Leasing compared to Shopping for a household | Housing | Finance & Funds Marketplaces | Khan Academy

Designed by Sal Khan.

Enjoy the future lesson:

Missed the earlier lesson? Enjoy right here: https://www.khanacademy.org/economics-finance-domain/core-finance/housing/household-equity-tutorial/v/household-equity-financial loans?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets

Finance and funds marketplaces on Khan Academy: Is it always better to buy than hire? What if household rates go up significantly and rents will not? How can we compare household rates to rents to figure out what to do. This more mature tutorial (reduced-res, undesirable handwriting) walks us via this. It is about housing but equivalent contemplating can be utilized to any hire-vs-buy determination (spoiler warn, Sal did inevitably buy a household).

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23 thoughts on “Leasing compared to Shopping for a household | Housing | Finance & Funds Marketplaces | Khan Academy

  1. Thank you for saving my life AGAIN! I used you as my math curriculum when I was homeschooled, I used you to survive organic chem and physics, and now you'll help my with my living situation in grad school ( on campus housing is few and far between) From the bottom of my heart, thank you!❤

  2. Understood, but the big difference after the 30 years of rental or paying on a mortgage, in this case 1 million house. At the end of 30 years you would now have an asset free and clear worth 1 million dollars whereas if you were a rental you would have nothing?

  3. My post on mortgages
    Title: Mathematical proof as to how usury destroys wealth and how abstaining from usury increases wealth.
    Alan: Whenever most people want to go buy a house, they do not have $100k ($100,000) or $200k in the bank.
    Ben: So what do they do if they want to buy a house?
    Alan: They go to the bank and as them for help.
    Ben: How?
    Alan: Well it is like this. The bank will ask them qualifying questions:
    How much do you make and what are your obligations. Just to keep things simple let say the person makes $33k. The bank will say that based on a ratio of 1 to 3 you can buy a $100k house and lend the money.
    Ben: So what, most people do this and it is a custom or tradition to buy a house in this way.
    Alan: What you need to realize is this, the biggest single output of a person is the living expense that is the rent or mortgage. So let say that you get a 3% raise in your salary next year but rent or the price of a home goes up $10% did you get a 3% raise or a 7% pay cut?
    Ben: On paper I got a 3% raise but in inflationary terms, I got a 7% pay cut being that that is my biggest expense.
    Alan: This is where the problem lies. So people work very hard for their money and it seems that they are getting ahead but in reality they are struggling. That is because the value or power that their money commands is being reduced year after year.
    Ben: So Alan, know all of this, what can be done to reverse or fix this situation?
    Alan: Let's say that out of your paycheck you transfer $40/week to your savings account and don't touch it and you do this week after week after week. How much money are you going to have in your savings account after a year assuming a 50 week year.
    Ben: $40 * 50 weeks = $2000
    Alan: how much would you have if you continued this process for another 19 years?
    Ben: $2000 + $38000 = $40000. Alan where are you going with this? I don't see the connection.
    Alan: Imagine if you did this and at the same time you decided that you will not buy a home until you have the entire amount for the purchase price of a house in your bank and that you will keep renting. Also, you decide to tell everyone on social media that you are doing this. What will happen to the price of a house if no one borrowed money to buy a house and every single person did this exact same thing. What would happen to the price of a home over the next 20 years?
    Ben: The house price will drop.
    Alan: If no one borrows money to buy a home and a $200k house drops at a rate of 7.5% every year, what would be the price of a house after 20 years?
    Ben: year 1= $200,000 x (1-0.075) = $185,000
    year 2= $185,000 x 0.925 = $171,125
    year 3= $171,125 x 0.925 = $158,291
    year 4= $158,291 x 0.925 = $146,419
    year 5= $146,419 x 0.925 = $135,437
    year 6= $135,437 x 0.925 = $125,280
    year 7= $125,280 x 0.925 = $115,884
    year 8= $115,884 x 0.925 = $107,192
    year 9= $107,192 x 0.925 = $ 99,153
    year 10= $99,153 x 0.925 = $ 91,716
    year 11= $91,716 x 0.925 = $ 84,838
    year 12= $84,838 x 0.925 = $ 78,475
    year 13= $78,475 x 0.925 = $ 72,589
    year 14= $72,589 x 0.925 = $ 67,145
    year 15= $67,145 x 0.925 = $ 62,109
    year 16= $62,109 x 0.925 = $ 57,451
    year 17= $57,451 x 0.925 = $ 53,142
    year 18= $53,142 x 0.925 = $ 49,157
    year 19= $49,157 x 0.925 = $ 45,470
    year 20= $45,470 x 0.925 = $ 42,060
    Alan: Which is about $40k. Now you take the $40k that has accumulated over 20 years and go buy that house cash. Now you don't have a rent payment or a mortgage and you are still 10 years ahead of the cat who got a 30 year mortgage today.
    Also, let say that you have a salary of $40k. What is the ratio of that salary to a $200k house.
    Ben: 1:5 or 5 times greater than the salary.
    Alan: Let's say you were to do all this and your boss froze your pay for the next 20 years. What would the ratio of your $40k salary to that $200k house that has now dropped to $40k?
    Ben: 1:1
    Alan: So wouldn't you agree that the value of your $40k salary in 20 years would be the equivalent of you making $200k today. Not only that but you are also not in the higher tax bracket of those making $200k.
    Ben: That is amazing. Then I would truly be prosperous. Then I could enjoy my life and be at peace with myself.
    Alan: For centuries people have be duped by the super rich and have got themselves into serious problems and have only made the elites rich at the expense of the simple people by making them believe that progress and prosperity can only be achieved by pawn their souls to the bank. The only people laughing all the way to the bank is the bank themselves and no one else.

