Learn about Renting vs. Buying a home Video

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Learn about Renting vs. Buying a home

Welcome back. I'm not going to take a slight tangent and cover topic that I think this should be probably the single most important video that really anyone can watch. I go to all of these parties or I go to see family and my wife and I right now we live in Northern California and we’re renting and I'd like to point out by choice and I have family members a lot of by stage in life that’s the major milestone. All of these is a lot of pressure to buy. And when I tell friends I tell mom I'm not going to buy because I think I'm pretty convince that almost 100$ convince that housing prices are going to revert back and I'm going to do a bunch of presentations that justify why they will. But in my friends they’ll just throw out the statement that I hear from them that you hear from real estate agents because obviously they want you to buy is that while isn’t buying always better than renting. And I think that kind of common wisdom comes out of the notion of when you have a mortgage or when you borrow money to live in the house every month that money that you give to the bank is kind of going into savings, that’s the perception while when you rent that money is just disappearing into vacuum. In this video I'm going to I guess work through that assumption and see if that actually is the case. So let say I have a choice, let say there are two houses, this house number one and this is house number two and let say that they are identical houses, these are three bedrooms, two bath, town houses some place in Silicon Valley which is where I lived. And I have a two choice—I want to live in one of these houses I mean different in which house I live in because they are identical so living in them is the identical experience. I can rent this house for $3000.00 a month and or I could buy this house by this house $4 million and let say that in my bank account right now let say I have $250,000.00 cash. So let see what happens in either scenario let see how much money is being burned. So in this scenario what happens? I'm renting so in a giving year to see how much money comes out of my pocket. So in a giving year I'd paid $3000.00 x 12 months so I lose $36,000.00 so I put a negative there because that’s where I spend in rent $36,000.00 per year in rent. And then of course I have that $250,000.00 I'm going to put that into the bank because I have nothing else to do it I didn’t buy house with it and let say that I can in the bank, oh I don’t know let say I put in the CD and I get 4% on that. So let see $250,000.00 that’s worth $10,000.00 I think. All right, I get $10,000.00 in interest a year on that, so plus $10,000.00 a year in interest. So out of my pocket for the privilege of living in this house in Silicon Valley with beautiful weather out of my pocket every goes $26,000.00. So that’s scenario one. So what happens if I give in to kind of the pear pressure of family and realtors and the mortgage industry and I buy this house for $1 million? Well I only have $250,000.00 which is more frankly than most people who buy a million dollar house is have but I have $250,000.00 cash so I need to borrow $750,000.00 so I take out a mortgage for $750,000.00. And I'm going to do a slight simplification and maybe in the future presentation I'll do kind of a more complicated one and a lot of mortgages when you pay your monthly payment most of your monthly payment at least initially is the interest on the amount that you're borrowing and you pay a little bit extra on that to bring this value down that’s called paying off the principle. You can also take an interest only loan but the component of the interest is the same. Essentially when you take a traditional mortgage kind of a 30 year fix every month you're paying a little bit more than the interest just to take down the balance. But for the simplicity of this argument I'm just going to say that we’re doing an interest only mortgage and then maybe with any extra savings I can pay down the principles and that’s that same notion. And right now if I do 25% down and I'm buying a million dollar house so I have to take $750,000.00 mortgage I don’t know what a good rate is, 6%? So, let say at 6% interest, so to live in this house how much am I paying just an interest? Well, I'm paying $750,000.00 times 6% a year is equal to $45,000.00 an interest that’s coming out of my pocket. And of course on the monthly basis that means an interest per month I'm paying just to get an idea, I'm paying about $3700.00 or $3800.00 in interest a month. My mortgage actually might be something like $4000.00 a month so I pay the interest and then I pay a little bit to tip away at the whole value of the loan and it takes 30 years to cheap away the whole thing and overtime the interest component become less and principles comes more. But for simplicity this is the interest that I'm paying $45,000.00 a year. And then of course at a party when I starting paying this was like, aha! But interest on a mortgage is tax deductible and what tax deductible means is that this amount of money that I spend on interest on my mortgage I can deduct from my taxes, I can tell to IRS that I make $45,000.00 less than I actually did. So if I am getting tax that let say 30% what is the actual cash savings? Well, I save 30% of this. I have to pay $15,000.00 less in taxes. How is that work? Well think about it. Let say I earn $100,000.00 in a year and I normally have to pay 30% so I normally paid $30,000.00 in taxes. This is if I didn’t have this great tax shelter with this house. Now, I have this interest deduction so now I tell the IRS that I'm actually making $55,000.00 a year and then $55,000.00 and let say my tax rate is still 30% that actually probably go down since I—but let's just for simplicity we might tax is still $30,000.00. So now I'm going to pay $16,500.00 in taxes to the IRS. So how much did I save in taxes? So I save $13,500.00 from taxes for being to deduct this $45,000.00 from my income. So let say tax savings plus 13.5, okay. Now, what else goes into this equation do I get any interest on my $250,000.00? Well no, I have to use that as part of the down payment of my house so I'm not getting interest there. But what I do have to do is I have to pay taxes on my property. In California I hear we have to pay 1.25% in taxes of the value of the house. So what's 1.2? So taxes is property tax and that’s actually tax deductible too so it’s actually becomes more like—I don’t know 0.75 or 1%. So let just say 1% just for simplicity property taxes, so 1% x $1 million that equals what? 1% of $1 million is another $10,000.00 in property taxes. And notice I'm not talking about what first of part of my mortgage goes to pay principle. I'm just talking about money that’s being burn by owning this house. So what is the net effect? I have $13,500.00 tax savings, I have to pay $10,000.00 actually I have to pay a little bit more than that and will give you a little bit income tax savings on—I'll do deduction on the property taxes. And then I actually have to pay the $45,000.00 of interest that just goes up at the door. So I'm paying $41,500.00. Notice! None of this $41,500.00 is building equity. None of it is getting save this is money that is just being burned so this is completely comfortable value to this $26,000.00. So in this example and this example is not that far off from real values and I don’t know the bury I can rent a $1 million house for about $3000.00 but in this situation I am burning every year the $41,500.00 where I could just rent the same house for $26,000.00 out of my pocket when I have just for everything. And then, people, you know, a couple of years ago said, “Oh, but house is appreciate and that’s what would make it up.” But now you know, very recently we know that that’s not the case. In the next video I dealt into this in a little bit more. I'll see you soon.

