it's extreme expensive now I'm starting with
1:31 this example in Palo Alto because you're going to see the numbers and they are insane but don't just think that because Palo Alto is expensive this only applies there you're going to learn how to do the analysis so you can try it for your own City by the way if you look online you can see that the current price estimate has decreased by $154,000 since it sold now that's just an estimate we don't really know what the sale price would be today but you have to remember that prices go up and prices go down unfortunately we really only talk about when prices go up let's take a look instead of being worth $2.15 million it's now estimated at $1.9 million again just an estimate if you put 20% down at the current average interest rate for mortgages of 7% you'd
2:17 pay about $106 a month on your mortgage alone okay just the mortgage now that we know how much this place would cost to own let's see how much it would cost to rent if you were to rent this same unit it would cost you $5,400 a month which is exactly what it rented for in January of this year that's about half of what it would cost you per month to own and that's not even factoring in what I call Phantom costs of ownership things like maintenance or closing costs or all kinds of hidden or counterintuitive fees that would make renting an even better financial decision okay now we see it black and white it is clear that sometimes renting
3:02 can be a better financial decision let's move on to step number two understand the myths around housing after you've acknowledged that renting can sometimes be a better financial decision the next thing you got to do is get to the bottom of a lot of housing myths now you've heard these repeated so many times that a lot of people actually just believe them but I want you to go deeper I want you to stop being trapped by these myths that might not actually be true buying a house in America is rarely a carefully measured purchase in my estimate less than 5% of people carefully run the numbers instead most of us make the biggest purchase of Our Lives based on what we think we should do based on how we feel based on what we have been told
3:48 by some random person these expectations and myths surrounding renting and Home Ownership are so heavily embedded in our culture that almost all of us believe they're simp simply true it's caused so many people to buy a house when they're not ready or worse when it's not even the right choice for them let me break down three common housing myths for you so we can get to the truth myth renting a house means you're just paying your landlord's mortgage all right let me explain how people think landlords operate they think a landlord owns a place that cost them $1,000 a month so they go $1,000 a month let me add on 10% for profit they're paying my mortgage I could go on vacation cuz of my tenants listen your landlord can only charge you what the market will bear they cannot
4:35 simply take whatever they bought add on a profit margin and go if they could do that why would they stop at 5% or 10% why wouldn't they go to 15 or 100% the answer is they can't simply charge you whatever they want sometimes landlords make a profit sometimes they lose money A lot of times they don't even know how much their costs actually are please stop thinking of landlords as these omniscient observers who know all their numbers no you don't even know how much that roof repair cost you you don't know how to amortise that over 11 years you're just charging whatever the market will bear and if they don't like it if there's one month of vacancy wiping out your entire Year's profit they go oh it's so hard oh government protect me this myth has led to so many people rushing into a house
5:20 because they think someone else is getting the better end of a bargain myth if you're paying rent you're throwing money away well I like to have a little fun with this topic so I posted a question on Twitter I said hey I spent $30 on dinner in New York great food great service I plan to go back did I throw money away on dinner and wouldn't you know 95% of people said no RIT that sounds like great then I said hey I spent $6,000 renting an apartment last month in New York and for the last 10 years good location good views good roof I plan to keep renting did I throw money away notice this time it wasn't 95% it was only 81% who said no in other words 19% % of people said you threw money away what do you notice virtually everyone agreed that when I paid for
6:06 dinner it was worth it but when I said I rented an apartment suddenly 19% of people thought that I threw money away on rent but I'm not throwing money away on rent I'm paying for a roof over my head I'm paying for a great view I'm paying for somebody to fix issues so that I don't ever have to go to Home Depot in my life that's a rich life when you pay rent you are paying for Value when you go to a restaurant you are paying for Value the value of knowledge of cooking the dishes someone to clean the dishes and service the same concept applies when you pay for essentially anything you're not throwing money away on rent just as you're not throwing money away at your local restaurant myth you need to buy a house cuz you're building equity in America there's a
6:53 magic word it doesn't matter how much it doesn't matter how to get it we don't understand anything about it but we love it and it's called Equity I get a lot of criticism because people think I ignore Equity I don't ignore Equity I actually understand it now yes it is true that you can build equity with a house but it actually takes a long time and there's a phrase in real estate don't pay a dollar to make a dime let me show you what I mean I'll use the same address from our first step let's assume that you have a 30-year mortgage at $1.59 million at 7% interest look at this amortization table something that 99.999% of Americans have never even heard of this is showing you how much
