Ramit Sethi is a personal finance expert best known for his blog, I Will Teach You to Be Rich. Recently, Sethi took to Twitter to explain why purchasing a home – although he likely will do so – is actually a terrible financial decision.
This idea may come as a surprise, since real estate is often painted as a wise purchase that can improve your net worth as you build equity in your home. But Sethi has some good reasons for why a home purchase isn't a good investment for him. Here's what he had to say.
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When buying a home isn't a smart money move
Sethi explained in a Twitter thread in March that he's "rented by choice" for more than 15 years in major cities including San Francisco, New York, and Los Angeles. He's made the decision to do that, in large part, because of the "phantom costs" that eat away at any perceived gains when housing prices rise.
Specifically, some of those phantom costs he mentioned include:
- The down payment required to purchase a home
- Maintenance expenses
- Mortgage interest
- Property taxes
- The time spent managing the property
- The opportunity cost of using money for a home purchase instead of investments
The finance expert explained that after factoring in all of these expenses – which people often don't think about – the actual return on investment homeowners get when selling is much smaller than it originally appears.
Sethi also made clear that while costs are guaranteed for renters, that's not the case with homeownership. When you rent, a landlord is responsible when things go wrong. For homeowners, on the other hand, a mortgage is the minimum cost of housing. Those who buy property may get hit with many other homeownership expenses, too, such as covering large repairs.
He also dispels several common arguments about renting, including that you're throwing money away and paying your landlord's mortgage. Sethi points out that people don't think this way about other expenditures like dining out. And he adds that landlords can charge only the rent the market bears, and they don't always make a big profit.
While Sethi explains that he will likely purchase a house eventually, his motivations will be because of other factors such as wanting to design a home with a partner, his parents moving in, having children, or a simple desire to become a homeowner. He won't buy a home as an investment, but rather as a luxury purchase.
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Is buying a home a terrible financial decision?
Now, this position makes sense for people who will use their money to invest in other assets that can provide a better return. But many people who aren't as financially savvy as Sethi struggle to invest in the stock market or other assets, but they do prioritize paying a mortgage. As a result, their home turns out to be the best way to build wealth in a practical sense.
till, anyone considering buying a home does need to take Sethi's points into account. Homes can come with unexpected costs, and they aren't necessarily the best investment. This is especially true because you can't cash in on your asset until you're ready to move out of the home, and your return on investment may be low over time.
Buying a house may make financial sense for some people. But it's important not to justify spending too much on a home because it's an "investment" – and to keep phantom costs in mind when deciding if ownership is the right step for you.
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FAQs
In I Will Teach You to be Rich, Ramit Sethi explains various concepts about money and finance, e.g. the role of credit, how banks really work, different types of bank and investment accounts, types of asset classes etc. If you're unfamiliar with such terms, this book provides a useful overview.
Is buying a house a good financial decision? ›
If you're financially stable and need a place to live, buying a home can be a great investment. With a fixed mortgage rate, you could stop pouring money into rent, start building equity and enjoy the tax deductions that come with being a homeowner.
Why don't rich people own houses? ›
Many wealthy individuals would rather save money by renting and put their dollars to work somewhere else. Instead of tying up your money in an illiquid asset like a home, one could invest it in the stock market, which often performs better.
Can you get rich without buying a house? ›
In conclusion, while real estate investment is a proven wealth-building strategy, it's not the only route to financial success. Diversifying your investments and considering alternative paths can be a prudent approach to building substantial wealth.
How much money does Ramit Sethi have? ›
Both partners work in tech and together earn about $850,000 a year, Sethi told his readers in a recent newsletter. They have a combined net worth of $2.3 million with over $1.5 million in retirement and regular investment accounts.
What is the moral of the Richie rich story? ›
It proclaims that money cannot buy happiness, that well-off people ought to protect those less fortunate, and that family is more important than money. A touching moment comes when would-be thieves question Mr. Rich about the contents of his vault; baby shoes, bowling trophies and other family memorabilia.
What does Suze Orman say about buying a house? ›
According to Suze Orman, "One of the greatest forms of financial independence is truly owning your own home outright." Orman believes you should focus on paying off your mortgage before you retire -- even making that your No. 1 goal as long as you plan to remain in your home.
Should I buy a house now or wait for a recession? ›
If your credit score is strong, your employment is stable and you have enough savings to cover a down payment and closing costs, buying now might still be smart. If your personal finances are not ideal at the moment, or if home values in your area are on the decline, it might be better to wait.
Is owning a home worth it anymore? ›
If you're in a financial position to do so and ready to stay put for at least a few years, buying a house is totally worth it. You'll gain stability, build equity and a retain sense of ownership and control, rather than being at the whim of a landlord.
Is it smart to be house poor? ›
Your house and the expenses that go with it still represent only one piece of your monthly budget. Becoming house poor can affect your ability to save for retirement, pay off debt or afford other purchases.
Millennials have been hit hard financially, with more debt and a lower net worth than their parents had at the same life stage. Growing that wealth has been made more difficult due to the drop in housing supply over the last 15 years, which has pushed prices up and made it that much harder to get into the market.
Who is the billionaire without a house? ›
In the early 2000s, Berggruen was dubbed "the homeless billionaire" when he sold off his residential properties and belongings. At 40 years old, he did not own a house, a car, or a watch. Instead, he traveled, staying in different hotels with only a small bag of clothes and his BlackBerry.
Do billionaires buy homes in cash? ›
Here's why rich people don't buy properties free and clear
Rather than tying up hundreds of thousands or millions of dollars in buying a home, wealthy people usually just borrow after making a reasonable down payment and researching their options to find an affordable lender.
Do most millionaires pay off their house? ›
In fact, the average millionaire pays off their house in just 10.2 years. But even though you're dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
How can I buy a house with no source of income? ›
Asset-Based Loan
The more valuable your assets, the more money you can borrow. This type of lending is ideal for high-net-worth individuals, retirees, and small business owners that don't have a traditional source of income but have enough in assets to pay their mortgage bills.
How to be rich book summary? ›
How To Be Rich is essentially a series of articles that Getty was commissioned to write by Playboy magazine. Getty's intention was to explain himself and why he was a businessman, and secondly get behind the myths of what it was like to have great wealth.
What is the main summary of Rich Dad, Poor Dad? ›
Rich Dad teaches that the rich acquire income-generating assets, while the poor and middle class accumulate liabilities that drain their wealth. Building passive income streams, such as rental income from real estate or dividends from investments, is a key strategy for achieving financial freedom.
What is the summary of Andrew Carnegie Gospel of wealth? ›
This belief became known as the Gospel of Wealth. He argued that the affluent had a unique responsibility to be philanthropic. In other words, the rich should devote themselves to distributing their wealth responsibly to benefit society while they are still alive.
What is the summary of the science of getting rich? ›
Brief summary
The Science of Getting Rich by Wallace D. Wattles is a classic book on personal development that teaches readers practical principles for accumulating wealth and achieving financial success through creative thinking and action.
