Yahoo Finance Ramit Sethi wants Americans to stop believing a major ‘lie’ about housing
For generations, the virtues of owning one’s home versus forking over money to a landlord have been obvious. You build equity, you may get a tax deduction on mortgage interest payments, you gain bragging rights, you gain stability, and you can paint the place any color you want.
But try telling that to one tycoon, who proclaims at the outset of his recent YouTube video, “I’m a multimillionaire, and I rent my house.”
The contented castle dwellers of America watching this video titled “Renting vs Buying a Home: The Lie You’ve Been Told” might well ask, “Just who is this guy?”
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Ramit Sethi is the host of Netflix’s “How To Get Rich,” a New York Times bestselling author and the brains behind the YouTube channel “I Will Teach You To Be Rich,” which boasts more than half a million subscribers.
He wants to change the popular mindset that “buying is the best thing ever to build equity; renting is throwing your money away.”
Given Sethi’s estimated net worth of $25 million (per Fortune), it’s worth considering his argument even if it runs counter to the so-called American Dream.
Run the numbers
Sethi isn’t 100% against home ownership. Rather, he contends that it isn’t always the best answer and renting can sometimes be a better financial decision.
To Sethi’s credit, he uses an actual address in Palo Alto, Calif. to make his point. The two-bed, two-bath condo at 776 Bryant St. sold in 2018 for $2.15 million. When he filmed his video, Sethi found that the current price estimate on the property had fallen to $1.9 million, per Redfin.
With a $1.6 million 30-year mortgage at 7%, Sethi showed that you’d pay about $10,600 a month on the mortgage alone. That’s much higher than the $5,400 monthly rent the owner charged as of January 2024. He added, “That's not even factoring in what I call ‘phantom costs’ of ownership — things like maintenance or closing costs or all kinds of hidden or counterintuitive fees that would make renting an even better financial decision.”
He believes that less than 5% of people carefully run the numbers before buying a home, and mentions three popular beliefs about housing he calls myths, including:
Renting a house means you’re just paying your landlord’s mortgage.
If you’re paying rent, you’re throwing money away.
Buying a house builds equity.
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“Most people do not realize the total cost of ownership — TCO — until they've already bought the house, and I don't want that for you,” he said. “... rent is the maximum you will pay but a mortgage is the minimum you will pay.”
He recommends using The New York Times rent vs buy calculator. After plugging in the information from his Palo Alto example, he found that renting over buying saves almost $900,000 over a decade.
But he makes it clear that if someone is renting, they need to invest their money to build wealth. If you would like real estate to be included in your portfolio without owning a home, you can consider putting money in real estate investment trusts (REITs).
Returns and stability
While Sethi makes a strong argument, it’s worth pointing out a few things.
Palo Alto has seen its boom come and go, whereas those who buy in certain areas stand to benefit from property values that explode after gentrification. In the 1980s, you could land a house for $60,000 in Chicago’s Lincoln Park neighborhood, home of DePaul University. Check Zillow today, and you’ll see the cheapest homes selling for pennies shy of $900,000, while the most expensive lists for about $10 million. If that’s not a good investment return, it’s hard to imagine what is. However, it's hard to predict the future and house prices can go up or down.
Owning your home does offer you more stability than renting. That’s a huge consideration in an age of sky-high rents and rental unit shortages (there are just 155 available rentals in Palo Alto right now). In fact, the unaffordability of apartments has hit an all-time high, according to a report by the Joint Center for Housing Studies of Harvard University. It says at last measure in 2022, a record-high 22.4 million renter households spent more than 30% of their income on rent and utilities.
If rents shoot up, financial advantages for renters drop. If you’re not a millionaire like Sethi, the new calculus of renting may stretch your finances to the limit and leave you with little or nothing to invest. Your landlord could also decide to sell the property.
Another advantage of buying is that a paid-off home, as a tangible asset, can pass from generation to generation.
Meanwhile, if the Federal Reserve starts cutting interest rates as many anticipate, mortgages will become more affordable.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
