If you're weighing the pros and cons of renting versus buying a home, you have probably compared the amount you pay in rent and a typical mortgage payment. Depending on where you live and what kind of housing you're looking for, it may look like one is clearly cheaper.
But that's not the whole picture, says Dr. Shaan Patel, the CEO and founder of Prep Expert SAT & ACT Courses. "The argument is always: If your mortgage payment is less than your rent, then you should buy a home, right? But that math actually doesn't work out, because there are a lot of costs to homeownership outside of your mortgage payment," he says.
"I'm not interested in buying a home," says Patel, a self-made millionaire who won an investment from Mark Cuban on ABC's "Shark Tank" in 2016. "I'd rather rent and invest the money I didn't put down for the down payment, home insurance, property tax, all of the other costs and make 7%-10% in the stock market, or in other investments."
Overall, Patel says, renting is a "no-brainer" for him.
Three years ago, Patel was considering buying a condo in Philadelphia, "because I was following the conventional wisdom that 'renting is throwing money down the drain,'" he says.
While weighing the pros and cons of buying a home, Patel read "Quit Like a Millionaire" by Kristy Shen. He realized how much money he'd have to put into buying a house. "I don't think people take into account all of the costs of homeownership that are in addition to the mortgage. For example, property tax, home insurance, maintenance and repairs, HOA fees, and of course the interest on the mortgage itself."
These numbers vary depending on where you live, how much the house costs, how much of a down payment you're able to put down, the interest rate on your mortgage, and the type of loan you get. Still, the costs can be considerable. And since it isn't easy to account for these costs on your own, he followed guidance from Shen's book about the "rule of 150," which helps consumers estimate the cost of homeownership.
"Since the extra ownership costs are approximately equal to the interest of a typical mortgage over nine years, and the interest is approximately 50% of your mortgage payment during that time, you have to multiply your monthly mortgage payment by 150%," she writes. "This is how much your home will actually cost per month, once all expenses are factored in. If that 'Rule of 150' monthly cost is higher than your rent, then it makes sense to rent. If it's lower, then it makes sense to buy."
For example, the median monthly mortgage payment for homebuyers with a 5% down payment is $1,533, according to Redfin. If you multiply that monthly payment by 150%, taking into account all of the other expenses that owning a home requires, your real monthly cost could amount to $2,299.50, according to Shen's rule.
Still, it's important to consider your personal situation and time horizon when it comes to your decision whether to rent or own. The higher up-front costs of a mortgage may make more sense if you plan on staying in that home for the long term, for example. Buying a home builds equity and can be a smart way to build wealth.
After reading Shen's book, "I personally think these are two great insights to share with readers who believe that renting is throwing away money," Patel says:
- Owning a home is a lot more expensive than you think, since you're responsible for more than just the mortgage payment
- Don't just cut costs by renting: Invest those savings
If you compare how the S&P 500 performed over the past 20 years with the Case-Shiller U.S. National Home Price Index, which tracks housing prices throughout the U.S., "the stock market has produced an average return that is far greater than the returns of real estate," says Patel.
"Now, you can make the argument both ways: Real estate is currently at an all-time high, the stock market is at an all-time high. Who's to say what's going to go higher over the next 10, 20, 30 years?" he says.
It's also important to note, Patel points out, that "real estate isn't guaranteed and the stock market isn't guaranteed." That means your investments in either can lose money.
One of the reasons Patel prefers investing in stocks over property is because of the time commitment and ease of access to those funds. "For me, as a pretty busy person, I like my investments to be pretty passive and liquid," he says.
Patel has taken the money he would have invested in a house and invested in a diversified portfolio of stocks. In addition to equities, Patel owns real estate investment trusts, or REITs, which is a way investors indirectly invest in real estate by putting money into a firm that operates or finances real estate that aims to generate income. As an entrepreneur and a venture capitalist, he invests in other start-ups, too, and has a small portion of his portfolio dedicated to cryptocurrency.
So far, he has found that those assets "provide a better return on investment," Patel says, "and I'm happy renting for now."
This content is the opinion of Dr. Shaan Patel and not necessarily the opinion of Grow. This content is provided for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. Consult your accountant, tax, or legal advisor regarding such matters.
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