Full transcript
0:00Meet Ryan and Steve.
0:02They are both 32. They live in the same
0:04city. They both earn $80,000 a year.
0:07And after years of responsible financial
0:10decisions, canceled subscriptions, and
0:12convincing themselves that supermarket
0:14brand cereal tastes exactly like the
0:16expensive stuff,
0:17they've both managed to save $80,000.
0:21Financially, they are identical.
0:23Personality-wise, not even close.
0:26Ryan likes stability in every part of
0:28his life. He likes having a plan and
0:31knowing what comes next.
0:33He wants a place that feels permanently
0:35his, a garage for tools he may or may
0:37not know how to use, a backyard he can
0:40slowly become irrationally protective
0:42of,
0:43and the freedom to make the place
0:44completely his own.
0:46Steve is different. He values
0:49flexibility. He likes keeping his
0:51options open and knowing he can change
0:53direction whenever he wants.
0:55He doesn't know where he'll be 5 years
0:57from now, and honestly, he prefers it
0:59that way.
1:00The idea of committing to the same
1:02address for the next 30 years makes him
1:04slightly more nervous than it probably
1:06should.
1:07Eventually, those two very different
1:09personalities lead them to two very
1:11different financial decisions.
1:14Ryan buys a home. Steve keeps renting.
1:17And for the next 20 years, we're going
1:19to follow them both. Every mortgage
1:21payment, every rent increase, every
1:23repair bill, and every dollar Steve
1:26saves by renting and actually invests.
1:29Then, at the end, we'll see where two
1:31people who started with the exact same
1:33income, the exact same savings, but
1:36chose two completely different paths
1:39actually ended up.
1:41Let's find out.
1:42Ryan and Steve are currently renting in
1:44the same mid-sized American city.
1:47After months of searching, dozens of
1:49property listings, and more house
1:51viewings than Ryan would ever like to
1:53admit, he finally finds the the
1:56Three bedrooms, two bathrooms, a small
1:58backyard, and a garage large enough to
2:01store exercise equipment he will never
2:02use.
2:04He decides to buy it.
2:05The home costs $350,000.
2:09Ryan puts $70,000 down, exactly 20%.
2:13That leaves him with a $280,000
2:16mortgage.
2:17But, the down payment isn't the only
2:18money Ryan needs to buy the house. There
2:21are closing costs, lender fees, title
2:23fees, inspections, prepaid taxes, and
2:27approximately 46 documents he's asked to
2:29sign while understanding almost none of
2:32them.
2:33Closing costs can often run around 2% to
2:355% of the purchase price. So, on a
2:38$350,000 home, Ryan could easily spend
2:41somewhere between $7,000 and $17,500
2:46just to complete the purchase.
2:48For our comparison, let's assume Ryan's
2:50closing costs come to $10,000.
2:53So, before he has even moved in, Ryan
2:56has already put his entire $80,000 into
2:59buying the house.
3:00$70,000 for the down payment and another
3:03$10,000 in closing costs.
3:05He takes out a 30-year fixed mortgage at
3:087%.
3:09His monthly principal and interest
3:10payment is about $1,863.
3:14But, that's just the mortgage.
3:16Owning the house comes with a few other
3:18monthly expenses.
3:20Around $350 in property taxes, $150 in
3:24homeowner's insurance, and Ryan sets
3:26aside about $290 per month for
3:29maintenance, roughly 1% of the home's
3:31value each year.
3:33That brings his initial monthly housing
3:35cost to about $2,653.
3:39Meanwhile, Steve's calculation looks
3:41very different.
3:42He rents a comparable three-bedroom home
3:44nearby for $2,000 a month.
3:47No property taxes, no homeowner's
3:49insurance,
3:50and if the water heater suddenly decides
3:51to retire, that's his landlord's
3:54problem.
3:55That leaves Steve with an extra $653
3:58every month.
4:00For a brief moment, that money starts
4:02looking suspiciously like a trip to
4:03Thailand.
4:05But Steve resists the temptation.
4:07Instead, he decides to invest every
4:09dollar he saves by renting.
4:11Steve puts the $80,000 he did not use to
4:14buy a house into a broad stock market
4:16index fund.
4:18And from that point on, the $653
4:20he saves each month goes straight into
4:22the same investment.
4:24At least initially, Steve's decision
4:26looks pretty good.
4:28He lives in a similar house, pays less
4:30each month, and has his money working
4:32for him in the market.
