Ramit Sethi Reacts to "House Poor" TikToks and Explains the Math Behind His Choice to Rent
I Will Teach You To Be Rich
Buying a house can be a good decision for lifestyle or financial reasons, Ramit Sethi says at the start of this video, but it can also leave people "house poor." His team pulled a set of TikToks from people who feel financially squeezed after buying or moving into a home, and he reacts to each one. His argument throughout is that most people never run the numbers before the biggest purchase of their lives. He describes himself as a multimillionaire who chooses to rent, and he closes by laying out the calculation he uses to decide between renting and buying.
"I bought a house at 26 and fell immediately into poverty"
The first creator is a nurse who lived rent-free with their parents while working full time, then bought a house and was shocked by the first mortgage payment. Sethi uses this to describe what he calls America's "number one religion," homeownership. People are taught from a young age that buying a house signals success and that renters are poor. He adds that Americans look down on anything associated with poor people, and gives the example of how some suburbanites react to the idea of taking the bus. In his telling, the standard story goes: buy a house, then something vague happens, then you end up with generational wealth. No one explains the middle. People don't ask how much they will actually pay, or who handles a broken dishwasher or an HVAC problem. That is why the first payment comes as a surprise. His view is that anyone taking on a 30-year obligation should be skeptical enough not to be blindsided.
The creator's problems then piled up. Pipes broke almost immediately in the 80-year-old house, which wiped out their savings. Another pipe broke elsewhere in the house, then a neighbor's pipes in the attached twin home, then the water heater. Sethi uses this to explain how he budgets for maintenance. The usual guideline is 1–3% of the purchase price per year. He personally assumes the high end because he has no interest in doing repairs himself. He expects to hire people who will look him up and charge him more. He hopes the real figure turns out to be 2% or 1.5%, but he recommends planning conservatively. He is sympathetic to this creator: much of what happened was not their fault, and he compares it to taking one punch, then a second, then a third that knocks you out. Some of it can't be planned for, he says, but you can at least set money aside ahead of time.
Was it really "worth it"?
The creator says it was worth it in the end because the house is now worth about twice what they paid. Sethi says he is glad it worked out, but he questions the reasoning. He claims most homeowners don't actually know whether buying was a good decision. They assume it was because they own a home and have equity, and because everyone told them buying is smart. He gives an example he says he hears regularly: a grandmother bought a house in Austin in 1982 for $50,000 and it's now worth $750,000, so people think she made $700,000. According to Sethi, that ignores "phantom costs" such as taxes, interest, and opportunity cost. He says investing that money in the stock market could have produced two to five times more.
He expects the objection that you can't live in an index fund. His answer is that there are several options: rent and invest, or buy at some point. He is especially doubtful about stories of recent gains, because he believes COVID dramatically inflated housing prices in a way that is very unlikely to happen again. People who saw their home double in three years now assume that's normal. He says he would want to see the actual numbers.
Land, $10,000 rent, and handling social pressure
The next creator shows off three acres, a barn, and a house bought as a retirement home for their mother, after renting for about two years at over $10,000 a month. Sethi says owning land is his "worst nightmare," and he and his wife laugh at the American "manifest destiny" urge to own land. What he focuses on is the creator's remark that everyone treats renters as crazy.
People stopped telling Sethi to buy once he became known for I Will Teach You to Be Rich. Most renters, though, get treated as foolish by people who believe buying worked for them. In Sethi's view, those people often don't know their numbers or why things worked out. They don't account for NIMBYism, the COVID run-up, whether the renter is investing the difference, total cost of ownership (TCO), or rent ratios. He calls it a "childlike approach": I bought for X, it's worth 2.5X, so I'm smart and you're not. His advice is to respond with a smile and use a script: "When I ran the numbers, I realized that buying doesn't make sense for me." He says the phrase "for me" is deliberate because it is hard to argue with. He jokes that it won't work on parents.
Landlords can't charge whatever they want
The same creator says that renting a $5 million house with a $30,000 monthly mortgage might cost only $15,000. Sethi uses this to explain what he considers one of the most basic principles of real estate. The common saying that "you're paying your landlord's mortgage" is often wrong, because rent is set by the market, not by the landlord's costs. He holds up his book as an example: its price isn't production cost plus a markup, it's $19.99 because that's what the market will bear. Similarly, a landlord with $8,000 a month in expenses can only charge $5,000 if that's the market rate. He adds that many landlords don't know their own total costs. In cities such as New York, LA, San Francisco, Palo Alto, Menlo Park, Santa Monica, and Malibu, he says, you can often rent for less than half of what owning the same place would cost.
