Hello. Welcome to Todd Miller TV. I wanted to share a very simple buy-versus-rent strategy for those of you who are not sure whether you should buy a house or rent a house. There’s two different ways you can calculate whether it’s a good idea and we will take a look at those.
So a couple of assumptions here. First of all is you have to be in a position to be able to buy a house. If you can’t buy a house because you either don’t have the cash, your credit is really, really terrible, you can’t get a loan, then you may not have a choice. You’re probably stuck with being a renter.
So we’re going to start the first one and this is the one that people most commonly look at which is how much is it going to cost me on a monthly basis. So we will start with renting because that’s easy. We will just pick an average house, three bedrooms, two baths in a normal market, not the Bay Area or some place like that. Maybe here in Las Vegas and your house is going to rent for $1000. That’s what you will pay in rent and there’s very little risk in it. You paid 1000 bucks. You pay it for whatever the term of the lease is and when you’re done, you’re done. You can move houses pretty easily, pretty straightforward.
Now we will talk about buying. Now the house you would pay $1000 a month rent for, you could probably buy it and get a loan and have a $600 a month principal plus the interest, another 50 bucks for taxes and insurance. So your total paycheck or total amount you would write every month to the bank and send it would be 700 bucks. You’re saying, “Hey, this would make sense. I should do this.”
So you’re saying, “Well why doesn’t everybody do this?” Well we know two things. First of all, half of all houses that are purchased are purchased by investors and this is part of the reason they do it because remember you’re an investor. Maybe this person, they may be paying that $700 a month. They’re collecting a thousand. So you’re paying for their profit. They’re taking that money and of course if you’re a renter, you have no downside if the market drops. You just pay your rent and the investor loses. Of course the market goes up. You don’t get a profit in it.
So the road block a lot of people have is they feel like they’re real estate speculators but investors don’t think that way. I mean most investors don’t think about trying to time the market or do anything crazy like that. What they really think about is this number right here. They know they’re paying 700 a month. They know they’re taking in a thousand. They don’t care what the house price is. They’ve got a margin to collect every month.
So that’s one way to do it is just figure out if I bought a house, I would pay 700 or if I rent it, I’m paying a thousand and you’re just out of pocket every month a little less. Of course here you may have a down payment of some kind that you have to put money down. Of course when you sell the house, you get that back.
The other thing is called ROI and this is a little more of a finer one to figure out but if you start over here with what does it cost to buy a house, like what’s the interest rate I would pay to buy a house, and right now for a person with an average credit, you will get about a four percent interest rate.
Now ROI over here is what an investor would get cash on cash return. So if I bought a house or an investor bought a house, you would get between the 7 and 15 percent annual return on your money. So if you bought a $70,000 house and you rented it out for $1000 a month, you can collect $12,000 plus you have some other taxes and things. Once you backed all that up, you get this ROI.
Anytime there’s a difference between this and this, you’re really better off buying because you can make up the difference meaning you could borrow money at four percent and you can get a return of 7 to 15 percent. That different percentage is money going into your pocket and then of course this is the model a lot of investors use. When home prices go up, what happens is this may or may not change but this certainly changes. So you pay more for the house.
If I paid 200,000 for the house, now my ROI is going to be like four, five percent. It may be better to rent. When home prices are historically high, you may be better of renting. When home prices are historically low, this number gets better which is why right now in Las Vegas half of all home purchases are purchased cash because those investors realize we’re only getting one or two percent on their money. So they could put it to an asset where they get a higher ROI and they take advantage of the difference in the interest rates.
So anyway, these are just two scenarios. It’s always a personal decision. The average real estate investor owns five houses. That’s just the average person. They’re just private individuals typically as your average real estate investor and they’re all using, looking at this. They’re saying, “I can borrow money at this rate and have this kind of a payment and get this return and have a positive cash flow,” or “Hey, I have got a bunch of money in the bank. I’m not getting good ROI.”
The cool thing about this is you can go buy a house to live in and then after a couple of years, move into another house, rent that one out, still make this payment to the bank but then collect a higher rent on it.
So you’re buying another house, collecting rent; and if you do this a couple of times, if you have three or four houses, then the house you live in is being paid for, meaning all the rents. The collected rent will make all of your house payments which is kind of nice.
So anyway, I just thought I would share that with you. This is my buy versus rent analysis anyway. That’s my tip for today and hope to see you on another video. Thanks.