Ramit Sethi is a self-made millionaire, the star of the Netflix series “How to Get Rich,” the author of “I Will Teach You To Be Rich” and a member of the GOBankingRates 100 Most Influential Money Experts list.
Sethi believes that investing is the best way to combat inflation. When it comes to the investment that most people regard as the gateway to generational wealth, however, Sethi has opinions that can only be described as unconventional.
For generations, Americans have viewed homeownership as the ticket to middle-class stability and a hallmark of financial success. But Sethi told CNBC in May 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 the numbers.
Considering that a house is the biggest investment that most people will ever make, Sethi told the publication that 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 rent 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
- His insistence that homeownership comes with a laundry list of secondary expenses that renters avoid
Take Our Poll: Are You Planning To Buy or Sell a House This Year?
Every House Is Haunted by Phantom Costs
On June 8, about a month after he discussed the topic with CNBC, Sethi took to Twitter to flesh out his thoughts. Referring to typical aspiring homeowners, he tweeted:
“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.”
Don’t Landlords Include Phantom Costs in the Price of Rent?
When a commenter asked him to expand on “and more,” Sethi 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 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 told CNBC 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 every or even most renters. Each situation and property are unique. The key, Sethi tweeted, 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 iwillteachyoutoberich.com.
Sethi is hardly alone. In November 2022, a Yale economist told Business Insider that renting is probably the better option financially for many people.
In May of this year, Kiplinger outlined many of the same hidden costs that Sethi mentioned in challenging the notion that renting is akin to throwing your money away. The publication concluded that even when buying pays off financially, renters retain the flexibility to make significant life changes, which homeowners forfeit.
One month earlier, in April, Forbes pointed out that, unlike stocks that you can quickly sell, equity is wealth that’s hard to tap into. Forbes also concurred with Sethi’s position that renting frees up time and money to grow your income and investments, particularly in big, expensive cities. That mirrors Sethi’s experience.
Sethi’s experience is not universal, however, and homeownership remains a worthwhile pursuit for millions. But he and many other credible money experts have effectively debunked the notion that renting is always a waste of money that represents failure unless you’re doing it to save for a down payment.
More From GOBankingRates