The creator also mentions paying about $15,000 in property taxes. Sethi asks viewers whether they could cover a $15,000 bill right now. Are they setting aside around $1,000 a month for it? And do they know it will likely rise most years for the next 30 years and beyond? He calls this the perfect example of how people become house poor: they skip planning and go straight to buying. (He then promotes his Money Coaching program, which this article omits.)
"I can pay for it, but I can't afford it"
The next video comes from a renter who moved into a luxury apartment. They explain that they have enough money in the bank to pay the rent, but they can't afford the life they want because of it. They haven't traveled in a while, even though travel is important to them. Sethi is enthusiastic about this distinction.
He tells a story about two guests on his show who said they bought an ordinary mattress, "nothing crazy." It cost $2,000. When he asked how they decided they could afford it, they said they had to "invest in my back." Sethi says that was when he realized people don't know how to answer the question of whether they can afford something. His test is simple: if your answer doesn't contain a number, you don't know. A proper answer might be that a baseline mattress costs about $500. Because their backs matter to them, they used $1,500 they'd saved in guilt-free spending, and they're still under 35% guilt-free spending and 60% fixed costs. If those terms mean nothing to a viewer, he says, they should read his book.
He also anticipates criticism of the creator, particularly from older people who will say they had 16% interest rates and never dreamed of taking trips. His response is that housing was dramatically cheaper back then, and there's nothing wrong with young people wanting to travel. Their rich life is simply different. On why people end up in this situation, he blames decades of being told homeownership is the only way to build wealth and equity. People never stop to ask what they want, or whether their total cost of housing is under 28% of gross income. He acknowledges that this is hard in very high-cost cities and says it might stretch to 30–32% depending on debt.
Lifestyle creep and "it just makes sense"
The creator says they felt they had to raise their living expenses because they started earning more. Sethi says the personal finance industry calls this lifestyle creep, but he doesn't believe in it for himself. He didn't "creep into this sweater" or "trip and fall" into his apartment or his trips. He chose them deliberately. He thinks people should spend more when they earn more, but also save and invest more.
He singles out the phrase "it just makes sense" as a warning sign that someone has slid into a decision without calculating it. His examples: it just makes sense to move in together because we're both paying rent; it makes sense to get married because we've been together six years; it makes sense to buy a house. When the creator admits they thought "people who make this amount of money live in this kind of place," Sethi praises the honesty. He notes that people who visited his apartment were visibly confused that a rich person would rent.
His alternative is to choose one or two "money dials" to spend on extravagantly and cut costs mercilessly elsewhere. He drove a 19-year-old car because it didn't matter to him, while spending heavily on travel, luxury hotels, clothes, and fitness. You can't spend lavishly on everything, he says.
Building a moat against one bad event
The creator also says that if something drastic happened, they don't know if they could afford it. Sethi says he never wants to be in a position where one financial problem can take him out. He recalls Warren Buffett saying at the Berkshire meeting in Omaha, which Sethi attended, that Berkshire is set up so it never runs out of money. Sethi found that inspiring and describes the goal as a "financial moat." He mentions he has a separate video on how to build one.
A $330,000 down payment and the cost of opportunity
The creator Sethi seems to like most calls buying a home in 2021 their biggest financial regret. They put 30% down, about $330,000, on a two-bedroom, three-bath townhome costing $910,000, while earning roughly $100,000–110,000.
Sethi runs the down payment through his calculator. He assumes $330,000 is invested with no further contributions for 30 years at a 7% return, which he says already accounts for inflation. The result is about $2.6 million in today's dollars, or roughly $6.5 million in nominal terms. That is based on his assumption that an index fund can reasonably be expected to return about 10% a year, or 7% after inflation. He says that could likely cover housing costs forever from the returns alone. Alternatively, someone could invest for 20 years and then buy a house in cash. "If this math was shocking to you," he says, "you are not ready to buy a house."
He is critical of buying a $900,000 home on about $100,000 in income. He says people used to buy houses at about 2.5 times their annual income, and now some go to three, four, or five times. The fact that others do it doesn't make it right, he argues, and he jokes about using the parental line "Would you jump off a bridge if your friends did?" on parents who push buying.
The creator's monthly cost, including interest, taxes, and HOA, is about $4,200, while a nice comparable rental would be about $3,500. Sethi adds it up: the $330,000 one-time payment that could have grown into millions, plus roughly $700 to $1,000 extra each month. Renting and investing the difference, or even getting a nicer place, were real alternatives. His view is that fixating on buying narrows people's view of their options. The creator's own estimate is more modest: had they invested the down payment instead, especially with the market bottoming in 2022, they'd have at least a couple hundred thousand dollars more.
The creator also notes that in their market, renting is cheaper than buying. Sethi praises this because it recognizes that markets differ; Omaha isn't Tribeca. He then claims that, as of now, renting is cheaper than owning in 100% of the top 50 US metro areas.
