So should you buy a house?
Ali Abdaal is one of my favourite YouTubers.
He’s a former NHS doctor and makes “silly videos for the internet”. (His words — not mine!)
It’s a lucrative pursuit. His main channel has 2.97 million subscribers, and he has a team of 19 people. In this video, he explains how online income streams made him $4,790,000 in 2021.
In one of his latest videos — My $2.4m London Apartment Tour — he talks through the financials of owning your own place.
It’s one of the best takes on the whole “rent vs buy” argument I’ve ever seen.
Here’s a breakdown.
The context
Ali starts with an apartment tour.
All you need to know is this. He lives in a nice apartment in a nice building that’s full of amenities. A gym, spa, coworking space, entertainment room — the lot.
“If you were to buy somewhere like this, in Central London… this flat would cost £1.8 million or $2.4 million.
“I did not buy the place… I could not afford it. I wanted to live in a nice place in Central London, and a nice place in Central London is super expensive…
“I don’t yet have enough cash to actually get a mortgage or buy a fancy-ass place like this, so I decided to rent instead.”
— Ali Abdaal
Ali views the decision as an experiment.
He’s going to rent the apartment for a year to see what it’s like living in London. He’s “young and unencumbered with dependents.”
But what about the cost?
Rental cost
“Well, me and my housemate are paying £4,100 a month… which comes to just under £50,000 a year…
“This place is fully furnished. We didn’t have to worry about furniture or anything like that…But it doesn’t include bills…
“Bills-wise, we’re paying £459 a month…”
Ali knows how ridiculous this seems. He and his flatmate have gone from renting a two-bedroom flat for £1,400 a month to renting a two-bedroom flat for £4,100.
That’s a 3X increase!
The question is, why’s he doing this?
“… There were two main factors…
“The first one was the location, and the second was the niceness of the apartment…
“Location is the one that I think’s worth it…
“This place is bang in the middle of Central London (and) it’s amazing for transport links… The area’s super nice. There are coffee shops, restaurants, etc, and it’s super easy to get everywhere…
“If the location was the only thing I cared about, probably for about half the price… we could have got a two-bedroom, relatively-okay apartment in Central London…
“The extra £2,000 a month is mostly because of the niceness of the building and the niceness of the amenities…”
Before he moved in, Ali thought he’d value the amenities a lot more than he does.
He’s not sure it’s worth it.
“When I think about getting a place in the future… I probably wouldn’t rate the amenities and fanciness of the flat as much…”
The “buy vs rent” ratio
There’s one question Ali has heard a lot since moving in:
Why not just buy a place in London?
Here’s his response:
“Firstly, it’s really frickin expensive to buy a place in Central London!
“Generally, when you’re thinking about buying, you’ve got to think about the buy versus rent ratio.
“In a place like Central London…. it costs a lot more proportionally to buy a place than it does to rent an equivalent place…
“For example, this place would cost £1.8 million to buy, but it ‘only’ costs £4,000 a month to rent…”
Ali goes into the nitty-gritty details:
“So let’s say you’re putting a 10% downpayment to buy this place of £180,000, and you’re getting a mortgage of £1.6 million. You need to have an annual income of £400,000 per year…
“Most people don’t have that sort of annual income…
“With an annual income of £100,000, you could rent a place as nice as this, even though you’d need four times that amount to buy it. So in this particular context… the buy versus rent ratios are wildly skewed.
“This means if you want to buy a place on a £100,000 salary, you’d end up in a much grimier and less nice place… compared to if you rented it…”
But what if Ali did buy the apartment?
If he had enough money and actually wanted to, here’s how it might look:
“£1.8 million. 10% downpayment (would be) £180,000. £1.6 million (would be the) mortgage. And let’s say the mortgage has an interest rate of 1.7%, which is the interest rate on my Cambridge flat…
“That would mean that every single month, I’d be paying £6,500 in mortgage repayments.
“The mortgage repayments would be more expensive than the actual rent — about 50% more…
“When you own an apartment — at least in the UK — you also have to pay ground rent & maintenance… I’d estimate that for this building, the ground rent & maintenance is around £5,000 a year… Around £600 a month.
“So I’d be paying around £7,000 a month in terms of mortgage repayments… and ground rent & maintenance. Again, this is compared to the £4,000 a month in terms of rent…”
But renting is “money down the drain”, right?
