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The surprising myth about investing in real estate

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Surprising real estate investing myths: 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.
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One of my most popular concepts is “Invisible Scripts,” or the guiding beliefs we have that are so deeply embedded, they’re often invisible.

For example:

  • “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!

Right?

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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223 Comments

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  1. I’m looking in to buying my first property in the next 6 months and have been asking myself a lot of the questions you mentioned in this post. It’s amazing how the costs all add up when you sit down and start calculating everything!

  2. We wanted to buy a house because after 22 years of renting we didn’t want to be at the mercy of a landlord any more. No more dictating whether we could have pets, what we could and do to the house and yard, and no more getting evicted because the landlord wanted to “get rich in real estate.”

    We spent 2.5 years going around looking at the sorriest dumps you could possibly imagine because that was “our price range” in the early 1990s in southern California. “Our price range” came with a chain, a stake, and a dog dish, basically. But we were willing to keep going as long as it took, and presently along came the big market crash and suddenly there were livable human dwellings in our price range.

    We bought the house as a HOME, not an investment, in late 1994 and we’re still here.

    • Same here – we were fed up with renting after three separate landlords decided they wanted to stop renting and sell instead (and at least one changed his mind at the last minute – too late, we’re not staying now…). There are “hidden costs” to renting too – deposits might as well be burned as you’ll never see them again. The cost of moving house is several hundred a time (not to mention the stress and time), before you even factor in the effort involved in setting up the phone line, notifying all the banks and the driving license agency and so on. Sure, we have to fix stuff ourselves now – but we’ve had a few landlords who were hopeless at arranging this stuff. It’s not the money we care about with ownership – it’s the stability.

    • I 100% agree with your comment, Andrew. Thanks for leaving it.

  3. The key is not buying “too much” house. But home ownership (and rental properties) are fantastic.

  4. I agree with @infmom, I want to buy a house, but not for financial reasons, but because I don’t want to live at the mercy of someone else or their contract. I hate that in my current apartment I can’t have my cat, currently with family. I want to be able to paint and decorate and tear down walls. I want a kitchen garden. My husband wants a work-space where he can tinker and build things. And once future house is paid off (or paid in cash!) not having to pay anyone (except government for property tax) would be great. I also eventually want to buy land and build my dream house.
    The appeal of a house is being in control of your environment. Unless you have a really lax landlord, you don’t get that renting.

    • I agree, this can be a very valid reason to buy.

      Again, I’m not against homeownership per se, but I am against stupid reasons to buy.

      In this case, the question is, is the freedom to have a cat and paint worth tens of thousands of dollars (possibly hundreds of thousands of dollars) to you?

  5. I have been asked over and over why I would want to “throw my money away” on rent by friends who can hardly afford their mortgage and have now locked themselves into jobs they hate for the next 30 years. It’s very weird that it’s seen as such a necessity.

    • This happens to me all the time too. I’ve noticed that it’s usually from the friends of mine with the most student loan debt too. While most have well paying jobs in their fields, it seems they are desensitized to how much money they are on the hook for.

      On the other hand, I was able to get a job in my field without a master’s, and have less debt. After being overextended on my car (now paid off), I’m in no hurry to over extend myself again.

      Also, I don’t want to give up central air.

    • Really? So you don’t need a place to rent for 30 years and plan on living out of your car? Got news for you, your friends are building equity and their mortgages are fixed, while rents go up as do their incomes. When the mortgage is paid off, they pay even less than they were before. Still think you’re so smart?

    • Contrary to what Jack wrote, I feel like pointing out that while renting, you’re flexible and can relocate to a new place on pretty loose terms. This way, you can move to a cheaper place, a nicer place, or a place where you have a job offer you prefer over your current one for any reason.

      It’s also noteworthy that owning a house for an extended period of time infers quite substantial maintenance costs, which really negates the equity building argument because you could build equity by investing that same money into pretty much any investment, while homeowners are kinda locked into their “investment”. Even after the mortgage is paid off (which, by the way, requires the owners to retain their jobs or get at least equal pay after inflation in the same geographical area since they can’t simply move when their employer goes out of business or they get fired), these maintenance costs stay and after that amount of time, they’re probably even higher. Rental property is generally owned by investors and moved from time to time, at which point it’s often refurbished to some degree. Realistically, how often do you refurbish your own home unless something actually breaks?