4:34Now, this is usually where someone says,
4:36"Yeah, but Steve is throwing $2,000 away
4:39on rent. Ryan's mortgage payment is
4:41building equity."
4:42And technically, that's true. But
4:44there's a small problem.
4:46Especially in the early years, Ryan's
4:48mortgage builds equity painfully slowly.
4:51In his first month, Ryan pays $1,633
4:55in mortgage interest, $350 in property
4:59taxes, $150 in insurance, and $290
5:03budgeted for maintenance.
5:05So, out of Ryan's total $2,653
5:09monthly housing cost, only about $230
5:13actually goes toward building equity.
5:15The other $2,423
5:18is simply the cost of owning the house.
5:21Meanwhile, Steve pays $2,000 in rent.
5:24Yes, that rent builds no equity.
5:27But calling rent throwing money away
5:29while pretending mortgage interest,
5:30property taxes, insurance, and roof
5:32repairs are investments is creative
5:35accounting.
5:36Now, let's fast forward 3 years.
5:39Ryan has made 36 mortgage payments,
5:41built up some equity, and learned one of
5:43the first lessons of homeownership. When
5:45you own the house, every strange noise
5:48suddenly has financial consequences.
5:51One Saturday, the water heater stops
5:52working.
5:53Ryan watches a YouTube video titled easy
5:56water heater fix, anyone can do this.
5:594 hours later, he calls someone who
6:01actually can.
6:02The repair cost him a few hundred
6:04dollars.
6:05Fortunately, expenses like this are
6:07exactly why Ryan has been budgeting for
6:09maintenance.
6:10After 3 years of mortgage payments,
6:12Ryan's mortgage balance has fallen from
6:14$280,000
6:15to about $270,835.
6:19He has paid down just over $9,000 of
6:22principal.
6:23Now, let's assume his home has
6:25appreciated at between 3% and 4% per
6:28year.
6:29The house is now worth somewhere between
6:30roughly $382,000
6:33and $394,000.
6:36That leaves Ryan with approximately
6:37$112,000
6:39to $123,000
6:41in home equity.
6:43That is real wealth.
6:45Meanwhile, Steve has paid $72,000
6:48in rent over those 3 years, but his
6:51original $80,000 has remained invested.
6:54At a 10% annual return, that initial
6:57investment alone has grown to roughly
6:59$106,000.
7:02Steve has also continued investing the
7:04monthly difference. Add those
7:05contributions and their growth, and his
7:08portfolio is now worth roughly $130,000.
7:13So, after 3 years, the result is
7:15surprisingly close. Ryan has built
7:17substantial home equity. Steve has built
7:20a substantial investment portfolio. Ryan
7:23can paint the living room whatever color
7:24he wants. Steve can move next month.
7:27But, as the years go by, the costs on
7:30both sides begin to change.
7:32Ryan's principal and interest payment
7:34remains fixed, but that doesn't mean the
7:36total cost of owning his home stays
7:38exactly the same.
7:39As the value of the property rises, his
7:41property taxes rise with it. Insurance
7:44gets more expensive, and as the house
7:46gets older, the repair bills start
7:48becoming more ambitious.
7:50Meanwhile, Steve has a growing expense
7:52of his own, rent.
7:55He starts out paying $2,000 a month, but
7:57every year his rent creeps a little
8:00higher. $2,000 becomes $2,060,
8:03then roughly $2,122,
8:07then a little more the year after that.
8:10Nothing about the house has changed
8:12except the amount leaving Steve's bank
8:13account every month. Apparently, his
8:16landlord is also a big believer in
8:18compound growth. And with rent
8:20increasing by around 3% a year, the $653
8:24monthly advantage Steve started with
8:26slowly begins to disappear.
8:29And this is where time starts working in
8:31Ryan's favor. The principal and interest
8:33portion of his mortgage stays fixed,
8:35while Steve's rent keeps climbing.
8:38But Steve still has one major advantage
8:40we haven't fully accounted for.
8:43Steve's original $80,000 has been
8:45invested in the stock market this entire
8:47time.
8:48And that brings us to one of the biggest
8:50factors in this comparison, opportunity
8:53cost.
8:54At a 10% annual return, that $80,000 has
8:57the potential to grow dramatically over
8:59the next two decades.
9:01And that's before counting any
9:02additional monthly investments.
9:04That doesn't mean Ryan is losing out.