How Sethi rents
The creator says that if they could do it again, they'd rent a nicer place and invest the difference. Sethi says he has rented for over 20 years in nicer places in better neighborhoods and has had virtually no maintenance costs; he texts the landlord and things get fixed. When people reply that their landlord never fixes anything, he asks whether they considered paying a bit more for a better landlord, and says they're usually mystified. He argues renters have power. He interviews landlords as much as they interview him. He asks how long the last tenant stayed, says he plans to stay several years, and asks whether they plan to sell. He admits this doesn't guarantee anything, but says it puts the odds in his favor.
The escrow surprise and the real estate industry
Another creator's mortgage payment rose almost $500 a month. They have a fixed rate, but homeowners insurance and property taxes in their escrow account jumped, and no one told them until they were $3,200 short. Sethi calls this very common. His main advice is to be highly skeptical of everyone involved in buying a home. In his view, the real estate industry is huge and profitable because everyone in it wants a piece of the buyer. That includes inspection fees, maintenance, and above all the interest paid over a 30-year mortgage. Asking your loan officer or realtor for advice, he says, is like a cow asking the butcher which way to go.
He also rejects the idea that buying "locks in" housing costs while rents keep rising. The mortgage may be fixed, but total cost of ownership is not. People are regularly shocked when property taxes rise by $1,000, $2,000, or even $10,000 a year, and he expects that to continue.
A 28-year-old about to close
The last creator is 28, unmarried, has no kids, and closes in seven days, yet feels terrified and wants to back out. Sethi says buying can be part of a rich life. But he has almost never met someone who bought in their twenties and could clearly explain why buying was central to their life and accept the trade-offs. More often the reasons are fear that they'll never be able to afford it later, and the belief that renting is bad. Interestingly, he doesn't treat the fear as proof of a mistake. He mentions statistics that 28% or 37% of new buyers regret their purchase, but says he never shares them because he thinks they're nonsense. Any major life-changing decision is scary.
The calculation: total cost of owning vs. total cost of renting
Sethi's closing argument is that most people decide whether they can afford a house by looking only at the monthly mortgage. He says what matters is total cost of ownership. His method starts by comparing two monthly numbers. Non-financial factors like school districts, renovations, or simply wanting to own come in later, but the numbers always come first.
The total monthly cost of owning includes the mortgage, taxes, insurance, closing costs spread over the years you own the home, maintenance (which he says almost nobody accounts for properly, using 1–3% of the purchase price per year), upgrades, HOA fees, and what he calls the most overlooked item: the opportunity cost of the down payment. The total monthly cost of renting usually includes rent, utilities, renter's insurance, and possibly moving costs, depending on how often you move.
With those two numbers in hand, he asks whether buying this house leads him to his rich life and whether it creates more freedom or less. He warns against buying out of scarcity, such as the fear that you'll never be able to afford it if you don't buy now. He also dismisses "throwing money away on rent." Nobody says they're throwing money away on sushi or a vacation in Mexico, he points out, and he attributes the phrase to realtors.
Every time Sethi has run this math, buying would have cost him far more than renting and reduced his financial and emotional freedom. He and his wife have agreed they're not interested in buying at this stage of life, though maybe someday. They rent "not because renting is better for everyone, but because it's better for us."
Buying a house can be a great decision from a lifestyle or from a financial perspective, but it can also leave you house poor. And based on these TikToks that my team pulled for me, a lot of people are financially drowning after buying their house. I'm the guy on Netflix helping couples fix their money. And I've written two bestselling books on personal finance. And stick around because at the end of this video, I'm going to break down the exact math that I use to decide whether to rent or buy. You might be surprised, especially because I'm a multimillionaire who chooses to rent. I got to tell you, most people never run this calculation and it is the reason that so many people end up house poor. All right, first video.
I bought a house when I was 26 and fell immediately into poverty. When I lived with my parents, I was living my best luxury lifestyle. I had no bills and I had a full-time nine-to-five job. I was working as a nurse. I was killing it. I bought my own house. That first mortgage payment came in and I was like, "Oh, this is a situation."
Let me explain what is going on here. In America, we are taught from a very young age that you've got to buy a house to be successful, that renters are poor people. And in America, more than anything else, we hate what the poor do. That's why people don't just merely dislike going on the bus. They'll say things like, "Ew, smelly. I would never take the bus." You don't believe me? Just text your suburban mom and say, "Hey, Mom, why don't you try taking the bus next time you go out to that restaurant?" Just watch her reaction.
So we are told from a young age, buy a house, and then there's these question marks. And then somehow you pop out at the end with generational wealth. It all works out, but no one ever really explains the details of it. And we don't question it because this is America's number one religion, homeownership. We simply go, "Yeah, sounds great. I believe, I believe." But we should be questioning it and saying, "Wait a minute. How much am I going to pay? What happens when the dishwasher breaks or I have an HVAC issue? Who handles that? I don't know anything about dishwashers. What am I going to do?" And on and on and on.
