The surprising myth about investing in real estate

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.

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:

http://www.youtube.com/embed/A90vWH9aFYY

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.

* * *
Get my insider newsletter, sent every few days to ~200,000 people:

  • Insider techniques on psychology, negotiation, automation, and investing
  • Ready-to-use scripts that are never publicly released
  • Case studies and private Q&As

facebooktwittergoogle_plus

Related Articles

How this guy can get people to read his emails

I send millions of emails a month. I also publish blog posts. Why do people read them? Today, a counterintuitive ...

Read More

Watch this 18-minute video on happiness

I have something cool for you today. I’m sharing part of my video interview session with Gretchen Rubin, the ...

Read More

177 Comments

 
  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.

  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.

    • 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. 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. 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.

    • 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.

    • 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.

  11. One goal all of us should have is to be able to burn a mortgage some day. Getting there without going up in flames, that is the trick. I have gone up in flames several times due to my ill advised purchasing of a home. You are very correct in making your assessments here. I often tell folks…do not try and fit a square peg into a round hole, when it comes to purchasing real estate. In other words you must be in an area where you intend to stay, buying at a price you can readily afford (including all the other add-on’s which you mentioned)…and if you need to move, before burning that mortgage the home can be sold readily, or rented out in a manner that does not burden you financially. Solid advice Ramit, very solid advice.

  12. I have owned and prospered with real estate and you are neglecting the real question. The question wasn’t “Should I buy a house?”, it was “Should I buy real estate?”. The question even mentioned the idea of renting it out to cover the mortgage. There is no better investment in most jusistictions than real estate. In this model the person could buy a property worth 75% more then he/she has the funds for and let the bank mortgage cover the other percentage that the renter will pay over time. In twenty year the property will have been paid off by renters and statistically be worth more than the purchase price. I challenge you to find a better investment with as little risk….

    • Buying property as an investment is VERY different than buying a house, living in it, and and thinking it’s “the best” investment. Most people do the latter.

    • There are no free lunches. Real estate investment, to be profitable, is a full-time job for someone – whether you hire someone to do it or you do it yourself. You have to find renters to fill the property, since every period the property is vacant takes money directly from your pocket for the mortgage. But just having a tenant isn’t enough – it has to be a good tenant, someone who will pay on time and not destroy the property. Some states make it incredibly hard to evict a tenant, and even if you are able to do it you still lose since you’ll have to fight to recoup back rent and damages (if you ever manage to get anything). Remember how Ramit always has us remind companies and employers how expensive it is to find new customers or employees? The same is true for tenants – they’s basically just customers.

      You just want to flip the house? Do you know how to spot the differences between a fatally flawed house that will eat you alive and a diamond in the rough? Do you understand what it will take to polish the diamond? Do you have the skills, the tools, and the manpower, or are you going to have to hire them? Do you understand what level of restoration the market will support for that location and class of property? Will the market support the price you need to achieve in order to turn a profit?

  13. We are about 4 years away from paying off our home. I took the 15 year loan rout and I’m currently paying double payments to pay the house off as soon as possible. That might look like a waste of money but it will put me in a great position to buy rental property once this house is paid off.

    So I think for me buying the house was a good idea since we didn’t over purchase and our house payment will be gone relatively soon. No I just need to learn about the “making a profit from renting” side. Hmmm….. Maybe that’s my dream job…… :)

  14. I bought my house in 1990. I live ia a high-cost town.
    Shortly after I bought my house, prices dropped and stayed low for years.
    My house will be paid for in 5 years. right now Ihave several hundred thousand in equity. And I was able to refi at a low interest rate, so my payments are now less than renting a similar house.

    If I want, when I retire I can rent my house out for more than the mortgage payment for a nice stream of cash flow. I can move to a lower cost area and make money off my house.

    My friend, who would not consider purchasing a house in the early 1990′s when prices had dropped and interest rates were low, like today’s market, has to move away when she retires because she can’t afford the rents here.

  15. I’m single, and I bought at a bad time–the end of the housing boom in 2004, but I think Ramit would agree that in my situation, it was the right decision, even despite the bad timing.

    I needed a place to live, but I didn’t need more than one bedroom. So, since I had the resources, I bought a 3-bedroom condo with the intention of living in the master to have a private bathroom (I was 33 so I was due), where I could control everything about my living environment, get the benefits of home ownership and collect rent on the other two bedrooms, usually from 20-something professionals.

    I chose to buy rather than continue to rent because: 1. It locked in monthly costs as long as I needed only 1 room; costs actually declined as other 2 rooms rent increased. 2. I am self-employed with inconsistent income, and don’t feel like I earn enough to buy real estate and invest for retirement. Since it was one or the other, I went with the condo not only because I needed a place to live, but also because I have no retirement “fund.” I figured if I never made a lot of money, at least I’d have a paid off condo, from which I could collect rent as a retirement fund replacement, which also increases with inflation. True, property taxes increase as well, but by the time I was using the rent as my primary income, the condo should be paid off and I’d regard taxes as overhead that reduced my income, but doesn’t eliminate it. So, I could go live somewhere cheap while collecting rent that increases over time as my primary retirement income, plus probably gain significant appreciation after 30 years (I’m in the DC area).

    Because of my unique situation as a single person who was willing to rent 2 rooms to others (careful screening process), I feel like buying worked very well for me, but only because I had concrete plans for how to benefit from buying.

    As it turned out, I have spent less per month on housing (because I collect rent from 2BRs) than I would if I had my own 1BR apartment, ever since I bought. There’s been no capital appreciation, but my total cost of ownership is less than renting would have been for nearly 9 years.

  16. I own a commercial real estate company in San Francisco and I rent a three bedroom, Victorian apartment about one block from Duboce Park. I can’t even count the amount of people who have asked me, ‘how come you didn’t buy a place?’ My typical response is, BECAUSE I’ve done the math. For me to own what I live in, my mortgage would be double and on top of that, I’d have a whopping $12K property tax bill each year, not to mention general maintenance and repairs. I’d be NUTSO!! San Francisco is one city where it rarely makes sense to own a property unless of course, it is for those intrinsic reasons! I am very lucky to be in a rent controlled unit so I feel I’ve the best of both worlds!! Great article Ramit! Thank you!

  17. My father always told us that renting was throwing money away.
    My mother-in-law was fixated on our saving money to buy a house as soon as we got married. This became an obsession with her and she kept pressuring my husband — as if this was more of a priority than anything else, including getting along as a couple.

  18. I will be 40 this year. I know that is no real reason to base purchasing a home solely upon, but I have rented since I got out of college and I noticed I was spending money to update the houses I rented more and more. Sure, I got a rent deduction based on reimbursement, but the thing is, some other renter (as well as the landlord) are benefitting from my hard work and ambition, whereas I will never enjoy it ever again. The money and time were just thrown away as far as my enjoyment in the long run. I am buying a home, but it isn’t a 6 figure deal. The bones are good, it is just aesthetics need to be addressed to update the place. I never really felt pressured, I am just at a point in my life where I am ready to make that all important, life altering decision. It is just my son and I, and I want a place where we can call home and make memories. For me and mine, it is our time. Ramit makes absolute sense. If you’re young, single, just starting out, or feel planting roots where you are is questionable, do not feel pressured. You’ll know when the time is right and you’ll be glad you waited til that time.

  19. I used to be in the same mode of thought as you, Ramit. But now I’m thinking differently when I put in the perspective of retirement. IF I BUY PROPERTY: Whether or not I am paying the monthly mortgage or a tenant is, the real draw to me is that once the property is paid off in 30 years or less, its now a form of passive income that can support me indefinitely through retirement. Since I have no idea how long I will live, and the thought of saving up a specific dollar amount to live off of, I like the thought of renting out the property to supplement my retirement savings. And yes, that means I would rent in retirement: gives me the option to live wherever I want, and how modestly/lavish I can afford. Does anyone else share this train of thought? What faults can you find in this? Occupancy, HOA fees, depreciation, damage are all negative factors to account for, but I still believe it’s better than saving up the money and crossing my fingers that it doesn’t run out.

    • This is one idea I disagree with, because from your question, it seems like this is a decision made out of fear (“what if my money runs out?”) instead of a more constructive approach: “What is the best option for me?”

      Example: Have you considered what would happen if you rented, and invested the other money you’d spend on a mortgage, taxes, furniture, etc? Not saved it — invested it.

      I cover this in Chapter 9 of my book.

      Again, not slamming real estate as a general thing. If you’ve done your homework and decide to buy, I’ll be your biggest fan. But if you haven’t studied it exhaustively, making the biggest purchase of your life without doing your homework is asking for trouble. And if I find out you read my blog and bought without running the numbers, I will hurt you.

  20. I love renting because I can pick up and leave if I change my mind after a year. But I can’t wait til I am able to buy my own piece of property so I don’t have to deal with so many rules: no pets, no noise after this time, shared laundry room, random people coming in and out of the building. I wouldn’t do it alone though.

  21. My personal pressure to buy a house is primarily a situational one, and I think it’s relatively time-sensitive, as well. I’m a recent college grad (also an architecture major, like Naomi), I own 30% of a my family’s construction firm, and I live five minutes from a Sandy-ravaged barrier island in New Jersey. I’m currently renting an apartment above our showroom space, and I want to keep my living arrangement exactly as it is: at $800/mo plus approximately another $100 in utilities with zero commute, I’m living quite comfortably on my salary (I only take $40k in paychecks, but my end of year dividends more than double that, and they go directly into savings). As far as debt is concerned, I made it through school mostly on scholarships, so I have about $15k to pay down, plus $10k left on a car loan. I don’t have credit card debt – I firmly believe in paying off my entire balance, automatically, on the first of every month.

    My desire is to own a small beach house as a rental property. There are flood-sale houses in my area currently running between $80k-90k. I’m an architect and I own part of a construction company so rehabilitation work will only impact me for my cost – let’s say, worst case scenario, another $60k. And beyond that, the area I’m searching in is itself only a ten minute drive from one of the most popular boardwalks in NJ, which is currently on track to be almost completely reopened for the summer season. Sure, my biggest tenant demographic will be teenagers who innately can’t be trusted to keep the property in exactly the same way they entered it, but as long as I’m collecting the weekly rent up-front and covering my mortgage (which would be miniscule), taxes, land lease and utilities, how bad could it ultimately be?

    I know I must seem naively optimistic, but the reason I haven’t jumped on anything yet is because I KNOW I’m ignorant of some factors in this incredibly long-term relationship. I do feel that time might get the better of me if I don’t move soon, because the redevelopment in my area is proceeding at a decent clip and I know I don’t want to feel like I missed out when these same properties are once again selling for $120k-150k. Any advice, then, for a prospective first-time landlord wrestling with this conundrum?

    • Don’t forget to take into consideration the costs of flood insurance in that area as well as the cost to repair from future floods, depending on how close to the beach those houses are. That area has been hit twice in the last few years with storms, so seems to be a fact of life now.

  22. I can say as a person who owns 11 properties, 1 in which I live that if you are looking for an investment it’s fine to buy a property to rent out to others to get the cashflow from the property but only if it covers the mortgage and all other bills and puts money I your pocket every month and as you use leverage (borrow on a mortgage) it will increase your returns on investment. It’s better than a bank account, but buying one for you to live in will just suck money out of your pockt

  23. I love how everyone assumes they’ll be able to rent out their place for a profit so easily

    • HA! So good. I missed this point in my comment above. Some people don’t get that if they have even ONE MONTH of vacancy, it can often ruin an entire year of profits.

      “Oh…I didn’t think of that”

    • Though, if you’ve got the stomach for it and your municipality approves your property, you can have your very own Section 8 property. With the current waiting lists, particularly in metropolitan areas, you’re not likely to be at a loss for tenants. That’s not nearly the whole story, though.

