The BRUTAL Truth About Buying A House Nobody Tells You

0:00 What about buying a house?

0:03 Is that a good investment?

0:05 I wouldn't consider buying a house to live in an investment.

0:09 It's sort it sort of is.

0:11 You get an asset, but you're really you're

0:13 buying an asset that funds your housing consumption.

0:17 It kind of pays you a dividend that's sort

0:19 of like getting rent from the house that you own.

0:23 But when you do the sideby-side comparison,

0:25 which I think is the only way to think

0:26 about this, if you compare buying a house,

0:29 so that means in in Canada, you'd usually save up for a 20% down payment.

0:34 So you put 20% down in your house,

0:36 uh you take out a mortgage to finance the rest.

0:39 You're now living in the house, you're paying your mortgage payment,

0:41 you're paying for some maintenance costs, you're paying for property taxes.

0:45 Alternatively, you could have rented the house.

0:48 that 20% that went into buying a home

0:52 could have been invested in the stock market.

0:53 So again, we're back to the idea of opportunity costs.

0:56 And the other important thing here is that renting

0:58 typically has lower cash flow costs than owning.

1:01 So these are the unreoverable costs of owning a home.

1:06 Mortgage interest.

1:07 So that's when you buy a house and you borrow to to fund the purchase.

1:10 You're paying interest to the bank.

1:12 That's a I call these unreoverable costs.

1:14 That's money that you're paying for the use of money in this case.

1:17 and you're not going to get those dollars back.

1:19 It's gone.

1:23 Opportunity costs.

1:25 So that's what I just mentioned.

1:26 Whatever equity you have in a home is equity

1:29 that you could have otherwise invested in the stock market.

1:32 The capital portion, the principle,

1:34 the price of homes has increased around inflation

1:39 at the rate of inflation maybe a little bit higher.

1:41 Historically, stocks have far outpaced inflation.

1:45 So by having money sitting in a house

1:47 as opposed to invested in the stock market,

1:49 you have what is called an opportunity cost.

1:52 You're not earning returns you could have otherwise been earning.

1:55 So that opportunity cost is one of the largest costs of owning a home.

2:00 So I've got mortgage interest, the opportunity cost of equity.

2:05 Property taxes are another big unreoverable cost.

2:08 Property taxes vary depending on where you are,

2:10 but it's say between 0.5% and 1% maybe some sometimes a little bit higher.

2:14 You get utilities and some services in exchange for it,

2:17 but it's again it's an unreoverable cost.

2:19 You pay that, you've got nothing left afterwards.

2:23 Then we've got maintenance costs.

2:24 Oh, this is the annoying one.

2:26 This is the it's it's the annoying one,

2:27 and it's the one that I think people underestimate the most.

2:31 Mhm.

2:30 I started making content about renting versus owning a home years ago.

2:34 I used to say 1% was a reasonable estimate of maintenance costs,

2:38 and people would push back and say that's way too high.

2:40 There's a bunch of academic literature show on this too

2:41 that's it says it could well be over 2%.

2:44 I think that's probably a more reasonable estimate.

2:46 Having been a homeowner now for six years

2:49 after renting prior to that, I'm fairly confident, at least in my case,

2:53 that maintenance costs are far higher than 1

2:55 or 2% of the property value per year.

2:57 Yeah.

2:58 I mean, I I bought my first home a while ago and uh hell.

3:03 I I didn't think about the gardening and the pool

3:05 pump gets broken and then there's a crack

3:08 in the the patio outside and then the heating

3:10 system breaks and then everything just seems to break and it's always breaking.

3:14 It's always breaking every time I go back

3:16 there which is it's in a different country.

3:17 I'm the first week I'm just spent looking at the things that have broken since

3:21 I was last here like making a list of the new expenses and it's never cheap.

3:27 No.

3:26 And if I was renting that wouldn't be my problem.

3:29 No.

3:29 There's also like another cost here which we

3:31 don't talk about which is like the time you

3:33 waste on the maintenance like when we think

3:38 of maintenance cost I imagine people are thinking about

3:40 the fees to fix things but actually the time

3:43 I spend having phone calls and speaking to people for me is is worth a lot more

3:47 than just the costs but anyway yeah maintenance cost.

