Tag: Buying

Renting vs. Buying a home | Housing | Finance & Capital Markets | Khan Academy

Welcome back.

I'm now going to take a slighttangent and cover a topic that, I think, this is probablythe single most important video that reallyanyone can watch.

I go to all of these partieswhere I go see family.

And my wife and I right now,we live in Northern California.

And we're renting.

And I like to pointout, by choice.

And I have family members,why don't you buy? You're at that stage inlife, that's a major milestone, all of this.

There's a lot of pressureto buy.

And when I tell friends,I tell them I'm not going to buy.

Because I think I'm prettyconvinced, almost 100% convinced, that housing pricesare going to revert back.

And I'm going to do a bunchof presentations to justify why they will.

But then my friends, they'lljust throw out the statement that I hear from them, thatyou hear from real estate agents, because obviouslythey want you to buy.

Well, isn't buying alwaysbetter than renting? And I think that kind of commonwisdom comes out of the notion of, when you have amortgage or when you borrow money to live in a house, everymonth that money that you give to the bank is kindof going into savings.

That's the perception.

While when you rent,that money's just disappearing into a vacuum.

In this video I'm going to workthrough that assumption, and see if that actuallyis the case.

So let's say I have a choice.

Let's say there aretwo houses.

This is house number one.

And this is house number two.

And let's say that they'reidentical houses.

These are three bedroom, twobath, townhouses some place in Silicon Valley, whichis where I live.

And I want to live inone of these houses.

I'm indifferent as to whichhouse I live in, because they are identical.

So living in them is theidentical experience.

I can rent this housefor $3,000 a month.

Or I could buy this housefor $1 million.

And let's say that in my bankaccount right now, let's say I have $250,000 cash.

So let's see what happensin either scenario.

Let's see how much moneyis being burned.

So in this scenariowhat happens? I'm renting.

So in a given year, let's justsee how much money comes out of my pocket.

So in a given yearI pay $3,000.

$3,000 times 12 months,so I lose $36,000.

So I'll put a negativethere, because that's what I spend in rent.

$36,000 per year in rent.

And then of course Ihave that $250,000.

I'm going to put that into thebank, because I have nothing else to do with it.

I didn't buy a house with it.

And let's say that I can,in the bank, let's say I put it in a CD.

And I get 4% on that.

So let's see, 250, that'swhat? $10,000, I think.

That's 0.

04.

Right, I get $10,000 in interesta year on that.

So I get $10,000.

So plus $10,000 a yearin interest.

So out of my pocket, for theprivilege of living in this house, in Silicon Valley, withbeautiful weather, out of my pocket every yeargoes $26,000.

So that's scenario one.

So what happens if I give into the peer pressure of family, and realtors, and themortgage industry, and I buy this house for $1 million? Well I only have $250,000, whichis more, frankly, than most people who buy $1 millionhouses have.

But I have $250,000 cash.

So I need to borrow $750,000.

So I take out a mortgagefor $750,000.

And I'm going to do a slightsimplification.

And maybe in a futurepresentation, I'll do kind of a more complicated one.

In a lot of mortgages, when youpay your monthly payment, most of your monthly payment,at least initially, is the interest on the amount thatyou're borrowing.

And you pay a little bitextra on that, to bring this value down.

That's called payingoff the principal.

You can also take aninterest-only loan, but the component of the interestis the same.

Essentially, when you take atraditional mortgage, kind of a 30-year fixed, every monthyou're paying a little bit more than the interest, justto take down the balance.

But for the simplicity of thisargument, I'm just going to say that we're doing aninterest-only mortgage.

And then maybe with anyextra savings, I can pay down the principal.

And that's the same notion.

And right now, if I do 25%down, and I'm buying a $1 million house, I'll have totake a $750,000 mortgage.

I don't know what agood rate is, 6%? So let's say at 6% interest.

Soto live in this house, how much am I paying justin interest? Well I'm paying $750,000times 6% a year.

So $750,000 times 0.

06 is equalto $45,000 in interest.

That's coming outof my pocket.

And of course, on a monthlybasis, that means in interest per month, I'm paying,just to get an idea.

I'm paying about $3,700, $3,800in interest a month.

My mortgage actually might besomething like $4,000 a month.

So I pay the interest.

And thenI pay a little bit to chip away at the wholevalue of the loan.

It takes 30 years to chipaway at the whole thing.

And over time, the interestcomponent becomes less, and the principal becomes more.

But for simplicity, this is theinterest that I'm paying.

