Navigating real estate is much more than just saving for a down payment. Before you invest, it’s recommended to seek the advice of financial advisors and success stories.
Ramit Sethi is a self-made millionaire with an estimated net worth of about $25 million, the star of the Netflix series “How to Get Rich,” the author of “I Will Teach You To Be Rich” and a member of our 100 Most Influential Money Experts list. This is a pretty solid resume when it comes to personal finance.
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Sethi believes that investing is the best way to combat inflation. However, when it comes to real estate — the investment that most people regard as the gateway to generational wealth — Sethi has a take that can be described as unconventional, if not highly controversial. Let’s explore.
For generations, Americans have viewed homeownership as the ticket to middle-class stability and a hallmark of financial success. However, Sethi told CNBC last year that he believes America’s collective aspiration to own property has become a “religion.”
He feels that the tendency to associate renting with failure compels many people to rush into buying without analyzing such factors as paying property taxes, homeowners insurance or even maintenance costs. Considering that a house is the biggest investment that most people will ever make, not to mention the most upfront cost, Sethi said he’s “tired of the blind obsession with homeownership in America.”
Sethi bases his position on three points:
His rejection of the common assumption that renting a home is always a waste of money that pays your landlord instead of paying yourself in the form of equity;
His assertion that stocks have delivered better returns than real estate even with the recent surge in home prices across all housing markets;
His insistence that homeownership comes with a laundry list of secondary expenses that renters avoid on a monthly basis.
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It can get complicated when weighing the costs of mortgage payments versus monthly rent. However, when referring to typical aspiring homeowners, Sethi outlined it like this on X:
“They see this:
2-bedroom house for $1,600 rent
2-bedroom house for $1,600 mortgage
And think: ‘Same price? I should build equity!’”
But he suggested that only the renter truly pays $1,600. He wrote, “Rent is the MAXIMUM you will pay, but a mortgage is the MINIMUM you will pay.”
According to Sethi, a lot of people aren’t aware of all the hidden fees — or “phantom costs,” as he calls them — in buying a house, which he claimed can typically add 30% to 50% to the monthly mortgage. These fees include property taxes, insurance, maintenance “and more.”
When a commenter asked Sethi to expand on “and more,” he responded, “Interest, closing costs, transaction costs, any renovation costs, labor costs, gas to Home Depot, etc. Those are just a few and there are even more, which you can find by searching for ‘hidden expenses of homeownership.’”
Several users pushed back, saying that landlords include those costs plus their profits into the price of rent.
One wrote, “The owner of the property you’re renting also has to incur those costs and surely would like a return on her/his capital at least or (probably) more than the cost of a mortgage. Under these assumptions, why would anyone rent at par with a mortgage.”
Sethi responded that investment properties pay only when investors keep their rents competitive. He wrote, “Landlords can ‘want’ anything. Doesn’t mean they can get them. The market decides, not their costs or desires.”
Sethi has said that he has rented by choice in Los Angeles, San Francisco and New York, and that even in the most expensive markets in the country he earned more money while renting than he would have from the sale of a comparable property over the same time.
When renting in Manhattan, he calculated the cost of buying a similar property for sale nearby — including the phantom costs — and found that the true monthly cost of ownership would have been double his rent payment. That, according to Sethi’s assessment, gave him 100% more money to put into investments with the potential to deliver higher returns.
This, of course, is not the case for most renters. Each situation and property are unique. The key, Sethi posted, is to “run the numbers to make sure you can afford it.” He offers a three-step guide to running the numbers when buying a house on his website.
Sethi is hardly alone with his stance on renting vs. buying. In fact, several economists maintain that renting is probably the better option financially for many people. Even when buying pays off financially, renters retain the flexibility to make significant life changes, which homeowners often forfeit.
Others would point out that, unlike stocks that you can quickly sell, equity is wealth that’s hard to tap into. Therefore, Sethi’s position that renting frees up time and money to grow your income and investments, particularly in expensive cities, checks out.
Sethi’s experience is not universal though, and homeownership remains a worthwhile pursuit. Still, he and many other credible money experts have effectively debunked the notion that renting is always a waste of money — and it doesn’t make you a failure either.
Caitlyn Moorhead contributed to the reporting for this story.
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This article originally appeared on GOBankingRates.com: Renting Is Better Than Buying? Ramit Sethi’s Controversial Take on Wealth
