Read this before you buy a home

To buy or rent a house? That is the question…

I recently sent an email to my network letting them know that Kim and I bought a home:

If you’re interested in learning more about the research I did and why I ultimately chose to buy a home (even though there are much better financial investments), reply to this email and I’ll send you my notes.

To my surprise, hundreds of people replied to my email requesting my notes. After all, I claim that there are “much better financial investments”.

Because there was such a high demand for my notes, I took the time to refine my research with my good friend Steven Chen.

I find it surprising that to this day, many educated, savvy millennials are brainwashed to believe that buying a home is a “smart financial investment.” In fact, as you’ll see in our research, buying a home (to live in) is a terrible financial investment when compared to the alternative (rent and invest in the market).

Without further ado, let’s dive into the research.

I could not have published this article without the help of Steven Chen. Thank you my friend.

Also, thank you to my friend Tiffany Chin who worked tirelessly to find us our perfect home. If you’re in the hunt for a home in Southern California, then I highly recommend you give Tiffany a call.

The key question: during a 30-year span, what gives you a higher return on your investment: buying a home or renting + investing in the market?

The key assumption: the alternative to buying a home is investing in the market — the down payment and the monthly income that you save from not paying a mortgage is invested in the market.

This will be a hands on activity. Take the following steps below to follow along and conduct your own research:

Step 1: create a copy of our spreadsheet

click on file make a copy

Step 2: set your values for home ownership

set the values for owning

  • Set the value of your home
  • Set your down payment
    • Use 20% as a minimum down payment amount
    • 25% down payment will get you a much better interest rate
  • Set your interest rate
    • On January 2016, I was quoted a 4.15% interest rate for putting 20% down and 3.75% interest rate for putting 25% down
  • Leave the terms to 360 months

Step 3: set your taxes, HOA fees, and maintenance costs

tax hoa maintenace v2

  • Set your state tax rate
    • The tax we pay for our home in California is 1%
    • I suggest checking online for the tax rate for your state
  • Set your HOA fees
    • We bought in Irvine, and they have the worst HOA fees :(. We have fees for the city, the condo, and the community. Yikes!
  • Set your monthly maintenance costs
    • Newer homes will have much less maintenance costs than older homes

Step 4: set the annual appreciation rate for your home and the agents’ commission fees

appreciation and commission

  • Set the annual appreciation for your home
    • This is how much the value of your home will increase year-to-year
    • According to this article, the price of new homes per square foot went up by only 4.2% annually from 1963 to 2008
    • Steve and I used 2.5% to be conservative
  • Expect to pay 5% – 6% in real estate agent commissions

Step 5: set the rent and market factors

market forces and prices

  • Set the rent price
    • Rent is difficult to estimate as the price will vary greatly throughout your lifetime. If you’re single, then rent prices will be relatively low; if you have a family, then you need multiple bedrooms so the rent prices will be relatively high. Do your best to estimate a starting rent price that is representative for the next 30 years.
  • Set the annual rent increase
    • We have rent control here in San Francisco and the rent increases from 1.2% – 2% on a year-to-year basis.
  • Your initial investment will be equal to your down payment
  • Your investment is the different between your monthly total (for owning a home) and your rent price
    • The investment is how much you’re going to invest in the market on a monthly basis
  • Set the average annual market return

Ok, your research numbers are complete. Let’s dive into the analysis.

Analysis: buying a home vs renting

Note: the analysis is based on the default values Steve and I used to compare buying a home vs renting:

  • Starting home value: $700,000
  • Starting rent cost: $2,500

You take an immediate hit on your investment when you buy a home

immediate hit on month 1

Immediately starting in month 1, renting + investing in the market beats home ownership by a substantial $40,702.

The culprit: the 6% real estate commission fees you pay when you sell your home.

If you rent instead of buying a home, then you’ll have $551,579 more in your bank account at the end of 30 years

home buy vs rent

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

– Albert Einstein

This is the beauty of compound interest — the money in the market (7% year-over-year growth) is growing faster than the value of your home (2.5% year-over-year growth).

If you hold on for 10 more years (40 years in total), then you’ll have almost $2,000,000 in your bank account!

40 years 2 million more

Let’s say that at the end of 30 years, you decide to continue living in your home because it’s completely paid off and now it’s like free rent! Sounds good in theory, right?