    • Yes, I experienced this myself with one month of Vacancy. In my scenario is that I have hired a bad real estate agent. As soon as I changed to a new one, I got tenant straight away.

      My reason that I bought that investment property is tax benefit – only available in NSW, Australia. I have done researched, compared and shopped around. It’s a brand new estate with 10 yr warranty so I don’t have to worry much about fixing cost. Vacancy rate is 0.5%.

      I was stupid that I spent so much time carefully choose the property but didn’t do the same to screen who will manage it.
      Last year I got around $4.8k tax benefit from the property,
      This year I probably get neutral gearing from the low rates.

  24. “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.”

    Leverage doesn’t really work two ways in real estate, at least not the same as with other domains. When you leverage yourself in stocks (which is the same concept as real estate leverage only there are rules in place to make sure you can’t get anywhere near as leveraged as in real estate), your value can grow really fast but the flip side is you can lose your value really fast and be forced to sell off your position to cover the margin call. With real estate, they can’t force you to sell off your position just because the value of your house declines. Quite the contrary; many people simply walked away from their mortgages when prices dropped and they were significicantly underwater with hardly any consequences other than a ding to their credit.

    Real estate leverage is more or less one-way, especially with low down payment financing such as FHA. When prices are rising or stable, leverage allows people to rack up tremendous amounts of net worth even if prices only keep up with inflation. When prices decline, there is very little downside (at least comparably speaking) when the only thing you can lose is a small down payment.

    I do agree with you on the main point though, which is that for the largest purchase you’ll ever make in your life, you better damn well know the math involved.

    • You always have some of the best comments when I post about real estate.

      I partially agree. But on the other hand, people aren’t logical or rational. Even though the downside to walking away was a “ding to their credit,” many people stuck with their homes, continuing to pay rents into a house that’s worth a fraction of what it was worth. Houses are deeply emotional in the American psyche.

      I think we’re on similar pages but disagree on small points.

  25. An additionally compelling argument against buying (especially for 10 years or less) is the ridiculously low actual percentage of equity you build initially.

    The majority of your early payments are interest. People “know” this but don’t realize how significantly this affects the “rent/buy” decision financially. It means even a 3% interest rate you are still throwing away 50% of the payments you make on the house for the first 10 years on average.

    It’s gets much worse if you keep it for less than 10 and/or have a higher rate (over 70% for 5 years with 4.25%).

  26. Bought condo less than 1yr right out of college year 2005 at 22yrs old in San Diego at the height of the refi boom. Was doing loans making 10Gs a month 6 months in a row that started to ramp up to 18Gs late 2005. Payment PITI (Principal Interest Taxes and Insurance) was $3500/month including condo fees. Total purchase price 350k only $22 down 100% financing. 3yrs later lost property in foreclosure. Too aggressive even with an increasing income in a market that was in a boom phase, new profession and buying the worst type of property at the height of market in area of San Diego that saw home values begin to fall first. What I thought was “the interest deduction would offset my income, the condo was only 5 minutes from work thus great time saved and to have a major achievement early in life). Some lessons I learned are when you are just beginning to make good money let it breathe do not force large transactions allow yourself to grow into it, be extremely cautious buying in any form of boom, be cautious making your core income from a boom industry and buying property during a boom as you could get SQUEEZED from both sides worst case scenario.

  27. To add on previous comment I was renting a room for only $350 a month in San Diego (insane deal) in a house and nice neighborhood from Real Estate Agent that worked in same office as I. Everyday he would tell me “you are making so much money you need an interest deduction,” “I can start showing you houses,” and so on- this went on for months on end until I decided yes I needed to offset my income via the interest paid on a home loan. Did go over the scenario with my parents beforehand and they advised for me to make sure that I understood the total costs and ramifications. Sure the Real Estate Agent made probably near 8-9Gs selling me the house so there was an incentive in it for him.

    • Best response to the interest deduction argument (in many cases, this is one of the stupidest arguments of all): “Why would I spend a dollar to save 10 cents?”

    • Responding to Ramit’s reply:

      It is astounding how many people do not understand the US tax system. Deductions, credits, brackets… they are simple concepts when you take the time to learn, but many people just recite the incorrect phrases they hear other people say without ever understanding the reality. Also, the misinformation is so prevalent that even when you’re right, people will tell you you’re wrong. (case in point….)

      It’s one thing to not know when you’re young, but once you’re in your mid to late twenties, you should be wising up to this game.

      This is especially true when people talk about raising taxes on certain income brackets. It reminds me of a few years ago when Obama was talking of raising taxes on those making over $250k and it was all over the media. There were people on camera saying that they would try to keep their income to less than $250k because they thought they would end up with more money. Unbelievable.

  28. I actually haven’t been pressured to buy a house because I bought my first house 1 year out of college. Now, I wasn’t pressured, but my family did use the fact that I owned a house at 22 as showing how successful I was and how great I was with money. I managed to sell that just before the bottom fell out of the housing market and have re-invested in another home in another city.

    Now, after reading Ramit’s book and doing some additional reading on the side, I’ve come to the same conclusion that buying a house/condo really isn’t the best idea; I’ve even convinced one of my coworkers that he should rent for the time being. My wife and I have considered selling our current property and going into rentals, but are a bit reluctant since we now have a family and do not want to be subject to anyone else’s whims. Great example is that a different co-worker of mine’s landlord decided out of the blue to let her sister use the house, and didn’t renew the lease. That is something that we don’t want to happen.

  29. I absolutely agree that buying a single-family home to live in is not an ‘investment’ as people would have you believe. (For all the faults the book may have, that was one of the two things that stuck out to me reading ‘Rich Dad, Poor Dad’ years ago). However, that particular type of purchase does not necessarily equate with ‘real estate,’ and people need to stop thinking they are ‘investing in real estate’ when they buy a home.

    Actual real estate investing, which includes things like: identifying a growing market, examining rents in comparable properties, knowing your product type well (industrial warehouse space? suburban multi-families? class A office?) sticking to your convictions about what sort of IRR you’re looking for, and hiring a reputable property management company, can be as lucrative as any other investment – that is to say, it can be a huge success or a huge failure.

    People hear that it’s possible to get rich in real estate, but for most people individual homes are their only connection to the field, so that’s probably where the disconnect comes in.

  30. As someone who bought a house in Ireland during the boom and then sold it (in order to be free to move to Vancouver, Canada this year) when the country went bankrupt and had to be bailed out by the IMF losing a whopping 50% of the house value – you won’t be surprised to know that I am totally on board with your points here about buying houses.

    Interestingly, whilst being on the receiving end of that amount of loss was sickening at the time, in a strange way it sort of feels worth it now as cutting out losses and ditching the house gave us our freedom to leave the country and follow our dream of moving to Vancouver, Canada to live (which we did two months ago).

  31. Yah, I’m with you. All three of my siblings and most of my friends are owners. I listen to never-ending stories about their problems with their houses. The kitchens, the bathrooms, the landscaping, on and on. And that’s from the ones who didn’t get foreclosed on. But I’ve been hearing all my life what a good investment is a home, and how I missed the boat by not buying a place.

    All the reasons to avoid renting disappear if you have the right landlord. It’s not just luck, you have to interview your landlord and make sure they are someone you can work with. If you don’t like their terms, keep looking. It’s not as if there are no choices.

    I love renting. I have a two-bedroom house, nice neighbors, and big trees. My landlord has given me a new roof, new stove refrigerator and water heater, painted the outside, and refinished the hardwood floors. I’ve been here 20 years (that’s right) and now my landlord just about lights a candle on his altar in front of my picture.

    • I am in a similar situation to Gretchen. We have rented our house for 17 years. We did not have the means to buy in the mid nineties when places were cheap. For years I felt like I missed out, but now I am relieved. So many of my friends took out home equity loans after houses here tripled in price and now are saddled with huge debt and stress about finding money for repairs, etc. Right now, even though we plan to stay in this area, buying makes no financial sense whatsoever! We only pay $650 per month in rent. We would have to pay more than double that and move to a total junker in a less desireable neighborhood if we decided to buy. Our landlords live right across the street at LOVE us. They have only raised the rent by $75 in all these years. I do lots of easy cosmetic work on the house (painting, landscaping, etc) and act like I own it, but we have no property taxes and if the hot water heater explodes or the furnace breathes its last gasp, I just need to make one phone call and it is taken care of. And I’m sure glad I did not have to shell out for that new roof…

      Maybe if there is a huge bust in the market we will buy then. It would be nice to have freedom to do a major remodel, and also to know that someday we won’t be given 30 days to vacate out home. We know the landlords pretty well, but there is still that uncertainty about the future.

  32. Buying a house was the worst thing that ever happened to me. I bought in 2007 when markets were decent, and Have spent 3 years in the foreclosure process w Bank Of America.

    I originally purchased the house and note for $160k from Countrywide. In 2008 our note moved over to BofA.

    Getting divorced didnt help- I moved out in 2009 and my ex got the house but my name was still on the note. Since I made an actual salary and he was an investment advisor w no stable income they wouldnt remove my name from title or the note.

    In 2009 we tried to short sell for $122k, had a buyer, was under contract and BofA took over a year to make nothing happen. The buyers walked. I would have too.

    Here we sit in 2013, the house has been vacant for years because BofA said they’d foreclose any day now. Never happened. My lawyer believes BofA doesn’t even have the right paperwork to foreclose because it was lost in the 2008 cluster shuffle.

    I rent now and feel great about it. I don’t feel like I’m wasting money, but instead able to up and move any time I want or need to. All maintenance is taken care of by my prop managers and rent is 1/2 of what my mortgage was for a similar sized unit.

    Id urge anyone thinking about buying a house to make sure you really want to be there for an extended period and to be prepared for a shit storm if you need to get out from under it quickly.

    Of course I didn’t expect to get divorced after 2.5 years of marital bliss, no one does. So when that type of change Happens along w markets falling you must be aware that you are liable for what you purchased and could get into a long, credit effing process.

    I’m not saying I will never buy again, but I certainly will be more knowledgable about the difficulty that can come w home ownership the next time I do.

    Anyone want to buy a 7 year old town house in a quiet St Louis neighborhood? Or know a really good OTC anti-depressant? I didn’t think so.

  33. A house that you own and live in is a liability. A house that you finance properly and positively cash flow is considered a successful investment. Like any other successful (business) investment, you should look at the cash flow. If you can’t make a business produce positive cash flow (and adequate cash on cash return for the amount of money that you put into the deal to begin with), then you’re just speculating. Successful investors buy and create positive cash flowing businesses. A home you live in certainly provides a roof over your head, but it’s not a positive cash flow producing asset. It’s a cash guzzling speculation.

  34. I should also add that all y’all Americans complaining about you can’t bring a kid up in a 2 bathroom apartment with a huge amount of space should try doing the same in London ( really expensive with hardly any space or Hong Kong similar) so don’t whine as I know plenty people doing it. I think personally if I was to start all over I might buy real estate for investment, but rent myself as what is the point of burning all your dough on a mortgage and locking yourself into one place and be house, buy to rent and rent yourself for freedom!

    • Tom: This is true, but it depends a lot on the society itself. Family, friends, and fellow apartment-dwellers are a lot more likely to approve of raising kids in apartments if you actually live somewhere where everyone does it, like London or Hong Kong. In most of the US, relatives will act like you might as well just sign the kids up for welfare and get it over with, and other people in the apartment complex (unless they also have kids, and frankly in the US most apartment buildings full of families with kids are not in the best parts of town) are likely to be annoyed with you if your kids are not perfectly behaved at all times. That said, it can definitely be done.

  35. “Buying property as an investment is VERY different than buying a house, living in it, and and thinking it’s “the best” investment. Most people do the latter.”
    - and this is what the original question was.

