This Is the One Big Thing Ramit Sethi Misses About the Rent vs. Buy Debate

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KEY POINTS

  • Ramit Sethi urges people to run the numbers before buying a home, as renting can sometimes be a better deal than buying, particularly given phantom costs of homeownership.
  • Seth notes that you can also achieve wealth by investing the money you save by renting.
  • However, this fails to take human psychology into account -- most people will not prioritize investing the difference between what they spend on rent and what they'd spend to own a home. 

Ramit Sethi has a lot of smart advice about whether you should buy a home. Sethi has made it clear that he does not believe homeownership is the right choice for everyone and he advises that you run the numbers to see whether purchasing or renting a property really is a better deal. When doing so, he also says it's important to consider phantom costs, like home maintenance, which can add as much as 50% to your housing expenses.

In giving this advice, Sethi is urging people to realize buying isn't the only path toward wealth and that sometimes it can be cheaper to rent and you'll end up better off if you invest the difference. While this can definitely be true, it fails to take human psychology into account. 

Here's the big issue with Sethi's advice 

There is absolutely no doubt that in some cases, you will spend less to rent than you would to buy -- especially in high cost of living areas where you may have to sink a fortune into a down payment. And, if you invest the difference between what you'd pay for rent and what you would pay for a house, you can end up richer. 

However, the reality is, many people are simply not going to work as hard to make investments as they would to make their mortgage payment. For the most part, people who own a house are going to do just about every single thing they possibly can to avoid going into foreclosure even if they struggle to make their mortgage payments for a period of time. This could mean slashing spending, taking a second job, or making other huge sacrifices. 

Most people are not going to do those things to consistently invest. 

If you do not invest and you choose to rent instead of own, you are going to end up with a substantially lower net worth than if you had owned a house. When you get older, you are not going to have equity in your house that you can cash in to help fund your retirement. Instead, you will have housing payments to contend with. Although Sethi has pointed out that if you invested, your investments can produce enough to cover those housing costs, that will not be the case for those who didn't consistently put money aside over their lifetimes.

How buying can be a good investment

If you purchased a home, on the other hand, yes you'll have incurred maintenance expenses and spent money on mortgage interest for all those years. And you may even have spent more than you would have if you rented. But you will have an asset to show for it. 

You can live in your house that you've paid off and enjoy low housing costs so you won't need as much retirement income. Or, if you can sell it for a lot of money (even if you put a lot in), that will still give you a lump sum amount of cash to help fund your retirement that you wouldn't have had if you rented and didn't diligently invest. 

Homeownership may be the best path to wealth for the average person

The fact is, there is a good reason why the typical American has about 70% of their net worth in their residence. A house serves as a type of forced savings because the chances the typical person will consistently make their mortgage payment are a lot higher than the chances a typical person will invest money steadily over their entire working life. 

So, while there are lots of situations where it may be better on paper to rent than to buy, that doesn't necessarily mean this advice will work in practice. 

Unless you can truly trust yourself to regularly invest money over many decades even when you hit some bumps in the road, buying a house may be your surest path to wealth -- even if the math may not seem to work in every situation.

Our Research Expert

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