3:51 Yeah, the coordination is huge and you could outsource that, but that would

3:54 be expensive and depending on how valuable your time is,

3:58 it could make sense to outsource it, but I I agree with you.

4:00 I do the same thing.

4:01 I spend time on the phone finding which contractor

4:03 is going to come in and fix this thing.

4:06 Mhm.

4:05 And then you have to wait for them and then maybe they're late.

4:09 Yeah.

4:09 So, that's maintenance costs.

4:11 We have emergency cost here, which is really a subset of maintenance costs.

4:16 So, you can have big things like the roof needs to be redone,

4:18 uh the foundation cracks, whatever.

4:20 Those can be very significant.

4:22 And one of the challenges with those types of big costs is

4:24 that you kind of have to have liquidity available to fund them.

4:28 And that means that you have to have cash

4:30 sitting somewhere or at least some liquid assets sitting somewhere.

4:34 So probably not invested in the stock market,

4:36 which also has an implied cost to it,

4:38 which is more opportunity cost, right?

4:39 More more opportunity cost.

4:40 Exactly.

4:41 And then this one's this one's interesting,

4:43 and this is one that I don't think I appreciated until I own my own home,

4:47 which is renovation spending.

4:49 We talked about maintenance.

4:50 When you fix something in your house, you don't just fix it to get it back

4:53 to the baseline level that it was at before.

4:56 Yeah.

4:56 You make it a little bit nicer.

4:57 You're right.

4:57 I never did that when I was renting.

4:59 So, the side by side.

5:01 So, you run the sideby-side comparison.

5:03 You account for all of those unreoverable costs the owner has.

5:06 You account for the renter investing

5:07 in the stock market and investing the cost difference,

5:10 the cash flow cost difference between renting

5:12 and owning each month or or whatever frequency.

5:15 And what you'll find, and I've done this with projections,

5:18 so looking at expected stock returns and expected real estate appreciation,

5:22 you can very easily show that there is an equivalence.

5:25 There is a level of rent where you are indifferent between renting and owning.

5:29 I did a video years ago that has millions of views now

5:33 where I I came up with this idea called the 5% rule.

5:36 So, I took some of those costs.

5:37 I took property taxes, maintenance costs, and the cost of capital,

5:41 which is the the opportunity cost and the cost of of borrowing.

5:46 I wrapped all that up and said we've got roughly 1% for property taxes,

5:50 roughly 1% for maintenance costs,

5:52 which is probably way too low as we just talked about.

5:54 And I said 3% for opportunity cost, which I think is also on the on the low end.

5:59 And you put all that together and you get 5%.

6:02 So I said, "Okay, if you divide the price of a home

6:06 by 5%." And then divide that number by by 12,

6:10 you will get the monthly rent that has equivalent

6:13 that is equivalent to the unreoverable cost of owning that home.

6:16 Okay, so let's do that.

6:18 So I'm thinking of buying a $300,000 house.

6:22 What What's the method I need to do to figure out if it's better to rent?

6:25 Multiply by 5%.

6:26 And then divide by but divide that by 12.

6:29 Divide it by 12.

6:30 Okay.

6:30 You're brave.

6:31 I usually have a rule to never do math live on a podcast.

6:33 I can edit.

6:34 So, just in case.

6:36 Okay.

6:37 The result is 1,250.

6:40 There you go.

6:40 1,250 is the equivalent rent where you're

6:44 roughly break even between renting and owning.

6:47 So, if I could rent for 1,250 instead

6:49 or less

6:49 or less, I should rent.

6:52 Renting is a better financial decision.

6:54 So, this is an important part of this topic.

6:55 We can show financial equivalence and that just that is important.

6:59 like we can show that there is financial equivalence between renting and owning.

7:02 I've done more uh robust versions of this analysis since then.

7:06 We have PWL has a calculator on our website where you can see the the break even

7:10 by putting specific numbers in instead of just doing

7:11 this rough rule of thumb because things will change it.

7:14 For example, if your asset allocation is more conservative or more aggressive,

7:18 that opportunity cost number can be different.

