March 6, 2024 • 51min
Why You Should Rent Even If You’re A Millionaire
My First Million
Key Takeaways
- When deciding between renting and buying a home, you need to run the numbers carefully. Sometimes renting makes more financial sense, especially in high cost of living areas.
- Many people buy homes for emotional reasons or due to societal pressure, without properly analyzing if it's a smart financial move. Renting is often stigmatized.
- The decision to buy a home should factor in the full costs, including taxes, maintenance, HOA fees, opportunity cost of the down payment, transaction costs, furniture, and renovations. These costs are frequently overlooked.
- Lifestyle factors like walkability and proximity to farmers markets can be more important than the financial aspects when deciding where to live.
- Being intentional about purchases and focusing on quality over quantity can lead to less clutter and a more fulfilling life. Repairing high-quality items is better than constantly buying and discarding cheap things.
Introduction
In this episode, Sam Parr and personal finance expert Ramit Sethi discuss the pros and cons of renting versus buying a home. They explore the financial and lifestyle considerations that go into this major decision.
Topics Discussed
The Stigma Around Renting (2:54)
Ramit frequently receives comments criticizing his stance that renting can make more financial sense than buying in certain situations, especially high cost of living areas. There is a pervasive belief that renting is "throwing money away."
The Math Behind Renting vs. Buying (13:02)
Ramit breaks down all the costs that need to be considered when comparing renting to buying, including:
- Opportunity cost of the down payment (assuming 7% returns if invested)
- Maintenance costs (1-2% of property value annually)
- HOA fees
- Transaction costs when buying and selling
- Furniture and renovation expenses
In Ramit's analysis, owning was over 2X more expensive than renting an equivalent property. Over 11 years, his rent went down 4 times through negotiation.
"It is currently more expensive to buy than to rent in almost every city in America. That did not used to be the case. But with interest rates as they are and with the rising asset prices, it is crazy that people are still recycling the old phrases of, like, you're throwing money away on rent." - Ramit Sethi
Amortization and Interest Payments (21:33)
On a median priced $417K home with 20% down and a 7.1% mortgage rate, more money goes towards interest than principal for the first 20 years of a 30-year mortgage.
"Everybody. You are paying more in interest than in principle for the first 20 years, not one year, not two years. For 20 years. Only in year 21 are you paying more towards the principal. Then you are in interest." - Ramit Sethi
Family Considerations (22:21)
While Ramit currently rents, he says he will likely buy a home in over 5 years, factoring in lifestyle and family. However, he still plans to analyze it primarily as a luxury purchase rather than an investment.
Intentional Purchases and Minimalism (34:03)
Sam tries to be intentional about all purchases, not just housing, preferring to buy fewer high-quality items that last. He avoids Amazon to reduce packaging waste and clutter. Ramit agrees with surrounding yourself only with things you love and purging the rest regularly.
Conclusion
Buying a home is a huge financial and lifestyle decision that warrants careful analysis, not just an emotional leap based on societal expectations. In high cost of living areas, renting often makes more financial sense. Being intentional about all purchases and focusing on quality over quantity can improve happiness and fulfillment.
