Graham Stephan: Is It Cheaper To Rent or Buy a Home?

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Graham Stephan is a real estate investor and YouTube influencer with more than 4 million subscribers and close to half a million Instagram followers. With over a decade of real estate investment experience, this young expert is well-positioned to answer one of the toughest questions in the industry: Is it better financial planning to buy or rent your home?

Stephan, who recognizes that he is “obsessed” with frugality, has a lot of insights into the issue — even if he admits that there’s no simple answer. In a YouTube video, he gives advice and discusses the pros and cons of buying and renting a home.

Reconsidering the Popular Mindset

Most people have heard the conventional wisdom on renting vs. buying. There’s a widespread perception that renting a home amounts to throwing away money since you’re not building equity. By extension, buying a home is seen as a wise investment.

But, as always, you should be cautious about accepting popular views. “Even though there can be some truth to these statements, it’s not the entire picture,” Stephan said.

That’s why it’s important to drill down and consider the true financial cost of each option.

The Cost of Buying and Owning a Home

Calculating homeownership costs is a complex operation. It’s not just a matter of the monthly mortgage payment. When buying a home, you’ll need to consider these costs too:

• Down Payment: Typically 10%-20% of the overall cost of your home. As of the first quarter of 2024, the average homebuyer put down 13.6% of the home’s value, according to Realtor.com. The median down payment was $26,000.
• Mortgage interest rate: Stephan calls this “the cost of borrowing money” and said, “Today, that cost is going to be the highest it’s been in 20 years at just over 7%.”
• Property taxes: It varies from state to state but on average, U.S. homeowners pay 3.1% of their annual income on property taxes.
• Insurance: Homeowners insurance covers earthquakes, fires and other unexpected disasters. Depending on where you live, you can expect to pay at least $2,200 annually, according to Stephan. 
• Repairs and general maintenance: You should budget 1%-2% of your home’s value for repairs. That way, you’ll be prepared when your roof springs a leak or your deck needs major repairs.
• Personal mortgage insurance: If the down payment on your home is less than 20%, you’ll probably need to take out personal mortgage insurance to protect your lender against a potential default.

The Hidden Cost of Housing

The cost of homeownership in taxes, monthly payments and out-of-pocket repair costs is already hefty — but it’s not the whole story. Stephan points out there’s also an opportunity cost to buying a home.

For example, imagine you buy a $400,000 home with a $40,000 downpayment.

“Since you put $40,000 down, you also have to account for the opportunity cost of that money, since you’re tying up $40,000 of that money that otherwise could have been invested elsewhere,” Stephan said.

Stephan calculates opportunity cost at 6%, meaning you’d lose $200 monthly.

The Financial Benefits of Homeownership

Are you overwhelmed yet? In addition to the cost considerations, Stephan wants you to consider the financial upside of homeownership. After all, buying a home isn’t all cost and no gain.

Buyers can enjoy:

• Long-term home appreciation: For a $400,000 home, it’s about $330 a month.
• Equity: The home gains about $300 per month in value in this hypothetical scenario.
• Savings in the form of mortgage payments against the principal: This is about $200 monthly in this example.

The Cost of Renting

The cost of renting is extremely easy to calculate. Renters are responsible for one monthly charge. Unless they break or damage something, renters aren’t required to pay for repairs or the general upkeep of the home.

This brings you back to the big question: Is it cheaper to buy or to rent?

Should You Buy or Rent?

Stephan feels it all boils down to your timeline and your values. 

In the long run, homeownership does make financial sense. But homes take at least a decade to appreciate enough to make it a sound financial investment. If you plan to live in your home for less than 10 years, renting will save you money. But if you’d like to live in your home for at least 10 years, then ownership is smarter.

It’s also a question of what matters most to you. “If you want and value stability, owning a home is priceless,” Stephan said.

On the other hand, renting makes more financial sense if you want to be free to move — say, for a new job, a relationship or an adventure.

Whatever your choice is, be smart, crunch the numbers and listen to your values!

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