    Purchasing real estate as a home may or may not be a good investment depending on the market, (both rental and purchase markets in ones local area) but it isn’t a path to wealth as it is still an expense and needs to be treated as such. At the minimum home ownership is like a forced savings plan that historically keeps up with inflation.

    Purchasing real estate as an investment is usually a great path to long term wealth. There are very few other investments where you can obtain access to cheap funds to obtain a residual income stream.

  36. Real estate may not result in a positive investment outcome for those that live in their dwelling. However, we all have to live somewhere. It is a quality of life question for me.

  37. The very fact that reverse mortgages exist, and are so popular for the elderly, should serve as a good cautionary tale… don’t use your home as an investment vehicle! The returns just aren’t there!

    We are in the market for a house, currently renting, but for lifestyle reasons: we have four kids. Also I’m “behind” my peers who currently own. But I’m planning for a financial future that will allow me to invest money in other areas to lead a richer life in the future. Call it delay gratification.

    Our generation (I’m 30) needs to wake up to this issue because social security will not be an option! Invest in Roth’s, not Roofs.

  38. I was considering buying a house with my wife back in 2009, but we decided to rent the house instead. The house was listed at $125K back in 2009 or we could rent it for $875/month. We decided to rent. We have excellent credit and offered to pay the 1 year lease up front in exchange for $100 less per month in rent. Since we’ve been there, a giant limb broke off the tree in the yard ($2000 removal), electrical problems ($1000), plumbing (at least $2000) and then the entire sewer had to be replaced ($14000!). Even if we bought the house for only $100K, we would have no money right now and would probably be in debt. Or we would have a basement of sewage. Then of course there are the Realtor fees and taxes.

    People say that the landlord is just passing the costs onto us which is true. But we get those costs in an amortized form, not all at once.

    In my opinion, you should only buy a house if:

    1) You have at least 6 months worth of savings AFTER the 20% downpayment
    2) You’re contributing fully to your retirement (Roth + 401K match)
    3) You’re 99% confident you’ll be there at least 8 years.

    • “[W]e get those costs in an amortized form…”

      It’s even better than that. Depending on how the owner amortizes the cost, you may not even have to bear the full impact of the repair. If the owner needs to make a big-ticket repair and can finance it for longer than you will live there, you will not pay for the whole thing. And like Ramit said, if the owner does a lot of renting (as an apartment complex does) there is a much bigger pool of tenants to share the burden.

    • “We have excellent credit and offered to pay the 1 year lease up front in exchange for $100 less per month in rent.”

      Wow, that’s an excellent strategy!

  39. “Can you show me the numbers? If you cannot do that, you are not ready to make the biggest purchase of your life, jackasses.”

    I LOVE this, Ramit. Your no-bullshit-ness + “I hold you to a higher standard” = effective, inspiring, and fun.

    And thanks for illuminating the buying a house issue. It’s about time ;)

  40. the stupidest thing I ever did was to buy a house. I LOVE renting. Major repairs, insurance, taxes, all that crap is someone ELSE’s problem. All I have to do is pay the rent, and if my situation changes and I need to move, I won’t be saddled with a house I can’t sell. Why did I buy? Exactly the reasons you state…it’s what you are supposed to do after to get married and want to start a family. And the bs about rent being money down the drain. It was mostly my ex that really wanted to buy, and we were both idiots. Don’t marry an idiot.

  41. Wow- I can’t believe how timely your message is. Just today I had to break the difficult news to my dad (now ready to move into an assisted living facility) that his house is worth little more than what he paid for it 15 years ago… Less if you figure in the realtor’s commission on the sale.

    Dad was one of those people who believed his house was his ‘best investment’ and it obviously has turned out not to provide the nestegg he thought it would.

    On the up side, we’ve found that he can actually move from his single family home into a luxury senior facility with every possible amenity, and his rent- which also includes all meals- will be less per month than were his costs in owning and maintaining his home.

    Definitely serves as a cautionary tale for myself and my husband as we weigh the longterm pros and cons of home ownership.

  42. Our first house – we didn’t really feel pressure to buy – we just felt it was something we ‘should’ do. (we wanted a dog, had just gotten married, felt we needed more space etc). Looking back, that was a dumb decision. The house is worth 50% of what we paid in 2003 and because we didn’t make much, we couldn’t afford a ‘nice’ neighborhood, but settled for an ‘ok’ neighborhood. Well, surprise surprise, that ‘ok’ neighborhood has gone to crap along with the property values. We rent it now – but for much less than the mortgage. We’re just lucky that our current incomes are enough to pay for it on top of our 2nd home.

    Our 2nd home, it made sense. We had a kid, 2 dogs, 3 cats and were renting a small house that was poorly built, inadequately insulated and overpriced. We pay LESS for our mortgage (PITI) than we did on rent. If we hadn’t had the animals, we could have rented a nicer place for the same or less. I don’t regret the 2nd house (good neighborhood & schools).

  43. Ramit – Please add links below your videos to items/sites you recommend or discussed! I couldn’t make out the investing site you mentioned at the end.

    Thanks so much!

  44. It’s funny, I had a conversation about this with my 21 yo niece about 2 weeks ago. I’m 41, and have yet to own a house. Her bf is house-shopping (currently living rent-free with his mother so he couls save money for a house). She gave the usual arguments about throwing money away, and some new to me that sounded good but did not make much sense (she’s studying accounting). People are so emotionally attached to the idea of owning a house that the hole thing turns them in some kind of irrational mush. That’s the only way I can describe it. The sort of thing that makes people have sword duels.

    I’ve never felt pressured to buy a house, but there is the prevailing ingrained belief that owning is better than renting. And a sense that having a mortgage is THE rite of passage into true adulthood.

    I would love to own a house one day, mostly to have my own yard and garden, Plus, having something other than white as a wall colour would be so very awesome! I’ve managed to grow pretty impressive balcony gardens over the years, so I make the best of it. I currently live in a basement appartment, so no garden at home this year. As much as I would love a house, I have specific requirements or self-conditions before I do. I’ve seen too many friends, both married and single, being owned by their house. They’re having trouble making ends meet, especially when unexpected repairs pop up.

    My ex-spouse loved to flash. I was debt-free when we met in 1997, and when we split in 2004, I was in about $6,000 of debt. (It was worse for him.) I bought peace. A shitload of it. And when the common expenses were higher than our share, I always absorbed it. It took me 3 years to recover financially. Counting every penny. “Cutting down on lattes” not to save money, but because I could not actually afford them. I never ever want to experience that stress and anguish again. Even if it means never being a house owner. Not worth it. I still would love a house, but I have other priorities.

  45. I looked into buying a house twice since college ( I’m class of 2007). Once in 2008 and once in 2011 or 2012. I’ve had a decent income, other expenses were low, and interest rates looked great, especially in comparison to 2004-2007 before the bust. I was actually got qualified and looked into prices and different options, because, you know, it doesn’t hurt to take that first step and just look right? Test the waters? I was very wary and I’m pretty cautious and yet I could feel myself getting caught up in this wave of enthusiasm. Even though it would be MY mortgage over decades (!!) almost EVERYONE had a very strong feeling about the purchase. Everyone gets so dang excited and pushes you to do it. Rates are so low! You can always sell in a few years, the market can only go up. Fortunately I had read you and Suze Orman and that voice in my head (the minority) caused me to back out both times. In honestly feels like you’re disappointing your friends and family, you’re being a wuss, you’re letting go of a huge opportunity you’ll probably regret missing out on. Yet sometimes the smarter decision feels that way. I’m very happy I made it. And Also grateful to you and IWTYTBR for that!

  46. I just bought a house. For our family of 6, it didn’t make sense to rent anymore. For the equivalent house in our market, it would cost us 1200 a month minimum. I’m currently paying just over 1000 for the mortgage, insurance and taxes. If I add on maintenance I’m probably spending 10-15% more renting my house from the bank than I would from a landlord but at least I can do what I want with the place and don’t risk getting kicked out after the lease is up.

    I’m still firmly in the camp that believes a house is just a pile of raw materials that depreciates and needs to be maintained just like a car. The land it sits on can be valuable but you’re just gambling on the market if you think you’re actually going to make a profit on a house.

  47. It used to be that you could OWN a house and land here in America. Now that it has been turned into Amerika, you cannot. You will NEVER own your property, and the government can take it from you at will, (Eminent Domain,) and if you do not have money to pay the forever property taxes you just became a renter.

    Home ownership used to be a mark of freedom, now we are like the commies: rent from the “haves” and hope they are not killed have by the commie leaders.

  48. I remember receiving all the classic, subtle pressures to buy a house a few years ago, not long after I got my first time job.

    Said pressuring parents provided the down payment, too, not to mention some family issues that complicated it, but I really underestimated the opportunity costs.

    A new job in, say, California or NYC a couple years ago would have quickly – backed by good spending habits – swamped that one-time new home owner tax credit, even at a whole $8000.

    As it is, I plan to make the job move anyway and perhaps sell the house sooner than later.

  49. I love this article … when you really start drilling down into the WHY of what you are doing or about to do, that’s when things get interesting. I got over any interest I had in owning a home by housesitting for some wealthy people for a while. But they are wealthy only in that they own money-sucking homes that require incredible amounts of time, money and energy to maintain. And, when the real estate market goes down, they ARE trapped if they don’t have the cash flow to maintain that home, as well as some other place that they either buy or rent.

    Plus, finding someone to care for your home while you are gone can be hair-raising. Finding someone to clean your house, maintain the garden and do any home reparations that you don’t want to do also suck up valuable time and energy.

    All in all, spending a day watching repair workers put in new double pane windows in a giant house where the owners were paying a bundle of money for the heating of it and then learning that the new $3000 window project didn’t actually help the heating costs go down any killed any lingering desire I had to own something. Dude, I don’t have a day and $3000 to waste on that stuff. Plus, who knows how long it took the owner to find someone who could do the project the best for the least cost? That’s a whole other time-sucking activity.

    Time is the one thing you can’t get more of in this lifetime. So you may as well use it doing the things that you enjoy. This isn’t one of them for me!

    • And finding good renters and having to manage real estate as rental properties creates its own set of time-consuming nightmares that I wouldn’t want to have to handle. Forget that noise! And I’m 40, so I’m supposed to want to “settle down” by “buying a house” and “setting down roots.”

      Instead, I rent. I can move when I want and I don’t have to deal with all of the buying, selling, renting, repairing, etc, the homeowners have to manage all the time. I like the freedom.

  50. Written from the viewpoint of a single guy in his early thirties. Have a few kids and you’ll want some security for them and not have to worry about a landlord’s plans for his property that may not include you.

  51. The way people think about home ownership as an investment is extremely weird to me.

    I remember how I read “Rich Dad, Poor Dad” when I was 12, and even at that time I couldn’t understand how people can think of their house as an asset when it’s costing them money, not generating them money (renting is another thing of course).

    I think people would be better off if they would start being honest with themselves and stop calling everything they want to buy an investment.

    Why not simply admit that you want to buy a house because of the security or prestige you think it will provide?

    Plus, I know nothing about US tax law, but people what kind of tax benefits do you have there that you would BUY A HOUSE in order to get those benefits?

  52. I agree. I’m 40 and have worked for myself the last 10 years. I never wanted to buy a house when all my friends did because I’ve had a great time living in various beautiful places and renting very well located apartments I couldn’t afford to buy. I’ve lived in Maui, Costa Rica, Caracas, Miami Beach, and traveled a lot. Banks don’t like freelance people that move a lot anyway, so I’ll keep living in cool warm places and happily renting while I invest my money in my own businesses, education, and lifestyle.

  53. Thank you for this post! I am going to show it to my entire family, who have been pressuring me vociferously to buy property. It’s not positive persuasion, either: a few weeks ago I had this conversation with my aunt: “What you should do is BUY A HOUSE! You’ve been throwing your money away on rent for almost FOUR YEARS now.” Then she actually PULLED OUT A CALCULATOR and asked me what my monthly rent was. I told her (I don’t know why…familial deference perhaps?) and she belligerently thrust the calculator at me. “THAT is almost $37,000 dollars that you’ve THROWN AWAY renting!”

