The WAY to WOW Shows
Should You Buy or Rent a Home?
October 18, 2023
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[0:14] good afternoon and welcome to the way to wow shows people making money I'm your host Kevin bamel and we are here every Wednesday at 12:30 p.m. Pacific Time 3:30 p.m. uh eastern time and an hour in for Central and Mountain to talk about how to gain greater Financial uh greater professional success and how to build wealth so today um in in light of what's been going on in the housing market I thought it would be an opportune time to look at the issue of whether um it makes

[0:50] sense to buy or rent your home so I was talking to a friend of mine yesterday and he was talk he was telling me he's a residential real estate agent or primarily so and he was telling me that um interest rates have gone up quite a bit which which I knew but to the point where a lot of people are priced out of the market at the same time um and and you see reports of this in in the media um at least I do in the Wall Street Journal quite often um because housing prices

[1:25] have increased so much over the last few years um the cost to buy a house when you add on top of that higher interest rates has priced a lot of people out of the market oh I'm sorry I just said that and um because interest rates have gone up people who have a low interest rate loan they can't afford to sell their house and buy another house because they could they can't afford the increased payments and so there's very low

[2:01] inventory of available properties on the market um I I read in the Wall Street Journal yesterday I believe it was that um the estimates are that there'll be about 4.1 million homes sold this year which is very low I think it's the lowest it's been since the uh late 2000s and and I guess one uh one person uh was was saying that they might even they might not even four million homes a year which would be incredibly low sales volume so at the same time um it it may

[2:38] behoove you to buy a house depending on where you live and a number of other issues and so I'm going to do this in in basically two parts first part I I'm I'm going to discuss some of the issues to consider when you're making a decision about whether to rent or buy your home and then I'm going to take you through a financial analysis that will um hopefully Aid you in making that decision I've put together a form uh it's it's a um Excel spreadsheet and if you plug in I think

[3:14] there's maybe seven or eight numbers that that you'd have to kind of figure out and plug in and I gave you sources for those then you can figure out at least from a financial standpoint what may make more sense that then you can use along with the other issues that we discuss to to make this decision so I did put together a um um a PowerPoint presentation because this is a a complex um topic and and so um uh you know it's

[3:49] it's not it's not a decision just just sort of you know make off the top of your head and and by the way um I don't know if I don't recall if I've made this offer before um but if you want a copy of this presentation um by all means let me know I'm happy to send it to you um and and you know so that way you don't have to necessarily take notes although of course you're welcome to do so so um you know here we are should you rent or buy a house or a home however you want to phrase that okay and as du all the way to wow shows we deal with the three

[4:26] pillars of attainment we're talking about primarily finances um however um buying a home um versus renting a home will have an impact on a lot of other issues in your life um funds you might have available for play travel those kind of things um you know what that what this means for your family um and and even your friends and colleagues okay there may also be um an issue you may have certain constraints put on You by by your faith

[5:01] um and and so that will um determine where where you live and so um that will that could also impact the decision as well you know your identity and your mindset may come into whether you want to um own a home or not so while um we are going to spend a fair amount of time talking about the financial side of this equation um my advice is um the decision is a lifestyle decision it's it's not necessarily a financial decision

[5:36] finances are certainly an important part but they need not be the soul determining decision it really depends on what you want um in your in your life and when I say you by the way it could be you it could be you and a spouse or or a partner okay so um I'm using that term in the singular or plural depending on your particular situation so I'm going to look at four sets of issues you see them here the real estate market location personal Readiness and

[6:11] financial Readiness and you can see I've left Financial Readiness till the end because after we get through these categories of um things to consider then we'll go into the financial um in Greater depth so let's look at the real estate market first of all so three issues here and I I mentioned all of them in my opening comments home prices interest rates and inventory so all of these have an impact on your ability to buy as well as your

[6:48] inclination to buy so if um home prices are changing rapidly and and and rapidly is a somewhat relative term um but but certainly in uh 2021 prop home prices were increasing quite quite quickly even by historic standards so you know is that a time when you want to um be buying a house now some people would say well wait I I I don't want to be buying a house when the prices are going up um I want to wait until prices are coming

[7:25] down um that's one way to look at it the other way to look at it is if prices are going up and you think they're going to continue to go up then you may want to get into the housing market sooner rather than later in order to take advantage of price appre price uh price appreciation in the Home Market okay so prices changing isn't necessarily A Reason To Buy or not to buy it's a factor to take into account based on what you see happening and how that fits

[8:02] with other other issues and other plans you may have okay so at the same time that um prices changing um may be an issue interest rates may also be an issue now um interest rates while by historic standards are actually not that high so it's not particularly unusual for interest rates to be in the 7% range um in recent history they are they are high so just um what a year and a half two years ago they were less than half you could get a fixed rate loan in the threes now that that was pretty