Well, because of compound interest, after 40 years, you will have almost $2 million more in your bank account. That’s a huge difference in your retirement!

Play around and customize your numbers

Your numbers will most likely differ greatly compared to the default values that Steven and I used. Real estate and rent prices differ greatly across states and cities. Share your numbers with us in the comments section!

Ok, now I’m sure you must be thinking: “if renting + investing in the market is so much better than buying a home, then why did you and Kim buy a home?”

Good question.

Ultimately, the Google Spreadsheet analysis can only give you an analytical, tangible-benefit analysis; however, it misses out on the emotional, intangible benefits of owning a home.

Furthermore, there are many personal, professional, and financial variables that one must factor into a decision to buy a home or rent.

Why Kim and I ultimately chose to buy a home

2016-03-26 19.22.36

2016-03-26 16.22.54 2016-03-26 17.05.02

There are so many reasons why we bought a home, but ultimately, it just felt right for us.

The neighborhood was perfect, the amenities were awesome, it’s a close distance to our friends and family, the elementary school is completely new and state-of-the-art, and most importantly, Kim has always dreamed of owning her own home, and like I always advise my friends: happy wife, happy life.

Published by

Jun Loayza

Jun Loayza is the Chief Growth Officer at Bunny Inc. In his startup experience, he has sold 2 technology companies and raised $1M in angel funding. Jun lives in San Francisco, CA with his wife Kim.

9 thoughts on “Read this before you buy a home”

  1. Jun,
    Thanks for sharing this! I think it’s a valuable tool and does a good job of illustrating the complexities of deciding what is a “good” vs. a “bad” investment. What I’ve learned from fiddling around with your calculator for the past 30 minutes or so is that it really depends on the cost of home prices vs. rental prices in your area. I live in Des Moines, Iowa which is a completely different market than California. Basically, my “investment” (cell Q4) ended up being negative, so it quickly becomes a better decision to buy vs. rent. If you’re curious, I put in $250K for home value with a 20% down payment. I put in $1,500 for rent. It’s also very unlikely that you’d have HOA fees here, and if you do, they’re like $15/month. 😛 I did adjust the market return to 5%.

    I really hate those agent commission fees, as 7% on a $700K home seems crazy for the (little) amount of work it may take to sell the home (sorry, real estate agent friends!)

    Anyway, thank you for putting this together!

  2. It doesn’t seem like your spreadsheet is comparing condos to condos. I mean I don’t think you’re going to be able to rent a $700K condo for less than what the owner is paying for PITI. So, either you’re renting in a totally different area, or much smaller condo/apartment. Because the ‘owner’ of that condo would be making money off your rent, not renting it for $1000 less than the PITI… unless the owner has already paid off the mortgage, then any money you’re paying toward rent is nearly pure profit for the condo owner.

    Another way to put it is after 30 years the owner lives rent free and the renter continues to pay rent.

    1. Hey Cosmo Crackers, when you purchase a home, you usually purchase for the future. I’ll use myself as an example:

      Kim and I are married (we’re a family of 2). If we were to live in Southern California, we would rent a 2 bedroom apartment. I can easily find a 2 bedroom apartment in Southern California for about $2,500.

      However, we bought a 3 bedroom house — this is because we bought for the future. In the future, we plan to start a family (possibly having 2 kids), so our house needs to be big enough to accommodate that.

      This is the challenge with buying a home — you buy for the future, not for the now. This is the flexibility that renting affords you — you can rent the apartment size that you need now, and then upgrade later.

      This is why in the spreadsheet, we start the rent at $2,500.

      1. Sounds like you should have bought a ‘starter home’. If you are truly worried about the costs, that would be a good way to keep costs low early and still give you equity when you’re financially ready to size up.

  3. Let’s not forget that real estate can also plummet. I bought a condo as an investment (renting it out) 7 years ago and it’s now worth 30% less than what I paid. Wouldn’t surprise me if it happens again soon.

  4. “There are so many reasons why we bought a home, but ultimately, it just felt right for us.”


    It’s good that you crunched the numbers so you could do a real cost-benefit analysis. What you’re saying is, all those other, non-monetary benefits you listed are worth more than the extra $500K you’d have over 30 years. While people might agree or disagree with you on the value of those intangibles, you are clear on your priorities and made the choice you did for solid reasons. I don’t understand how people could make a similar choice without crunching the numbers as you have.


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