9:06His money went toward a home that was
9:08also appreciating and building equity.
9:10But that $80,000 had an alternative use,
9:13and an honest comparison has to count
9:15it.
9:16Now, let's jump to year 10.
9:19Ryan is 42. His home, appreciating at
9:22between 3% and 4% per year, is now worth
9:25somewhere between roughly $470,000
9:28and $518,000.
9:31After 10 years of mortgage payments, his
9:33remaining loan balance is about
9:35$240,000.
9:37That leaves Ryan with roughly $230,000
9:40to $278,000
9:42in home equity.
9:44He now walks around the property with
9:45the confidence of a man who owns about
9:47half of every brick.
9:49Over the decade, he has also spent money
9:51maintaining and repairing the house.
9:53Some of that improved the property. Some
9:55of it simply stopped the property from
9:56slowly returning to nature.
9:58Steve, meanwhile, has kept investing. At
10:01a 10% average annual return, his
10:03original $80,000 alone is now worth
10:06roughly $207,000.
10:09And throughout those 10 years, he has
10:11also invested the money he saves each
10:12month by renting. That amount started at
10:15$653
10:16a month, but gradually became smaller as
10:19his rent increased by 3% each year.
10:22Add those monthly investments and their
10:23growth to his original $80,000, and
10:26Steve's portfolio is now worth roughly
10:28$290,000.
10:30So, after 10 years, Steve is still ahead
10:33in liquid financial assets.
10:35But something important has changed.
10:37His rent is no longer $2,000.
10:40After 10 years of 3% annual increases,
10:43it's approaching $2,700
10:45per month.
10:46Ryan's principal and interest payment?
10:48Still about $1,863.
10:51Now, let's go to year 20.
10:53Ryan and Steve are 52.
10:56Ryan's home, appreciating at between 3%
10:58and 4% per year, is now worth somewhere
11:01between roughly $632,000
11:04and $767,000.
11:07His mortgage balance has fallen to about
11:08$160,000.
11:10That leaves him with somewhere between
11:12roughly $472,000
11:15and $606,000
11:17in home equity.
11:18Steve's portfolio has also been
11:20compounding for 20 years. His original
11:22$80,000 alone is now worth roughly
11:24$538,000
11:27at a 10% annual return.
11:29And that doesn't include the additional
11:30money he invested during the years when
11:32renting was cheaper.
11:33Add those monthly investments, plus the
11:35returns they earned, and Steve's total
11:37portfolio is now worth roughly $750,000.
11:41So, after 20 years, on pure net worth,
11:44Steve has come out ahead.
11:46But their wealth looks very different.
11:48Steve's is much easier to access. Ryan
11:50cannot sell 8% of the kitchen, at least
11:53not without creating some serious
11:54questions from future buyers.
11:57But Steve still has one cost that never
11:59disappears.
12:00Rent.
12:01After 20 years of 3% annual increases,
12:04his original $2,000 rent is now around
12:07$3,600
12:08per month.
12:09Ryan has only 10 years left on his
12:11mortgage. Steve's rent has no finish
12:13line.
12:14But Steve's result comes with one very
12:16important condition. He actually had to
12:19invest the difference every month for
12:21decades. When the market rises, you
12:23invest. When it falls 30%, you invest.
12:27When financial news announces the end of
12:28capitalism for the fourth time that
12:30decade, you invest.
12:32The spreadsheet assumes discipline.
12:34Human beings often have other plans. The
12:36money he was supposed to invest becomes
12:38a nicer car, a few holidays, a slightly
12:41more expensive lifestyle.
12:42And 10 years later, the investment
12:44portfolio that looked fantastic in the
12:46spreadsheet, somehow never made it out
12:48of the spreadsheet.
12:50A mortgage, on the other hand, creates a
12:52form of forced saving.
12:54Ryan doesn't decide every month whether
12:56he feels like building equity. The bank
12:58has already made that decision for him.
13:01And behaviorally, that matters.
13:03But buying has weaknesses of its own.
13:05The first is time.
13:07If Ryan had sold after only 3 years, the
13:10closing costs going in, selling costs
13:12coming out, and interest-heavy early
13:14mortgage payments could easily have
13:16wiped out much of his advantage.
13:19Buying generally needs time for the
13:20numbers to work in your favor.