7:38 you are paying in principle in other words Equity versus interest on your loan you can see that it takes 21 years for you to start paying more towards principal than to interest so we might actually say I don't want to waste money on interest do you see how ridiculous these myths are by the way I'll link the amortization calculator in the description for you you should put your own numbers in there and play around you're going to be shocked remember these myths and why they are untrue and you'll be much more likely to make a choice that's right for you I encourage you to really take some time to decide if buying a house is right for you at this current season of life and if that is a rich life if it is amazing I
8:24 support you buying a house is the biggest financial decision you'll ever make and it's also a lifestyle decision you have to factor in all these things but what I'm specifically focused on here is helping you run the numbers here's some good non-financial reasons to buy a house you have kids you want to stay in that school district or build memories in a certain house your parents are moving in with you you want to design a house together with your spouse you love repairing and tinkering your house and renovating it or you just want to notice what's not on this list you need the price of the house to go up I'll repeat myself again buying a house doesn't always mean Building Wealth so Factor it appropriately buy for the right reasons now before we move on to step three hit that subscribe button and
9:10 turn on notifications I want to keep sending you new videos with real numbers including money psychology going forward and thank you very much for watching all right now that you've stopped believing all those common housing myths that brings me to step number three run the numbers for renting versus buying so far you've learned that renting some times can be a better financial decision than buying you've stopped believing these harmful housing myths and now we get to do something near and dear to my heart run the numbers now before buying a house you should always run the numbers and no I don't mean asking your freaking broker how much you can afford you should treat your broker like you should hold him out arms length away I don't I trust a broker as far as I could throw him oh broker's so nice broker wants to
9:55 make money from you okay broker's using you to pay for their BMW do not ask your broker how much you can afford they're not the person to ask run your own numbers now very few people do this a lot of people get mad at me at even suggesting you should run the numbers why cuz housing always goes up in America you freaks let me explain how this works somebody sees two houses one of them is a two-bedroom house renting for $2,000 next door is a house that costs $2,000 a month for the mortgage what would you do almost everybody goes I'll get the mortgage cuz I'm building equity not so fast they forget to factor in 30 to 50% of phantom cost things they didn't even consider closing costs
10:41 maintenance opportunity cost transaction costs Renovations and on and on most people do not realize the total cost of ownership TCO until they've already bought the house and I don't want that for you that is why I'm constantly reminding you rent is the maximum you will pay pay but a mortgage is the minimum you will pay now to figure out your total housing cost when renting it's pretty easy it's your monthly rent plus your utilities like electric water internet whatever utility bill your landlord charges sure feel free to factor in other things if you have somebody come and clean your house once a month Etc Factor it all in but basically that is your housing costs on the other hand your total housing costs when you own include not just the
11:26 ordinary costs but also the fan cost that people often forget about let's break them down your principle this is the part of the payment that goes towards paying down your principal closing costs buyers can expect to pay roughly 2 to 5% of the purchase price on closing costs interest you saw that in the amortization table that can be quite High over the course of a 30-year loan property tax which by the way can increase and sometimes dramatically like we see in States like Florida Insurance maintenance is one that most people totally neglect it doesn't show up in most calculations this is a cost to maintain the home including utilities yes but also the roof repair that happens 8 years from now and that's not
12:12 even broken yet you have to actually factor that in a simple guideline to use is 1 to 3% of your purchase price every year in maintenance then of course we have additional fees like HOA condo fees Etc don't forget transaction costs like when you sell and renovation which Americans love to do and then they deceive themselves by saying it's an investment you almost never make your money back on Renovations so to calculate your total housing cost if you own add up the monthly cost of all of these items and you can see even without any numbers that owning can cost a lot more now let me show you a quick and easy way to run the numbers we're going to use the same unit I talked about earlier 776 Bryant Street in paloalto