[8:38] historically low um and people I would talk to people from from time to time and they say well you know they they I don't know I'm trying to decide whether to you know refinance now or or wait and see if interest rates go lower and I would say to them well how much lower do you think they can go wouldn't you agree that the bias is is to interest rates increasing so when they're at the kind of historic lows they were at um it was much more likely that they were going to increase that than that they were going to substantially decrease um now what

[9:14] we're seeing are certainly interest rates much higher than they've been in the last I don't know maybe 10 years or so however um still not high by historic standards so when I first got into the real estate business in the sort of early to mid 1980s um interest rates of 10 to 15% were not at all unusual um and in some cases they were higher for buyers who didn't have tip toop credit so where interest rates are and where you think they're going to go

[9:50] is another issue to consider as you decide on this question of whether to buy or rent a home um where do I think interest rates are going you know I'll get out my crystal ball right I mean this this is sort of The $64,000 Question um and and the indicators are mixed so on the one hand we're we're seeing um robust uh job growth um and and and that would indicate that the economy is is strong um and so that would tend to indicate that the Federal

[10:27] Reserve is going to continue to increase interest rates um but on the employment side um I think six of the last seven months um the labor department has um lowered the employment growth figures for PR for the prior month when they released the next month's data so although we're showing big job growth from last month when this month's figures come out you know it would it would appear that it's it's likely that the job growth wasn't as high as as they

[11:03] thought at least that's been the current pattern and there is a lot of consternation about this I.E why has the Department of Labor been so off so frequently this really I you know I I don't think you've ever heard me use this word before it's almost unprecedented to have so many months in a row of job growth lowered why is that the case and there's you know tons of speculation um but so far far um the labor department has not come out and said you know for example oh there's there's a problem in our software or something like that that has cause the

[11:38] um overestimation um so on the one hand that could be something pushing interest rates higher um on on the other hand we have seen um inflation come down from its high of of about what 9% um about you know 15 months ago or so um and now it's down to around the sort of 5% level um give or take half a percent and that's still higher than the fed's target of 2% um but nonetheless it is down and that's why um I think the FED paused on

[12:13] their interest rate increases last last time they considered them um having said that um there's speculation going on that they're going to raise their target inflation rate to 3% a lot of people argue that would be a mistake um and so so but but other people are saying well it's getting closer and closer we're going to have a so-called soft landing and so there isn't a need to raise interest rates anymore so if if that were the case we might see um you know home loan rates um moderate some you know at least a little bit I don't think

[12:48] we'll see them go down to 3% in the near- term frankly um but we might see them moderate back down into the sixes if that were the case but you know those are just two of the competing factors that make it right now I think extremely difficult to predict where interest rates are going okay finally inventory so there as I mentioned again in my opening remarks um inventory is very low right now a lot of people just really can't afford to sell their house um and

[13:23] and because they can't afford a new one they can't afford to give up their low rate mortgage and and they can't afford um not only a more expensive home but a more a more expensive home at a higher uh interest rate for their mortgage so um people you know the homes that are selling are where people have to sell homes okay so so for example I have a the friend I was talking to yesterday Bill gross he's one of the top probate um real estate agents here in Los Angeles and and look the nice thing about being in that part of the business is

[13:59] sadly people always die and so there are properties that need to be sold as a result of people passing away so there's always business there I mean the downside is there's a lot more competition because all of a sudden everybody specializes in in selling probate homes whereas you know that's not really the case it's it is a very specialized part of the real estate business takes a lot of additional knowledge um and and um and so there's there's likely be a sort of shaking out coming um but it is going to think take a while for people to realize that um

[14:34] you know all these people handling these homes they don't necessarily have the additional expertise necessary but um you know for people who are moving because of jobs again they may have to sell although um remote work seems to be here to stay on some level so there's there's probably fewer people selling their homes due to a job relocation and so you know inventory I think you know one would have to imagine we're not going to see a huge increase in in home Inventory either in terms of existing

[15:10] homes or new homes so new home builders are also scaling back because of interest rate increases um they were able for a while to take advantage of the low inventory for existing homes but now they're scaling back as well so you know you so inventory comes down to both how it affects home prices Etc but it also comes down to are you going to find a home that you want to own right and if the answer to that is no then you know if you can find a home you want to live in and own then maybe none of the other

[15:45] questions really you know H matter at all because you know you don't want to buy a house you don't want to live in right so so these are the first three factors in in the in terms of the real estate market to take a look at okay next location so where do you want to live okay and where do you want to live in terms of city in terms of part of a city suburbs um you know downtown core um you know all of those factors part of you know region of the country right there's been a huge um well huge

[16:21] there's been a certainly a large outflow of people from California I think it's been about a half a million people over the last year or two um and the biggest inflows it appears have been to um Texas and Florida um and and what's happened in Texas and Florida is they've seen their home prices go way up so similar things have happened in the past Californians have left and they've gone to places like Oregon and Washington I remember going back now about 20 25 years ago um I was up in Seattle on business and I was um talking to