      So really what I’m trying to say is don’t listen to what Jack says, he clearly didn’t actually do the math (or read and understand the article, for that matter, because it’s quite simply explained there).

  6. As someone married with kids, the convention is that you should *absolutely* have a house because kids belong in houses and never, ever, in apartments. Feh.

    In our apartment in Columbus, Ohio, decent-sized two-bedroom, two-bath plus room for big patio garden, etc. INCLUDING all & unlimited utilities, $820/month. All the amenities of a house but without having to take care of it. And if it ever becomes a crappy neighbourhood… never more than a year to move with no commitments. Kiddos are going to private school anyway… don’t care about the public school district sucking.

    Bottom line–cheaper and more time and more money to hang with said kids when we don’t have to worry about long commutes, crappy home/yard maintenance chores and fretting over wildly vacillating utility bills.

  7. The equation changes once you have kids. Then you want to provide them a room of their own and a place to call home. Having an apartment always feels like a temporary living space, something that someone else owns and you use. Plus, you usually share walls with your neighbors. Which isn’t great for them when your the ones with loud and rambunctious kids. Kids need a lot of room to play, as well as great schools and a good neighborhood to play. Great kid-friendly apartments are hard to find. Decent homes for rent are even harder.

    • Barbara Saunders Link to this comment

      I grew up in a poor neighborhood where almost everyone owned their homes. I think what you describe is a myth, too. Homeowners with low salaries end up in situations like not being able to pay the light bill because the water heater broke down. So the kids are sitting in “a room of their own” in the dark.

      In the neighborhood where I currently rent, my neighbors a young family had their car damaged by gunfire the other day. I’ve no doubt they bought HERE so that they could afford to get into the housing market. I can move. They likely are stuck if the neighborhood goes further into the toilet. I’d rather raise my kids in an apartment than in a house where people play with guns outside my door.

    • Having grown up in an apartment, I can safely say that this is not the case at all. You have a lot more room to play in a safe apartment enclosure than a backyard of anything but a mansion. Good public schools mean high property taxes or high concentrations of expensive property, which give an advantage to renters as property taxes are effectively spread out among all renters–thus you still end up paying less for an equivalent apartment in the same neighborhood as a house.

      Our apartment was a popular choice for families for all of these reasons (including landlords and managers who have been part of the community for decades). We got access to the best public schools in the state at prices we could afford, especially after a lot of my dad’s career plans ending up falling through and forcing him to scrounge for work for a good while.

      As to a “room of their own” the calculations change a bit if you have a lot of kids, but you can still get a 3-bedroom for less than a house. And kids are more flexible than you think–they can get used to sharing walls (in a good apartment) a lot easier than used to arguments between their parents caused by bad financial decisions (again, having experienced both).

  8. Naomi (a different one) Link to this comment

    The LL must cover all costs, the same costs one would incur as a homeowner (roof, furnace, taxes), and maybe even some profit. Wouldn’t the LL just pass along those costs to the renter eventually? Over the long term, how can it be cheaper to rent? Why would anyone hold houses as rentals if the rental lost money?

    Another way I look at it – if people make money on rentals, then as a renter I am on the losing side of that equation. Landlords and renters can’t both be winners.

    • This seems logical, but is a myth. There are two reasons this isn’t necessarily true:

      1. The landlord is subject to simple supply and demand. In cities like SF and NYC, you can rent for FAR LESS than what you would pay to own.
      2. Many landlords are simply not sophisticated enough to calculate all costs associated with home ownership. In other words, many believe they’re making a profit from renting, but they’re actually not. This sounds unbelievable, but it’s been proven true over and over. (See my examples above and in my book.)

    • Even aside from Ramit’s points in reply to your comment, consider that…

      -A lot of landlords are renting out property because they don’t want to sell right now (maybe they don’t like the current market, they’re waiting on local developments to drive up RE costs, they intend to move back to the property someday, etc.). They’re not all operating under the same assumptions and goals, and some are perfectly happy to just cover their costs or come close to it. Some are failed investors who can’t get out of their investments easily and they just want to minimize the damage by getting some rental income.