This is where Ali’s logic comes to the fore.
With buying, the traditional argument is this. You’re building equity in a place.
With renting, it’s “money down the drain”. You won’t see it again.
Ali agrees with this.
However, he doesn’t think it’s so cut-and-dry.
“… If we use an amortisation calculator… some amount of the mortgage repayment is ‘principle’. (This is) how much is actually contributing to the equity of the house.
“ Another big part of it is ‘interest’ which is literally money down the drain. It’s the money you’re paying a bank for the ability to get the mortgage…
“If we run these numbers… I’d be paying £2,200 a month just in interest payments, and another £600 a month in ground rent & maintenance…
“Around £2,800 a month would be ‘money down the drain’…
“This means the difference between £4,000 a month of rent and £2,800 a month in terms of ‘money down the drain’ (is) about £1,500.
This is where things get tasty!
“Let’s say you’re ‘saving’ £1,500 a month by buying the place…
“Even if we ignore the taxes and stamp duty and all that kind of stuff, and we just think about the downpayment, it would cost around £180,000 to actually buy the place.
“So in essence, that’s putting £180,000 away and saving £1,500 a month — £18,000 a year.
“18,000 / 180,000 is 10%…
“By putting this £180,000 into the mortgage through the downpayment, you’re getting a 10% rate of return every year… In fairness, this is pretty good…”
The calculations don’t end here.
To figure out the difference between buying and renting, we’d have to figure out what the theoretical £180,000 would be doing instead.
Ali has an answer for this:
“… If it were me, I’d probably put it into a low-cost index fund like the S&P 500…
“ It’s done really well over the last 5–10 years… but if we take an average over the last 30 years, the average rate of return is around 7%…
“The difference between me buying this place and renting it is 3% of £180,000 as an annual rate of return…
“Which is £5,400 per year.”
So what should Ali do in this scenario?
Financially speaking, it would have made sense for Ali to buy the apartment.
“So really the money it costs to rent this place is around £5,400 a year if you take these numbers into account and make a few assumptions along the way…
“At that point, it’s better to buy this place than to rent it… At least you’re saving this £5,400 a year.”
However, this decision was more than just a financial one.
“… Why do people rent in the first place? I don’t think it’s quite as simple as renting is ‘money down the drain’…
“When you buy a place, you’re kind of stuck with it. You have to worry about it. You have to deal with the maintenance. You have to deal with the faff…
“I didn’t know what it would be like to live in Central London. I wanted to try it out and renting gives me options.
“It gives me the possibility to change my mind…
— Ali Abdaal
Takeaways
Ali can turn a complex subject into something simple.
His apartment tour video is no different.
The whole “buy vs rent” argument is hotly debated, and Ali makes compelling arguments. Renting isn’t just a financial decision. It’s an emotional one.
And whether you should buy or rent really depends on your situation.
“Whether something is ‘worth it’ is hard to objectively define.” — Ali Abdaal
Here’s a quick summary of how Ali thinks about buying versus renting a property (from a financial point of view):
- Step #1: Decide what you want from your property. Is location important to you? Or do you have other preferences, like the niceness of the building? You can end up paying more, depending on what you want.
- Step #2: Consider how much rent costs each month for the property. Don’t forget to include bills like gas and electricity. These often aren’t included.
- Step #3: Work out your monthly repayments if you were to buy the same place. You can use an amortisation calculator to figure this out. Consider the mortgage repayments and any extras, including ground rent & maintenance.
- Step #4: How much of the monthly mortgage repayment goes towards “principle”. How much goes towards “interest”? Interest payments and things like ground rent & maintenance are “money down the drain”.
- Step #5: Compare the monthly rent to the monthly “money down the drain” through buying. How much are you “saving” by buying — if anything?
- Step #6: If you have a downpayment of £180,000 away and save £1,500 a month through buying, that’s £18,000 a year. 18,000 / 180,000 would be a 10% annual rate of return.
- Step #7: Compare this annual rate of return to what you could get elsewhere. For example, you may decide to invest the same downpayment into the S&P 500.
- Step #8: Work out the difference between the annual rates of return. In Ali’s example, the 3% difference equates to £5,400 a year.