[16:57] somebody I think I think it was at a grocery store seems to me and uh and and the woman asked for some reason she asked me where I was from and I I said I'm from California and she kind of got a little bit Surly and she I'm like I'm like I'm just here on business you know she she's like yeah you know you Californians have come up here and you've you've raised our housing prices and now you know we locals can't afford a home here anymore so you know that's happened in a lot of States uh it's happened in Idaho um it's happened in in in parts of Oregon parts of Washington um the same thing has happened now in in

[17:32] Texas and Florida um housing prices there have gone um way up and um uh home construction has not kept pace with the inflow of people not just from California certainly but from other parts of the country as well um and and so now they're seeing very high home prices um nonetheless maybe you you know you want to live there by the way it's not as if there aren't people moving to California there's certainly are there are there are people who want to live in California they they want to live uh they like the climate or they you know they like uh the way life is here or

[18:08] whatever so where do you want to live is a fundamental question now sort of sub questions to that is if you have children you're probably concerned with the quality of schools right so um I live in Los Angeles literally just south of Beverly Hills Beverly Hills is one of the top public school districts in the country right and um if you go what is it about five blocks north of me you cross into Beverly Hills so that that street there and uh off the top I can't

[18:43] remember the name of the street I think it's I want to say it's witw worth but I could be wrong anyway if you're south of witor we'll call it you're in Los Angeles if you're North you're in Beverly Hills and the diff last time I analyzed it in frankly it hasn't been for a while but the difference in home prices really comes down to What's called the capitalized value of paying for a highquality private education so what I mean is let's say it would cost um $25,000 to send your child uh to a a good private school and let's say you

[19:18] know we don't have on average two children but but just we'll say two children $50,000 a year if you capitalize that value meaning you can you convert it from uh an expense into a a value you would probably have something in the neighborhood of uh let's see 50,000 times 4 about somewhere between 500 and 750,000 and I think if you were to look you would see that there's going to be a value Gap somewhere in that range as you go from south of the street to north of

[19:54] the street into Beverly Hills because in Beverly Hills the public schools are are so good it's like sending your kids to a private school in fact um my my daughter goes to Beverly Hills uh school and um you know that was that that was that's a big savings in in private school tuition and when you talk to parents there and and the administrators everybody agrees that you know it's as good or better than most of the private schools so quality of schools obviously has a a a big impact on what loc where you want to live if you have children okay crime rates so I live um in in like

[20:33] I said in Los Angeles and if I go literally one block to the east there's a major Street there and if you go on the other side of the street the level of crime triples or quadruples okay according to the there's like this uh app that I that that I have that shows you where crimes are happening all right and you can go on the um Los Angeles Police Department's website as well and I think they report them there I think that's where I saw it but in any event crime rates can crime rates do differ considerably um by by location also the types of crimes that

[21:08] are committed um in any particular location they may they make a big difference so you know what is acceptable for you in terms of risk to you or if you have a family to your family you know if if I were um um you know if I were 30 years younger a single guy you know um I I think I would love living in you know downtown it's very exciting you can walk everywhere um it's certainly not as safe from a crime standpoint but there's other the next category amenities to living in Downtown

[21:44] LA and and in other down downtown cores um that you know you don't have if you're living in a more Suburban location um so on the on the other hand there are amenities to living in a Suburban location so if you have children there may be Parks um other kinds of recreational amenities that are that are great for for kids that you you know really don't have um in in a in a downtown core so these are just some of the issues to consider uh or sub isues if you will to consider when you're looking at where do you want to live

[22:19] okay but in the end where you want to live okay is is going to in part determin uh the some of the financial constraints okay and and so you know you you may not be able to afford to buy a house um in your you know First Choice location so if that's the case um do you want to trade off for a a a lesser desired location but greater affordability or would you would you rather you know rent in order to be um

[22:56] in that location okay so these are you know these are tradeoffs that we have to make all right next um personal Readiness um so these are these are more ISS sort of almost like lifestyle issues if you will so first of all how long do you plan to stay in the area that you're living um if you're only if you're only planning to stay for a year or two buying a home may not be a good decision so it's not that the buying of the home

[23:33] itself is is bad but if you have to sell it in two years are you going to be able to get your money out keeping in mind that the cost to sell a home um typically includes a brokerage commission and while commissions are not fixed by law and there is a lawsuit pending um with uh I think it's where was I is it before The Supreme Court now I don't remember anyway there's a there's there's a major lawsuit pending against the um uh National Association of Realtors um based on what um the

