Ramit Sethi Debunks Renting Vs. Buying Myths

A lot of people will tell you you're wasting your money if you rent, rather than buy, a home. That may be conventional wisdom but it's just plain wrong, according to Ramit Sethi.

The idea that you're just throwing your money away by renting is the No. 1 myth that Sethi, personal finance expert and author of "I Will Teach You to be Rich," says he hears all the time, and it "really needs to die," so renters can stop feeling guilty about doing what's right for them.

"When I pay rent, I have a roof over my head and a great view. That's what rent gets you: shelter. It gets you a house," Sethi says.

Paying rent doesn't mean you're throwing your money away. It means you're exchanging your money for something important.

You don't have to be able to hold something tangible in your hand in order to be excited about it. When you go to a movie or buy a basket of strawberries, Sethi says, all you have to show for that purchase is the satisfaction that the film was fun or that fruit tastes good. But that's enough.

"When you spend on something you love, you get value from it," Sethi says.

In fact, depending on your situation, renting your home, as opposed to buying one, may save you money, especially if you're planning to move in the next five years.

The costs associated with a $200,000 home, including the brokers' fees, appraisal costs, title insurance, and mortgage origination fees, add up to about $2,128 on average, according to Fidelity. And if you end up paying closing costs, that could be another 5 percent.

The longer you live in the home, the more you can amortize and justify those extra expenses. But if you move around a lot, the fees can really add up.

Besides, it's not like you can assume your landlord is making huge profits off of you. "Your landlord can only charge you what the market will bear," Sethi says. "So sometimes landlords are making more than their expenses, but a lot of times they're not even covering their expenses."

Costs such as taxes, insurance and maintenance can add up to about 50 percent of a person's monthly mortgage, Sethi says, and those are borne by the landlord.

Ultimately, Sethi says, you can feel good about making whichever housing decision makes sense for you and your financial situation: "Paying rent is perfectly fine. Buying a house can be perfectly fine. But I want you to run the numbers before you make the biggest purchase of your life."

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The No. 1 myth about renting a home that self-made millionaire Ramit Sethi says 'needs to die' | CNBC Make It.

[auzziebridger]

1:41 what in the absolute world of awkward interactions was that?

[joeytorontocanuck]

Don't give up. I used to rent and had major debt. Then I re-designed my lifestyle by downsizing to a room for rent. Lived below my means. Saved half of my income. After 2 years I upgraded to a larger apartment for rent for only 20% increase in cost. Still saved a chunk of my income. After 5 years I have enough for a down payment for a home.

[guestspinelli]

We are ALL renters, even after I paid off my mortgage I was still renting. Paying a ongoing, never ending, always rising property tax for something that you "own" makes you a renter. A high end renter but a renter nonetheless. Don't be fooled, we are all caught in a web. Ownership in the USA is a scam. Also keep in mind: 1) property tax hasn't always been and is not equally imposed across all "taxable" properties. 2) the tax rate can be changed at the discretion of your tax collector so that you will always pay the same or more tax, (almost never less) if your assessment is $500, 000 that turned into $300, 000 in a bad FACTS

[clifflaw]

I'm a Realtor in Dallas that rents an apartment and I 100% agree with his statements. Owning isn't for everyone; especially if you don't have at least 10% for a down payment. I'll eventually purchase something, but buying isn't always better than renting.

[jrubalcava]

Many want the pride of ownership, been there and done that, it is not all that. rent save and enjoy life! I had a friend buy a home, could not keep up and within months foreclosed, bye bye down payment and everything else he paid from interest and taxes not to mention upgrades.

[ruffey]

The market in US and the UK is pretty hot, rents have been rising over the last 5 years due to an affordable housing shortage. Right now, landlords are laughing. When they can no longer find people to rent for $4000/pm, that's when rents will go down. Landlords can charge whatever they want. The current market shows that. People are paying through the nose because most rents are very high in many cities. When renters are pushed to their limit, rents will go down.

[AmericanCheeselouise]

I want to buy a house to live in, not because I think it's a good investment - it's not... especially now. I live in a nice neighborhood I love in a cute place for very low rent and I have been able to save and invest a tremendous amount of money because of my low housing expenses. When the microwave stove craps out, I call the landlord. When a pipe breaks, I call the landlord. Need pest control - landlord. I don't have to pay out of pocket for any of these things. No way I could afford a house in this area. I'm considering a house because at this point I think I could buy one without it ruining my finances, but I'd have to leave the area. There's a lot more that goes into the rent/buy discussion. He's absolutely right - the idea that renting is throwing your money away is a myth.

[c.m.]

I agree with RAMIT! I pay low rent and am therefore able to save a huge amount to my emergency and retirement funds monthly that I would not be able to save if I was paying mortgage here in Jamaica which is very expensive for us middle age folks...