7:20 If you're a taxable investor, meaning that you're taxed on your investment gains

7:25 by investing in the stock market or the bond market,

7:27 your opportunity cost decreases because the after tax expected return

7:31 on stocks and bonds decreases relative to uh home ownership.

7:35 5% is a very rough rule of rule of thumb.

7:38 Do you think for the average young person, let's say someone's, I don't know,

7:42 25 years old, they should and they're thinking

7:44 about building their wealth over the long term,

7:46 do you think they should buy be buying a house

7:49 as an investment or should they be doing something else?

7:51 I think for young people, it's really tough.

7:53 And it's tough for a couple reasons.

7:55 One is because home prices are high.

7:57 You have to save up a lot of money to buy a house.

7:59 Another one is that it can limit your mobility.

8:02 We've seen in in Toronto, in Canada,

8:04 where I'm from, uh prices, condo prices in particular, have plummeted.

8:09 They've fallen off of a cliff.

8:10 If you bought a condo in Toronto and you

8:13 get a job offer somewhere outside of Canada,

8:15 what are you going to do with that condo that's that's at a big loss?

8:19 You're kind of stuck.

8:22 Yeah.

8:21 Or you're have to try to rent it out and now

8:23 you've got this this just difficult situation to deal with.

8:26 And plus, there are big transaction costs if you're if you're selling a place.

8:29 So for young people,

8:31 I do think that home ownership can be tricky because it can limit your mobility,

8:35 your your ability to go and find maybe higher paying work.

8:38 It introduces a risk that you probably don't need

8:40 in your life because you may end up moving somewhere else.

8:44 And then people often move up where they want a condo today,

8:48 but they're going to want a house later.

8:49 For my family, I I met my wife.

8:51 I was renting a place.

8:52 The first place we met in a second place, a third place, and a fourth place.

8:56 We rented four different places as we were having our family.

8:58 We have four kids and so our needs were changing over time.

9:01 We needed a bigger a bigger condo and then

9:04 we had a townhouse and then we had a house.

9:06 Uh but we just the lease ended and we gave notice and we left.

9:10 We found a better rental that was more suitable for our needs.

9:12 If we had been homeowners, the amount we would have paid in transaction

9:15 costs to do that would have been insane or we would have had to buy the house

9:18 that we were going to have forever much earlier,

9:20 which would have introduced significant opportunity costs.

9:23 That's one of those things that's just

9:24 impossible to measure and because it's so intangible,

9:26 but like the psychology of feeling like you can't easily move.

9:32 And I see this a lot actually with people that apply for jobs in our company

9:36 is in the interview process.

9:37 They'll say, "Well, I've just bought a house in insert

9:40 city." And you can see this their sort of psychology

9:42 is is um holding them back from taking an opportunity

9:46 because they've made an investment in a particular city.

9:50 And so they might lose as you say like an opportunity in New

9:53 York or LA or London because mentally they feel committed to a place.

9:58 Yeah.

9:58 Now the flip side of that is that if you're

10:00 really sure that you want to stay in one place,

10:04 one of the best ways to accomplish that is buying.

10:06 Who can be sure?

10:07 Yeah, you can't.

10:08 But if if someone was really sure, maybe someone has maybe like me,

10:11 I have four kids, they're all in the same school.

10:14 It's very unlikely that we would move.

10:16 The other big mistake I think I made is I bought a holiday home.

10:19 That was a terrible Well, I shouldn't say terrible idea,

10:22 but kind of a terrible idea.

10:23 In part because of the same reason.

10:24 In part because it means you go you only go on holiday to one place.

10:28 Yeah.

10:28 Which is like defeats the point of a holiday.

10:30 Yeah.

10:31 And it's I I have not done that.

10:33 And the main reason is the mental overhead.

10:34 I don't like having to think about one property.

10:39 Mhm.

10:39 I can't imagine having to think about a second one that I'm not at.

10:42 Such a dumb idea.

10:43 I don't like it.

10:44 I don't know why I did it.

10:45 Especially when you're like young.

10:46 It's like the whole point is you can still walk up mountains and do things.

10:50 You don't want to be sitting in a in the same house every day.

10:55 Yeah.

10:53 Are homeowners happier than renters.

