Ramit Sethi is not a fan of buying a home, but it's not an emotional decision. The financial guru and author of "I Will Teach You To Be Rich" crunched the numbers and exposed how homeownership can be more expensive than renting.
It's common to hear that you are throwing your money away if you rent, but that isn't always the case. In fact, you could be throwing your money away if you buy a home instead of renting.
"You've been lied to about buying property," Sethi claimed.
Sethi breaks down why renting may be the better choice and the mentality you should have if you want to buy a home.
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The Phantom Costs Of Homeownership
The cost of homeownership is far more than just a mortgage. Sethi explains that there are several phantom costs of homeownership that are hard to notice. Taxes, closing costs, repairs, gas, maintenance, insurance, time, and opportunity cost are some of the expenses he covered.
While landlords can pass these costs on to tenants, opportunity cost is a notable one. Instead of saving $200,000 for a down payment, you can rent and put that money to work in an index fund. Sethi explained that you could grow your wealth more by putting down payment money into the stock market instead of putting it into a home.
It's possible to lose money on a house even if you sell it at a higher price due to all of the phantom costs adding up. That's part of the reason why Sethi believes you should prioritize building a stock portfolio over buying your first home.
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Real Estate Doesn't Always Go Up
A core component of viewing a house as an investment is the notion that real estate always goes up. Sethi explained that it's a myth to say that real estate goes up. He also said it's a myth that real estate doubles every 10 years.
If you bought at the peak of the pre-Recession bubble, it took many years to break even. However, real estate prices can decline in the long run as fewer people have children. "Dual Income, No Kids" families are becoming more common, and population decline translates into fewer home buyers and lower prices.
Just because real estate has a good long-term history doesn't mean asset prices will continue to rise. Furthermore, some real estate markets do better than others. Just because you own a house doesn't mean it's going to double in value every decade.
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Run The Numbers
Regardless of whether you want to buy or rent, Sethi says that you should always run the numbers before making a decision. He once had an opportunity to buy a property in New York City that was the same size as his apartment. However, he realized that it was much cheaper to rent than to buy a nearly identical property.
Buying is usually far more expensive than renting in big cities. Sethi prefers to live in big cities like New York and Los Angeles, so he's usually in areas that are plagued by skyrocketing housing prices and phantom costs.
Sethi says it's only a good idea to buy a house if you will live there for at least 10 years, have a down payment, and can ensure that the mortgage is less than 28% of your gross monthly income. He also says that you should treat a house as a purchase instead of an investment. You shouldn't mind if the house loses value over the long run if you are ready to become a homeowner.
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