$45,000 a year.

And then of course at a party,when I start to explain this, it's like, ah-ha.

But interest on a mortgageis tax deductible.

And what tax deductible means,is that this amount of money that I spend on intereston my mortgage, I can deduct from my taxes.

I can tell the IRS thatI make $45,000 less than I actually did.

So if I'm getting taxed at,let's say 30%, what is the actual cash savings? Well I'll save 30% of this.

I'll have to pay $15,000less in taxes.

How does that work? Well, think about it.

Let's say I earned $100,000in a year.

And I normally haveto pay 30%.

So I normally pay $30,000in taxes.

Right? This is, if I didn'thave this great tax shelter with this house.

Now I have this interestdeduction.

So now I tell the IRSthat I'm actually making $55,000 a year.

And let's say my taxrate is still 30%.

it actually will probably godown since I'm — but let's, just for simplicity, assume mytax rate is still $30,000.

So now I'm going to pay $16,500in taxes to the IRS.

So how much did Isave in taxes? So I saved $13,500 from taxes,from being able to deduct this $45,000 from my income.

So let's say tax savings,plus $13,500.

Now what else goes intothis equation? Do I get any intereston my $250,000? Well, no.

I had to use that as part of thedown payment on my house.

So I'm not gettinginterest there.

But what I do have todo is, I have to pay taxes on my property.

In California, out here we haveto pay 1.

25% in taxes, of the value of the house.

So what's 1.

25%? So, taxes, this isproperty tax.

And that's actually taxdeductible too, so it actually becomes more like 0.

75% or 1%.

So let's just say 1% justfor simplicity.

Property taxes.

So 1% times $1 million.

That equals what? 1% of $1 million isanother $10,000 a year in property taxes.

And notice, I'm not talkingabout what percent of my mortgage goes topay principal.

I'm just talking about moneythat's being burned by owning this house.

So what is the net effect? I have a $13,500 tax savings.

I have to pay $10,000 –actually I have to pay a little bit more than that, butwe're getting a little bit of income tax savings onthe deduction on the property taxes.

And then I actually have to paythe $45,000 of interest that just goes out the door.

So I'm paying $41,500.

Notice, none of this $41,500is building equity.

None of it is getting saved.

This is money that isjust being burned.

So this is a completelycomparable value to this $26,000.

So in this example — thisexample is not that far off from real values.

Out here in the Bay area, I canrent a $1 million house for about $3,000.

But in this situation I amburning, every year $41,500, where I could just rent the samehouse for $26,000 out of my pocket, when I adjustfor everything.

And then people a couple ofyears ago said, oh, but houses appreciate.

And that's what wouldmake it up.

But now you know, very recently– we know that that's not the case.

And in the next video, I'lldelve into this, and a little bit more.

I'll see you soon.

Source: Youtube

Real Estate: Buying, Selling & Renting : How to Rent Out a Home That You’re Trying to Sell

Hello.

My name is Penny Smith.

I'm a licensedreal estate broker in North Carolina, and today I'd like to talk to you about how torent out your home that you're trying to sell.

If you're selling your home, and you're doinga rental on it, I highly recommend that you do a rental that's a month to month.

If youdo rent your home as a lease, a twelve month lease or a six month lease, then the new homebuyers will have to honor that contractual contract and will have to keep those tenantsin place through the lease.

That's going to eliminate some buyers for you.

So if you doa month to month, then that contract, they can be given a thirty day notice and theyhave to vacate the property, depending on what the buyer's requirements are.

Or thebuyers can pick up that month to month, and keep them in the property if that's what theirintention is, is to buy investment property.

So it's my recommendation that if you do haveto rent the home during the time that you are trying to sell, that you certainly donot limit yourself with buyers by having a lease in place, but have a month to month.

And that's my recommendations on how to rent your home while you're trying to sell.

Thankyou.

Source: Youtube

Real Estate: Buying, Selling & Renting : How to Rent an Apartment or House

Hello, my name is Penny Smith.

I'm a NorthCarolina real estate broker.

Today I'd like to talk to you about how to rent a house oran apartment.

There's quite a process that you need to go through.

Once you find theproperty that you want to rent and you know that the price on that property is what youwant to pay, then you need to sign a contract.

If the owner doesn't already have preprintedcontracts then he may require an application as well.

And which you will have to providehim with your personal information so that he can do a search to make sure that you area suitable renter.

And then he will have to provide you with a contract.

He can buy thosecontracts at Office Depot or get them form his personal real estate agent.