[24:09] plaintiffs um consider to be Restraint of trade because of how they handle listings and commissions of of of people who of agents who represent sellers so it's not unusual to see a commission of five or six% okay so um and then plus there are other costs of selling the property so if you're only going to be in a location uh for a couple of years the value of the house has got to go up by at least five six s% for you to even break even okay um assuming that it made sense

[24:45] for you to buy ra rather than rent uh to begin with okay and if you're if if if buying is more expensive than renting but you decide to buy anyway so not only do you have to make up up the cost of selling the home but also what you've lost um owning the home during the period you've owned it now again you may still say I I prefer to own a home and so you know this isn't a relevant issue to me and that's perfectly fine it's just I recommend you know you think about this issue upfront rather than be surprised by what it means um you know

[25:23] when you plan to move in a couple of years or whatever it is or a year or three years whatever it is okay so that's that's a that's number one of a personal Readiness issue the second one is there's there's a lot more responsibility of home ownership than there is to being a renter okay first of all all the costs of owning and maintaining the property fall on you right I mean and it's not just paying your loan and your property taxes and your insurance there's also maintenance costs and arranging all the maintenance right getting finding the contractor

[25:58] getting the bids supervising the work all of that okay whereas when you rent you may not have to um pay for maintenance or or certainly in most cases you're not going to pay for large maintenance okay you may pay for minor things and many times you may not have to supervise the maintenance either okay now I I know for myself I I rent the house that I live in and um my my landlord does not live here in Los Angeles he he lives in Northern California it's it's too far away for him to you know for me to expect him to

[26:35] supervise maintenance for this house so you know we've had an agreement that's worked very well for uh gosh I've been here for almost 10 years now and and I just um you know when when something needs to be done with the house like recently I had to have the main drain line in front of the house replaced and there there was no way you know for me to put the burden on him well you got to take care of this I mean what what a jerk I would be okay so you know I I called him up and I said hey here's what's going on here's what I've checked out here's the information I got from the plumbers this is what they're recommending um you know what do you

[27:11] think and you know he agreed that the right thing was for the drain line to be replaced and so so I said look you know here's what I've got um you know I'm I'm happy to you know supervise and make sure it's done right and keep you up to dat um you know help you out there and he's like you know thanks I appreciate that right um but and the flip side is that you know we work together um and so I have a nice place to live um and and as a result too you know I really don't have to worry about um I know some people have you know kind of landlord never want to fix anything um and look it is a pain in the neck to maintain a

[27:46] property um so my attitude is you know I want to sort of you know work together with the the fellow who owns the house he's a very very nice guy um and and and we have a really good relationship right but um nonetheless I don't really while I have some of the responsibilities that would normally go with home home ownership I don't have you know nearly as many so um you know is that something that you want to take on right um and and that's something that you want to to decide that and and they come down to um financial

[28:22] responsibilities time responsibilities and what you might call sort of the aggravation right of responsibilities um that you know those are the those are the um those are the sort of categories if you will and then finally um do you feel like you have a secure enough income to justify owning a house right um you know are you are you secure in your job or in your business that that your your income is going to be there and it's not going to um uh go down significantly such that um owning

[28:57] the home home is going to become a very a big strain on you okay um now you know and and by the way um let's say you're a married couple is you know is one parent gonna stay home one person gonna stay home and raise children and so then you know the burden of bringing home the bacon so to speak I know you think that's funny bring home the bacon for a rabbi um I can't resist um so you know the the the responsibility for you know income is is on only one one person

[29:32] right that's very different than having a dual income household which is much more common today certainly than you know when I was a kid so um how secures your income and by the way you you may not have super secure income that doesn't mean that you shouldn't buy a house all it means is you should recognize the additional risk that you're taking on by buying a house when you don't feel particularly secure about about your income now by the way you may have assets that in a pinch you know you can fall back on to maintain um ownership of the home so then the fact

[30:08] that your income isn't particularly secure may not be that big a deal you may be perfectly comfortable again these are all individual decisions but but um issues that I that I encourage you to think about in advance before you make a decision about owning buying or renting okay and then finally so um Financial Readiness so this really comes down to um four issues number one do you have the down payment if necessary two your what is your credit score and how's that going to

[30:44] affect um your ability to get a loan and and the terms of the loan what's your debt to income ratios I'll talk about that in a minute and then what's your total monthly cost so let's talk about each of these in just a a little bit of detail so it used to be that um to to buy a house you typically put down uh 20% of the purchase price so if a house cost and and I know there's no house for $100,000 anymore but just using a simple example if a house cost $100,000 so some you know you you'd put down $20,000 You' borrow $80,000 okay

[31:21] and you know so then the question was did you have do you have the $220,000 right um now of course where the median home price is around $400,000 a 20% down payment is $80,000 that's that's a lot of money I mean there that's real money as as we used to joke um when I was more actively in the real estate business so you know do you have the down payment or do you have some other means for borrowing money to buy a house that doesn't require a a down payment or at least as large a down payment okay okay so for

