The surprising myth about investing in real estate
May 17th, 2013 - 177 Comments
One of my most popular concepts is “Invisible Scripts,” or the guiding beliefs we have that are so deeply embedded, they’re often invisible.
- “Everyone should get a college degree”
- “I don’t have any money, so I can’t go to college”
- “Marry someone you love”
- “If you rent, you’re throwing money away”
- “Online courses are SCAMS”
Here’s an overview of the Invisible Scripts concept, which many of my readers told me changed their lives more than anything else I’ve written.
One of our Invisible Scripts is almost overwhelmingly powerful, causing people to make life-altering decisions for reasons they often cannot even grasp.
It is: “Buying a house is the next step!”
You see, you go to college… get a good job… buy a car… meet a nice guy/girl… then buy a house!
Interestingly, at least 30% of the “I have a horrible financial problem” emails I get are directly related to people’s mortgages.
And if you’ve read my book, you know that in Chapter 9, I’m critical of people buying real estate because it’s a “good investment” or because they’re “throwing money away on rent” — both of which are rarely true. I also cover some of the numbers on the “Buying a House” section of my site.
It turns out that Americans HATE to hear this.
In a recent article by James Altucher, one of the best writers anywhere, he writes about why entrepreneurs should not buy a house. What I really liked was how he dug into the psychology of owning a house. Predictably, the commenters hate him.
How often do we do something or want something without considering WHY we really want it? For example, if I were to say, “Why do you want to buy a house?” and you replied, “I’m tired of throwing money away on rent,” I would reply: How exactly are you doing that? Can you show me the numbers? If you cannot do that, you are not ready to make the biggest purchase of your life, jackasses.
If you say “Leverage,” and I point out that leverage works both ways, you need to have an answer for that before you drop several hundred thousand dollars.
Finally, if you say “For the tax benefits,” then I would like to invite you to join to a community college class on financial math so that you can understand how the tax benefit really works.
Guys, I don’t think I’m asking too much. If you’re about to make the biggest purchase of your lives, you need to understand the basic concepts of real estate. In fact, I hold you to a higher standard: You need to be at least intermediate, if not expert, for this expenditure that costs hundreds of thousands of dollars.
So while others (especially parents) might urge you to buy a house — “rates are so low right now!” — I hold you to a higher standard. I insist you do more than take catch phrases (“I hate paying my landlord’s rent every month”) and truly understand how real estate works.
For example — if you pay $2,000/month for a mortgage, how much TCO (total cost of ownership) will you actually pay? Would it surprise you to learn that you’ll pay 50% more than your monthly mortgage in additional costs?
Most people would be shocked. But they take their shock out in the form of denial, not further digging. And 3 years from now, they’re saddled with a purchase that they feel cheated about…because they never took the time to learn how it works.
I’m not saying real estate is a bad purchase for everyone. But the vast majority of buyers do not understand how the math works…on the biggest purchase of their lives.
Which brings me to today’s Ask Ramit question from Naomi in New Zealand.
Ask Ramit: Should I invest in real estate – or not?
“I would like to know about property. I’m nearly thirty, and feel like I SHOULD own some property – an apartment, or something. I have $38K saved up, so I could buy something, and possibly rent it out to cover the mortgage. Stocks don’t feel so real to me, while property does. (Probably comes along with being an architect.) I’m curious about how you would decide to buy property – or not.”
Here’s my response to Naomi:
Real estate might be right for you. It might not. But do not make the largest decision of your life because it’s something you “should” do.
Question: Out of curiosity, who here has gotten pressure to buy a house? What’s the subtle ways you’ve felt pressured? Was it a throwaway phrase, or a subtle intonation, or did someone outright blurt out, “You’re wasting money renting”? Leave a comment below — I’m curious.
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