Renting vs Buying A Home - DON'T Ignore These Numbers!
In a Nutshell
The core message is that renting is currently cheaper than buying for most people because unrecoverable housing costs (interest, taxes, insurance, maintenance) total 9-10% of home value annually—meaning a $400,000 house costs $36,000+ per year in non-recoverable expenses. The primary recommendation is to rent if monthly rent is under $3,200 for a $400,000 home, save the difference, and invest via dollar-cost averaging into index funds rather than rushing to buy. Houses should only be purchased as lifestyle decisions when money isn't a concern or when committing to 15+ years in the same property.
These notes were generated by AI and may contain inaccuracies.
Member financial audits allow viewers to submit their finances for review. The reviewer analyzes the submitted information and provides opinions on their financial situation.
Michael submitted his finances as an example of someone with old economy values. His core belief is to buy a house as soon as possible, viewing it as the best and most secure investment for his family's future. He represents a traditional American nuclear family that homeschools, with a single income primarily from the public sector, a stay-at-home mom doing some part-time work, and they are renting in South Florida.
Key financial details:
- 100% debt-free
- Handle their budget well
- Main issue is inadequate income, which they acknowledge and are working on as highest priority
- 6-month emergency fund
- Retirement accounts just under $100,000
- Average $600 a month in savings
The central question: Should they dump everything into down payment savings to buy a house as soon as possible, or invest into retirement and kids' accounts banking on compound interest and stock market returns as primary wealth builder?
The common argument against renting is that rent money goes to the landlord and is thrown away, while buying allows ownership of an appreciating asset. However, houses are not viewed as good investments in the current environment.
When financing a house with a mortgage, the unrecoverable costs break down as follows:
- Mortgage interest: 6.5% to 7%
- Property taxes: approximately 1%
- Insurance: approximately 1%
- Maintenance and buffer: approximately 1%
- Total unrecoverable costs: approximately 9% of home value per year
For a $400,000 house, this equals $36,000 per year in costs that are gone. This calculation does not include major repairs like roof replacement or AC failure. In reality, costs could reach 9.5% to 10% of home value annually.
If a $400,000 house can be rented for less than $3,200 per month, renting is the cheaper choice because 9.5% annually would otherwise go to lender costs, closing costs, escrow, and title fees. Objectively, renting is cheaper for most people currently.
Home appreciation of 2-4% per year is possible but not guaranteed, and losses can also occur. The recommendation is not to bank on appreciation. Even if everything stays flat, renting appears cheaper and provides flexibility without tying up money in an illiquid asset.
A house should be purchased when it's not a financial decision—when money doesn't need to be considered. Alternatively, buy when planning to live there for 15+ years, knowing 100% that the house remains affordable even with income reduction, and major repairs can be handled. The purchase should be viewed as a lifestyle decision rather than a financial one.
For most people currently, renting is the better option, especially if a $400,000 house can be rented for less than $3,200 monthly. The difference should be saved and invested through dollar-cost averaging into index funds, though stock market declines should be expected and prepared for.
A 39-year-old software engineer submitted finances with the following goals:
- Live off investments and retire early
- Live a healthy life and have 2-4 kids
- Sell home and downsize to save more money and invest
Current financial position:
- $189,000 in cash looking to invest for multi-X gains
- $34,000 HSA
- 401k at Fidelity with good diversified mix of stocks
- Well-diversified portfolio of index funds and ETFs with low fees
- Monthly expenses total approximately $6,300-$6,500 including mortgage, food, utilities, car insurance, gym, YouTube, travel, and fuel
The software engineer's investments are considered fantastic with broad index funds and ETFs at low fees. Spending appears reasonable and not excessive. The only suggested improvement is making more money to invest more and reach goals faster.
For cash reserves, the standard 3-6 months emergency fund recommendation applies. With the current income level, this should be sufficient for unexpected expenses.
Regarding selling the home: The option exists to sell and potentially take advantage of primary residence tax benefits (up to $250,000-$500,000 tax-free). Renting a two-bedroom apartment for around $1,600 monthly is being considered. This decision is highly personal and depends on whether the current home would be kept for 15+ years or if mobility and reduced overhead are priorities.
The house should likely be kept unless there is a high interest rate mortgage and plans to live there only a few years before selling. If planning to stay long-term with a low interest fixed-rate mortgage and low property tax basis while enjoying the home, staying put is probably better. Paying down the mortgage and enjoying the current situation is advised given the overall strong financial position.
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