10:58 Depends how you slice the data.

11:00 If you control for property types and neighborhoods

11:03 and all that kind of stuff, no, they're not.

11:06 If you don't control for those things,

11:08 I think owned homes do tend to be a little bit nicer and better maintained.

11:11 They do tend to be in better neighborhoods.

11:14 So uncontrolled renters are a little bit less happy.

11:17 There's a there's multiple studies on this.

11:19 Statistics Canada has a really good one that does exactly that.

11:21 They have controlled and uncontrolled uh

11:23 life satisfaction differences for renters and owners.

11:26 If you're a professional who is thinking about buying a house

11:29 in a nice neighborhood or renting a nice house in a nice neighborhood,

11:34 it's unlikely that you'll be happier in either case.

11:37 If you are forced to be a renter in a not

11:39 very nice neighborhood because it's all you can afford,

11:41 you may be less happy.

11:43 But it's not necessarily the renting that's making you less happy.

11:46 Is there any particular group of people that you think should be buying a house?

11:50 Yeah.

11:50 So people who are very riskaverse,

11:51 people who want to stay in one place for a very long time

11:54 because they have a family or something.

11:56 Yeah.

11:57 Yeah.

11:56 And you don't want to be priced out of of of the market that you live in.

11:59 This did happen in in some cities in Canada in recent history.

12:01 It's now reversed, but there were people

12:04 who were getting priced out of their market.

12:06 They've been renters for a long time and rents went

12:08 up so quickly that they they just couldn't keep pace.

12:12 It depends on your rental market.

12:13 Some rental markets are controlled where that's less of an issue.

12:16 So, you do have to think about things like that.

12:18 But, yeah, if you want to stay in one place,

12:19 owning your home is is the way to do that.

12:23 But, it's a double-edged sword because if you realize you want to leave,

12:26 you might be you might be stuck.

12:28 Uh, and then the other big one for who should

12:31 own a home is taxable investors with with high tax rates.

12:35 And again that comes back to the opportunity cost where if you're paying a lot

12:38 of tax on your investments whereas real estate

12:40 tends to be tax preferred in Canada gains

12:42 on your primary residence are taxfree US has

12:45 a I believe unamount and so that's that's

12:48 another thing to think about where the opportunity

12:49 cost changes depending on your specific tax situation.

12:52 When we have these conversations about buying a house or not buying a house,

12:55 one of the things I see a lot in the comment section

12:57 is people um sharing their case studies of them buying a house

13:00 30 years ago and now it went from being worth $100,000 to $600,000

13:07 and they're they're asserting that that's evidence that it's a good idea.

13:11 You probably see this.

13:12 Oh, this is this is the thing.

13:13 This is the example.

13:15 And everyone has the family member that bought

13:17 a house for $70,000 and sold it for a million.

13:20 I'm just going to read you the top four

13:21 comments and I'd like to get your response on them.

13:24 Now, the first one is the not buying a house does not work

13:26 in the UK as 90% of rents are higher than a mortgage cost.

13:29 Also, if you want to start a family,

13:31 you need a stable place to raise your children.

13:34 And with renting, you can be kicked out within a few

13:37 months notice and your whole life could be turned upside down.

13:41 I personally think there are ways around that.

13:43 And I, as I mentioned earlier, I did rent for six years of my life

13:47 with a wife and an increasing number of kids.

13:51 The two things that I always made sure

13:52 to do were to rent from professional landlords.

13:55 We did have one experience renting from a a sort of mom and pop

13:59 person who had bought a condo and rented it out and that that wasn't great.

14:03 But after that, we we were very careful

14:04 about vetting our landlords and only renting from professionals.

14:08 And then the other thing that we did which addresses at least in Canada

14:11 addresses one of the other points there is we would sign long leases.

14:15 If we want to stay in a house for a few years we

14:17 would sign a multi-year lease and landlords do tend to to like that.

14:21 The other point that was was in there that I think

14:23 is really important is that rents are higher than mortgage payments.

14:28 I think this is one of the biggest mistakes that people make when they're

14:30 making the rent versus own comparison is

14:32 they'll say this is my mortgage payment.

14:34 This is my rent.

