Ramit Sethi Is Begging You Not To Buy That House, Even if You're Rich
Sure, the rich can afford a house, but should they buy one? It might be an all-around bad deal at any income level.
Ramit Sethi, host of Netflix's "How to Get Rich," regularly shares his financial wisdom on YouTube so the general populace can learn and earn our own way to financial independence. In a video on his YouTube channel, Sethi broke down the reasons why multi-millionaires should not buy homes. Hot take, but Sethi isn't some outsider looking in — he himself is a multimillionaire who does not own a home.
In fact, as he said, he does not invest in any property whatsoever. Sethi broke down why you don't need to buy a house into four parts.
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The American Dream Doesn't Have To Be Yours
For decades and decades, according to Sethi, people have been inundated with marketing about what should be the ideal lifestyle: a family, a career and a home. Part of this marketing comes from The National Association of Realtors, he said, who have pushed for all Americans to own a single-family home.
Sethi pointed out that times have changed, with housing prices going up and the ability to afford a home becoming increasingly challenging. Homebuyers who spend three times their annual salary on a house with 3% down might feel like they are buying into the dream — until they find themselves underwater and their homeownership a nightmare.
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Homeownership Myths
There are four main myths of owning a home that Sethi debunked in the video:
Real estate prices always increase.
House value doubles every decade.
You can use leverage to increase your money.
Mortgage interest can be deducted annually from taxes to save money.
Sethi noted that real estate prices can go up, but they can also go down. There is also no evidence to support the notion that a house doubles in value every decade, especially after the housing market crash of 2008.
Even if the prices goes up, Sethi said, so do the expenses to own and maintain the house. And while anyone can use leverage to increase the price of a home, leverage works both ways and can decrease the value significantly, as well.
For the mortgage interest tax deductions, Sethi pointed out that any tax deductions from your mortgage payments are deductions based on money you wouldn't have otherwise paid: "You don't spend a dollar to save a dime."
Run the Numbers
In regards to the high cost of living, particularly in big American cities, Sethi pointed out that buying can be way more expensive than renting a home. Sethi has lived in New York, Los Angeles and San Francisco — metro areas known for pricey living — and instead of buying a piece of property, he took the money he would've spent and invested it in the market, which paid off big-time for him.
"If you buy a house without opening up a spreadsheet and entering some numbers, you are making a huge mistake," Sethi said. "Look at the home you are thinking of buying and calculate the true cost."
This means not only the down payment and monthly payment numbers are crunched, but closing costs, taxes, maintenance, insurance, as well as "phantom costs," like time.
For those looking to turn property into an investment, Sethi said it can work, but "you have to really know your numbers" in order to turn a profit. Sethi added that a home should be looked at as a "purchase" first and "investment" second due to risk and low return on investment. To boil it down: Make your home do work for you, but only within your means, in case it doesn't.
When You Should Buy a House
Sethi debunked the idea that he claims people should never buy a house. He dismissed that accusation as not true, explaining that one day, he will purchase a home. He called it "a terrible financial decision, but I'm going to do it anyway."
What Sethi is against is people making poor financial decisions and being a follower in a group mindset while never questioning how that thinking pattern developed in the first place. Sethi is asking himself these five questions and encouraged his audience to do the same:
Will you live in this house for at least the next decade?
Will your total monthly housing cost be less than 28% of your gross income?
Have you saved 20% for a down payment?
If the value of your house goes down, will that be OK?
Are you excited about buying a house?
Taking into account all of these questions, figures and insights, Sethi reminded everyone watching that buying a home is a big decision. However, it is not the be all, end all of success. He said, "If you are someone who rents, you are not a failure."
He's living proof.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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