We don't. And so the first mortgage payment comes to you and we are shocked. You should never let yourself get in this situation. You should be too skeptical and too smart to get blindsided by something that you are now going to have to pay for 30 years. Let's keep going.
But at first you think you could handle it, right? What's a couple thou? What's a couple thou? I got it. Then the pipes in my 80-year-old home broke immediately.
As an example of how to plan for how much your house is actually going to cost you, I know the basic guidelines for maintenance. They are 1 to 3% of the purchase price every single year for maintenance. 1%, 2% or 3%. Now I know myself. I don't want to go to Home Depot. I don't want to learn how to use all these tools. I'm not going to buy a two-by-four. I don't care. I am going to hire people who are definitely going to take one look at me, Google my name, see my house, and they're going to triple the price. That's life. Now I hope it's 2.8% or 2% or even 1.5%. But I am being conservative in my assumptions, as I would recommend you do the same.
As soon as I bought the house, wiped out my savings, then another pipe in a different area of the house broke. I'm struggling. I need help. Then my neighbor's pipe—it was a twin house—her pipe broke.
This is difficult to hear because a lot of this is not her fault. Her pipes broke. Then a neighbor's pipes broke and all these things. It's kind of like taking one punch and you're like, "I could take it. I'm strong." You take two punches, "Uh-oh, that hurt." And then three punches and you are just out. So I have a lot of compassion for folks like this. Sometimes you just can't plan for it, but you can at least put money aside in advance.
And then my water heater broke. When I tell y'all, I went from living in the lap of luxury to destitute immediately. Now don't get me to fooling y'all because it was worth it in the long run because that house is now worth like two times what it was worth then. So I'm actually doing pretty good.
I'm glad it turned out well. I hope that this has been a positive experience. And I love that this creator is sharing what she felt like in the midst of all these pipes breaking. She does mention something curious. She says it was all worth it because that house is now worth twice what it was worth. Can I share something that is quite shocking to most people? Most people actually don't know if buying their house was a good decision or not. They literally think, "Of course it was a good decision. I'm a homeowner and I have equity." But when I ask them, "How do you know if it was a good decision?" they're like, "Uh," and in their head, they're going, "Because everybody told me buying a house is a good decision. How could it not be a good decision?"
I have people who routinely tell me, "My grandma bought a house in Austin, Texas, in 1982 and it cost $50,000 and now it's $750,000." They think that she made $700,000 of profit. What they don't factor in is all of the phantom costs. They don't factor in taxes. They don't factor in interest. They don't factor in opportunity costs. They don't realize that if they had simply taken some of that money and put it in the stock market, they would have had two, three, four, five times more money. Now, please don't write me saying, "Ramit, you can't live in an index fund," because that's what we're talking about here.
There are lots of options. You can rent and invest. You can buy at a certain point. There's lots of different ways to think about it, but I'm a bit skeptical when she says, "Well, it all worked out in the end," especially because COVID dramatically inflated the price of housing, something that is extremely unlikely to ever repeat. And a lot of people now think that, "Well, my house went up 2X in three years. That's how it goes." I question it. I would want to see the numbers more carefully.
Overrated. First of all, this person has a neck tattoo. I need to talk about this. I always dreamed, what would life have been like for me as a single guy if I had a neck tattoo? Can anyone tell me? But I'm like, "Yo, there's not that many Indian guys with a fat neck tattoo." So I always dreamed about it. Anyway, I like this guy's tattoo.
You guys see all this grass right here and that barn? That's all mine. I own that land. Oh, yeah. And all that, that, that.
Owning land is like my worst nightmare. It's amazing. So many people, we have this manifest destiny concept in America, like, "I need to own my own land." My wife and I just laugh. We're just like, "That's literally the last thing we want."
Three acres all around. If you don't know how big an acre is, holy. But yeah, I bought this house last year for my mom. It's her retirement home. We're in the hills and I had been renting for, I would say, two years. We've all been renting for a long time, paying over 10K a month to rent. Everybody on God's green earth looks at you and thinks you're crazy for, "Oh, you rent? Why not just buy?"
Anyone notice a trend here? Everyone looks at you like you're crazy. "You rent. Why don't you just buy it?" I got to tell you all something. People stopped saying this to me. They stopped saying it to me once I had I Will Teach You to Be Rich. And they knew, "Oh, this guy's..." They just thought, "This guy's a weirdo." But for most people who don't have this kind of stuff, they just think you're stupid. "What is wrong with you? Why would you not buy and accrue equity?"