[RamaSivamani]

If you want a low maintenance place to live and you are never at home during the day so its just used to sleep and shower in basically then owning a home is not going to be for you because then all the maintenance and upkeep is on you (unless you are so wealthy that you can pay to have your own private handyman to always be on call for you exclusively). If you rent an apartment that has good property management then maintenance issues will be taken care of with a simple phone call to the property management company.

[surenvision]

Too simple a video which ends with a direction to "run the numbers" without any idea or tip off on HOW. Whether you're renting or buying a home, either will work out depending on your income, trend of the housing / rental markets and interest rates along with what your long terms and short term goals are! It frustrates me so much I might make a short video on each perspective. cheers!

[gangaroo]

1:40 “In a deal, you always need to have the upper hand...”

[AnthonyAnik]

I’m a realtor and don’t agree. My last house I owned for 2 years and made $59k after expenses in profit. Rent sucks unless you’re in an area temporarily...

[begrateful]

My ex-husband advised me to rent a basement somewhere rather than buy a home for me and our three young children. That was s spring of 2011. I didn’t listen. I purchased my townhome for $275k. Today, 12 years later, it’s worth $525k and my mortgage is $190. I can sell it & walk away with $335k or more! Plus, my mortgage was cheaper than renting in the past twelve years!

What other investment could have made me $335 in twelve years?

[donnaallgaier-lamberti]

I do think it depends where you live, your age and your overall goals. When I was age 21, I paid $19, 000 for our first small two-bedroom home in 1970. I added a third bedroom, a large deck, a kitchen remodel and finished off the basement. I sold that home 27 years later for $120, 000. When I was age 50, I then bought a $120, 000 property on five acres in the country and sold that 20 years later for $189.999. I was going up the property ladder. When I was age 65 I then bought a $372, 000 condo in a tourist community overlooking Lake Macatawa and just two miles from Lake Michigan that has, for the last 40 years, gained $1000, 000 in value every 10 years. This was an investment property that I could live in and enjoy. I have lived here now for 5 years, I am age 72, and the plan is this, to live here until I die or if I run out of money. I will then sell it and live the rest of my life off the proceeds. My mortgage is just $988.per month plus my $295.00 HOS fee. I own just $1005, 000 left on my mortgage. The monthly rent in my area currently runs $1, 200-$2, 400 per month. (The condo next door to me rents for $2, 7, 000 per month.) I am paying for an asset that will help me reach one or two of my next financial goals; 1) Living comfortably without maintenance until I die or 2) Taking my asset and growing it to carry me through my elder years. In hindsight I would do exactly the same again. I made the property ladder work for me. YOUR EXAMPLE: Remember IF you own the property you will have property insurance. A leak or accident would be covered by your property insurance as long as you pay the deductible fee (My insurance fee is $500.00.)

[formeyousee]

Won't be taking this guy advice‼️
1. You are in fact paying your landlord's mortgage unless the landlord owns the building. Yes, you pay what the market demands, but so did the owner of the building you pay rent in. It's a business move to charge tenants rent above the mortgage. If the owner couldn't do that you would've be inside that building renting.
2. "something to show for it" doesn’t mean the enjoyment you experience at a movie. That's referencing a tangible appreciating asset which you get when your mortgage payments mean you finally own your home one day with its value.

I've gotten some great financial tips from Ramit. This ain't one of them.

[aparnaganapathi]

Its not black or white when it comes to buying vs renting. A friend of mine purchased a property in Seattle for $500k 7 years back and right now it's going for $1.1 million. That's more than any investment can come even close to.

[mariob.]

It actually depends on the situation, location, current market prices.
My take or rule of thumb, if you want to live in that place for 5 to 10 years only, maybe is just better to rent. There are few exceptions though, such as, if the house market is very low at that exact moment, if you are an handyman and can buy something old at low price and flip it yourself.
Generally if you want to stay more than 10 years in that place/ city, it is worth all the effort if you can pay it, even if there is an house market crash. In 20 years the house will be worth more for sure and if you keep it up to retirement you can always sell it for something small and keep the money.

If you rent, you might save more money in the begging, but if you dont use it wisely for investing, you will just end up in the retirement with nothing. Having a lot of cash on your hands is very dangerous for many people.

[beautifulplaces]

When you rent you spend less money or none at all on repairs.

[SuzanneU]

Too true. Phantom costs are often overlooked. As a rule of thumb, it's good to keep 1-3% of your house's value in a separate account. When the plumbing goes or the roof has to be replaced to keep your home owner's insurance, you have cash to deal with the situation.

[asadb]

seems like the market in USA can bear crazy high rent. even though the income potential is so low.