Millionaire’s Solution to the Housing Crisis

I am a multimillionaire who has rented for the last 20 years. And I'm going to tell you something shocking. I have made more money renting than I ever would have owning a house. That probably sounds crazy to you, but in my opinion, here's what's actually crazy. We have a serious housing crisis in America, and the solution that people are pushing— buying a house at any cost because you're throwing money away on rent— is actually making it even worse. So today I'm going to pull back the curtain on exactly what's causing this housing crisis, including who's to blame and how they have twisted the system to make sure that the wealthy keep getting wealthier. I'll give you my solution to fix this crisis as someone who's talked to thousands of people struggling under the weight of oversized mortgages that many people cannot actually afford with part 1: Why you think you need to buy a house. Let me ask you a question. Do you believe that buying a house is part of the American dream? If so, I want you to ask yourself why. Why is buying a house part of the American dream? Go deeper. Don't just say, I want to own something of my own. Go deeper. Have you ever actually stopped to think about who benefits from you believing that buying a house is part of the American dream? Well, let's take a look. They're all around us. Real estate agents earn a 5 or 6% commission on every house sold. Banks profit from 30 years of interest payments, and homeowners, like our own parents, often have their entire net worth tied up in their house's rising value. When all of us just invisibly slip into this belief that you have to buy a house to be part of the American dream, that drives up prices and it traps many homeowners with high mortgages and high housing costs. I mean, think about it. Do you know someone who is house poor, what do you know about them? A lot of people will tell you they can't actually do anything. They can't eat out, they can't travel anymore. It all goes into their house. But it actually doesn't have to be this way. For example, in Germany, the majority of people now rent instead of owning. That's become the default route. And I bet if you really stop and think about it, you might start to question this dream of home ownership that has been bestowed upon you. For example, here's a question. Would you rather make a $3,500 mortgage payment every month, or would you rather take a month-long trip to Italy once a year? Be honest. Which of those sounds better to you? I want you to ask questions like this because I want you to question the default dream that we grew up believing. I want you to really craft your own vision of a rich life. And that leads us to the first solution to the housing crisis. Instead of defaulting to buying a house, it's actually time to normalize renting. Let me show you some real numbers from my own life. The apartment that I live in right now, if I were to buy it, I would pay more than twice as much as I'm paying in rent. Let me give you a hypothetical number to hammer home the point. Let's say that I was paying $5,000 a month in rent for this apartment. In order to own it, it would cost over $12,500 per month. That is thousands of dollars more every single month just to own the same place I'm already sleeping in. You know what I do instead? I take that extra money, the difference between $12,500 and $5,000, and I invest it in index funds that generate consistently over time about a 7% real return. That's after inflation. And here's what's shocking. Right now, It is cheaper to rent than to own in 100% of the top 50 US metro cities. Just look at this chart. On average, you would save about $850 a month renting over buying right now. That's the largest savings between buying and renting in the last 50 years. Now I know what you're thinking, Ramit, what about my favorite word, equity? Yes, we're going to talk about that. And what about the fact that maybe people are not only living in New York City and LA and San Francisco? True. This doesn't work everywhere. It doesn't work all the time. There are moments when buying makes more financial sense and certain cities where it makes more sense. But right now, this is one of the historically worst times to buy. Most importantly, I want you to stop accepting buying as the only option. And maybe there are more options to buying a house in your 30s. You could do it in your 50s. There's so many different ways of thinking. Let's get creative and open up our minds right now. Now, everything I've shown you so far is about one decision: renting versus buying. But let's be clear, that decision does not live in a vacuum. It's connected to the rest of your financial life. How much do you have in investments? What are your career plans? What does your family look like? What is your rich life all about? Do you buy and lock into a big mortgage for the next 30 years? Maybe. Do you keep renting and invest the difference? Could be. How does that choice affect when you can retire, or if you're able to move to a different city. If you are wrestling with questions like this, then this is where having the right partner can make a huge difference. And that's where Facet comes in. Facet offers dynamic financial planning that actually evolves with you. You get a dedicated CFP professional and a team of specialists who can help you run the numbers on renting versus buying for your