[31:57] example if you in the military or you're a military veteran so you have um in most cases you're going to be eligible for a VA loan and a VA loan essentially allows you to buy a house with no money down now there will be some costs so it's not it's not cashfree in the sense of you don't need to have any money at all to buy the house but you don't need a down payment you'll just need really closing costs now the closing costs on a VA loan typically will be a little bit more than a conventional loan but as

[32:32] compared to a down payment plus closing cost far far far far lower okay now there used to be a lot of zero um you know zero down payment uh home loan programs around um you know in the searching I've done I haven't really seen too many of them anymore um if any um there is now there is the FHA Loan program where the down payments around 3% and various states have um home uh buying programs for different groups of people so you if you qualify for one of those so you may be be able to buy a

[33:07] house with a you much lower down payment but keep in mind that as your down payment goes down the size of your monthly payment is going to increase okay um and that's because the loan amount is going to be larger and in some cases the lower the down payment the higher the interest rate okay so there is a tradeoff between the two so you know when you look at fi Financial renting is first of all do you have the down payment really do you have the cash because you're GNA need down payment plus Co closing costs to buy second what

[33:42] is your credit score and how is that going to impact your ability to borrow and your cost to borrow so we're going to look at this a little bit more when I go get into the um into the uh the actual you know running of numbers okay but like if you have a credit score of 780 or higher mean you're you're pretty much gold okay that's that's anything above 780 I think for the most part is considered excellent and you're good to go um you know others will say oh above 760 um you know it it varies a little

[34:18] bit okay um and I'm not going to get into what credit scores are hopefully you you you at least know a little bit about them I am planning on doing show um I don't remember exactly when but in the somewhat near future talking about uh credit scores um so that you can understand them better okay uh debt to income ratio so most lenders are going to look at what is the percentage of your monthly payments on debt versus your gross monthly income so let's just

[34:53] take a a quick example let's say you make $5,000 a month and currently you've got a car loan payment of $500 a month you have other living expenses but in terms of debts the only debt you have is the car loan okay so $5,000 a month uh gross income 500 uh $500 a month car payment so your debt to income ratio is um uh 10 to one so you have 10 times the income that you have of debt another way

[35:30] of putting it is you have a 10% debt to income ratio in other words your debt payments are 10% of your income okay most lenders they they're going to look at somewhere in the low to mid-30s for your total debt income ratio including your proposed um loan payment for the for your house okay so if you have a lot of debt already maybe you have a car loan you owe balances on some credit cards and you're already at you know 20 22% are you going to be able to borrow

[36:06] enough money to be able to afford the house okay so that's why you want to look at debt to income ratio all right finally monthly cost and and I mentioned this a little bit earlier in addition to your loan payment you're going to have property taxes insurance and there may be you know more than one type of insurance here in California you're going to have to have earthquake insurance in many cases you may have to have flood insurance as well right so there's there can be a number of different types of insurance that you need plus maintenance cost right so when you look at the total monthly cost to own a home do you feel financially ready

[36:44] to take that on okay so those are the issues I think that's it right yep okay so I'm gonna um I'm gonna stop the share here now we're going to look at just the number side of it the financial issues and where is it here it is okay uh oops nope wrong one okay this should be it let's see I'm not sure why it's doing

[37:22] this um oh there it is okay I see uh let me let me close this so it's not distracting me in background all right so here is the the form um that I that I put together in order to um analyze um the different issues related to um making a decision about um buying or renting or buying a home okay now um just so you see how the form Works real quickly so you anywhere where there's a

[37:58] a box like this um we have to fill in the information so the price of the home the percentage of down payment um the interest rate for the loan the loan term property taxes Insurance annual maintenance cost closing costs um and and a couple of other things and you see right here these are links where you can get the information that you need Okay so let's start out by find finding a home that we want to buy okay so and I've got a let's see let's got got to

[38:34] change what we're doing here okay so this is a this is a website called realtor.com there are others there's Redfin there's Zillow there's there's a number of different websites um that um uh um you know you can use that you have access to um in and getting information to buy a home so um we were talking about Texas and Florida earlier um we Al well we talking about a lot of St so let's um how about if we use [Music] um celan oops I spelled it wrong let's

[39:09] see hope is it c yeah calan Idaho I don't know that that sounds good right um oh and see I was just saying there's no houses for $100,000 this is actually this looks like a manufactured house it's really like a a house trailer so um uh this this this looks pretty cool right look at this house right here let's let's take a look at this this looks nice so it's looks like it's overlooking a lake um no I don't want to be okay and and uh let's see wow there's an overview yeah it's it's there's a lake and um I don't sure why they keep

[39:45] showing us the same picture um but anyway that's there it is wow that you know two-car garage and looks like it has great views okay so this house is $390,000 okay and it's uh so we I'm going to go ahead and plug that into the um the form okay and just for now let's look at it where there's a 20% down payment okay all right so um okay I want to make sure let's