Because in their head, it worked for them, even though they don't understand if it worked because they don't know their numbers, or they certainly don't understand why it worked. They don't understand NIMBYism. They don't understand a generational run-up during COVID. They don't understand any of this stuff. Literally it is a childlike approach. "I bought a house 15 years ago. I spent X on it. It's now worth 2.5X. I'm smart and you're stupid." But they don't go deeper to understand, "Oh, are you renting and investing the difference? What's TCO? What is the rent ratio?" Or all this stuff. They don't understand that.
So you've got to approach it with a smile. Don't take it personally. And you can use this little script that I came up with. I would say, "You know what? When I ran the numbers, I realized that buying doesn't make sense for me." Notice the phrase I used at the end. That is very intentional. I tested it: "for me." When I say "for me," it's very difficult to argue with. And that will quietly shut down some of the comments, unless it's from your mom or dad, in which case prepare to spend the next 55 years arguing with them.
Because when you rent, you're paying half the mortgage, by the way. If you're in a $5 million house and the mortgage is $30,000 a month, they're going to rent it to you for 15K because that's just what's on the market.
Hey, everybody. We just discovered something quite dramatic, something that less than 0.1% of Americans know. And that is landlords cannot simply charge whatever they want to cover their taxes and interest and maintenance and all that. You know what I'm talking about because you've heard people say, "You're paying your landlord's mortgage." Maybe. Often you are not covering your landlord's total cost of ownership. And most of the time your landlord doesn't even know what their total costs are.
Let me explain. "Hey, everybody, it costs me $60 to create this book. So I'm going to charge you $68 for a nice little tidy profit." That's not the way it works. What is the retail price of this book? $19.99. Why is that the price? Because that is what the market will bear. So landlords can have expenses that might be, let's say, $8,000 a month, but if the market will only allow them to charge $5,000 a month, that is what they can charge. You need to understand this. It is one of the most basic principles when it comes to real estate. And especially in cities like New York, LA, San Francisco, Palo Alto, Menlo Park, Santa Monica, Malibu, you can often rent for less than half of what it would cost you to own the exact same place.
Sure, you may be throwing your money away, but people don't talk about property taxes. I paid like 15 grand to property taxes.
I like that he says he paid 15 grand in property taxes. If you right now were faced with a $15,000 expense, where would the money come from? Do you have it sitting aside? Are you putting a thousand bucks every single month aside for this once-annual expense that you know is going to come your way? Oh, and by the way, it's going to increase most years for the rest of your 30 years and beyond. No. This is the perfect example of why people end up house poor. They skip the planning and they jump straight to buying the house. A house is too big of a decision to make it like that.
I want to show you how to be deliberate and methodical about the biggest purchases of your life. I have a program called Money Coaching. Inside Money Coaching, we show you how to run your numbers carefully, how to factor in the kind of lifestyle that you want, and ultimately how to make the right decisions that power your rich life. And when you do this, you can immediately tell whether buying a house will make your life better or whether it's going to trap you for decades.
If you want help making that decision before you make the biggest purchase of your life, I recommend you join Money Coaching. It's going to give you clarity. It's going to show you exactly what math to run and also how to factor in all the lifestyle questions that you're thinking of. You can scan the QR code on screen or click the link in the description below to join Money Coaching today. Okay, what's next?
I moved into a place that I can't afford and now I'm stuck. I recently moved into a luxury apartment and though it is nice and I like it and all these other things, I realized that I can't afford it. When I say I can't afford it, it does not mean I can't pay for it. I have enough money to pay for it as far as monies in my bank account, but as far as what I want to do in life, I can't really afford it.
Hallelujah. Already I am enjoying this video. One of the most shocking moments that has happened to me in the last decade is two guests came on my show and they said, "Oh yeah, we bought a mattress, not anything crazy." And I asked them, "How much was your mattress?" And they said $2,000. And I'm like, "Do you think that that's an ordinary price?" And they go, "Yeah." I go, "How did you decide if you could afford that mattress?" And you know what their answer was? "I got to invest in my back." And that was the moment I realized people actually have no idea how to answer the question, "How do you know if you can afford it?"
I'll ask you right now, how do you know if you can afford that $50,000 car? How do you know if you can afford that $565,000 house or a $2,500 mattress? If your answer does not have a number in it, you don't know how to answer that question. A proper answer to the mattress question should be something like, "Well, the baseline mattress that we can assume costs 500 bucks. We decided that because our back is important to us, we have $1,500 that we saved up in our guilt-free spending. We've allocated that and we are still below 35% guilt-free spending and 60% fixed costs." Do any of the words I just said mean anything to you? If not, you need to go back and you need to read I Will Teach You to Be Rich.