    That being said, I have to admit I am tempted by all those HGTV shows that show people flipping houses or building income suits and making a cool grand a month for the next thirty years…
    In the end I think of home ownership as a gamble…maybe you will buy a house in perfect condition that needs almost no maintenance. Maybe you have a handy neighbor or friend who can perform maintenance for a fraction of the price…on the other hand maybe you will get stuck with a house where the roof caves in after 6 months and the foundation shifts and you have no insurance to cover it (incidentally…try buying flood insurance in Florida : p). It’s just a giant coin flip, IMO.

  54. I have owned ‘homes’ since 1971. I purchased my 1st home when I needed to rent a house, for my family of four, and realized that most of the 2 bedroom houses I was looking at were filthy and inadequate. I thought my wife was out of her mind (I wasn’t about to take out a 30 year loan on anything!) when she made an appointment with a Realtor to show us some homes for sale. The Realtor’s figures showed we would be buying the 2 bedroom home, with a guest house in back, for the same price as renting a pice of ‘crap’ house. We bought our home for $18,500.00. It cost me approx. $500.00 for closing costs on a VA loan. Yes, there are other homeowner costs, but, if you factor them in from the beginning you should have no problems.
    I agree that you have to be truthful with youself as to why you want to own. For me it was to have my own “Home”. The amenities of homeownership.
    1. Never buy a house as an investment.
    2. Never, ever, ever buy over your head.
    I think most people that get into trouble buy based on impulse and emotion. Seems nobody today wants to buy less than what they can afford which, I believe, is the prudent thing to do. Too many people want the ‘Pie in the sky’ right now. They are unwilling to wait and work for it or they get in way over their head.
    Anyway, sometime after I bought that home (which is worth approx. $277,000.00 today) I started investing in real estate. I started buying apartment buildings. Of course, you need to study the market and buying below actual value. Besides working full time, I did most of the repairs and managed the properties myself.
    The other day I worked out the figures on one of those properties and it showed that, including mortgage, taxes, insurance, repairs, all costs and adding in the present equity I made 104% yearly return on my $55,000.00 investment. And, that investment money was the cash I made from a previous investment.
    But, Real Estate is not for everybody.

    By the way, I bought the home I live in today in 1987. I bought it for $229,000.00 but it came without landsacping which I factored into my future expenditures. Today it is worth over a million dollars. I haven’t sat down to figure my ‘profit’ on this purchase, but, it’s got to be substantial.

    Respecrfully submitted.

    • 1,000,000 – 229,000 = $771,000 profit. Sounds good, right? The value has increased to 437% of your purchase price.

      But that’s over 26 years. Let’s check it with the compound interest formula:
      (we’ll assume a yearly compounding to check the annual yield)
      1,000,000 = 229,000 * (1+r)^26, where r is the APY
      4.3668 = (1+r)^26
      log(4.3668) = 26 log (1+r)

      r = 5.83%

      And this was a charitable set of assumptions:
      -I assumed no mortgage (and thus no interest costs – a 30-year fixed went for about 10% in 1987).
      -I assumed no property taxes
      -I assumed no repairs
      -I assumed you can actually find a buyer for that million dollar price
      -I assumed no losses from inflation (most of the years in that period seem to run between 2 and 4 percent each year)

      So I don’t know exactly what your profit will be either, but it seems like we can cap its yield on price at ~5% per year and in reality we expect it to be much less, much closer to breaking even. For what amounts to used goods, that’s perfectly fine. Even as an investment, it’s better than holding a company that goes bankrupt. But it’s not great.

      For comparison, the S&P 500 went from 246.45 (2 Jan 1987) to 1426.19 (31 Dec 2012). The same compound interest formula gives me an APY of 6.99%, which itself assumes we had a fund that tracked the index exactly and paid no fees on it (not valid, but closer to reality than the mortgage and repair assumptions above). We also would not pay taxes until we sold out, unlike property taxes which come every year (and in addition to the cap gains on the sale of the house unless we buy another one quickly). Of course, you can’t live in an index fund, but that’s not the point of the exercise.

      Now that I think about it, I’m not even sure compound interest is the correct evaluating tool for these investments. But at least if I’m wrong there I’m consistent in the comparison. I don’t think switching to a different evaluation would cause the yields to switch places or even change substantially from where they are. Any thoughts?

  55. I feel like I made a mistake buying my townhouse back in 2005.

    I was just out of college and the DC real estate market was taking off. My mindset was instead of renting, I thought I could buy a property live in it for 4-5 years, make a profit, buy a bigger and better house and repeat over and over. Well 8 years later, I’m still in my townhouse and it’s worth 50% less in value.

    Thankfully my income has risen so that I’ve been able to pay the principal down. But if I rented an equivalent townhouse for the same 8 years I’m sure I’ll be at least $100k richer now. Also, I passed up some opportunities to move and work in different cities because I can’t fathom now selling my house for a loss.

  56. Hey Ramit,

    Thanks for writing this up. You shed light on a topic that I frequently hear growing up in an asian family that STRONGLY believes buying real estate is the a way to grow your wealth. I find it interesting that when I ask my asian parents what are the downside of buying a property they don’t have any concrete rebuttals other than “I save money on my taxes every year!” WTF? How about giving me specific numbers on how much you saved?

    I love how well you handle haters giving you crap over this. I have a lot of respect for you. I can’t wait to meet you someday.

  57. Mom recently pressured me to buy a house… “THE PRICES ARE NEVER GOING TO BE THIS LOW AGAIN”

  58. I have from my mom, whom I still live with. She tells me all the time that I should just live here until I can afford to buy my own house so that I don’t throw away money on rent.

    I never really took it seriously. However, I did learn something interesting last week after researching house prices in the Conway/Myrtle Beach, SC area. Prices there have actually gone so low that I believe it’s cheaper to buy a trailer or low-end condo than to pay rent for a comparable apartment. It can cost about $7-800/mon incl. to rent a 2-3BD around there. Meanwhile, a mortgage for a place that’s total cost was around $42K or below should only be in the low hundreds, even with taxes and insurance. If I had a mortgage that didn’t penalize paying extra for the mortgage every month, I could have it paid off within 4-7 yrs, depending on how much extra I paid. If I rented for that amount of time, I would pay around $45K. All in all, depending on how large a mortgage I took out I would wind up paying a very similar dollar amount in the end.
    The difference is that after that 4-7 yrs, I want to sell whatever I buy and move to the SF Bay area. So, even if I sell at a loss I will still get back a percentage of the money I put in the trailer/condo. I won’t get that if I just rented obviously.

    In summary, I’m not saying I’m absolutely right about this. I’m no expert but as far as I can tell, my theory works out. Feel free to pick it apart if you’d like.

    Also, any tips on how to afford the SF Bay area would be good too, haha~

  59. I have been working as a real estate buyers agent for a little under a year now, and feel real estate can be a great investment if you know what you are doing. That being said I am being pressured into buying my first house by my father (who I work for). His main point being that I need to support the product that I sell, and that it is the best time to buy. The problem is that being so new to the business I do not feel financially stable enough to buy.

  60. I don’t even notice pressure to buy a house because I’ve been reading you long enough that I have my responses knee-jerk ready! So, first and foremost, thanks for that Ramit.

    Second, I was in a continuing ed class last week where the presenter asked who owned houses and why those people had bought houses. A 25 y/o kid behind me pipes up “You’re throwing away money on rent!” I couldn’t resist. I said, loud enough for the presenter to hear me, “If you want an argument against that, I have one.” He wrote down the kids answer and came over to me to ask what my reason was. I responded …

    I’m not throwing away money on rent. I pay someone else to worry about the hot water heater, the roof, the shower head, the garbage disposal.

    He smiled and said “So, you’ve transferred the risk?” Since I am an insurance agent and this was an insurance class, that rang true for everyone in the room. I told him yes, that is exactly what I am doing.

    I’ve been wanting to share this with you for weeks, I just keep forgetting! So, hope you enjoy my little giggle, and thanks for giving me the “answer” to real estate pressure before I ever felt the pressure.

  61. Hi Ramit,

    Something I do not get:

    for argument sake, I want to retire in manhattan or sf, currently renting 1 bed for $3000 a month. In 30/40 years from now, the rent would end up being what? 6, 8, 10, 20k per month? Without owning anything I do not see any other solution but to buy. How many thousands of $ would I need to put aside and invest ON TOP of maxing out 401k/IRA to keep up with the future rent throughout retirement. I am under the impression you are saying that the money we are not putting towards a mortgage, needs to be invested (index funds, etc …). Well, don’t I have the rent to pay instead of the mortgage?

    Btw, Ramit, did you buy or rent your apart in NYC?

    Thierry.

  62. As a married person with two kids, I have felt enormous pressure to buy a house. This pressure usually comes from friends who seem willing to risk everything to purchase property. They are even willing to move to a town they know nothing about just to get a good “value” even if that entails paying 15k a year + in taxes in addition to their mortgage and other expenses.

    One friend who bought in his 20s before many of us were ready to settle down and was an evangelist for buying, is now upside down in his property, and has a property manager role he never wanted because he won’t be able to sell his house for who knows how many years.

    Anyway I could go on and on about this. I think a lot of this is meaningless social pressure. Several years ago during the housing bubble I thought everyone was smoking crack because the obsession with property was completely out of control. One dream my husband and I are trying to realize is living abroad with our kids for at least a few years, something we most likely could not do if we were tied down to one location through home ownership.

    • Best to my knowledge, rents barely keep up with inflation and remember rents are usually tied to peoples incomes, unless incomes sky rocket i doubt your rent will also. Plus living in a paid off home isnt “free” by the time you have the home paid off and are in retirement, the cost of living will probably only be alittle bit less than renting. My parents are retired in a paid off home, and its definitely not FREE!

  63. The monthly payment for my house is lower than my old monthly rent payment by a couple hundred dollars.

    • Steve, with all due respect to your profession, please re-read the post above. Did you see the part about TCO and Phantom Costs being 50% higher than the cost of the mortgage?

  64. Great points here.

    I bought my first $250K condo at age 22 with a 30K salary job. Barely made the payments but had this dream of investing. Dumb.

    Then 2007 hit. Yet, I bought a $500K house as well at age 23. Dumb.

    I managed to rent out the garage and basement and upper floor and turn a profit for a year. Then I broke even and sold it.

    I’m stuck with the condo but because its almost maintenance free, I keep it. It’s also in the best city in Canada, which is growing rapidly every year. I’ll use it as my “nest egg” should I fail at everything else.

    But it’s true that all the reasons mentioned are dumb for buying a house. If your completely happy in your city and your job and want to be there for most of life, then why not buy a house or apartment and make it a “home”, not an investment.

    Other than that, you have many questions to answer.

    Dealing with tenants is horrible. I have been lucky lately but the first few years turned me against all human beings for a while. I was so bitter having tenants who went from sweet to not wanting to pay, etc. Took all of them to court. happy times.

    I’m now a world traveller and at first, it was horrible to be thinking about my tenants not paying me and the house having problems while everyone else is just enjoying their life on the beach.

    If you even think you wanna travel for a long-time, don’t buy a house.

    Typically, you do save hundreds of dollars a month by renting. IF this was invested half-decently, you’d come out likely on par with owning a house in a perfect market.

    If you rent, you pay a landlord, if you buy, you pay a bank. same shit really. You don’t actually own the house for 25-35 years. In that time, if you miss a few payments, your kicked out. the bank is your landlord.

    If the market goes south as you have seen, the owner is f**cked. If your a tenant, oh well, just move on or score cheaper rent ! yippee… no stress.