[40:20] see okay yeah it was built in 1993 it's got a two-car garage okay and there there's the ZIP code okay all right so we found our house obviously it's not going to happen that quickly I'm just you know doing a uh um just finding a house that we can okay so that so um and I don't want to have to keep clicking back and forth um between the different screens so I'm gonna I I'll show you the the the form in just a minute but with a $390,000 purchase price a 20% down payment is $78,000

[40:57] okay so we're left with a loan amount of $312,000 okay so the next thing we want to do is is look at mortgage rates so um there's a site called um nerd wallet okay it's it's really great it has a lot of good things you'll see we're going to use it several times so we're going to first of all take the zip code of um where the property is Okay curtan purchase price is um $390,000 okay the down payment I think

[41:32] we said was $78,000 yep okay um and and see here on this particular one they're saying 760 credit score is the top okay and you can see it goes down let let's just let's just use an example where you you have the top credit score you want to get a 30-year fixed loan okay so then you just click update results and it's going to give you what kind of interest rates um it looks you looks like you can get so you see here 7.7 um sorry 7.75 7.74 7.875

[42:09] 7.875 um so they're all 7 and 3/4 to 7 and 78 this one's almost 8% so you know let's let's uh let's think positive here and let's say that um you you're going to get an interest rate of 7.7 7 5% okay and it's going to be for a 30-year loan all right now by the way if you look over here you see it says more filters okay here you see it's a single family home it's a primary residence meaning you um are going to live in it

[42:44] as opposed to here's your other choices secondary residence or an investment property because that's going to change the loan rates and here you single family home versus a condo or a townhouse or or maybe a two or three unit building see those are also going to change it okay uh FHA loan eligibility either you're eligible or not um and then if you're a veteran if you are a veteran that you know you should click that because that'll give you um that'll give you a uh that that will possibly give you a more favorable uh loan rate okay so now we've got loan

[43:20] rate now um the next thing we need to do is figure out what our property taxes are going to be okay so this is another website called smart asset and see here it's got um you enter your location and your assessed value okay and then and it'll tell you um uh what it'll estimate the property taxes so here's calan idah Idaho okay and presumably your assessed value is going to be um uh the same as what you paid for the property okay okay

[43:56] so your annual property taxes are going to be $2,496 so you'll plug that in okay next you need to figure out what is your insurance going to cost okay so you'll see we're going back to nerd wallet okay and here you scroll down average homeowners insurance rate by ZIP code okay so select your state which is item I passed it there it is okay zip code there's your zip code and it's

[44:32] saying average home insurance rating in in your ZIP code is $1,100 okay now I I I recognize that insurance rates can vary widely um we're we're getting here you know somewhat of a ballpark estimate by the way you could certainly especially if you live in the area where you want to buy the house already you may know someone who's in the insurance business and and you could call them and say hey I'm I'm thinking of buying a house in this neighborhood this size um you know what do you can would you you know give me just a rough estimate of Insurance I'm not going to hold you to it and and maybe your friend

[45:08] will help you out okay finally we're going to estimate maintenance cost so the house has 3564 square feet so one way to estimate maintenance cost is at a dollar per square foot per year so wait what was that again 30 3 4 3564 okay so that comes out to a little less than $300 a month all right now I'm gonna I'm gonna I am gonna uh switch over to the form so you can just see the progress that we're making

[45:46] now okay so here's what I've filled in so far our purchase price 390 20% down payment which we said so it automat and the form um let me show you this so when you when you fill in the the percentage of the down payment 20% see the form will automatically calculate that for you as well when you fill in the interest rate and the um term of the loan this payment right here will automatically get calculated as well okay and then when you put in the annual cost of these expenses the monthly expenses get calculated here so the

[46:23] total your total housing cost cost is $2,832 per month however that is not the um total cost of owning a home there are two other factors that have to be taken into account one is something called the opportunity cost so because you've put the money for the down payment into owning a house you're no longer able to invest that money okay so there's an

[47:01] opportunity cost in the loss of investment income you would get if you invested the $78,000 now those of you who are sharper saying well wait a minute um you might also lose appreciation of your Capital yes that's true the 78,000 may increase in value okay but it also May decrease in value okay and now you say well but the home could increase or decrease in value right that's why I'm not going to take those into account because they're they're very hard to predict okay so

[47:36] we're just going to look at what kind of return are you giving up on the $78,000 that you otherwise could have invested okay and we're going to go back to nerd wallet okay and here I'm gonna I'm gonna go back to uh I have to I have to figure out how you uh how you share two screens at the same time um so I'm sorry so actually we're yeah so we have to figure so we have the down payment of $78,000 plus we have closing costs that's additional cash okay that we have to pay in order to buy the house okay so