12:57 California now I'm going to pull up the New York Times rent versus buy calculator I love this calculator because it has so many variables you can play around with makes it really easy to see if buying or renting is right for you and I'll link to it in the description below after plugging in that lower price of $1.9 million to buy and the $5,400 a month to rent without factoring in anything else we can quickly see that it never makes Financial sense to buy this property in fact over 10 years you would save $900 ,000 renting that's why when I post these funny pictures of me eating all this food and traveling and stuff I go so glad that I can afford to travel here because I'm not throwing money away on interest and then everybody on the
13:42 internet gets mad because they don't know how to run a single calculation and then I'm just sitting there chomping on my pepperoni pizza going what's the problem guys this calculator automatically sets how long you plan to stay in your house to 10 years but it actually turns out that the average amount of time people spend in their home is is only 8 years so I've reduced that number to eight now let's look at the loan details the current average 30-year fixed rate mortgage in the US is around 7% so I've updated that to 7% on the calculator and just to be conservative we're going to put a 20% down payment now a lot of people do not do this I believe you should be able to before you buy let's put 20% just to be conservative you can see that renting saves you $691,000 over a years you can see that by
14:30 adjusting those numbers slightly it didn't really make much of a difference it still makes more financial sense in this case to rent before we go on just remember this why is this so counterintuitive because every month people pay their rent and they feel like they're losing a little piece of their soul I don't I go amazing cuz I can invest literally thousands of dollars per month and make even more than I would have owning all right let's keep going let's factor in something a lot of people forget about maintenance as I mentioned which is usually 1 to 3% this unit is in California in a very expensive city I'm going to actually be conservative and change the maintenance to 2% realistically I think it's probably more than 3% but let's just keep it at two after factoring that in
15:16 you can see buying this house cost you more than $800,000 over 8 years makes no Financial sense to buy this property now let's factor in another thing that very few people do the the opportunity cost of investing your down payment what I mean by that is just let's say that your down payment was $100,000 what if we took that $100,000 and simply invested it in the market let's assume we make 7% That's a conservative estimate whoa that amount you would save by renting just shot up to $1.1 million over 8 years again we're factoring these things in one by one renting saves you 1.1 $ million over 8 years now you can
16:01 keep going there's so many more variables you should include but you can see that just by using the simple New York Times rent versus buy calculator to quickly run the numbers it never makes Financial sense to buy this property now a lot of you going well what what about Equity REM what about Equity at the end of 30 years I own the place first of all you're not going to stay there for 30 years very few people do I hope when you buy you stay there for a long time because that's when you really start to build actual Equity second if you rent you need to be inv investing that is the key to the entire thing if renting makes better Financial sense you still need to invest that's where real wealth is created so use this tool to run the numbers yourself play around with the different variables play around in your own City I want you to become really good at this okay you understand that renting can be a better financial
16:47 decision you've decided if buying or renting is right for you and now you've run the numbers now it's time for step four figure out if you are ready to buy okay listen up closely to this part the actually two very important questions that I want you to ask yourself to decide if you are actually ready to buy I don't want you to get into trouble by skipping these questions I want you to walk into the biggest purchase of your life ready to go now I'm about to show you how you can calculate whether you can afford a house how much you should put down and how to even save for your down payment but sometimes especially if you have a more complex situation you want to know exactly how much you can afford for a house and how that one decision will affect your finances 5 years from now 10 20 30 years years from now you want to know all different kinds of scenarios and how they're going to
17:33 play out for your finances this couple I just spoke to on Tuesday Rob and Adrian came to me with a lot of very specific questions about their financial situation and they're close to retirement age they want to know how their decisions such as renting instead of owning and traveling Etc would affect their retirement so I actually reached out to our partners at facet a financial planning service that offers a flat fee membership and asked if they could run some scenarios for my guests we sent their net worth income expenses Social Security Insurance everything and facet put together three scenarios for how and when they can retire it was really cool really specific if you are nearing retirement or you have a complex financial situation that you want a second set of eyes on consider reaching out to the planners at facet instead of