14:35 If the mortgage payment is lower, owning must be better.

14:39 But that's not the case.

14:39 As we talked about a minute ago, you have property taxes, maintenance costs,

14:44 potential renovation spending that you wouldn't do otherwise,

14:47 and the opportunity cost of of capital.

14:49 When you add all that up,

14:51 the cost of owning a home is far more than the mortgage payment.

14:55 This guy here said, "I bought a house.

14:57 It's the best thing I ever did.

14:59 It's launched my mindset in new directions.

15:01 Remember that having your own space has profound psychological impact and can be

15:07 life-changing for some of us that want to live in a healthy environment.

15:13 What do you make of that point?

15:14 Is it have profound psychological impact?

15:16 If someone believes that it does and they've really taken

15:20 the time to reflect on their life and has decided that yes,

15:23 it it is in fact true that it has had a profound psychological impact,

15:26 of course that person should own a home.

15:28 Of course they should.

15:30 Is it true for everybody?

15:32 I don't think so.

15:33 Dawn said, "My experience,

15:34 I purchased a house in 2013 with 20% down payment deposit.

15:38 My total payment, including taxes, insurance, HOA,

15:42 home owners insurance, um is $1,800 a month.

15:48 As of today, the exact same house is renting for $4,000.

15:52 The property value has also gone up 3x.

15:54 I'm glad I bought my house." Yes.

15:56 So there are cases where real estate allows you

16:00 to use leverage very easily as as Don mentioned

16:03 and if you end up buying in a market

16:05 that goes up a lot in a short period of time, it can be really really good.

16:09 However, and this is what we've seen in Canada more recently,

16:12 it hasn't touched other markets yet, although of course the US has had

16:14 their own declines and so have other countries,

16:17 but Canada's right now in one of the biggest real estate

16:19 price draw downs when you adjust for inflation going back to 1975.

16:25 And so if you had bought, yes,

16:27 seven years ago and then well and then looked at the price in 2022,

16:31 you'd think, "Wow, I'm a genius." Of course, everybody should buy.

16:34 But if you had bought in I think it's 2021 was

16:36 the was the kind of peak and you look at at today, you're thinking like, "Wow,

16:40 I've ruined my life." So yes, there are examples like that for sure,

16:44 but that that is not what people should

16:46 expect every time that they purchase a home.

16:48 So are you saying that the future is not going to be as like as the past

16:53 for this?

16:54 I know the Canadian market best,

16:55 but I think these it generalizes outside of Canada.

16:58 We've seen record decreasing interest rates,

17:01 although that's that's changed a little bit now,

17:03 but for a period of time, we had interest rates going down, down, down.

17:05 In Canada, we had a ton of immigration.

17:07 I have no problem with immigrants.

17:10 Uh but we had levels of imig immigration that were just not

17:13 compatible with the amount of housing that we had in in Canada,

17:15 which was contributing to prices going up.

17:18 We we have housing supply just not growing uh quickly

17:21 enough which are all things that Canada's addressing now but all

17:24 that causes price cause prices to go crazy which is

17:26 I think why they've come down in such an extreme way.

17:28 So I'm not I'm not saying necessarily that we're never

17:31 going to see high house prices again or house prices going

17:34 up at an extreme rate again but in Canada at least

17:36 that has now normalized or at least started to normalize.

17:40 I don't think it's reasonable to expect

17:43 stocklike returns from real estate forever,

17:46 even though we did see that for for some years.

17:49 So for most people then you think if their goal

17:51 is to make money and they care about mobility,

17:54 being able to get up and go if opportunity arises,

17:57 a better investment decision would probably be just investing

17:59 in an index fund which gives you exposure to the stock market.

18:03 Yeah, I think the mobility piece is key

18:05 there because remember just from a wealth perspective,

18:07 we can show that hey, these are pretty close to equivalent.

18:10 Mhm.

18:10 But if mobility matters to you, yeah, I think that that matters a lot.

18:13 If you have unique investment opportunities,

18:16 that that can be another reason where your opportunity cost is really high.