specific situation. They can help you map out how a mortgage or rental affects your long-term plans, and they can balance your housing costs with investing and debt payoff and all the other parts of your rich life. All Facet planners are fiduciaries. That means they are required to put your interests first. And unlike traditional advisors who charge a percentage of your assets, like that 1% fee that turns into huge costs over time, Facet charges an affordable flat membership fee for financial planning. I've worked with Facet to help couples on my podcast answer questions like, can we actually afford this house? What happens if one of us stops working? And can we actually spend more on the lifestyle we want? If you want a smart team to help you make confident decisions about housing and all the other major decisions in your financial life, check them out and see if financial planning is a fit for you. Head to facet.com/ramitsethi or click the link in the description below to learn more. That's facet.com/Ramit. Now, wait a second. Doesn't buying a house mean that you're building equity? Because after all, everybody tells me when you rent, you're just throwing money away. Now, when I hear those words, it usually tells me you're about to make a mistake that can cost you hundreds of thousands of dollars. I want to break it down right now. Part 2: The Real Cost of Buying That Nobody Tells You. If you want to get stuck making one of the worst financial decisions of your life, I want you to buy a house this way. Get the most expensive monthly payment you can afford. By the way, when it comes to how much you can afford, don't run the numbers yourself. Just trust a mortgage broker. They're the ones who really are looking out for you. Then hope and pray that your house goes up in price in a few years. Then wait for prices to go up and then sell and pocket the profit. That's simple, right? That's how it works in America. Not so fast. Buying this way often loses you money even when you sell a house for more than you bought it for originally. Let me show you why. Because when you buy, you are ignoring the phantom costs of homeownership. These are costs that are largely invisible to you when you are signing the papers, even when you're paying them. I will show you the math. If you buy a house for $400,000, Over 30 years, you're not just going to pay $400,000. By the end of your payments, you end up paying nearly twice that original amount. That's another $400,000 on top of the original purchase price, thanks to interest. And there's more. You'll also pay property taxes, maintenance and repairs, homeowners insurance, closing costs. Add those in, and your $400,000 house will cost over $1 million by the time you're done. You could sell that house for twice what you bought it for and still lose money. This is why so many of us truthfully do not understand how much a house costs us and how profitable it actually is. And a lot of people genuinely believe they are making a smart purchase. For example, many of us don't realize that for the first 10 years of the mortgage, the vast majority of your monthly payment is going towards interest, not equity, interest. After 10 years, for example, you've paid about $50,000 towards your loan and about $200,000 in interest. Do you see how confusing and opaque this actually is? Paying a mortgage feels like you're building equity. Like, let's say you buy a house tomorrow and you go, oh, I did the right thing, I'm building equity. But if you actually looked at something called an amortization table, you would realize that you are paying more in interest than principal for the first 20 years of a 30-year mortgage. You're actually paying the bank interest for decades. So here's what I want you to do. I want you to figure out if renting or buying makes more sense for you. You can use the New York Times buy versus rent calculator. I will link it in the description below. And you're going to plug in the purchase price, the rent price, how long you plan to stay, your down payment, the interest rate, and all those phantom costs that we talked about. This is going to help you factor in everything, not just the mortgage— property taxes, maintenance costs, which typically we can assume at 1 to 3% of the purchase price every single year. That's going to factor in things like the HVAC system or the roof that's going to need repair 11 years from now. All of it. Here are some simple guidelines. Take your monthly mortgage payment and add 30 to 50% to account for all those phantom costs. That's your real monthly housing cost, even though the numbers might be lumpy, meaning you might wait until a $22,000 roof repair 7 years from now, but it all backs out. So here's an example. If your mortgage is $2,000 a month, your actual cost is probably closer to $2,600 a month to $3,000 a month. Once you factor these in, the math becomes quite startling. You will discover that renting might be better for your finances, especially in large metro areas where housing prices have gone way, way up. So what do you do now? If buying makes sense to you and your finances, fantastic. Save for a down payment, buy a house, and then carefully continue saving to account for those unexpected expenses and maintenance that you will encounter. My suggestion to you is that before you buy, you commit to living there for at least 10 years, which will allow you to spread all of those transaction