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Welcome back. I'm not going to take a slight tangent and cover topic that I think this should be probably the single most important video that really anyone can watch. I go to all of these parties or I go to see family and my wife and I right now we live in Northern California and we’re renting and I'd like to point out by choice and I have family members a lot of by stage in life that’s the major milestone. All of these is a lot of pressure to buy.

And when I tell friends I tell mom I'm not going to buy because I think I'm pretty convince that almost 100$ convince that housing prices are going to revert back and I'm going to do a bunch of presentations that justify why they will. But in my friends they’ll just throw out the statement that I hear from them that you hear from real estate agents because obviously they want you to buy is that while isn’t buying always better than renting. And I think that kind of common wisdom comes out of the notion of when you have a mortgage or when you borrow money to live in the house every month that money that you give to the bank is kind of going into savings, that’s the perception while when you rent that money is just disappearing into vacuum.

In this video I'm going to I guess work through that assumption and see if that actually is the case. So let say I have a choice, let say there are two houses, this house number one and this is house number two and let say that they are identical houses, these are three bedrooms, two bath, town houses some place in Silicon Valley which is where I lived. And I have a two choice—I want to live in one of these houses I mean different in which house I live in because they are identical so living in them is the identical experience.

I can rent this house for $3000.00 a month and or I could buy this house by this house $4 million and let say that in my bank account right now let say I have $250,000.00 cash. So let see what happens in either scenario let see how much money is being burned. So in this scenario what happens? I'm renting so in a giving year to see how much money comes out of my pocket. So in a giving year I'd paid $3000.00 x 12 months so I lose $36,000.00 so I put a negative there because that’s where I spend in rent $36,000.00 per year in rent. And then of course I have that $250,000.00 I'm going to put that into the bank because I have nothing else to do it I didn’t buy house with it and let say that I can in the bank, oh I don’t know let say I put in the CD and I get 4% on that. So let see $250,000.00 that’s worth $10,000.00 I think.

