You’re not ‘throwing away money’ on rent – MASHAHER

Ramit Sethi, self-made millionaire and star of Netflix’s “How to Get Rich,” says that renting is unfairly dismissed as “wasting money” because “it’s going to a landlord” rather than building wealth.

But when you pay rent, “you’re not throwing money away,” Sethi tells CNBC Make It. “You’re paying for a roof over your head. You’re paying for a landlord to maintain your residence and you’re paying for the convenience and flexibility of being able to leave at the end of your lease.”

When looking at homes as an investment, renters commonly overlook the “phantom costs” of owning a property beyond the monthly mortgage payment.

This includes closing costs, property taxes, insurance, utilities, homeowners association fees and repairs. Mortgage payments are also front-loaded with interest, often as high as 80% during the first few years of the loan.

“People say they don’t want to throw money away on rent,” Sethi says. “Well, I don’t want to throw money away on interest.”

Sethi has rented homes in expensive cities like Los Angeles and New York simply because the costs of owning were too high. 

“I’ve made more money renting than I would have owning,” he says, referring to investments made with money that could have been spent on a down payment and phantom costs for units similar to the ones he rented.

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That doesn’t mean that buying a home can’t be a good investment, he says. Considering that home values have increased by 85% since 2010, many Americans have built wealth by owning a home.

However, we “have become accustomed to irrationally high appreciation in real estate markets,” especially during the run-up in home prices after 2020, says Sethi. This can lead people to assume that owning a home is the best way to build wealth, even though stocks have historically outperformed home prices.

“If people believe that a housing shortage will cause higher prices for decades, that’s a perfectly respectable bet to make,” he says. “But you also need to calculate your alternatives. How much would it cost to rent and invest differently? How much capital would be tied up in a down payment?”

There are lifestyle considerations that go into buying a home, too. Those could include a number of things, such as expecting to move within a few years, needing a bigger place for a family, wanting to change neighborhoods or simply needing the “flexibility to switch jobs at the drop of a hat and increase your income,” says Sethi. In that case, renting might be a better fit because it keeps your options open.

In Sethi’s experience, homebuyers don’t always examine the opportunity costs of acquiring property, especially once they’ve decided that they want to own their own home.

That’s because homeownership is viewed as a major achievement and a key part of the American dream, something “deeply embedded in the American psyche,” he says. This can lead to shortsightedness about a property’s true value compared with other investments, like 401(k) plans or stock index funds.

“I speak to couples that often tell me that the money in their retirement account does not feel real. They’ll say, ‘I mean it’s there. But I can’t really touch it [like a home],” says Sethi. “There’s something mesmerizing about about a physical thing that we can see and touch.”

Since purchasing property is one of the biggest decisions that people will make in their life, Sethi advises buyers to “carefully run the numbers,” including phantom costs, before they make a decision.

“The American dream is not simply buying an expensive purchase that represents over 100% of your net worth and drains your finances because of phantom cost that you didn’t predict,” he says.

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