Why Ramit Sethi Says Renting Can Be a Better Decision Than Buying

Will your finances actually thank you for buying a home?

One of the most firmly held beliefs repeated by financial gurus is that you should buy a house basically as soon as you can afford it. Most seem to have this deep conviction that you can't possibly be financially successful if you rent.

Ramit Sethi, of I Will Teach You To Be Rich fame, is one of the few popular personal finance gurus to fly in the face of this advice. In a recent Twitter post, he wrote:

"A mortgage broker (lol) writes that it's 'UNIVERSALLY APPLICABLE' that having a mortgage beats renting for the past 17 years. I rented for the past 17 years. I tracked my numbers meticulously. Renting was a far, far better financial decision than owning for me."

Owning up to reality

The housing market, like any other market, fluctuates regularly. We all heard the stories in 2008 about the thousands of people who wound up underwater on the homes they'd purchased in the years prior during the housing bubble.

For every tale of someone making their fortune in real estate, there's another of a family that lost everything when their home went down in value or needed repairs they couldn't afford.

So, why are so many people still absolutely convinced that home ownership is the end-all and be-all of financial independence? According to Sethi, it's a combination of tradition, propaganda, and FOMO -- with a healthy dose of improperly-crunched numbers.

The "throwing your money away" propaganda

Owning your own home is a cornerstone of the "American dream" we're all fed from infancy. And the idea that you need a home is reinforced by just about everyone, from the real estate lobby to the government to our own parents.

And it's not just about having somewhere to raise your 2.5 kids. The idea that real estate is an "investment" has been deeply ingrained in our society. A big part of that narrative is that you're "throwing money away" by paying rent, since you're paying off someone else's mortgage instead of your own. Insert endless repetitions of the word "equity" here.

But the reality doesn't always fit the narrative, as Sethi points out in his blog:

"In reality, real estate is not always the best investment. It comes with significant phantom expenses. And there are often better investments, such as a simple low-cost index fund. This is well-understood by sophisticated investors but ordinary Americans have been duped into thinking their primary residence is a great investment. Often, it is not. (I could buy today but I rent by choice because it is a better option for me.)"

All-inclusive vs. phantom costs

One of the biggest flaws in the real estate as an investment ideology is the underestimation of how much owning a home actually costs. Simply buying a home means forking over thousands in closing costs, real estate agent fees, inspection fees, and appraisals.

And that's before you factor in the interest fees you'll pay over the course of your 30-year mortgage. Even if you do everything right -- including putting 20% down and having spotless credit -- 3%-5% interest over 30 years is going to mean you've paid six figures in interest fees by the time you actually own your home.

Then there's the continuing costs of owning a home. You know, like the property taxes that can easily run you a few grand a year. Appliances break all the time, as do things like plumbing and electrical. Oh, and how old is your roof? That'll be $10,000, please.

As Sethi says, "People believe if you buy a house for $200K and sell it for $450K, you made $250K. This is false. They don't understand maintenance, taxes, and other phantom costs, and they don’t compare ROI to other investments. Also, did you know real estate prices also go down?"

When you rent, all of the costs related to owning and maintaining a property are included in your monthly payment. There's no making sure you save up for property tax payments, you don't need extra savings for your major appliances, and you don't have to worry about calling a repair company if something goes wrong. You just live your life and cut a check once a month.

One isn't better than the other

Can owning a home be a worthwhile investment? Sometimes. Is the average person going to make bank on their primary residence? Probably not.

In general, the people making a ton of money in the real estate market are the professionals who do it for a living. These are people with the money and experience to turn property into income. For everyone else, making money on real estate is often more about luck than anything else.

Overall, the owning vs. renting debate is just like everything else in personal finance: personal. For some people, owning a home makes sense. For others, it really doesn't. It's all about what works with your lifestyle and finances.