[48:11] this is going to estimate the closing cost so so we said the house is we're paying $390,000 we're putting $78,000 down okay and our interest rate is 7.75% and let's say there's no um there's no uh we're not going to pay what are called discount points okay okay we click next and it says estimated closing costs are $3,594 that's on top of your down

[48:47] payment okay so we're going to plug that into our form 13594 okay oops what did I do here oh uh oh I see okay I've got it let me let me correct the see it's a good thing you can't see the form I I I I made an error in it okay we're gonna corre correct this real quickly oh oops no no no okay there you go all right so um

[49:23] closing costs are like said um about $13,600 okay so the total funds you would have been able to invest are over $91,000 between the down payment and the closing costs okay so um now we're going to look at what rate of return could you have gotten on that money okay so I'm gonna just look at a CD um this is a very simple thing obviously you could put it in you could put it in uh mutual funds you could put it in EXT exchange traded funds um you

[49:58] could buy a piece of income property there's lots of places you could put that money I'm just doing this somewhat simply okay and if you're wondering wait you know mutual funds exchange traded funds um if if you go to our YouTube channel I did a show talking about what those are and how they work so feel free to check that out youtube.com thee way to wow okay so we've got we don't have 100,000 to invest um but we do have 50,000 plus to advance uh to invest and let's say you know um let's just set it at four years

[50:34] okay um so here's what we've got in terms of rates so you've got five five and a half and five and a half percent okay so let's say that you're giving up a five and a half% return on your money okay that works out to $420 a month okay let's let's switch back to the form now so you can see this part okay so you see here's our down payment 78,000 here's our closing cost

[51:09] 13594 for a total of 91 uh 594 okay at a 5 and a half% annual interest rate means we're giving up $420 a month okay all right now the other thing we to adjust for is there are tax advantages to um owning a home okay and and those advantages are that certain expenses of owning a home certain parts of your housing costs are

[51:44] deductible you can itemize them on your tax return okay so first of all you can itemize you can deduct the loan I'm sorry the interest portion of your loan payment so you notice up here the loan payment is 2235 you can't deduct the entire payment because part of that is principal okay but you can deduct the the interest portion which for the first payment anyway is $215 now again if you're if you're really sharp you'll say well wait a minute but it's going to decline each month and it is it's going to decline a little bit each month now as the loan

[52:20] gets older and older it's going to decline by more as more and more principal is paid off but for the purposes of this analysis we can simplify it and say um the loan interest paid monthly is about $25 okay your property taxes typically are also tax deductible okay so that's $92 a month and your insurance is deductible $297 a month now no oops wait I got the wrong what I do here oh I I put the wrong things okay

[52:56] property taxes and insurance there we go okay now um notice that your maintenance expenses are not deductible okay so what it costs you to maintain your house you cannot deduct those expenses only mortgage interest property taxes and insurance okay now there are certain other things but they typically won't come up hopefully they won't like a um uninsured casually lost for the house that means the house was damaged and there wasn't Insurance to pay for it you might be able to deduct the cost of

[53:32] repairing the house then but that's unusual and we you know we really hope that that wouldn't happen to you okay so your um deductible um monthly expenses are $2,315 okay now what we need to know is what is your tax rate now by the way this is not what's called your marginal tax rate so just a a quick primer on how taxes work income taxes that is so income is taxed according to brackets so

[54:07] if your income is between you know this much and this much the tax rate is whatever it is and then if it's a dollar above that to the next level it's tacked at the ne at the at the next higher rate okay however we it's not it's not that your entire income is taxed at the higher rate it's just the amount above the first bracket is taxed so you can be in a uh you know 28% tax bracket but that doesn't mean that your tax rate is 28% because everything below the 28% tax bracket is taxed at a lower rate so what

[54:44] we need to figure out is what is your overall tax rate okay and we're going to go back to nerd wallet they have a tax rate calculator that you can use it's it's really pretty nifty where is it here we go okay and it's just it's it's it's just goingon to ask for real basic information okay so it it doesn't take very long um but so let's just say you're married filing jointly okay step number one and let's say your income is 95,000 a year either on your own or

[55:19] between you and your spouse that's your income okay how old were you January 1st so let's say your your 32 okay how many dependents will you claim let's say one okay traditional IRA contributions let's say you're going to contribute uh $200 a month okay your your company has an IRA and let's say I mean it has a 401k plan um and let's say you're not going to contribute to an IRA in addition okay so um your deductions then are going to and this is your annual deduction if you look on the form you'll

[55:55] see it's 27776 27776 now by the way that's higher than the standard deduction so it will Mak you will have some kind of uh tax savings okay all right so click next um and you don't have to fill in taxes paid or withheld it's not going to change what ends up happening okay your effective tax rate is 11.4% see even though your your um tax bracket is going to be higher than that once you take into account the portions that are taxed at lower rates the