    Renting is almost strew-free compared to owning a place, and unless your determined to live most of your life, it’s border-line ridiculous to buy a place. Add in costs of buying, agents, lawyers, things to fix, and potential downsides, and your likely stuck for a while.

    Unless your lucky, and you just so happened to buy a house in canada around 2004. Then your laughing. But like the lottery, it’s all luck when it comes to buying at the just the right time :P

  65. As a military family, we’ve gotten subtle pressure pretty often from other service members. Before the real-estate meltdown several years ago, military families could build mini-empires of rental property, buying a house at each duty station and then either selling for a profit or renting it out, either with the intent of selling it later, moving back to it, or just keeping the tenants to cover their expenses. Some people were able to buy 6-8 houses over a twenty-year career, then either sell them profitably or earn sweet passive income from tenants. It was like we were idiots to skip out on this win/win situation.
    Then, in 2007 or so, all the military-heavy housing markets started to get mushy, and we knew people who couldn’t find good tenants or any tenants at all and were totally incapable of selling, especially since banks were unilaterally uncooperative with short sales. Several people lost their houses to foreclosure. One or two did manage to short-sell after tons of paperwork and phone calls. No military homebuyer has recommended purchasing in the past five years, and many think we’re wise not even to jump into that game. The stakes are too high.

  66. As one who has had a financial and emotional interest in several homes over the years, I can advise that you should buy for pride of ownership and settle down and not just the investment potential. There are other things to invest your capital in that can get you better returns than real estate; being a landlord is not for the faint of heart, and you can have a very happy home by renting. It’s really all about living within or below your means so you aren’t a slave to the lifestyle you choose. Spending too much doesn’t make us better people (contrary to our keeping up with the Joneses mentality); it makes us stressed and imprisoned.

    Learn to distinguish between basic needs and wants, define your priorities (education for the kids vs. huge home e.g.), and above all more flexibility in your life. Do not let others dictate how you’re going to live, and that includes your own family. It’s your life, and the only people you’re accountable to are your partner and children.

  67. Ultimately we bought because we’d had two landlords in 4 years say “you’re the best tenants I’ve ever had – I want the equity out of this property, you have to move”. I hate moving. Husband hates sharing walls, so houses were the only option that would lead to peace and tranquility. Solution? Buy our own. But the decision was made purely on the basis of “what is going to provide the best living environment for our brains?” and the tax benefits were a convenient perk. When the in-laws complained about the loss of their deduction when they paid off their mortgage, all I could do was tilt my head at them in bafflement because I understand how the tax math works…

  68. This obsession with house ownership has always struck me as really weird. Having grown up in Germany, I’m used to renting being the norm and owning being quite rare. No one I know, other than my grandparents, owns a house. It’s funny how attitudes about some things can be so different between countries.

  69. I can see that some sites, including yours, think that video responses are the new way to come across to audiences. It would be great if you had a transcript available for those of us that can’t hear videos.

  70. Hi,
    I think this question is way to simplified. First of all, I’m sure the cost of renting vs ownership is quite different between countries and even cities.

    Living in Stockholm, Sweden, it is very hard to even get an apartment to rent if you have not had your parents put you in a renting-queue (with a monthly small payment) for 15 years.
    Some other things:
    There are many restrictions in what you can do with an apartment you rent compared to owning one. Where you can do a complete interior design renovation to your own liking and by improving the standard you will be most likely increasing the value when later selling (unless it is badly done and you have a poor taste for interior design!).

    Cost: Renting costs can be very similar to having a bank loan. Sure, you need at least 10% to put in when you buy the house. So technically, the bank usually is the big owner :)
    However if selling at the right moment, many (almost all who I know) have managed to sell for a profit (making it harder for younger generations to buy something when they have not had the same chance to accumulate wealth while buying/selling).

  71. Where I live it’s incredibly hard to find rental properties. I currently share a three bedroom apartment with two strangers, paying a pretty exorbitant rent. Do you have any specific advice for finding rental properties? (a lot of your advice in _other_ areas is of course useful, such as the straight-jacket technique)

  72. Can anyone recommend a good book specifically focused on home buying and TCO? My finance and I plan to buy a house this fall and will have close to $250K cash available. We would love to pay cash but in our market we may end up having a loan – which we will be sure we can cover with just one income (the smaller one!). We have never owned a home before and want to know all we can about what the hidden risks may be. I’d love to read a more recent book that doesn’t have a “you’re throwing your money away on rent” slant but the more measured tone Ramit takes.

  73. I find your uber-firm stance a bit disconcerting. In the comments above, when confronted you seem a bit less negative on the concept- but in the post you’re solely focused on telling everyone why investing in real estate is such a horrible idea.

    If your goal is to have your readers not buy and live in a single-family home, or not make bad decisions… then help by talking about how to buy investment properties soundly and wisely, which is absolutely possible (and easy in the current market).

    It is true that a home you live in is not investing, but the title of your post talks about “investing in real estate”, which is actually a fantastic way to “get rich”, or at least to get ahead and out of the hamster wheel we are all taught to live in.

    We bought during the worst part of the boom (our last purchase coming right before the crash) but because we didn’t take any bad loans or balloon payments we’re doing just fine. In fact, despite holding multiple mortgages we are beginning to see a life of freedom (because our renters are paying them off for us). And trust me when i say freedom=rich.

    You say “why pay a dollar to save .10?” Totally fair, but most of your readers would probably love to pay zero and get .10 back in addition to anything above their mortgage they get in rent. You’re only telling one side of this story and real estate happens to be one of the only places where uncle sam has actually allowed (and helps) the average person to make good money that isn’t tied to working every day… AND get to write interest off on top of everything.

    Do everyone a favor and talk to the good and bad… Real estate isnt for everyone, but if your goal is truly to help people find financial freedom and “be rich”, real estate is absolutely one of the paths to that end.

    • I played the Cashflow game on Rich Dad for a while. Got really good at it, too. But look at all the hidden assumptions:
      -Real estate deals just fall into your lap. Except they don’t, you have to go searching for them. You’ll sift through a lot of garbage to find those sweet deals.
      -You know exactly what cashflow to expect up front. Nope, there’s a tremendous amount of uncertainty, and a small-time player can’t absorb a lot of volatility the way that a big investor can. A single month of vacancy could wipe you out when you’re as leveraged as that system encourages you to be.
      -Managing your portfolio takes no time. Wrong again; the day-to-day grind is at least a part-time job, and you will either do it yourself or have to find someone you can trust and pay him.
      -You can find financing easily with no money down. Not so fast! Banks don’t really like no-money-down first time investment buyers. You can’t get the same deals on investment property that you can on a home that you’re going to live in.

      So yes, you can make money doing this. Even a lot of money. But just like there’s a difference between Harry Potter books and the novels I never get around to writing, there’s a wide variety of outcomes that come down to talent and luck.

  74. I live in NYC. I would want to buy something in the city. That way i dont have to worry about a rent increase, only maintenance increases. Future generations in my family can have a place to live in the city. Right now i try to look out for lotteries, and first time home buyer programs. There is a return to the cities happening all over the country. I would try to buy if i lived in Portland, LA, Seattle etc.

    Now i dont think its worth buying in some areas outside of a metropolitan area. For example everyone always talks about AZ being a hot market. All it takes is the tech companies to leave and it will turn into San Bernardino County, California.

  75. My wife has said all the things you mentioned above regarding the normal expectations of buying a home from all her friends and was very determined to buy a home this year. Her parents even gave some money specifically to buy a home.. After looking at the total cost of ownership, and also looking at what is in our price range in the area, I convinced her we should keep renting and wait to buy a home when we have a higher income. I’d rather invest the money in various other ways anyways. I’m glad to see Ramit agrees w/ my decision.

  76. @TheDangerz – did you read the article? Ramit clearly encourages folk to “Do the maths then decide.”

    Anyway, for me, buying was a simple no-brainer, I couldn’t NOT buy. A government scheme allowed a discount purchase on my currenly occupied Socially Provided House (UK Council House, Right To Buy scheme). This offered me a 30% discount on its market value, so on day 1 I’d secured a 30% equity cushion – which has come in handy to soften the blow of the market crash (which, pisses me off reading some of the above comments – borrowing TEN TIMES your salary?? Fuck, you idiots partly caused this crash!)

    Here, local rents are easily 2-3 X my mortgage payments, allowing me a *relatively* secure home withou needing to rent.

    I purchased well within my means and haven’t upgraded yet.

    • indeed i did.
      and yes, his final conclusion is “do the math”, but all numbers and examples given are negatively spun.

      This website and post aren’t about how to take the easy road, its about becoming rich or being financially free. The fact that playing the market seems to be the only route to that goal is what frustrates me- it is simply incorrect. In my opinion they should both be part of your plan/portfolio.

      My wife and I are in our thirties. We left our jobs (after working our asses off to save every dime for several years) to travel the world for a few years and are now able to look for ways to spend our days doing something we enjoy rather than chasing the wheel BECAUSE of real estate not despite it. I cant say that for any of our friends that havent used real estate as part of their path to freedom.

      That doesn’t mean it has all been easy, that doesn’t mean there aren’t hurdles, and i agree that people shouldn’t buy out of some social norm to do so. None of that change’s the fact that i (and a few others i know) have several mortgages that are being almost entirely paid off by others. Inflation or not, when those mortgages are paid off we will have a sizable and sustainable income from houses that we didn’t even pay for.

      When i get an employer match in a 401k of course i invest in the market. When i can have a tenant payoff a loan for me, of course ill jump at that opportunity as well! Read the books Ramit suggests, but also read Rich Dad Poor Dad and other real estate investment books – then do the math with facts from both sides!

  77. Thank you for this article! Rarely do you hear about the hidden costs if ownership. The truth is that with renting there is no hidden costs, with owning there are MANY and they can be SCARY. Hello roof repair, hello foundation problems, hello plumbing. My father supported our family with real estate, and it’s a tough game, and he has to this date advised me against buying a home. He has always told me there is a HUGE difference between buying real estate as an investment and looking at total cost of ownership, market value, cash flow, return on investment, and basically being a general contractor because “no problems no profit” and buying a HOME. Buying a home is not an investment – it’s a PLEASURE PURCHASE, like a luxury car, and should be treated as such. There is a great book called “Work Less & Play More” by Steven Catlin that also talks about this and has a great story about buying a canoe with a ex-girlfriend. Thank you Ramit for not “blowing smoke” – I can tell you really care.

  78. Thanks Ramit for your article! We are thinking to buy house because needs more space. We have 7 yr old and 1month old. Still struggling should we go for house or rent a big house? Any suggestions? (I haven’t read all 106 comments people left on this post so might someone already asked you this. ) thanks in advance.

    • I suggest before making the biggest purchase of your life, you spend a few hours reading this post, every other real-estate post on this blog, and my book. Then other sites too. Or I guess you could just go buy a house. Up to you

    • Thanks Ramit!

      I went through all the posts and it make sense to me. I have your book and reading. After watching you on CreativeLive, I am following your suggestions very diligently. I think we are going to wait for buying a house for few more years. Thanks again!

  79. I struggled with this concept in my early years. Since, I held off from buying, I have been able to travel for months at a time, move where the market is best and really experiment with living in different neighborhoods.
    The money I saved from not servicing debt went into other investments and I haven’t met anyone with a mortgage that can take 6 month off to travel and my net worth continues to climb.
    In my current city (Vancouver, BC), the cost to rent is currently cheaper than buying, such as in NYC and SF.
    If I do purchase a house or condo. I set up pre-qualifiers like 25% percent down (This means over $100 000) and Income:Cost ratio that will keep me in line. (1:4)
    I see many young people “stuck” paying off mortgages instead of exploring their potential and enjoying their youth.

