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## Finance and capital markets

### Course: Finance and capital markets>Unit 2

Lesson 2: Renting vs. buying a home

# Renting vs. buying (detailed analysis)

## Want to join the conversation?

• It sounds to me that best thing to do is to save enough money to outright purchase the house and not get a loan to pay the bank the interest on the loan. Then its a win win situation where you could rent the house out and have positive cash flow.
• That could work for some people. Just remember that while you save the money, you will still be paying rent.

Scenario #1: Pay rent for a long time while you save money to outright purchase a house.

Scenario #2: Pay rent for a shorter period of time then get a mortgage to buy your house.

Scenario #1 has higher rent expense, scenario #2 has higher interest expense. Neither of which is a win win and the cheaper option will depend on your situation.
• Nice spreadsheet. However, if I extend calculations for all 30 years, I am not getting debt = 0 (row 28) at the end of month 360. Is that correct?
For 1,000,000 purchase price with 20% downpayment and 5% interest for 30 years, I got mortgage payments = 4,271.64. With this monthly payments, I still have \$19,085 in debt at the end of 30 years.
On-line mortgage calculator gives me 4,294.57 mortgage payments and that does reduce debt to 0.
It seems there is an error in the spreadsheet. Is it?
• Alessandro P., you are right - the issue is in the mortgage payment and your formula is correct.

More simpler Excel formula will be
=(B4-B5)B6/12(1+B6/12)^(B7*12)/((1+B6/12)^(B7*12)-1)

or even
=(B4-B5)*B6/12/(1-(1+B6/12)^(-B7*12))

or using Excel capabilities:
=-PMT(B6/12;B7*12;B4-B5)

Thanks to jtponsi and leball99 for pointing to EMI formulas
• The video is show max resolution is 240p, I cannot see the texts, is this only for me?
• So when you're done calculating, you determine which option is better by subtracting the equity of buying or renting (how much you saved vs how much you sold your home) by the liability or cash outflow of renting or buying to get the asset value. Whichever one results in a higher asset value is the better choice? Am I on the right track?
• This is my first comment, and this is because I just can not understand what the very last number on line 58 really means. So on our excel spreadsheet, it is 21,426.. and so does this number tell me that it is in fact better to buy? I don't understand since the conclusion of the previous 2 videos all point to the overwhelmingly consensus that renting is better than buying. Maybe I am confused about the present value benefit..
• Is it in brackets or without brackets? ...if it is within brackets that means a negative value and means you're better off renting.

If you get lost you can just compare the numbers on lines 54 and 56 - whichever is larger is a better fit for you (given your assumptions).

To be fair - I don't think this series of videos was trying to convince people to rent instead of buy...just to have you think the decision through for your own circumstances.
• Why doesn't he calculate Present value benefit of owning vs. renting for the amortization period of 30 years, instead of 10 years?