[56:32] overall rate and and and by the way your deduction so your overall rate is 11.4% okay so I'm going to go back to the form now this is the last time we're switching back and forth are you getting dizzy uh I am a little bit so 11.4% oops oops what did I do here oh 11 4% okay and you see here then taxes saved is $264 okay so the total cost of owning a home is just under

[57:08] $3,000 okay got that all right so the last thing we're going to do is we're going to look at renting a home okay and see what that is so there's a couple places I I provided here apartments.com rent.com let's go to rent.com we'll just try that okay and and actually I guess I'm GNA have to switch one more time I forgot about this uh here we go okay so let's go to uh cordelane Idaho okay and there it

[57:43] searches okay and here's a property right here um it's a three-bedroom let's see three-bedroom two bath I'm not sure sure what this means okay oh that's an apartment oh okay so let's look at the filters that's right [Music] so um okay so we want a house and okay we want houses okay

[58:21] and um minimum square feet uh let's see it was well okay 1,600 and it would be nice if you could go higher because the house we're looking at is 3600 square feet that's okay that's what we've got to work with um three plus bedrooms um no I'm sorry uh yeah three plus bedrooms I think it was a three bedroom three bath house right let's see uh yeah 3 plus three okay uh uh

[58:56] da and three bed oops three bedrooms okay price range no um and it's going to show Five results okay so um and here's here's a map okay you you know if you know the area well enough you'll be able to plot you know where where the houses you're looking to buy okay um and here you see let's see uh Ridge View draw that sounds familiar where was this one oh Fern and Terrace okay Fern and Terrace

[59:32] so here's one it's $4500 new lower price here's Grouse Meadow $ 2950 right um here's Pyrenees Loop 2350 4200 and 2800 so here's the interesting thing four of the five houses are close to or higher than the cost to own okay we'll go this is the last time we'll go back to the form okay remember that it was

[60:08] 29.88 and there's you know you could say well the comparable to rent kind of the mid the median is is 2950 well so from a financial stpoint okay it's you know there doesn't seem to be a big incentive to go one way or the other so other issues now may come into play such as are you ready for home ownership do you have the 78 or the the you know 91 plus thousand for a down payment and closing costs do you want to take on the responsibility of home ownership do you like this as a place to

[60:44] live does it have schools for your children personally just your lifestyle do you want to own a house right all of those are potential issues ues then since in this particular case Okay the the financial side of things really aren't that much different now you you know it might turn out that um maybe the higher end was was more appropriate so it's you know to to rent a house in the same area is $4,200 wow so then financially it makes a lot more sense to um you know to to buy a house okay now

[61:21] by the way typically you won't see this typically you're not going to see that it's much more expensive to rent a house than to buy it but there are cases where it can happen depending on where the market is at okay so um and you know and it might be by the way that the the one that's most similar is the one that's renting for 2350 so if that's the case and and you'll have to you know you'll have to kind of do the research of the houses to see which are most similar so in that case it's going to cost you about 600 and change more per month to own a house than than to rent okay and

[61:56] you may and you may you may say nope I you know I can't afford that extra money I don't want to pay it or you may say you know what to have my own place to be able to do with it what I want um I would I would rather spend the extra money maybe the house will go up in value and so um in the end I'm not really going to lose you know 600 $650 or whatever $600 a month um so those are all that's where we would go back to all those issues that we talked about at the beginning of the show in deciding whether you want to rent or buy

[62:32] so we are just a couple minutes over time I don't want to keep you uh past time so I'm gonna leave it off here um suffice it to say um if you would like um a copy of the form um I don't know if I can set it up to download from um uh our our YouTube channel um but my contact information will be you know in the in the show notes so feel free to send me an email or or post on um social media um I wouldn't post your contact information

[63:07] on social media but if you want to post hey can I get a copy of the um of of the uh an analysis form um I can you know direct message you so that privately I can get your information so I can send you the form um but I'm I'm happy to do that if you have any questions uh comments feel free to email me feel free to post on social media um any observations um anything you think I've missed by all means let me know I'm always open to hear how I can improve um what I'm doing but I thank you very much

[63:42] for for tuning in today I hope you found this both informative and useful I you know it's one of the biggest decisions we'll make in our financial lives really in our lives overall so I I encourage you to really um you know dive into it um and the hour that we spend together is um in some ways only scratching the surface there's lots and lots to talk about um but but that that that's that's it for today so again thank you very much for tuning in uh that's our final show for this week so next week Monday 10: am uh trust and Estates weekly these

[64:19] times are all Pacific time uh Tuesday at 11:00 a.m. is business lessons from the military and then uh 7 days from today on Wednesday at 12:30 p.m. is the next edition of people making money so again thanks very much for tuning in wishing you a wonderful rest of the week and a very relaxing and restorative weekend and signing off Marie darling you are my bell all the best folks