    So, do your homework and think about long term impacts. My personal tip for the guys is don’t bother unless you are happily married and require that kind of infrastructure. You really don’t want a failed relationship resulting in a 50% loss of assets.

  80. Thank you. This is exactly what my husband and I have been talking through. As a young married couple (early/mid 20s) with 2 small children we are the unusual ones among our friends to be renting, and we hear plenty of encouragement to buy now when the rates are so great. We have a 2 bedroom apartment with nearly all utilities included for $500. If I ever feel like we are throwing away money on rent, all I have to do is add up the property taxes, increased utility costs, maintenance costs, and mortgage interest to realize I would be “throwing away” more than $500 a month as a homeowner. Even without investing the difference at this point, we are adding to our down payment fund faster than we would be building equity in a house. Plus as a young family we appreciate the geographic flexibility for my husband to get his career going with no concerns of selling a potentially underwater house.

  81. Hi Ramit:
    I have a friend who bought a townhouse 20 years ago. The mortgage will be paid in 5 years. He told me two things:1)Buy a property close to college campus. 2)and don’t rent to students. He has a monthly profit of $300.00 and it will be $700,00 a month within 5 years.

  82. For Christ’s sake people! There is a huge difference between buying a house to live in and buying one as an investment. Buying to live in is NOT an investment.

    Let’s start with buying to live in. There is not really a financial benefit when you buy a house to live in. There are intangible benefits though, which include not having to deal with landlord BS – including pet policies, if on month to month lease possibly being kicked out in 30 days at any time, raising your kids in a stable environment, if in an apartment – not hearing neighbors have sex or practice their tap dancing, or play their trap set, and on and on and on….It basically comes down to the numbers and if these benefits are worth the cost. Don’t get in over your head, and possibly buy a duplex so you can rent out the other side to supplement the costs. Depending on the area, it can be more or less favorable to own than rent (although most likely less favorable to own in a lot of situations).

    If buying as an investment, it can produce very favorable returns. I’m talking strictly buying to rent it out and hold, not fix and flips, although those can be very profitable as well. If all the numbers are “right” there is really only one way you can lose – getting a bad tenant in there, and that risk is significantly mitigated with proper screening. You can also obviously lose by paying too much, not doing proper inspections and finding massive termite damage – etc etc but I’m trying to keep it simple. Even if the house burns down, you are covered. It loses half its value? Who cares, if the cash flow is right and the numbers work out. I don’t care if all my houses are worth $0 right now, it would actually be good – less property taxes! I buy to hold and for the cash flow and don’t speculate with price appreciation. When it comes time to sell, it’s just icing on the cake and they will almost without a doubt be worth more with all the improvements put into them and the low cost of purchase. And those 20-30%+ returns? Yeah, very real even with SFHs that I am currently experiencing. I must make a minimum CASH ON CASH return of 20% to even consider the deal! It has been fantastic so far. I must reiterate, THE NUMBERS MUST WORK OUT!!!

    And Ramit, let’s get real with your example. Right now, you buy a 290k house, you’ll get around 3-3.5% interest on a 30 year even. I do 100% agree with you in not buying just because you “should”. This is most likely the BIGGEST FINANCIAL DECISION YOU CAN MAKE IN YOUR LIVES PEOPLE!! Do your research and know what you’re getting into.

  83. Not even living in the US and the pressure to purchase is the same. My husband and I currently have NO savings and are trying to correct this while renting. My family however is trying to convince us to purchase land and build a home. Bare in mind that lawyer fees in my country is at least 7% of the cost of the purchase, and its a long and drawn out affair. The pressure is intense, it has caused many an argument between us as it is MY family that has been butting their nose in our business. With all that said, our landlord loves us (we pay on time and upkeep of the house has improved) and they may consider allowing us to purchase the house we are in a couple of years.

  84. A few years ago my wife said we had to buy a house to have kids. I didn’t really buy into that argument but instead of debating it I said “ok, show me how we can afford it after accounting for all the hidden costs”. We worked through everything and found a price level that made sense for us.

    I was ok with it because the cost was a little higher than renting but it wouldn’t increase as much in the future. The price we were targeting was low enough that we didn’t even find out what a bank would really approve us to spend – probably 2-3x as much. When I hear about in-laws who think they can spend what the bank approved them for I laugh and cry at the same time (oh yeah and this is someone in an industry where he can lose his job for months or years at a time without notice).

    When we went and looked at houses in that price range we found a few that we would be ok with buying and doing some additional work over the next few years (like building a garage, or making the basement not look like it’s from the 60s). But we found others at a slightly higher price that had all that work done, so the total cost was about the same and we didn’t have to do it ourselves. In the end we spent about $45,000 more than we initially aimed for.

    Now two years later we have refinanced once to get a lower mortgage rate, done a bit of work with the help of some friends and family, and gotten to a point where it is very affordable by any measure (ie the mortgage amount is about 1.5x our combined income, and that’s in a year that includes maternity leave). We have increased our mortgage payments a bit so Quicken says there are 14 years left but I don’t really care about that because the amount we invest every month is twice what we pay on our mortgage.

    If you do the work it can make sense. If you don’t, I’m sure I profit from your bad decisions somehow!

  85. On Monday, my roof will be repaired and my only concern is that I may have to park farther from my apartment than usual. Not sure how much of this cost has been amortized into my rent, but if I were paying for the whole thing at once, I’d probably be looking for a second job.

    This morning, as I passed my complex’s maintenance truck, I was thinking of some friends of mine who will be spending a good chunk of this weekend doing yardwork. My mind went off on a tangent about division of labor from there and how renting makes me a better capitalist than if I were building equity.

    Not saying renting is for everyone, or even for me forever, but it’s not often that the thing you should do is the best thing to do.

  86. I did exactly the opposite of what Ramit suggests and it worked out for me. I purchased a beautiful home for my young family of four with no possible way of affording it. I bought it with no money down and a mortgage set up where I only paid the interest and no principle. I could do this because my credit ratings was very high. I probably overpaid because of the market conditions at the time. I didn’t have a job, any savings, and no plan for high future earnings. I did all of this on purpose… and here’s why.

    I purchased the house I wanted my children to grow up in – a beautiful house, great backyard in an awesome neighborhood. These are the memories they would have for the rest of their lives. If I rented and saved, it might take me ten years before I could afford a house like this… or perhaps we would be “comfortable” where we were at it and just rationalize that it was what we wanted when deep down we knew it wasn’t.

    I knew the next ten years would be a struggle because being self-employed and building businesses from nothing is hard and can take years. So, why not live in the house I would buy in ten years now…so my family can enjoy it and be comfortable?

    At the time I made this decision, I had felt I knew myself well. The greatest challenge of any entrepreneur is managing your own psychology. I was ready to take a big bet… so I put all my chips in… and bet on myself. I understood how I functioned and what made me tick. When I decided to buy the house, I decided to “burn the ships”.

    I knew this would alter my thinking and provide for an intense focus on making money… and it did. It made me very uncomfortable and caused a lot of stress. Most of you can probably motivate yourself without this kind of action, but for me, I needed something really big.

    Most people avoid the horrible feeling of possibly failing and will do anything to avoid it – or avoid being uncomfortable and getting stuck in a corner with no way out. I learned that I thrived in those situations and only those situations.

    I know if I was locked in a room and every exit was nailed shut with the exception of a small window high up on the wall – my brain would come up with a way to get out through it.

    However, if I walked in the room and there’s was a big door at the other end – I would take it. Even if I knew the small window led to big rewards, I would take the door. So, now I nail the door shut.

    • Let me get this straight… your credit rating was so high, and regardless of the fact that you had no job, no savings, and no “plan” to increase your income, that the bank took a look at you and said “Give this man a house with nothing down!” You must be one hell of a salesman.

      And you did this to give your family the quality of life that you felt they deserved. “Screw it! I’ll just dive in headfirst to the expense that I’ll (hopefully) eventually be able to handle, because I want them to be happy NOW.” (I’d like to plan on driving an Aston Martin one day. Shucks, I might as well just buy it now! Its all the same, right?) This then lead to an extreme amount of stress on your end to make ends meet (which motivated you, understandably) all in the valiant and noble quest to provide for your family what you thought they deserved.

      This begs the question: during that time, how much time did you spend with your kids? How many arguments were had amongst your family that could have been triggered (and spurred on) by your stress? How many nights did you spend working because “its for the best interest of my family,” when your kids just wanted you to tuck them in and read to them? If you were truly in such dire straights as you seem to convey, I’d be willing to bet that those things were the norm, not the exception.

      Sorry amigo, but it seems that you’ve focused on one emotional reason (quality of life – totally understandable) to the point that you may have been ignoring others (namely, spending time with your family instead of being an overly worked, exhausted and strung-out parent.)

      I completely understand the “tight spots get me fired up!” mentality. I find that some pressure helps the real work get done, and keeps me from being complacent. But good gravy man, taking it to such an extreme is never wise, and looks to me like much more of a burden to your family.

      By the way, your “tiny window” analogy doesn’t hold up. I don’t care how “motivated” your brain is. Sometimes, there are just physical (or mathematical) impossibilities. You’ll never squeeze through a rat hole, no matter how hard you work or how much you wish. Sorry brother.

      I am curious though. How’s all that working out for you? Are you able to make it work? I think we’d all love to hear how, if it is. (And I pray to the Holy Shiva that you signed up for Earn1k, started making fat stacks, and that Ramit himself helped pull you out of that hole!)

  87. A more telling measurement is what a renter’s net worth is vs a homeowner’s 10-, 20-, 40- years down the road. Cash flow is important, but Net Worth is the ultimate scorekeeper. Plus when selling a personal home it is likely all of your capital gain (yes, at some point we’ll be back to gains…) will be tax-free, unless Congress f-s with that in the future. Selling stock at a gain…well, not so tax-friendly…

    • I am not a tax expert or a homeowner, but I believe your capital gains are only tax free if you use them to buy a new house. So it’s something, but not quite as good as you’re saying.

    • Not in Illinois. My mom’s friend sold her house and started renting. She received a letter from the IRS about 6 months later stating that she owed taxes on the money she gained from selling her house. Unless you buy another house within 6 to 12 months the IRS comes for their cut. She had 1 month to set something up to pay them off. Needless to say to moved to Florida.

    • That’s one of the downsides of the mortgage interest deduction. You get to get a tax deduction for the interest but then have to pay taxes on the capital gains. Here is Canada no tax deduction but no capital gain on the primary residence either.

  88. What’s funny to me is that whenever the discussion of homeownership comes up no discusses the Condo or townhouse. They’re essentially renting and owning combined. That’s my story; actually my mom’s. In ’98 my mother and my grandmother combined resources to buy this condo. My mom stopped paying mortgage about 2 years ago after she filled bankruptcy. In addition to mortgage there are assessments. Now assessments is a monthly fee paid to a management company to take care of maintenance, landscaping, and certain combined bills such as gas, water, and security. They went from 190 a month to 515 a month and the association fired the original management company. Not to mention special assessments for big repairs like the porches or the roof. Which added up to over 5,000. If I hadn’t came home from school and lived with my mom she would ave lost the place more than two years ago. Now granted these costs were not the only culprits in the diminished view of condo living. For those of you that are considering the home buying thing, when you start the mortgage payments don’t refinance. EVER. It’s suppose to help diminish the payments but it just extends the life of the loan and raises interest costs and puts less of a dent in the principle. So personally I’d rather have a shitty landlord then have to deal with shitty financial circumstances. It’s easier to deal with a person than an concept or situation.

  89. Anyone who is seriously considering investing in real estate should get with a tax or real estate attorney BEFORE investing. I cannot tell you how many times I have met with new clients who have failed to set up these ventures correctly. And in PA and particularly Philadelphia correctly mistakes can be painfully expensive.