All right, I get $10,000.00 in interest a year on that, so plus $10,000.00 a year in interest. So out of my pocket for the privilege of living in this house in Silicon Valley with beautiful weather out of my pocket every goes $26,000.00. So that’s scenario one. So what happens if I give in to kind of the pear pressure of family and realtors and the mortgage industry and I buy this house for $1 million? Well I only have $250,000.00 which is more frankly than most people who buy a million dollar house is have but I have $250,000.00 cash so I need to borrow $750,000.00 so I take out a mortgage for $750,000.00. And I'm going to do a slight simplification and maybe in the future presentation I'll do kind of a more complicated one and a lot of mortgages when you pay your monthly payment most of your monthly payment at least initially is the interest on the amount that you're borrowing and you pay a little bit extra on that to bring this value down that’s called paying off the principle.

You can also take an interest only loan but the component of the interest is the same. Essentially when you take a traditional mortgage kind of a 30 year fix every month you're paying a little bit more than the interest just to take down the balance. But for the simplicity of this argument I'm just going to say that we’re doing an interest only mortgage and then maybe with any extra savings I can pay down the principles and that’s that same notion.

And right now if I do 25% down and I'm buying a million dollar house so I have to take $750,000.00 mortgage I don’t know what a good rate is, 6%? So, let say at 6% interest, so to live in this house how much am I paying just an interest? Well, I'm paying $750,000.00 times 6% a year is equal to $45,000.00 an interest that’s coming out of my pocket. And of course on the monthly basis that means an interest per month I'm paying just to get an idea, I'm paying about $3700.00 or $3800.00 in interest a month. My mortgage actually might be something like $4000.00 a month so I pay the interest and then I pay a little bit to tip away at the whole value of the loan and it takes 30 years to cheap away the whole thing and overtime the interest component become less and principles comes more. But for simplicity this is the interest that I'm paying $45,000.00 a year.

And then of course at a party when I starting paying this was like, aha! But interest on a mortgage is tax deductible and what tax deductible means is that this amount of money that I spend on interest on my mortgage I can deduct from my taxes, I can tell to IRS that I make $45,000.00 less than I actually did. So if I am getting tax that let say 30% what is the actual cash savings? Well, I save 30% of this. I have to pay $15,000.00 less in taxes. How is that work? Well think about it. Let say I earn $100,000.00 in a year and I normally have to pay 30% so I normally paid $30,000.00 in taxes. This is if I didn’t have this great tax shelter with this house.

Now, I have this interest deduction so now I tell the IRS that I'm actually making $55,000.00 a year and then $55,000.00 and let say my tax rate is still 30% that actually probably go down since I—but let's just for simplicity we might tax is still $30,000.00. So now I'm going to pay $16,500.00 in taxes to the IRS. So how much did I save in taxes? So I save $13,500.00 from taxes for being to deduct this $45,000.00 from my income. So let say tax savings plus 13.5, okay.

Now, what else goes into this equation do I get any interest on my $250,000.00? Well no, I have to use that as part of the down payment of my house so I'm not getting interest there. But what I do have to do is I have to pay taxes on my property. In California I hear we have to pay 1.25% in taxes of the value of the house. So what's 1.2? So taxes is property tax and that’s actually tax deductible too so it’s actually becomes more like—I don’t know 0.75 or 1%. So let just say 1% just for simplicity property taxes, so 1% x $1 million that equals what? 1% of $1 million is another $10,000.00 in property taxes.

And notice I'm not talking about what first of part of my mortgage goes to pay principle. I'm just talking about money that’s being burn by owning this house. So what is the net effect? I have $13,500.00 tax savings, I have to pay $10,000.00 actually I have to pay a little bit more than that and will give you a little bit income tax savings on—I'll do deduction on the property taxes. And then I actually have to pay the $45,000.00 of interest that just goes up at the door. So I'm paying $41,500.00.

Notice! None of this $41,500.00 is building equity. None of it is getting save this is money that is just being burned so this is completely comfortable value to this $26,000.00. So in this example and this example is not that far off from real values and I don’t know the bury I can rent a $1 million house for about $3000.00 but in this situation I am burning every year the $41,500.00 where I could just rent the same house for $26,000.00 out of my pocket when I have just for everything.

And then, people, you know, a couple of years ago said, “Oh, but house is appreciate and that’s what would make it up.” But now you know, very recently we know that that’s not the case. In the next video I dealt into this in a little bit more. I'll see you soon.

Transcription by: Scribe4you Transcription Services