Owning A Home Is Keeping You BROKE ft Ramit Sethi

Intro (00:00:00)

• Discussing renting versus buying.
• Many people complain about the high cost of buying a house and renting.
• The speaker believes renting is better and will explain his reasoning.
• Ramit Sethi, author of "I Will Teach You to Be Rich" and host of a Netflix show with the same name, will also share his perspective.
• Viewers are encouraged to watch the entire episode before commenting on YouTube.
• Only 70% of viewers are subscribed to the channel, and the speaker requests viewers to subscribe if they have watched more than one video or listened to more than one podcast.
• Ramit Sethi and the speaker agree that even if they could afford to buy a home, they prefer to rent.
• Many people, including friends, think this is insane.
• They aim to discuss their opinions and the numbers behind them, anticipating numerous comments.

Set your rich life intention (00:03:30)

• When making the biggest purchase of your life, such as a house, it's important to run the numbers to determine if buying or renting is financially beneficial.
• The decision should not be controversial, especially in high-cost-of-living cities like New York, San Francisco, and Los Angeles.
• Avoid using absolute words like "always" or "never" when discussing financial decisions.
• Historically, buying a home has not been more profitable than renting in many cases.
• People may argue that buying a home makes them happy, but that doesn't necessarily mean it's a great investment compared to alternatives.
• While some people have made money on their homes, it's important to consider historical data and market conditions.
• Investing in real estate, such as apartment buildings or developments with the intention of cash flow, can be a good idea.
• Historically, the average annual growth rate of the S&P 500 and rent of equal quality has outpaced the appreciation of purchased homes.
• Recency bias can lead people to believe that recent trends will continue indefinitely.
• To be a successful investor, it's important to take a long-term perspective and consider historical data.
• The author personally made more money renting than owning a home, despite currently owning a home.

Don't confuse luck with skill (00:07:30)

• The speaker reflects on the role of luck in their success.
• Initially, they believed in the "pull yourself up by your bootstraps" mentality, attributing their wins and losses solely to their own efforts.
• Over time, they realized that many favorable outcomes were not solely due to their actions but rather a matter of luck.
• For example, the sale of their company to HubSpot could have been significantly impacted if the CEO had an accident just before the deal closed.
• The speaker acknowledges that luck plays a significant role in various situations, including real estate investments.

Sam's journey from owner to renter (00:09:00)

• Sam is moving from owning a home to renting.
• He intends to rent for an unspecified duration, potentially for several years.
• He chose to rent a fully furnished home to minimize his possessions and maintenance responsibilities.
• Sam enjoys the convenience of renting, including the ability to easily call for repairs and avoid the burden of home maintenance.
• Despite his interest in fixing things, Sam prefers to focus on hobbies he enjoys, such as Legos and old motorcycles, rather than essential home repairs.
• Ramit believes that homeownership is not always the best financial decision and can lead to feeling "house poor."
• He emphasizes the importance of considering opportunity cost when making financial decisions, including the potential returns from investing in assets other than real estate.
• Ramit suggests that individuals should evaluate their personal preferences and financial goals before deciding whether to buy or rent a home.

Do the math: Real cost of ownership (00:12:30)

• When comparing buying vs. renting, it's important to consider both the financial and emotional aspects.
• In the beginning, the decision should be based mostly on numbers and math.
• The speaker provides an example of how he compared the cost of renting vs. owning in San Francisco and New York.
• In New York, his rent went down four times over 11 years, showing that rent can go down depending on location and market conditions.
• When he ran the numbers for an equivalent place to buy, it would have cost 2.2 times more than renting.
• The speaker breaks down the math involved in calculating the real cost of ownership, including:
  • Opportunity cost of the down payment (assuming 7.5% annual return)
  • Maintenance (assuming 2% of the property value per year)
  • HOA fees (can be significant in some buildings, especially in New York)
  • Transaction costs when buying and selling (can be hundreds of thousands of dollars)
  • Furniture (nicer furniture is often purchased for owned properties)
  • Renovations (more likely to be done in owned properties)
• The speaker emphasizes the importance of factoring in all these costs and using realistic assumptions, especially in high-cost-of-living cities.
• The speaker explains that while he personally chose to rent and invest the difference, he acknowledges that buying a home may be the right decision for others at a certain point.
• He highlights the financial benefits of renting and investing over the long term, which allowed him to live in amazing places.