  90. Stacey, thanks for your post. That is the bottom line. What will be your net worth down the line versus a homeowner’s. I started with $500.00 of closeing costs. That was my total out of pocket for my first ‘home’. About 3 or 4 years later we (wife & I) spent another $3,800.00 to purchase a 4-unit apartment bldg. We actually took over the existing loan on the property and signed a 2nd trust deed to the owner. That was our start. It was 40 years ago, but, all that time we have lived in our own ‘home’ and raised our children in a quiet and peaceful atmosphere. We have never bought our homes as investments. We bought apartment and commercial buildings for that. Had we rented those years, intread of buying, we might end up with a few thousand dollars in the bank, but, nowhere near 5.5 million.
    For me it’s a no brainer, in Southern California anyway. A million dollar home today was worth $229,000.00 back in 1986. Income property is even much better. In todays market, if you do your homework you will end up with a great return on your investment as actual cash flow, 20 to 30%. That isn’t even figuring in equity buildup.
    Anyway, if you believe a ‘home’ is a bad investment, you are right.

  91. I think I’m going to wait until there’s another crisis, then I guess (ignorant assumption) apartments will be cheaper, I’m pretty sure there’s too much people barely paying their homes (over the 1/4 of the monthly salary recommendation).

  92. Hi Ramit
    Interesting point. I think it would have been great if you had done the same research on the NZ property market for questioner. I live in Perth Australia, and after years of renting in really nice suburbs by the beach (a lifestyle choice) we are finally buying (also by the beach, but a little further away from the city) because it is literally cheaper to pay a $650,000 mortgage then rent anything half decent with a backyard with 10km of the ocean.
    In the suburb I currently live in, what was worth 250,000 15 years ago is now worth 1.2 mil (at least). I haven’t whipped out my calculator but I’m pretty sure that growth is much bigger then inflation.

  93. Ramit,

    Here’s a pressing question that combines renting vs. buying and love/ relationships:

    Since you say that “marry someone you love” is a script, do you recommend that a single person filters dating prospects for their financial worldviews, especially in regards to renting vs. buying, rather than try to change minds later on? Maybe casually bringing up the buying vs. renting debate on the third date before things get too serious?

    I read your book and blog and notice that you have tactics on bringing up finances with a current partner who may or may not be on board, but for the single guy who’s dating again, I wonder what you think is a wise strategy.

  94. I bought into those scripts in the past. I also bought into that “Wow, housing values are really going up! I should cash out some equity.” Then the market dropped out from under me. I’ve been paying on an upside down house for 7 years, which I now have to short sale because my wife wants a divorce.

    I know a lot of military, and I hear those scripts all the time. “I’m tired of paying somebody else’s mortgage! I’m going to buy a house!” I then ask them “You could be on the other side of the world in a year. What about your house then?” The response is almost universally the invisible script “That’s OK. I’ll rent it out!”

    Since the job market where my house is is as bad as the housing market, I ended up taking a job about 200 miles away. I’ve been renting a basement for $500 a month. The short sale with destroy my credit, and I’ll be happy to have a good arrangement and a low cost place to live. I won’t miss having a mortgage or upside down house.

  95. http://www.bankrate.com/finance/money-guides/computing-capital-gains-on-home-sale-1.aspx

    Please read this quick explanation of tax-free home sales to correct misinformation from previous posters (subsequent to my comment #121).

  96. I agree with the logic laid out in the article, but it’s worth pointing out that owning a home can quickly make much more financial sense if you plan to rent out one or more rooms. I’m a 30 year old single male, and I offset my entire mortgage payment each month by renting out 3 of the 5 bedroom in my house to friends/acquaintances. Being a landlord and having roommates presents its own set of challenges, but from a financial standpoint it can make a lot of sense.

  97. I didn’t notice anyone here talking about what a horrible nightmare owning a condo could be! My husband and I make fairly modest salaries but wanted to buy (at the urging of parents saying we could use our home as a deduction to spare us high taxes) and moved into an up-and-coming neighborhood for a good price. A couple of years later, our place was appraised at 3x more than we bought it for. We thought this would be our nest egg…but how wrong we were.

    The economic crash saw both of us losing our jobs due to corporate layoffs more than once and we’re barely holding on to our place, which has greatly decreased in value. Our place feels like a huge heavy chain around our necks! After several refinancings in an attempt to keep our place, now we are underwater.

    Talk about being trapped in one’s home: I HATE our place now and how noisy the neighborhood has become, plus they built a building across from us that completely obliterated our view and the alleyway below sounds like a constant truck stop. We cannot see anything nor even open our windows from the noise and pollution. This is no way to live!

    To top it all off, our condo board is a group of extremely wealthy people who dominate our finances with their expensive projects which we don’t even have the chance to object to. They continue to make costly decisions about the building–tuckpointing followed by a new roof and garage overhaul and we have had to draw from retirement savings to pay through the nose for these projects. These cold-hearted jerks are 1000x worse than any landlord could ever be! And then of course, top this off with the constant repairs to our place (i.e. the cost of dishwashers, etc) mentioned in the article.

    We don’t even have the option of renting, because all the picky rules made by the condo board prohibit it. We tried to sell at a discount: no one bought! We feel TRAPPED as trapped can be. All our money goes to keep this expensive roof over our heads. How we would love to be free of this burden!

    Beware, folks, if you buy a condo: A condo board coupled with a crap management company that cares nothing for its tenants is far worse than a landlord and could be your financial ruin, as it has been ours.

  98. I built my own house last year. I saved a lot of money doing the work myself, but can’t imagine buying a home without any knowledge about simple home repairs. My advice: If you don’t know how to do simple repairs and upgrades. RENT. Ramit’s advice is spot on here.

  99. That all makes perfect sense and I agree….the biggest surprise from that post was that there was someone other than me from New Zealand who knows who you are lol. I understand Naomi’s plight. In NZ its very hard to not own a home. If your in your 30′s and don’t have a house your looked down upon by a lot of people and they assume your someone who cant get your shit together or your not grown up enough.

  100. While I 100% agree that buying a house is not the best investment, I also think that you underestimate the incentive side. Yes, people definitely are likely to lose money, and NO ONE I have talked to about my decision not to buy has ever seemed to figure out that with interest over a 25 year period they’re almost paying twice as much as they think they are. However, on the flip side, all of my friends who own houses are putting money towards that – stretching to make an investment.

    On the flip side, apart from myself, all of my friends who AREN’T buying a house (or actively saving for a deposit) in general don’t have a lot fo savings, and don’t spend money on stocks.

    Like Naomi, I’m from New Zealand, a place where the general housing market has never, ever, gone down. It has stalled a few times, but never depressed. This is opposed to the stock market which is small, and has crashed a number of times in my own lifetime.

    So although I still agree buying a house isn’t the best option – I think you underestimate the fact that it at least makes people invest in something, and focus on saving and not spending every dollar they earn. Better something than the apparent default of nothing right?

  101. Home ownership isn’t right for everyone. It doesn’t make you more grown up.

    As a real estate agent I urge potential homeowners to never take more than a 15 year mortgage and save at least 20% of the purchase price for a down payment. It’s paid off much sooner this way and you save tens of thousands in interest. One thing I’ve always heard people say is “I’ll be able to retire when my mortgage is paid off” …15 years away sounds better than 30 years away when we’re talking about retirement.

    On a side note as a real estate investor we earn 18% returns with low income housing units, mostly section 8 type stuff.

  102. I feel that way all the time :( and I know it’s wrong! I hate renting and “throwing away money” – but I also know that if I was to buy, I would probably make the wrong purchase and be “stuck” forever. Granted you can sell houses but it takes time and effort,and I can’t imagine myself being ready to purchase something so big, holding me to the same spot in my life and the same job for years and years to come. I don’t ever want to have debt. I have student loans now, and that’s depressing by itself! So I’m one of those people who have heard it before and feel that way, about wasting money on rent.

  103. I was looking into purchasing instead of ‘throwing away my money on rent. I did simple math on the total cost of my purchase, if I were to live in the same place for the term of the mortgage and make standard repayments Vs renting and putting the remaining money into my business. Return on investment on my business far outweighed the ‘stresses’ of being tied down to a mortgage. It also gave me the freedom to make ‘risky’ decisions as I didnt have to pay a large mortgage every month. Before I made any kind of money on the property it would have to be resold for at least $1,000,000. This was not going to happen. EVER.

  104. Ramit, I am a new reader here. Applause! I LOVED the article you linked to about real estate! I do not have to agree with everything to appreciate that it provokes me to thinking. My husband and I just spent 30 minutes discussing the REASON we would want to buy a house, while I am working on developing a new business now. You and the author of the article have GREAT and valid points. We agreed that our reasons to have a house would be: HAVE THINGS OUR WAY, and for sentimental reasons. We both agreed that we would not call a house an investment, except in an emotional sense, which it would be, for sure. Financially, I would want to invest my $$ in many different ways. I have family members who lost homes in the 2008 mortgage bubble and I saw how hard it was on them, while my husband and, did just fine (we were renting) and had enough $$ to move, travel and try a hand at running a business. We LOVED that we lived stress free, even though we rented at the time.

    Thank you for a fresh view on such a revered topic–most people are too scared to think differently.

  105. Hey – thanks for answering my question Ramit!

    Update: in the time between my question and your answer, I did buy a property. However it’s a rental, and has been positively geared (incl. rates, insurance & mortgage) from day one. With potential to subdivide.

    So perhaps a worthwhile investment…

    As regards a house to live in, I’m a long way from that at the moment. So thanks for taking the pressure off me from diving into the white picket fence trap:)

    - Naomi

  106. Currently hubbie and I are doing well with our two houses. We could cover both mortgages on one average state salary, which is a possibility in our local job market. We are older than most of the IWTYTBR followers so won’t rehash the tradeoffs we made, which have been already been well stated by others above.

    What we struggle with is our parents and their irrational clinging to homes they cannot afford and sometimes cannot even maintain. The emotional attachments are strong and worth exploring early and often. I relish financial independence more than living in a house with a yard.

    Gotta know when to hold ‘em and when to fold ‘em.

  107. I understand Ramit’s point, and he’s right, you shouldn’t buy a house without good reason.
    But I don’t quite get how buying can be more expensive than renting, unless we’re comparing renting an apartment, to buying a house?
    All of the ‘other’ costs are still being paid when you rent, they’re just included in your rent.
    Fixing stuff is factored into the rent too, so unless the landlord has set their rent too low to cost in, you’re going to pay more than if you bought a house or apartment of the same value and pay your own bills.
    Things might be different in the UK, but generally when you rent you still pay your own utility bills, the only things the landlord takes care of is insurance and fixing stuff, house insurance only costs a few hundred pounds a year, and a few thousand a year allowance for fixing and maintaining a house should be plenty, so as long as you get a mortgage which is slightly less than renting you won’t be any worse off, until the house is paid for, then you’re quite a bit better off…

    • Again, this seems like it would be true, but it’s a myth. I answered this comment in my comment above. (I admit, I don’t know about the UK market specifically.)

    • Sorry I missed your first comment Ramit, there are just so many of them, it’s easy to miss a relevant one!
      Seems impossible, but it does make perfect sense, human behaviour often defies basic reason and maths, like the “Dollar Auction”, and countless other psychological experiments.
      Even logically, once you’ve committed to buying a house to rent, making a small loss by taking less in rent than it costs, is better than making a huge loss by trying to make a profit and instead not having a tenant.

  108. WOW – the 100+ comments above are like a Master Class in invisible scripts about real estate. The funny thing is that the commenters don’t even realize they’re doing it. Here are the three most common reasons I found why Ramit’s advice doesn’t apply to them:

    -If you have kids you NEED more “space”
    -If you’re a landlord you will always make a profit
    -If you pay off your mortgage you can live for “free”

    Did I miss any?