In a sense of, now I'm in a position where it's like I'm here and I pay so much in rent, it's to the point where it's like, I can't even go on a trip right now. I can't.
A lot of people watching this are going to be angry at her. I already know what a bunch of boomers are going to be doing. Hold on. "When I was younger, we had 16% interest rate and we didn't dream of taking a trip." Well, guess what? When you had 16% interest rates, the price of housing was dramatically lower. And why are you trying to shame young people for wanting to take a trip? There's nothing wrong with that. Their rich life is certainly different than yours. And I'm sure you didn't appreciate it when you were making decisions for what you want to do and your grandpa was telling you about his great-grandmother who grew up in the 1800s and how they saved money doing this and that. Why?
And I haven't traveled in a while and I'm very big on traveling. I'm very big on going out and stuff like that. And I can't really do it as much as I would like to because it's like I can't afford it. And I don't know why we do this to ourselves.
I do. I know why we do it to ourselves, because you basically listen to a bunch of people whispering in your ear for the last 25 years telling you homeownership is the only way to build generational wealth and there's no other way to build equity and on and on and on. And you never stop to critically think about, "What do I want for my rich life? Is my TCO, or total cost of ownership of housing, less than 28% of gross income? Can't do that in a very high cost of living city. Maybe I can stretch it to 30, 32% depending on debt." You never did any of this. You simply said "equity," just as so many people do, and never stopped to look at the whole chessboard.
I don't know why we feel like we get a new job or we start making money, more money and stuff like that, it's like, "Oh, I have to increase my living expenses."
This is a provocative comment. Let me tell you something. The personal finance industry calls this lifestyle creep. The idea that as you make more money, you will slowly start to spend more on eating out and travel and housing and accessories, all kinds of stuff. I personally don't believe in lifestyle creep, not for myself. I did not creep into this sweater. I knew exactly how much I could spend and I chose very deliberately. And that is what I do with my money. I don't trip and fall into this apartment. I don't trip and fall into the trips I take. I am deliberate and conscious. That's what I want for you as well.
Now, I actually think when you earn more money, you should spend more money, but you should also save more money and invest more money.
Because that's what I was thinking. I was like, "Okay, well, now I'm making more money. So it just makes sense for me"
To get a nicer place. It just makes sense for me to get a luxury apartment.
Amazing comment on how often we slide into these major life decisions. She said, "I was thinking, I make more money, so it makes sense for me to get a nicer apartment." Huh? What does that mean? Where's the math? Where's the calculation?
"It just makes sense" is a phrase that you should be aware of. "It just makes sense for us to move in together. We're both paying rent." Stop. Think deliberately about whether this relationship is right for you. "It just makes sense to be married. We've been together for six years. We're not getting any younger." Nope. That's not how we make the biggest decision of our lives. "It just makes sense for us to buy a house. It just makes sense for us," and on and on and on. Stop using that phrase.
Because I'm making this amount of money, and people who make this amount of money live in this kind of place.
Oh, that's amazing. I love this. It's so honest. I wish more people were this honest. The idea that, let's say I make $150,000 a year, I need to be driving this kind of car.
It's kind of funny. When people found out that I'm the I Will Teach You to Be Rich guy and then I rent, they were like, "Wait." I could see it in their eyes when they would come to my apartment. They're like, "Wait, what? He's rich, but he rents, but renting is for poor people, and he's not poor, I don't think." It's very confusing to them.
You need to be very deliberate about what you want to spend extravagantly on and what you want to cut costs mercilessly on. As an example, I drove a 19-year-old car. It just was not important to me. On the other hand, I love travel. I love luxury hotels, clothes and fitness. So I spent a lot of money on that, but you cannot spend a lot of money on everything. It's actually better to pick one money dial or two and really go extravagant on those. Really turn that dial up versus trying to spend just because that's what people who make $150K do.
I'm in a position, I honestly and truly can say, if something drastic would happen, knock on wood, I pray not, I don't know if I'll be able to afford it.
I never want to get in a position where one financial problem can take me out. Warren Buffett said at his Omaha meeting that I went to, he said, "We have set up Berkshire," his company, "so that we never run out of money." I just found that incredibly inspirational. The idea that we can set up a financial moat so that we do not ever worry about one emergency taking us out.
I created a whole video on how to do this. I'll link it for you in the comments below. And if you want to feel confident about the biggest financial decisions of your life, especially buying a house, hit subscribe. Okay, next one.
My biggest financial regret that I've ever had in life was purchasing a home back in 2021 for these three reasons. Number one, I had to put a 30% down payment on my home. My down payment was roughly around $330,000.
