Owning A Home Is Keeping You BROKE ft Ramit Sethi

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.

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