18:18 Like I had an opportunity to buy equity in my company years ago

18:23 and if I had been a homeowner at the I think I actually had just

18:27 bought a house and I think I even had to reduce the amount of equity

18:29 I bought because our I think our well pump broke like around the same.

18:33 Anyway, it was a whole thing.

18:34 It's annoying, isn't it?

18:35 But that's like there's opportunity cost in the stock

18:37 market which is you know call it 7%

18:39 or whatever but there's other opportunity costs that can

18:41 be a lot higher like in that specific situation.

18:45 And the next one there is number seven.

18:49 Yeah missing tax planning opportunities.

18:52 This is something that I think people just

18:53 don't think enough about but it's not terribly complex

18:59 but there are simp simple things that people can

19:01 do to minimize the amount of tax they're playing paying.

19:03 For most people, it's just optimally using things like in Canada,

19:07 we have the RRSP and the TFSA.

19:08 In the US, it's the the Roth and traditional IRA and and 401ks.

19:14 Using those things optimally make a lot of sense.

19:16 And then the rest other types of tax planning tend to get more country specific.

19:21 There tend to be lots of things particularly for higher income

19:23 people that you can do to pay a little bit less tax.

19:26 And I think what about for lower income people?

19:28 for lower income people the government accounts that are provided uh

19:32 like the ISA in the UK.

19:34 Yeah, exactly.

19:34 Those are probably the best thing for people to be focusing

19:36 on, but even then I don't like people are often not using them optimally.

19:41 One of the things people don't talk about enough is all

19:42 the ways that rich people do things to avoid paying tax.

19:46 They have like they hire people so that they don't have to pay tax.

19:49 And I hear about all these crazy stories

19:50 of like I've started this business on the side

19:52 here so I can get a real estate license and if I get a real estate license

19:55 I don't have to pay the same tax on this thing here and I move the money

19:58 around here and I flip it around there and then I don't have to pay any tax.

20:01 Most people like the average people don't have

20:03 any loopholes that they can they jump through.

20:06 Yeah, it's true.

20:08 And even one of the crazy ones I learned about when I got some money was

20:11 that you can take a loan against your stocks and there's no tax on the loan.

20:16 So, if I have a million dollars of Facebook stock,

20:20 I can go to a bank and get 500K

20:23 in cash loaned against that stock without having to sell it.

20:27 And then on that 500K, I have no tax to pay.

20:31 And I can just hold that Facebook stock.

20:32 And when it goes up to 2 million,

20:34 I can go back to the bank and say, "Give me another 500K."

20:37 You could, but if it goes down, you get margin called.

20:39 They have to come up with the cash to

20:42 Don't they just sell Don't they just sell the stock?

20:44 They might, but then you're selling after it's come down.

20:46 So, it's not risk- free, but yeah, that is a thing that people do.

20:49 I guess everybody could do that, right?

20:51 Most people could if they invested in the the S&P 500,

20:55 they could go and get a loan against

20:56 that investment and that loan would be taxfree.

21:00 Yeah.

21:00 Same same rules for everybody,

21:02 but I would still say that you're you're taking a lot

21:04 of risk by borrowing money against risky assets like that.

21:08 Okay.

21:08 So, tax planning, there's nothing else to cover

21:10 there in terms of the average person.

21:12 Yeah, I don't think so.

21:13 But it is an important thing for people to think about.

21:14 If they're thinking about what mistakes might I be making in my financial plan,

21:18 they should definitely be thinking about are there

21:19 tax planning opportunities that I am that I'm missing.

21:22 How would they find out?

21:23 It's a tough one.

21:24 A a good CPA, what's a CPA?

21:28 An accountant, a good tax professional should be

21:30 able to identify tax planning opportunities for you.

21:32 Good financial planners similarly should be able

21:35 to identify good tax planning opportunities for your situation.

21:37 But as you said earlier,

21:38 the reality is there aren't that many things that people can be doing.

21:42 And it's really things that you could figure out

21:43 how to optimize once and then you're kind of set.

21:47 If you love the Driver CEO brand and you watch this channel,

21:49 please do me a huge favor.

21:51 Become part of the 15% of the viewers

21:54 on this channel that have hit the subscribe button.

21:56 It helps us tremendously and the bigger the channel gets, the bigger the guests.