Okay, hold on. I need to run a quick calculation just to show you how opportunity cost works. This person mentioned they put a down payment of $330,000. So I'm going to plug it into my calculator. You can just Google Ramit calculators and you'll find a bunch of my calculators. $330,000. We're going to add zero. We're just going to let it sit. And we're going to do that for the next 30 years. And we're going to assume a 7% return that already accounts for inflation. Folks, you'd have $2.6 million in today's money just from the down payment. No maintenance, no pipes, nothing.
And by the way, just to show you a little shocking math, how much would you actually have in your bank account? This is not adjusted for inflation. Everybody sit down. Okay, everybody go like this: "I'm ready, Ramit. I'm ready." $6.5 million. That is taking the down payment, that is investing it in an index fund. We can reasonably expect approximately 10% per year or 7% after inflation. That means you could pay for all of your housing costs in perpetuity, forever, likely just off the interest alone. Or you could have invested that money for 20 years, had millions, then taken it and gone, bought a house in cash if you wanted to or paid the mortgage, whatever. The point is, I need you to understand this. If this math was shocking to you, you are not ready to buy a house.
I bought my two-bedroom, three-bath townhome for $910,000. And the reason why we had to put so much down at the time was just because of my income. I was only making around, I think, $100,000 to $110,000.
Why the hell would you buy a $900,000 house if you're only making $100,000? Again, need to run the numbers. Back in the day, people were buying houses 2.5 times their annual income. Okay, I know things are quite different now. Three times, four times, people are doing five times, but just because they're doing it doesn't mean it's right. You need to be thoughtful for yourself, not just what your dumb friends are doing. Remember what your mom and dad used to say, "Would you jump off a bridge if your friends did it?" And yet we do the same exact thing as adults.
Actually, you know what? That's what you need to tell your parents when they tell you, "Why aren't you buying a house?" You go, "Mom, would you jump off a bridge just because everyone else did?" And then she's like, "What?" And you go, "That's what you used to tell me. But right now, a lot of people are just doing this. And I think a lot of people are buying a house because everybody else is doing it." And then she's going to get extremely mad at you. And then you go, "Gotcha." And then you realize you probably should not use these techniques with your mom and dad. It's not nice. I use them with internet trolls, but don't use them with your parents.
Now, my monthly mortgage payment, if you factor in interest, taxes, HOA, et cetera, it's roughly around $4,200. If I was renting right now, I could probably rent a really nice two-bedroom condo or apartment for $3,500.
Hold on. I need to get control of my emotions. Let me restate. He put down $330,000, which could have turned into $6 million nominal over 30 years. Okay, in addition to that, he could rent a nice place for $3,500, but his payments are $4,200. Do you see how much money is being poured into this house? Not just the $330,000 one time, which turns into millions of dollars, but also the roughly $1,000 extra per month to own. And why? You have an alternative. You could rent, you could invest the difference, the roughly $1,000 per month, and you could take the down payment and you can invest that, or you could get a nicer place or go out to dinner. There's so many different ways to look at this, but so many of us are fixated on, "We've got to buy," and it just narrows down our field of view.
So I would save $700 a month. However, had I just not bought a home, I could have taken that $300,000 and $10,000, $20,000 that I used as a down payment and just invested in the stock market. We all know the stock market bottomed in 2022, and man, you see where it is today, right? I could easily have an extra, at the very minimum, couple hundred thousand dollars in my stock portfolio.
I'm really liking this guy. I love that he's sharing this. Not enough people share this type of information. I like that he's walking through the numbers. I like that he's very clear about knowing the difference between buying versus renting. This is great.
Number two, in the market that I live in, renting is actually cheaper than buying a home.
Again, this guy's awesome. He understands that it is possible to have renting be far cheaper than owning. And he's quite sophisticated. He said, "In the city that I live in, in the market that I'm in." That has an understanding of different markets. The real estate market in Omaha is different than the real estate market in Tribeca, New York. So when people say, "It's not cheaper to rent than to own," you've got to say, "Where?" Things are different. But in general, at least as of right now, it is cheaper to rent than to own in 100% of the top 50 U.S. metro cities.
Honestly, if I could do it again, I would just rent a nicer apartment or a condo, whatever, in a nicer community, and then just invested my money instead in the stock market.
It's kind of interesting. Most people are quite shocked when I tell them I have rented for over 20 years. I've rented nicer places in cooler neighborhoods and had virtually no maintenance fees. I text the landlord and it's fixed. And one of the most surprising things to me is the common reaction is, "Oh, must be nice, because my landlord never fixed anything." And I always ask a question. I say, "Did you ever consider paying a little bit more to get a higher-quality landlord?" And they actually look at me completely mystified, like, "What the f***? No." They don't understand that as a renter, they actually have power.