18:18 taking a percentage of your portfolio they charge an affordable flat membership fee check out their new membership options at facet.gov description now back to the two important questions you need to ask yourself to know if you're actually ready to buy question one can I afford to buy a house based on my income and debt I want to give you a little tool to use your total housing cost should be less than 28% of your gross monthly income or your total income before taxes and your total household debt shouldn't exceed more than 36% of your gross monthly income this is referred to as the 2836 Rule now let me talk about that 28 part because it's really hard these
19:04 days especially in expensive cities to hit that number sure you can stretch it to 29 or 32 or even 34 but the more you stretch your housing costs the more risk you are taking and you can become overwhelmed with expenses very quickly if something goes wrong like an unexpected repair or a job loss now let's talk about the 36 part if your total household debt exceeds more than 36% of your gross monthly income you might have difficulty getting a mortgage from lenders more importantly you're putting your household at risk too much debt can sink you it's like swimming with too much weight on your back so to see if you can afford to buy a house based on your income and debt let me break down the numbers for you total housing costs divided by your gross
19:50 monthly income equals your monthly housing costs just multiply that number by 100 to get your percentage is it lower than 28% it should be let me show you an example let's say your total housing costs are $1,120 a month and you make $4,000 1,120 divided by $4,000 equals 2828 * 100 that's 28% now couple of things I want to point out here first of all that total number it says total housing costs are $1,120 a month total does not just mean your monthly payment if you own it's the sprinklers it's the occasional repair it's even the gas to get to Home Depot it's all of it okay second this number says 28% ideally you would be a
20:36 little lower than that so you have some margin although again in high cost of living areas like New York LA or frankly a lot of cities these days most people have gotten above this next calculate your 2836 number see if your total monthly housing cost plus your total debt load would be lower than 36% of your gross monthly income that means factoring in things like credit card debt student loans car loans all of it the more debt you have the riskier it is to lend to you and that means you might not be able to get a home loan but more importantly you're putting your household at risk here's how to calculate it amount of monthly debt you owe divided by gross monthly income equals debt to income ratio multiply that number by 100 to get your
21:21 percentage the lower the number is the better the 2836 rule says that you should ideally have no more than 36% of your debt to income ratio here's an example let's say that you're spending 28% of your gross income on housing and you want to figure out your 2836 number well to find out the 36 number we look at the rest of your debt say you're spending $1,000 a month paying off credit card debt making $75,000 a year or 6250 a month 1,000 divided by 6250 is16 multiply that by 100 that's 16% well guess what in this case you're already spending 28% of your gross income on housing when you add the 16% you have a 2844 number that's higher than 36% that
22:06 means you're in serious risk this would be troubling if I saw this so I want you to calculate your own 2836 number now there are a few exceptions to this rule if you live in a high cost of living area like New York La SF again some people stretch that number even up to 34 35% but it becomes very very risky next if you have no debt like like no car payment no student loans no credit card debt you might stretch your housing number a little bit I would personally consider going to around 33% but I'm very conservative with my finances if your income is reasonably expected to go up soon such as a promotion again maybe you stretch the numbers a little but I would be very hesitant about doing this after all this you should still be able to save and invest money otherwise you
22:53 will not be building true wealth when you factor in all these other things you should still be a ble to save 5 to 10% of your take-home pay and invest roughly 10% of your take-home pay if you can't do that you're spending too much question two have I saved a 20% down payment if you haven't saved a 20% down payment in my opinion you're not ready to buy a house now this might sound like some old fuddy dudy advice but I want to tell you something it's not just because of PMI which is an additional fee you'll often pay when you get a mortgage without 20% down the real reason I believe in Saving 20% before buying is counterintuitive building the habit of saving is critical before you buy and have all these unexpected housing expenses like a broken water heater or unexpected tax expense I frequently get
23:41 frustrated comments about how impractical this rule is how am I supposed to save 20% this will take years yes it will which is exactly why you should start saving now saving is a habit which is better practiced before your mortgage is at risk now note I don't mean that you have to put 20% down in some cases such as low interest rates many people intentionally chose to put a smaller amount down that's fine that's just a math decision but in my opinion you should be able to put down 20% all right I hope this video helps you decide if renting or buying is the right decision for you and I hope you save money in the process as you can see when you make the right decision it can often save you a million dollar over the course of your life let me know in the comments what you found after you run
24:27 the numbers and check out this video popping up on screen to watch more
