Renting vs. Buying (detailed analysis)발음듣기
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Renting vs. Buying (detailed analysis)
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And at least, my thesis on why housing prices might have gone up, and how you should maybe, in simple terms, think about the rent-versus-buy decision.발음듣기
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But one thing that's happened, a lot of people said, oh, Sal, you're making oversimplifying assumptions.발음듣기
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You're not factoring in the tax deductions of mortgages, et cetera, of interest on your mortgage.발음듣기
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So that we could kind of do back of the envelope math, and just think about what the main drivers are when you think about renting versus buying.발음듣기
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And then tweak your assumptions. And really figure out what's going to happen to you if housing appreciates, depreciates.발음듣기
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So what I did in yellow, both this bright yellow and this less bright yellow, these are our assumptions.발음듣기
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These are the things that are going to drive the model, and tell us whether over - and I calculated over 10 years - whether we will do better renting versus buying.발음듣기
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And so if you download this model and want to play with it yourself, unless you are fairly sophisticated with Excel, the only things you should change are the things in yellow.발음듣기
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The down payment matters. You could, if you want, you can just write like I wrote, 20% of whatever the purchase price is.발음듣기
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This is the principal amortization. So principal amortization just means, well, if I just keep paying this mortgage, after how long is the entire principal amount - not just interest, how long is the entire principal amount going to be paid off in?발음듣기
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This is what I assume because I live in California, and in most areas of California, that's the property tax.발음듣기
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This is housing association dues. Maybe if you live in a community that has a shared golf course, or a shared pool or something.발음듣기
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This is annual insurance, for things like hazard insurance, and flood insurance, earthquake insurance, or whatever insurance you need where you live.발음듣기
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And in this bright yellow, I say, what is the assumed annual appreciation of the house itself?발음듣기
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Because we'll see later in this video that to some degree, that assumption is one of the biggest drivers of assumption.발음듣기
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And why does that matter? Well because you can deduct the interest that you spend on your mortgage.발음듣기
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So if you can deduct $100 in interest and property tax, if your marginal tax rate is 30% - so that means at what rate are you being taxed on every incremental dollar.발음듣기
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And what this assumption drives is, well, there's going to be some inflation on things like housing association dues, annual maintenance, insurance.발음듣기
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And so this, what you assume about, well, what is just the general rate of inflation, in our model that's actually going to drive how these grow over the life of your loan.발음듣기
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You can, if you know your geometric series, you can go in there and you can tweak it around so it compounds more frequently or less frequently.발음듣기
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Now these assumptions are so that we can make a comparison to, well, what if instead of using that down payment to buy a house, what if we actually just save that down payment, put it in the bank, and rent a house instead.발음듣기
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And I would argue, to some degree, that rental price inflation over the long term should not be that different than housing price inflation.발음듣기
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So if I don't put the $150,000 down deposit on the home, and I put it in, I don't know, maybe I'm a good investor.발음듣기
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So if my tax rate is 30% and I think I can get 10% percent on the stock market, I should actually put a 7% here.발음듣기
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This right here is the debt, or essentially the principal payment on your mortgage, or how much do you owe to the bank.발음듣기
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And as you see, as months go by, when you pay the mortgage note - and I show that right here, this mortgage payment.발음듣기
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And then a lot of it, especially initially, goes to be actually the interest on the amount you owe.발음듣기
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And then obviously, if you watch the video on introduction to balance sheets, your equity in the home is the value of the home minus the debt, or minus what you owe the bank.발음듣기
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It is driven by - This interest on debt, it's calculated by what interest rate you assume, times the debt you owe and the period before.발음듣기
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The mortgage payment, we calculated that before, using our mathematical knowledge of geometric series.발음듣기
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Maintenance, same thing. Property tax, same thing. Although I assumed that your house gets reassessed.발음듣기
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So you're in a state where every year, or every several years, the assessor comes, says, oh, your house is worth more now, so I'm going to raise your taxes.발음듣기
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But it's the case in many parts of the U.S. So actually to some degree, this, the dollar value, the property tax is driven by this home value assumption up here.발음듣기
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This income tax saving from interest deduction, this is assuming that at that marginal tax rate, you can deduct the property tax and the interest on the debt.발음듣기
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So this is essentially how much cash goes out the door, even after the tax savings, every month, in the buying scenario.발음듣기
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But I want to compare that to what happens if I take that exact amount of cash, after adjusting for how much money I get back from taxes.발음듣기
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And if I said, well, I'm going to use that cash to pay my rent and any other expenses associated with renting - which really aren't much - to pay my rent, and then put the rest in the bank.발음듣기
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So what we're saying is, well, that assumption was, that you can rent a similar house for $2,500.발음듣기
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So if you rented instead of putting that $150,000 as a down payment, you could have put it in the bank.발음듣기
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And then your savings account at period one would be this amount of money and whatever return you got it, plus the difference between your cash out from buying a home and your rent.발음듣기
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So this is your savings. So what I do in this model - and I could show you, I could scroll through multiple periods.발음듣기
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But the average house - anyone who's traded mortgage bonds will tell you - the average mortgage loan has a 10 year expected life.발음듣기
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So what I do is I figure out, well, given your assumptions you can make your own assumptions - given your assumptions, what is your home value?발음듣기
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So given your assumptions, what this calculates is, well, it tells you what the home value is after 10 years, your debt after 10 years, your home equity after 10 years.발음듣기
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Hopefully that won't be the case in 10 years and the internet will dis-intermediate real estate brokers, but who knows.발음듣기
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And then this line, line 54, that tells you what the net cash is if you sell your house at a market price, you pay the broker.발음듣기
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And so this number right here, this number is the difference between those two numbers in 10 years, discounted back to today.발음듣기
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And it would tell you in today's money, what is the benefit or the advantage of buying versus renting?발음듣기
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That although it looks really reasonable, let's say I make this 3% annual appreciation assumption.발음듣기
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That doesn't seem crazy. But it's amazing how much it'll change the model if you make that 3% into a 1%, or if you make it into even a negative 1% or negative 2%.발음듣기
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It's completely possible. It's happened before in the past that you have flat real estate prices for a significant period of time, even 10 years.발음듣기
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And actually most of the studies show that real estate, over the last 100 years, has actually roughly grown, in real terms, maybe 1% or 2%.발음듣기
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So play with these assumptions. And I think it'll give you an intuition of what are the real drivers.발음듣기
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