13:22The second issue is mobility. Imagine
13:24that several years into their journey,
13:26both and Steve receive incredible job
13:29offers in another state. Steve's
13:31decision is relatively simple. He gives
13:33notice, packs, and leaves. Ryan can
13:36move, too, but he has another decision
13:38to make.
13:39He can sell the house, which means
13:41dealing with selling costs and finding a
13:42buyer, or he can rent the house out and
13:45move. But now he has a mortgage on one
13:48property, rent in another city, and a
13:50tenant who may or may not cover all his
13:52costs.
13:53Any shortfall comes directly out of
13:55Ryan's pocket, leaving him with less
13:57money to save and invest.
13:59Then there is concentration risk. Steve
14:02owns a diversified portfolio containing
14:04thousands of companies. Ryan owns one
14:07house on one street in one neighborhood
14:10in one city. If the area performs
14:12brilliantly, Ryan benefits. If the local
14:15economy struggles, he cannot rebalance
14:17his portfolio by selling the upstairs
14:19bathroom.
14:20And finally, liquidity. If Steve needs
14:22$20,000, he can sell part of his
14:25portfolio.
14:26Ryan needs $20,000. He has to refinance,
14:29borrow against his equity, or ultimately
14:32sell the property.
14:33Home equity is wealth, but it isn't
14:35particularly easy to spend.
14:37So, which is better, buying or renting?
14:40The honest answer is, it depends.
14:43Buying becomes more attractive when you
14:45plan to stay for a long time. 7 to 10
14:47years or more gives transaction costs
14:50more time to be absorbed. Principal pay
14:52down accumulates. A fixed principal and
14:54interest payment becomes more valuable
14:56as rents rise, and appreciation has more
14:58time to work.
15:00Buying also becomes more attractive when
15:02property prices are reasonable relative
15:04to rent. One rough tool is the
15:06price-to-rent ratio. Divide the home
15:08price by the annual rent of a comparable
15:10property. A $350,000 house divided by
15:14$24,000 in annual rent gives us a
15:17price-to-rent ratio of about 14.6.
15:20As that ratio gets much higher,
15:22particularly above 20, renting generally
15:24becomes more competitive. But, it's only
15:26a shortcut. Mortgage rates, taxes,
15:29insurance, and expected returns still
15:31matter.
15:32Renting becomes more attractive when
15:34home prices are high relative to rent,
15:36when flexibility has real value, and
15:39when the renter actually follows through
15:40on investing the difference.
15:42And, of course, it doesn't have to be
15:44either or. Buying a home doesn't mean
15:46you have to stop investing because
15:48personal finance is rarely about finding
15:50one perfect strategy. It's about
15:52understanding the tradeoffs. Ryan traded
15:54liquidity and mobility for stability,
15:57leverage, and long-term control over his
15:59housing. Steve traded housing certainty
16:02for flexibility, liquidity, and more
16:04money invested in financial markets.
16:07Neither choice was automatically smart.
16:09Neither was automatically stupid. The
16:11real decision comes down to two
16:13questions. How long are you actually
16:16going to stay? Because if you buy a
16:18house and leave 3 years later,
16:20transaction costs can punish you. And,
16:23if you rent, will you genuinely invest
16:25the difference? Because if you rent for
16:2820 years and spend every dollar you
16:30save, the investment advantage
16:32disappears.
16:34So, no. Rent isn't automatically
16:36throwing money away. Renters pay rent.
16:39Homeowners pay interest, taxes,
16:41insurance, maintenance, and transaction
16:43costs. Both are paying for housing, and
16:45home ownership can absolutely build
16:47enormous wealth. But, it's also an
16:49expensive, illiquid asset with ongoing
16:52costs, concentration risk, and a roof
16:54that occasionally requests $12,000.
16:57The winner isn't always the homeowner,
16:59and it isn't always the renter.
17:01Ryan needed to stay long enough for
17:03buying to work. Steve needed to invest
17:06consistently enough for renting to work.
17:08Because 20 years later, the difference
17:10between them didn't simply come down to
17:12who bought and who rented. It came down
17:14to what they did after making that
17:16decision.
17:18Subscribe to Logical Money for more
17:19videos breaking down the logic behind
17:21the financial decisions we make every
17:23day.
17:24And let me know in the comments, are you
17:26buying, renting, or waiting for interest
17:28rates and house prices to both come down
17:30at the same time? In which case, I
17:33admire your optimism. See you in the
17:35next one.
17:37>> [music]