Is renting a waste of money? Ramit Sethi explains

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    I know, I know. You have been told that you are “throwing away money on rent.” Someone in your life made you feel guilty for not buying a home or building equity. And let me guess, you said something like, “Ugh, I just hated paying someone else’s rent!”

    To the right?

    There is only one problem: it is not true.

    First, let me ask you a simple question: “Are you throwing money away” when you eat in a restaurant? Of course not. You pay for value.

    But somehow that logic falls apart completely when you apply it to real estate.

    I decided to do a poll on Twitter to ask what people think.

    Ramit tweet asks if restaurant dining is a waste of money

    Unsurprisingly, 95% of people said, “No, you didn’t throw away any money on a good meal.”

    Then I asked the same question – but for rent.

    Tweet poll on whether renting is a waste of money

    LOL! Notice the decrease from 95% to 81% when I asked if I was throwing away money on renting. ”In other words, a lot more people believe that renting is throwing away money.

    You and I know that when we spend $ 20 on a meal, we happily spend on good food, table service, and someone to clear our dishes.

    Paying the rent is exactly the same: you pay for a roof over your head (the food). You also pay for a landlord to take care of all paperwork and maintenance issues (the service).

    Why do so many of us blindly repeat this phrase, “throwing away money on rent”?

    Why do people think rent is a waste of money?

    Understanding why this myth persists is the first step in understanding the truth about buying and renting. Check out these reasons why many people believe rent is a waste – what do you notice?

    1. Propaganda

    The powerful real estate lobby, the government and our parents all tell us that “Real estate is the best investment of all”. There are even government tax incentives to buy! Repeat this for decades and a population will begin to believe blindly instead of running the numbers.

    Here’s a little glimpse into how the real estate propaganda engine works. This New York Times article subtly portrays buying a home as the ultimate, foolproof way to get rich in America. Fast. Hurry! Only prices go up! Add HGTV, economic malaise, and phrases like “you’re throwing away money on rent”.

    Excerpt from the NYT article

    “Minus expenses.” LOL. Given that the “expenses” can be 10% of the selling price of a home, I say, “I really enjoyed this trip to the Grand Canyon! Everything except the part where my son fell off a cliff and died. In any case, it was fun! “

    Excerpted from the NYT article on the price of the housing market
    Hurry or you will be “priced out” forever. This is the message people get that leads them to make irrational financial decisions.

    In reality, real estate is not always the best investment. It is associated with significant phantom costs. And there are often better investments, such as a simple low-cost index fund. This is well understood by seasoned investors, but ordinary Americans have been fooled into thinking their primary residence is a great investment. Often it isn’t. (I could buy today, but I’m renting voluntarily because it’s the better option for me.)

    NYC homeowners have unrealistic expectations
    Excerpt from the article on NY Housing

    2. Real estate financialization

    In America, we believe that our home should be an investment too. Why? This is not the case in many other countries. When you sit at the dining table with your parents, they want the price of their house to stay high – while younger people want the house price to come down!

    Tweet about house prices

    3. The idea that someone “takes you by surprise”

    Americans hate the idea of ​​someone making money with them. A Reddit comment said (rewritten) “If you buy it may cost more, but at least you won’t pay your landlord’s rent.” Do you understand how crazy that is? When you eat out, say, “I like the food here? But I just hate paying this restaurateur’s rent?“Of course not. We only repeat this sentence for real estate. Stop it.

    4. Lack of understanding about phantom costs

    People believe that if you buy a home for $ 200,000 and sell it for $ 450,000, you made $ 250,000. This is wrong. They don’t understand maintenance, taxes, and other phantom costs, and don’t compare ROI to other investments. Likewise, Did you know that real estate prices are falling too??

    5. Following the same playbook as always

    Buying a home has generally been a good thing for most boomers. There were also less affordable investment options such as index funds in the 1970s and 1980s. Stuck in the past, they re-teach Millennials the same lessons that are faced with priceless housing, stagnating wages and better investment opportunities. That’s the problem when people (boomers) recommend something but don’t really understand it why it works: you repeat it over and over, even when the situation has changed.

    What you should know about buying vs. renting

    Renting is not necessarily better than buying and buying is not necessarily better than renting. It depends on many things:

    My advice: do the numbers and educate yourself. But never say that you are “throwing away money on rent”.



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