Ramit Sethi Warns You Will 'Almost Certainly Lose Money' on Buying a House if This Happens
- Buying a house can increase your net worth in many circumstances.
- Finance expert Ramit Sethi warns that one mistake could almost certainly lead to a loss.
- It's usually not a good idea to buy a house if you don't intend to stay there for at least a decade, according to Sethi.
Sethi's advice can help you avoid a catastrophe.
When you buy a house, you often improve your financial situation over the long run. You grow your net worth when you acquire equity and take ownership of your home as your mortgage is repaid. And you also grow your wealth when property values go up. This tends to be why homeowners often end up richer than renters.
But, this does not mean purchasing a home is always a smart financial choice. In fact, finance expert Ramit Sethi explained one situation where you're almost guaranteed to take a financial hit if you become a homeowner.
This is one time you may not want to buy a house
According to Sethi, buying a home without plans to stay put for a while is almost always going to be a bad economic decision.
"If you buy for a short period of time, when you factor in all costs, you will almost certainly lose money," Sethi explained on his blog, I Will Teach You to be Rich.
Sethi detailed some of these costs that you have to pay upfront when you buy and sell real estate. "There are closing costs, taxes, furniture, realtor costs, and maintenance," he said. And he warned that selling is even more costly than buying since you have to pay commission to real estate agents representing both the buyer and seller. This means your closing costs can add up to around 10% of the home's value. You need to think about this when you're buying so you can get a clearer picture of the long-term expenses.
In order to break even on your home, you would need to sell your property for enough to cover all of the costs you paid when you bought and when you sold. And if you want to end up wealthier as a result of your purchase, you would need to make even more on top of that.
Sethi has made it clear that this is not going to happen for most people who buy for the short term and, in fact, a loss of funds is a much more likely outcome than a gain.
How long should you plan to stay in your home?
So, since Sethi believes buying a house and selling it soon after is a recipe for financial disaster, just how long do you have to plan to be in your home to reduce the risk of losing money on the transaction?
"If you know that you want to move in fewer than 10 years, you will likely make more money by renting and investing in S&P index funds," Sethi said.
This is a longer time horizon than many experts recommend as the minimum time duration. Many financial gurus suggest that if you plan to stay in one place for at least five years, it can make sense to buy. But if you want to be conservative and make sure your purchase doesn't cause you losses -- or if your goal is to make the most money possible with your dollars -- then listening to Sethi's 10-year suggestion makes a lot of sense.
The bottom line, though, is that buying a home and selling it soon after is not going to work out for the vast majority of people. So unless you are certain of your future plans, you may want to hold off on making that offer.
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