You think that I just rent a place without talking to the landlord? I interview them just as well as they interview me because I have money and my money is good money. So I'll talk to them. I'll say, "How long did your last tenant stay? Here's what I'm looking for. I'm planning to stay for several years. Are you planning to sell this unit anytime soon?" And we get to know each other. Now, you can't guarantee that they're going to do exactly what they said, but I can make the odds on my side. Let's look at the next video.
My mortgage payment is going up almost $500 a month. $500 every month. I have a fixed interest rate, so it's not that. No, it's my escrow account. Apparently, my homeowners insurance and my property taxes just skyrocketed. But nobody thought to tell me about this until I was already $3,200 short.
This is a very common problem, and I want to talk about how to handle it. The most important thing you can do when considering buying versus renting is to be highly skeptical of everyone you will meet during the home-buying process. You need to understand that everyone in the real estate industry wants a piece of you. That is why the real estate industry is one of the largest, most profitable industries in the world. There is massive amounts of money to be made, and you don't even realize that you are funding it.
We're talking about everything from inspection costs, most importantly, the interest that you pay over a secured 30-year mortgage. There's maintenance. There's all kinds of things, but most people walk into this transaction and they literally ask their loan officer for advice. They ask their realtor for advice. Those people are making money off of you. That's like a cow walking past the butcher and asking advice. "Hey, what do you think I should do? Which direction should I go?" That butcher wants to kill you.
One thing that this video reveals is that so many people buy a house believing the phrase, "Well, I'm buying so I can lock in my housing costs." And they'll say, "Rents will keep going up, but my mortgage is fixed forever." Well, your mortgage may be fixed, but what about your total cost of ownership? So many people are shocked that their property taxes have gone up by $1,000, $2,000, $10,000 a year, and that's going to continue going likely for a long time. Okay, what's next?
I'm in the process of buying my very first house as a 28-year-old with no kids and not married.
I already don't understand what's the impetus for buying a house if you're 20 years old, unmarried, no kids. Again, it can be a part of your rich life, but I have almost never met somebody who bought a house in their twenties and then clearly laid out why buying a house was a critical part of their rich life and they were willing to accept the trade-offs and the ramifications. No, it's just like, "Oh, if I don't buy now, I'm never going to be able to afford it. And renting is bad."
I close in seven days and I feel like I should be super excited right now and happy, but in reality, I am terrified and I am so nervous and I want to back out.
Okay, I want to point out something. There's a lot of statistics out there showing that new home buyers regret buying a house. You see this all the time, 28% and 37% of them. I never post those things because I think they're bullsh--t. Everybody who makes any major life decision that changes everything, it's scary.
Why I rent and how to know if you should buy or rent. Here's what happens for the biggest purchase of our lives. Most people only look at the monthly mortgage to decide if they can afford it. They don't actually look at the real cost of owning a house, the total cost. That is a huge mistake because it's not the mortgage that you need to be paying attention to. It is TCO, the total cost of ownership.
Let me show you how I evaluate the biggest financial decision of my life, buying a house, and the exact way that I recommend you do it too. First, you compare two numbers: total monthly cost of owning versus total monthly cost of renting. Notice that we are starting with the numbers, and we will certainly factor in the non-financial considerations like school district or renovation or you just want to buy a house, but we always start with the numbers first.
The total monthly cost of owning includes your mortgage, taxes, insurance, closing costs, which need to be amortized or spread out over the number of years that you own the house, maintenance, which almost nobody properly factors in. You can use one to three percent every year of the purchase price of the house. That's a lot of money. Upgrades, HOA fees, and the biggest one that people ignore, the opportunity cost of your down payment. That is the down payment that you were putting towards the house, which you could have otherwise invested.
Now, on the other hand, the total monthly cost of renting usually just includes rent, utilities, and renter's insurance. Maybe you want to factor in how often you're going to move. You should factor in those moving costs as well.
Once you have those two numbers, here's the question that I ask myself, the same one I want you to use. Does buying this house lead me to my rich life? Does buying this house create more freedom for me or less? "Isn't it time to buy?" or "Hurry up, we better buy because if we don't buy now, we're never going to be able to afford it." Never make a decision like that based on scarcity.
A lot of people say, "Am I throwing money away on rent?" What the hell does that even mean? Did you ever say, "I'm throwing money away on sushi? I'm throwing money away on that amazing vacation in Mexico?" You never said that. You only use this phrase because some realtor shoved it down your throat and you never stopped to think critically about why would I be throwing money away on a roof over my head.
For me, every time I have run this math, buying would have cost me way more than renting. Buying would have reduced my freedom financially and emotionally, and buying is just something I don't want to do right now. My wife and I both have agreed at this point in our lives, not interested. At some point, sure, but right now, no thank you. So we rent. Not because renting is better for everyone, but because it's better for us.
Now, if you want to go deeper, I want you to watch this video next. It'll show you the exact math I use to decide whether buying a house ever makes sense.
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