      -Many landlords/property management companies have economies of scale. If you have 100 units, you can negotiate better deals on a lot of maintenance tasks. If many of your properties are multi-unit properties, you have fewer roofs and often less maintenance cost per unit than a standalone property.

      -Practice makes perfect. Experienced landlords/RE investors are generally better at spotting potential problems and better at negotiating favorable terms in their deals. New home buyers tend to be less experienced, less knowledgeable about their local RE market, and more emotional in their decisions (“I know the neighborhood is in decline but OMG I WANT THAT GOURMET KITCHEN”, etc.)

    • One of the main reasons the landlords will rent for too little is that they often bought the property decades ago, and have long since paid off the mortgage. The rents they charge are inappropriately low because they are still anchoring the rent on what they paid, rather than what the property is now worth.

    • Not to mention the real benefit from renting is the ability to depreciate your house values for taxation purposes. Where I live in Texas, this is a huge deal because of the high property taxes (via no state income tax.) I know several people who rent their homes at break even cash flow for the ability to lower their taxable income by 10-12k a year through depreciation. They are obviously making bets the housing market will increase, but your risk/reward scenario changes drastically in that situation versus someone just hoping to bring in a few hundred bucks extra each month. Ramit is right. Most landlords don’t factor in 1% maintenance, HOA fees, realtor fees for high turnover of tenants, higher insurance premiums, and a slew of other factors that could easily turn a cash flow positive month into a negative.

  9. Thank you so much for this. I am 25 and all of my friends are purchasing their first homes, and on top of that quite a few of my friends are real estate agents. I have been asked 100 times why I am not even looking at buying my own home. I tell each and every one of them, that it doesnt make sense. I have pointed out all of the things that you mentioned in this video, when something breaks paying for it out of pocket or making a phone call, adding in the costs of insurance, maintenance, higher utility bills (dependent), taxes, etc. Everyone keeps saying that it still is cheaper and that you are not “throwing money away.” I consistently tell those people that they are idiots and they need to be reintroduced to college math 101. Buying a house is an emotional purchase and in most cases should not be an investment choice, and do not try to kid yourself into thinking that is anything but.

    Thank you again, reading your material constantly makes me reevaluate my own thoughts and opinions, and sometimes satisfyingly reflects those I already have. Keep up the great work.

  10. Erika Lockhart Link to this comment

    My financial success is based on purchase of my first house. The discipline it took to launch me into homeownership (getting my credit under control and saving some money) led to profitable sale of first home and purchase of two others, one also for a profit, the other still owned.

    It is definitely part of what we learn but if I had learned from my parents, I would have avoided it–they lost massive amounts of money in a divorce after purchase of a home. Depends on your circumstances. Also, depends on what you want to spend your money on.

    Granted, if I had stayed in my $500 per month apartment and saved all the money I spent on houses and invested it, I might be better off financially. I also might have been in the rubber room because of noise from neighbors. Since living in apartments encourages arm’s-length relations, I would have missed out on meeting some wonderful people who have ended up being lifelong friends, and that entire network.

    Where I live, in the San Francisco Bay area, the $1,500 per month I spend on mortgage gets me much more than you can get in rentals. I can keep pets. It’s quieter. That same amount would get me a no-bedroom apartment with a view I can get on the way home from the grocery store.

    Quality of life! For the average person like me, home ownership makes sense.

    • Erika Lockhart Link to this comment

      I realize I didn’t really reply to the question. I felt pressured to buy a house because people of my age were expected to get married and buy a house and have a family. It took me a long time (until I was 34) to realize the I didn’t have to have a husband and family to buy a house. I then realized that I ddin’t have to be married and have children to make a lot of other financial decisions.

    • Barbara Saunders Link to this comment

      Isn’t there an element of timing to it?

      A friend of mine pays $800 for a mortgage on a nice home in the East Bay. She bought in 1980. The house is probably worth half a million now.

      She NEVER had an income that would have allowed her to buy the place at the $500M price. Yet she’s had an entire career and has a fairly comfortable retirement. Salaries for the same jobs have not gone up by that much.

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