  109. Indian here. The hints start first with an innocuous remark – “ABC has bought a house for Rs. X million” or “XYZ has finished construction of their house last week”. Slowly, it changes to “You are getting older now, the prices are increasing day by day” to “When are you buying property?”……

    Buying a property in India is not for the weak. There are numerous scams to check, numerous people to pay a bribe and finally the sellers may not the be the sellers but a sub broker themselves. You will need to know archaic laws passed in 1800′s by the British and also take into consideration modern amendments undertaken by the subsequent rulers. There is no clear rule book, there is no clear titles registered – the Land registry department actually can register property under any person’s name – they actually do not need to check who is owning it and who is selling it; all they need are an agreement and two people.

  110. Hello Ramit,

    I am thinking about buying a house, my wife and i have about 3 months expenses saved and in our area, renting costs about 1.5 times a mortgage payment, so buying is looking like its actually a better deal. i have a stable job, and we want to stay in the area for at least 5 years, if not 15. what are your thoughts?
    Regards,

    Jordan

  111. When I was younger I felt along with my husband that having started a family we “should” buy a house. Fortunately we truly couldn’t afford it. Looking back I am so grateful we didn’t buy something.
    I have a lot of real estate people in my family and they always give us a hard time about not owning a house. It has been especially bad since the interest rates have come so far down. They keep telling us we can “buy for less then we are renting” and “get a tax break too”.
    What we decided years ago (when we got a little smarter) was that we wouldn’t buy anything unless we had an emergency house fund on top of a general emergency fund and 20% for the down payment. We also would not buy anything that cost us more than 25% of our net income. This always sounds like a high bar to most people but we never want a house to own us any more than we want our money to control us.
    Besides if all we ever do is rent the rest of our lives what’s wrong with that?

  112. I am not sure how the TCO are added up for a house, but it’s not like if you are not paying the mortgage, you are saving that money. You still have to pay Rent, which if significantly is lower than your mortgage then you are truly saving. It’s not that hard to ask your mortgage broker to add your mortgage, insurance, taxes together and see if it is higher or lower than your Rent. Maybe the problem is the Home ownership is termed as Investment, when in reality it’s just not approached that way at all, neither is 401k that 2nd most invested vehicle by Americans, and that also is not approached with details it should be. Ramit you have posted I think rent vs own calculator according to the area you are living it, at least use that before deciding one way or the other.

  113. When I got married, I wanted to buy a house since my parents had been chirping in my ears for 5 years, “oh rent, you’re just throwing money away, such a shame.” So my husband and I bought a house when we got married and we rushed through the whole process and everyone said how smart we were (Ramit, you would have been screaming at us to put on the fiscal breaks!). Seriously considering selling our house right now (very little equity in it) and renting, and investing the difference while we decide where we really do want to live for the next decade (rather than us living in our starter home in a ho-hum neighborhood hoping for some return on investment).

  114. I bought a co-op apartment in NYC when I was 26. This made sense, but mainly for my specific case. I knew I was planning on living in New York indefinitely, had already saved up more than the amount of money I’d be spending on the place (basically a necessity to pass a co-op board), and, at the time, the mortgage plus maintenance was cheaper than renting an equivalent apartment in a worse location. Over time, it continued out to be a better deal than renting, with the downside that I’ve stayed in the same place longer than I might have otherwise, since selling an apartment is an expensive pain in the neck, and my place is basically good enough even though now I’d probably choose a bigger apartment. When my parents visit, they sometimes ask, “Why don’t you buy a bigger apartment, you can afford it!” and I remind them that if you bought everything you could afford, you soon won’t be able to afford much anymore.

    Price rises since have made the comparison between renting and buying much less clear cut, and I wouldn’t recommend anyone buy without doing a realistic assessment of the comparative costs and how long they’re willing to stay in the apartment.

  115. Not a math whiz? That’s OK. This website has the best calculator to compare renting vs. owning in your particular situation. Simply plugin the numbers and voila, see for yourself:

    http://michaelbluejay.com/house/rentvsbuy.html

  116. I keep reading that the cost for home repairs, taxes etc. are built into the rent, however remember the landlord isn’t setting the rent, the market is. You can ask for $3k a month but no one’s paying it if comparable homes are going for less.

  117. Awesome website and awesome pointers! great detail and perspective!
    Helps me a lot!

  118. Ramit, this is good stuff, but I think you’re overstating some of the costs of home ownership in the video. For instance, no one’s paying 6.41% interest these days; a 15 year mortgage can be under 3%, and even a 30 year mortgage can be had at less than 4%. So that cuts the interest cost in half. The T&I number is a little high in my experience, but I’m from an area with relatively low property taxes. You also don’t spell out the difference between “maintenance” ($108k) and “repairs” ($300k). $408k over 30 years ($13.6k/year) is very high in my experience; $5k/year ($150k over 30 years) is about what I’ve experienced. So using more accurate assumptions, the total cost of ownership over 30 years looks like this:

    House: $290k
    Interest: $98k
    T&I: $180k
    M&R: $150k
    Total: $718k

    Definitely not chump change. However, you ignore the most obvious benefit of owning a house (no, not the tax deduction). Eventually, the house is paid off, meaning you get to live in your place for free (not including taxes, etc.). This is called imputed rent and is a major benefit. Let’s say you buy the hypothetical house at age 30, get a 15 year loan. By 45, you own the house free and clear. Using the same 30 year term we’ve used in the above example, you live another 15 years in the house with no mortgage (obviously you can live there until you die if you like, but trying to keep it apples to apples). If the same house (have to use equivalent assumptions to be fair) rents for $2,500/month, that’s $450,000 of imputed rent that you get back over the course of the second 15 years. You of course also own an asset worth $290k, for a total value of $740k (obviously none of this takes inflation into account, but since the house value tends to track inflation it should be a wash). Add back the tax benefits (25% of the $180k paid in T&I, or $45k) and you’re at $785k. So boom, all of a sudden your’re in the black.

    Not trying to make an argument that buying a house is for everyone – it definitely is not. But if you’re going to factor in all the costs, you also have to factor in all the benefits.

  119. Just like anything, it depends on your circumstances and timing.

  120. I think the phrase I heard most often is, “you don’t build equity by renting.” We bought a house in 2006 just as prices peaked (oops). We paid extra on the mortgage every month to build up equity faster. Then the market tanked and we lost all of our so-called equity and then some, which I’ll probably have to wait 30 years to get back to break-even point. As soon as my kids graduate high school I’m dumping the place by whatever means necessary. I don’t think I’ll own ever again.

  121. For a long time, I thought I was making money by renting a property I had in NYC (I lived in another city, renting) but wised up & got out ASAP. This is a cautionary tale on real estate investment: if you don’t have the money to pay a lawyer (for regular consults), reputable managing agency and full-time staff to provide repairs to said property you might risk losing your shirt.
    Loft in NYC rented to tenant who seemed nice, but unbeknownst to me, regularly threw wild parties with all sorts of substances -> at the party a person fell and broke several bones -> said person tried to sue me (court decided in my favor) for $1.5million. When I explained afterwards that no more wild parties (it is nearly impossible to evict people, especially with LoftLaw, tenant continued – caused fire in loft!, had dangerous party on roof. Still no way to evict, so I got out, sold place at a loss to another party. Be very careful as owner is liable. If I had had more money, I would have employed top management firm to deal with things and had a lawyer on call so as to lessen massive fees incurred with case. Furthermore, a full time staff to check property regularly would have alerted me to fire in space, etc.
    A friend in Wealth Management said to me – the only way to go is to have enough money not to borrow when you buy and be able to pay the support system to maintain property value.
    Just thought I’d share this tale, remember that if you don’t have 100% of the funds in cash, then you will have to do a lot of work to manage, etc. the property & this time used might be better spent investing, getting ahead at work or in your main money-making funnel.

  122. I bought into the myth that we all NEED to buy a home. I didnt buy what I was approved for but what I thought I could afford. It was horrible. i loved my house but owning a home is not just the money cost for taxes (that went up quite a bit more then my salary did in the economy), repairs (monthly on an older home), renovations (not magazine style things I didnt need but atual necessities) and and utilities that are higher in a home even though mine was relatively small then most apartments. But the time…in summer it was all yard work, all the time…there wasnt much chance to enjoy the yard because if I was out in it, I was trimming, cutting, weeding, etc…in the winter it was pulling out decades old carpet, lino, wallpaper, repainting, sanding, refinishing…all while working full time and by myself and then as a single parent. Seriously one of the biggest reliefs EVER when I sold it in a short sale. Sure I wish I could paint my apt anything besides white, my son wants another cat, and I hate hearing the man above pee in his toilet every morning but cor the most part I really REALLY love renting.

  123. First off – great book, I got to the real estate section of the book while myself and my wife were returning from a long road trip. Being newlyweds we did feel a little ( not a whole lot) pressure to buy property. Occasionally in an off topic conversation at the workplace, a co-worker would remind me that buying property is a good thing to do considering its a good market right now. But I never took the comment seriously because going by the co-workers’ own experience, he wanted me to buy a house because it seemed to him as the best logical next step because he himself had bought one as soon as he and his wife got married several years ago.

    So on the road trip back home while reading the home buying section, I turned to my wife and asked this exact question. ” What if we never buy a house?”
    She said unflinchingly that based on those numbers ( renting vs buying) she would definitely be ok renting all the time. It wasn’t a revelation for me that she said this, my wife and I have no debts and we see debt more as a major burden than a boon ( even if it buys a house of our dreams). We were more driven about the idea of putting our hard earned money to better use and eliminating debt quick than making it our life. The book and these articles reinforced that principle.

    Recently one of our friends bought a home with her husband ( even though they could only barely afford it). Our friend borrowed from her 401k to fund the down payment. I asked my wife to forward the excerpts from your book and that link to her so she may change her mind but it did not. I asked my wife why this did not work. The reason is – Most people feel pressure to own property, in this case it was unprecedented pressure and under pressure they will devise reasons to buy it that do not actually make any sense. In their mind it is the goal, even if it takes 15 or 30 years to achieve it.

  124. Always a debate whether to rent or buy properties. Great insights, Remit!

  125. I guess the biggest invisible script for home buying was the one I always got from my mom: “Buy land. They don’t make more of it.” As a matter of fact, my husband “owning a home” was the only thing my mom liked about my husband when we started dating.

    That’s another big one: “owning a home.” The fact that we have so happily adopted what should be easily identified as marketing speech..Tissues are called Kleenex’s, cotton swabs are called Q-Tips, and houses are called homes. I’m always impressed when I see that kind of effectivesness in marketing.

    I think for my husband, who designed and built our house (with help on the building part), included it in his life plan as a symbol of the mainstream. To be able to own a house as an artist was such a status symbol for him. And it’s quirky and individualized; it’s like an art project that he personally financed. And even should we sell it in our lifetimes, I don’t know that we’ll really “make” money off of it. It’s the investment equivalent of stuffing money in a mattress.

    But you are right about how emotional we get about our homes (I use that word on purpose). More than anything else, that’s the one that gets me the most. It is my home, and it also happens to be the house that I own. I think the average person is going to find it very difficult to be objective about their HOME. Separating your house, as an investment, and your home, that you live, love, and build memories in? Good luck!

  126. Just wanted to say, as an illustration of phantom costs and costs of ownership: I live in a condo that I paid cash for (so I have no monthly mortgage payment and paid no interest on the thing) in Austin, TX, and my monthly costs (property taxes, HOA fees and special assessments for property maintenance, repairs to my unit, etc.) come damn close (less than a couple hundred dollars) to what I could rent it out for, or rent a place for to live in myself. I’m happy with my place, but it’s not all fields of daisies and dollar bills even after you burn the mortgage.

  127. Hi Ramit,
    Really informative post there. I am surely gonna read your book now. I was planning to invest in real estate but now i am gonna re-think my decision. Thanks a lot.