Buy for desire (00:16:30)

• The decision to buy a home should not be primarily driven by cost.
• It should be based on personal desire and the ability to afford it without financial strain.
• Homeownership should be approached as a luxury purchase rather than an investment.

Pay in cash for large purchases (00:18:30)

• One of the 10 Money Rules is to be able to pay for large purchases such as a house in cash.
• This rule is based on the idea that having a no-debt policy in one's household requires discipline and a clear philosophy on debt.
• The goal is to have enough net worth to cover the cost of a home without taking on debt.

The 10 year rule (00:20:00)

• Buying a house should ideally be a long-term commitment of at least 10-25 years to avoid significant financial losses, as the initial years of a mortgage primarily go towards paying interest rather than the principal amount.
• Renting is not necessarily a waste of money, especially for those who plan to move frequently or are unsure of their long-term housing needs.
• Family considerations, such as school districts, can influence the decision to buy a home.
• Negotiating a longer lease term and paying upfront can result in significant discounts on rent.
• The decision of when to buy a home should be based on personal preferences and needs, rather than following strict rules.
• Renting different types of properties, such as Airbnbs, in various locations can help individuals determine their ideal lifestyle and housing preferences.

Ramit's list of must-haves (00:25:30)

• When buying a home, make a list of the attributes you want and consider renting an Airbnb to test out different living spaces.
• Look for efficient kitchen designs, such as the kitchen triangle, and consider features like multiple dishwashers.
• Pay attention to bathroom design in hotels and incorporate elements you like into your own bathroom.
• Keep bedrooms small, avoid having a couch in the bedroom, and create a mudroom for packages.
• Consider having multiple separate structures, such as an office, guest house, and main house.
• Avoid houses that are too large, as they can lead to family members not congregating.
• Sam describes his current house as too much work and is looking to downsize.
• He wants a 5,500-6,000 square foot house to accommodate his in-laws, out-of-town family, and a dedicated room for his work.
• Sam mentions that he and his wife took a driving tour of expensive houses in Los Angeles and were initially drawn to the idea of living in a luxurious home.
• Sam emphasizes the importance of creating a simple list of values to guide decision-making and avoid getting enchanted by superficial things.
• For Sam, walkability is the number one priority in choosing a place to live.
• He also values convenience, as evidenced by his choice of a rental property located across the street from a weekly Farmers Market.

Sam's war on stuff (00:33:00)

• Ramit Sethi stresses the significance of being systematic when making substantial purchases, particularly when buying a home, and criticizes individuals for spending more time researching local restaurants than they do when making such a significant investment.
• Sethi's personal rules for daily purchases include investing in high-quality, durable items to reduce waste and save money, minimizing unnecessary purchases and reusing items, and making intentional choices that align with individual needs and preferences to avoid clutter.
• Among couples with financial difficulties, Sethi observes a tendency to struggle with saying no to themselves and their children, leading to credit card debt. Additionally, cluttered closets often reveal overspending habits and provide insights into an individual's identity.
• As people accumulate wealth, they tend to have less clutter in their homes, suggesting a correlation between socioeconomic status and the amount of possessions.
• The appearance of a person's home can offer clues about their identity and socioeconomic status, while clutter can create headaches and hinder productivity, highlighting the importance of a clean and organized environment.

When to overspend (00:40:00)

• Buy expensive items that can be repaired for free or at a low cost.
• Consider the long-term value and repairability of an item before purchasing it.
• Prioritize quality over quantity when making purchases.
• Be selective about what you buy and think about what is meaningful to you.
• Regularly declutter your closet and living space to free up mental space.
• Get rid of items you don't use or need, even if you have owned them for a long time.
• Keep your living space organized and clutter-free to reduce chaos and stress.

Millionaires who rent (00:44:00)

• Running the math is essential when making financial decisions, even if it shows that a decision is unprofitable.
• Buying a house should not be considered a good investment without careful calculation.
• Personal preferences, such as family and location, should be considered when making the decision to buy or rent.
• Many young people prioritize financial freedom but make poor financial decisions, such as spending a large portion of their net worth on a mortgage.
• Some high net worth individuals choose to rent rather than buy a house.
• Financially savvy individuals understand the financial implications of buying a house and make informed decisions based on calculations.
• The idea of needing to buy a house is often driven by preconceived notions rather than financial sense.
• In most cities in America, it is currently more expensive to buy than to rent.
• Rising interest rates and asset prices have made buying a house less financially viable in many cities.
• The traditional notion of "throwing money away on rent" is outdated in many cases.