In each caseit is his responsibility to provide them.

I highly recommend that you have someone toread over that contract to make sure it's in your best interest.

Whether that be a realestate attorney or a family member that you think has some experience with contracts.

Those are my recommendations on how to rent an apartment or house.

Thank you and I hopeyou have a good day.

Source: Youtube

Buy or Rent a House? (Home Buying 1/6)

Meet Emily.

Emily has been renting an apartmentwith her wife Olivia for the past seven years.

Recently, Olivia has made it clear to Emilythat she wants to move to the suburbs where there are better schools for their twin girls.

While this appeals to Emily, there’s just one problem.

She’s just not sure whether or not she shouldbuy or rent a home.

What should they do? Luckily for Emily, we’ve got her covered.

The first thing Emily needs to understandis that buying a home is often more expensive than renting one.

Emily is stunned.

Why is that? Well, the reason is simple.

In addition toa hefty down payment, large monthly mortgage costs and the one-time closing fees associatedwith buying a home, you’ll also have to foot the expenses your landlord is currentlycovering, like maintenance, property taxes, and insurance.

As you can imagine, this canlead to a pretty expensive monthly payment relative to renting.

Plus, residential real estate isn’t reallya very good of an investment.

From 1890-1990, home prices on average only increased about0.

3% a year after inflation.

To put this in context, the U.

S stock market returns about7% a year after inflation on average.

This huge difference allows a renter to buildwealth more easily than a buyer.

All the renter needs to do is take the cash they’d saveby renting and invest it with a robo-advisor for a 7% post inflation return.

If that soundsdifficult, don’t worry, our two videos “How to Invest” and “401(k) and IRA 101”,will teach you everything you need to know.

By now, rather understandably, Emily is confused.

Everyone has always told her that buying a home is a great move.

Were they all just wrong? The response is simple.

Of course not.

Homes do have value: their loan interest istax-deductible, they can provide a stable place to raise a family, and they can providetheir owners with flexibility and a strong sense of pride.

The trick is to avoid deludingyourself into thinking buying a home is always a slam-dunk financial decision.

It’s justmore complicated than that.

That’s why we highly recommend calculatingthe financial tradeoffs using our recommend calculator.

That way, you’ll be able tounderstand the full scope of the situation and make an informed decision.

Hopefully you and Emily now better understandthe rent vs.

buy decision.

Be sure to check out our next video, which covers the basicsof mortgages, and be sure to check out our website, where you can find great real estateagents, mortgages, and more educational content.

Source: Youtube

How to Sell Your Home Before Buying

Hey we're just about to head over to Kyrsa and David's house and talk to them about selling their home before buying another one.

Or even having one identified to buy.

You know it takes a leap of faith.

Let's hear about their experiences.

It all worked out for them.

Hi my name is Dave and I'm Kyrsa.

Our old house was a 1900 vintage home.

Partially redone when we bought it.

And we introduced a number of changes.

Essentially it was time to move on.

We wanted to make some major changes and so we brought in some architects to get the idea of the scope and costs.

And through that process we realize that, to get the help that we wanted we would have to invest significant amount of money.

We preferred to just take the risk and try to sell and buy something that we actually wanted vs put all this money into a house and may not end up being the house we envision for ourselves.

Working with Randall we were able to negotiate a 90-day closing which was really helpful for us to take the stress off of buying a new home.

Finding a new home to buy.

And buying a house that we might have just felt the pressure to purchase, vs actually love the house itself.

Hey, if we sell our house, and if we have to rent for a year, so be it.

We'll have a year to find the right house and we won't make the wrong decision that would impact this for the long term.

Well after selling our home we were able to have cash on hand.

We had enough money to have a down payment and significant earnest money so that the purchase of our new home would not be contingent on the sale of our old home.

Given today's market, and after consulting with Randall, we really felt this was important for us to obtain the house of our dreams.

We would have been at a serious disadvantage if we were contingent on the sale of our house.

To then move quickly, to put in a competitive offer on the house that we really wanted.

So during our 90-closing period, we were able to comfortably go look for homes.

And during that period, we were able to identify a home that we absolutely fell in love with.

And also have the time to negotiate a deal, settle on closing terms, and also get inspected.

We have a home today that's absolutely wonderful! Wow, Kyrsa and David that was a great explanation of what it's like to sell before buying.

I'm planning on making a series of videos addressing some of these questions that people are asking me.

I hope you'll tune in.

Thanks so much for watching.

Source: Youtube