  4. People who rent don't have 100K to invest at your 2%. I like your vids Khan. When you buy you HAVE to put cash down. There are all different walks of life. Renting can be attractive to well to do people. Anyhow I'm drunk and rambling.

  5. Typically you can get a much better house by buying…..remember the owner of the rental is doing it for a profit…rents WILL go up….and when you finish renting you have nothing but receipts…no equity, nothing

  6. If you are going to talk about the investment income on the $100,000 of unused money that was saved for the down payment on the renters side you need to balance that with the appreciation of the $400,000 asset (the house) on the buyers side. That down payment IS an investment in itself. It also lets you get appreciation on the amount you borrowed which (in addition to the tax credit) lets you offset the expense of interest even further.

  7. Why is he assuming that you are going to pay only the interest to the bank each month, instead of the loan itself? If you pay only the interest, you will still have to pay $300k in 20 years or so if you want to actually buy the property that you borrowed from the bank to live there. Sounds like you are getting all of the downsides of owning with none of the perks of renting?

  8. The market is unpredictable, and as time moves forward becomes more and more unpredictable. Jobs don't pay what they use to and a lot of people are not in a position to buy a home. Buying a home is nice if you know you're going to be at your job long enough to pay off the mortgage, or if you invest wisely or create a solid business all of which are gambles. In today's economy education is becoming outdated much faster than it used to be, so you can expect people to last much less time at their jobs unless they keep up with the new age educational demands. Also, there are various illnesses you can get for no damn reason if you are unfortunate and this happens across the economic board and it only continues to get worse. Renting is safer, and buying is a gamble. My advice is to live a modest life, with all the work that comes with owning a home I think it's better to own a nice apartment. People are weird, they want a living room, a dining room, a kitchen, an entertainment room, a video game room, individual bedrooms for all their children and a huge backyard where the kids can go out and play. Reality is most kids are on their phones all day, on the internet, or playing video games. If you want them outside send them to the local park and let them play there it's much better than your lame ass backyard, give them some money and let them go to the arcade, mall or movies with their friends. You've got this big ass house for the sole purpose of trying to be like everyone else and don't think about how many other options there are for your family. Most people make around 45k a year…what world is everyone living in where buying a house actually makes sense on that kind of income lmao I guess if you believe in self fulfilling prophecies you can take the gamble, but life is a roller coaster and unless you've got a supportive family you'll find yourself in sticky situations so it's just better to play it safe and make the most of what you have.

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