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Owning a home has certain benefits, but some people are more than happy to keep renting.
One thing Ramit Sethi fans like most about the financial expert is his habit of telling it like it is. And true to form, Sethi doesn’t hold back when it comes to whether buying a home is the right financial move for everyone. “Buying a house is one of the biggest purchases of your life,” Sethi tweeted out to fans. “If you want to do it, run the numbers first. Don’t just blindly make a decision while chanting dumb phrases like, “Renting is throwing money away.”
Sethi gives these reasons for remaining a renter.
According to Sethi, rent is the maximum amount you’ll pay each month for a roof over your head. A mortgage is the minimum amount you’ll pay. Once you factor in “phantom costs” like interest, taxes, closing costs, and maintenance, you might add 40% to 50% to your monthly mortgage.
According to Sethi, “When I lived in NYC, it would’ve cost me more than twice as much to own a similar apartment in a similar neighborhood. If I was paying $3,000/month to rent, I would’ve paid over $7,000/month to own a place (factoring in phantom costs). I made more by investing the difference.
Sethi tells followers that the idea that owning a house equals wealth is propaganda. If you run the numbers, you’ll see that it takes years to build meaningful equity.
Running the numbers does not mean simply subtracting the amount you paid for a home from its current value. It means subtracting the amount you paid for a home, plus taxes, insurance, maintenance, and improvements from the amount the property is currently worth.
Let’s say you purchase a home for $300,000 and the market value five years later is $400,000. At first glance, it looks like you’ve earned a quick $100,000. However, the reality looks more like this:
In truth, you’ve paid $361,000 into the house in the five years you’ve owned it. If you sold your home for $400,000, you’d pay approximately $24,000 in realtor fees and $8,000 in closing costs (based on closing costs of 2%). That means you can expect to clear around $368,000 ($400,000 – $24,000 – $8,000). Considering you’ve paid $361,000 into the house, equity in the home is far less impressive.
This scenario does not take into account the fact that interest paid on the home is tax deductible. However, let’s say you’re in the 24% tax bracket (single with taxable income of $89,076 to $170,050, or married filing jointly with income of $178,151 to $340,100), and you pay $10,000 in mortgage interest each year. The total amount you could deduct would be $2,400 ($10,000 x 0.24 = $2,400), if you itemize.
That doesn’t mean you’re due a refund of $2,400. It just means that you won’t have to pay taxes on $2,400. Depending on your overall tax situation, the deduction may make little or no difference.
Sethi reminds followers that buying a home is not their only option. He says there are other alternatives, including:
Sethi frequently uses the phrase “run the numbers.” He recommends spending no more than 28% of gross income or 50% to 60% of take-home pay for fixed costs to determine if it’s a good decision.
After making his original post on Twitter, Sethi received a barrage of intense reactions. Here’s what he had to say: “The fact that so many people hit me with angry comments when I say stuff like this tells you that real estate is not a carefully measured purchase. It’s religious.”
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