costs out over multiple years instead of paying them all at once. Otherwise, you're going to be losing a lot of money if you decide to sell before then. As an example, you know how when you buy a car, you drive it off the lot, it immediately depreciates something like 30%? That's actually kind of how it works with a house. The minute you buy it, you are paying tens of thousands of dollars in closing costs, and you do not want to sell it the next year because you will almost certainly, with rare exceptions, lose money. And remember, selling takes time, and it depends on what's going on in the market. It will be a while before you can finally free up all that equity that you built up over the years. Or if the buy versus rent calculation tells you, hey, it's actually financially a better decision to rent, then you can do what I've done for the last 20 years. Instead of having that money, dead money, in something like a down payment that's not really doing anything for me, I'm letting that money grow at roughly 7% per year after inflation instead of getting sent to the bank freaking interest payments. That path in many cities has the potential to make you far more money than owning a house. Now, remember, I'm not against homeownership. I know what you're about to say. Ramit Sethi, you can't live in an index fund. I know, I know. I've heard it all. Okay. Yes. You want housing. Yes. Everybody should have the ability to live somewhere. Of course. And sometimes you may want to buy. You may want to buy for financial reasons. You may want to buy for non-financial reasons like kids in school, or you simply want to stay there for 15 or 20 years, or you want to decorate, or you just want to. All of those are valid reasons, but you first have to run the numbers. Okay, you might be thinking, Ramit, I get it, fine, housing costs are a crisis, the math might be bad right now. What can we do about it? What could possibly change this situation? And also, why the hell is housing so expensive? Is it those greedy landlords? Well, the answer is actually going to make you pissed off. Before I dive into the details, I want to just ask you something. Does it feel like you are just treading water when you make big money decisions like it? Does it feel like you're just stuck guessing on whether to rent or buy or how much you can afford for a car? Does it feel like the numbers are not clear to you, but they're blurry, smudged? But deep down, you just try to do something hoping it'll all work out. I don't want you to feel like that about money. I want you to have crystal clarity. Like you just put on a new pair of glasses and you can see 20/20 with all of the important financial decisions in your life. That is why I created my money coaching program so you can stop guessing and get in control of your money. Inside the program, you'll get monthly coaching from my team and me, step-by-step playbooks for investing, paying off debt, and yes, how to choose the exact right housing decision that works for your rich life. Just imagine logging into your account and knowing the exact right next move for your money. No more confusion, no more arguing with your spouse, no more homework that you've assigned to yourself to figure out later. This program comes alongside you and it will help answer your money questions so you can become confident and competent. If you're ready to take action, scan the QR code here or click the link in the description below to join us in money coaching today. Part 3: How to fix a housing market that is rigged against you. Do you know why it is so historically hard to buy a house right now? It actually did not used to be this way. Your parents were able to buy a house on one income, and I want to show you the real numbers because they are actually shocking. Take a look. Today, it costs the average home buyer 5 times their household income to buy a house. So on average, if you buy a house for $300,000, you are likely earning about $60,000. But back in the 1960s, people could buy a house for about 2 times their household income. If that ratio held true today, buying a nice house would only cost around $120,000 for someone with an income of $60,000. Obviously, that sounds ridiculous to us. This just shows how much faster home prices have risen compared to household income. And that gap is actually getting wider every year. So what's happening? Well, the answer comes down to a very simple principle. If you don't build enough housing and everybody wants one, the price goes up. Simple supply and demand. If there are 3 loaves of bread in the entire New York City area and everybody wants bread and we're not allowed to make more bread, what happens to the price of that bread? It goes way up. So then the next obvious question you're going to ask is, why don't we just build more housing? What's the problem? We don't have enough cranes? No, that's not why. The actual reason that we don't build enough housing is simple and shocking, and the answer is that your parents and your neighbors bought houses 30, 40 years ago, and then they rigged the local city governments to make it illegal to build more housing around them. Take a look around. In virtually every city in America, it is illegal to build more housing, the kind that people want. It is illegal to build duplexes. It is illegal to build row houses, skyscrapers. That's not an accident. That's not greedy landlords. That is the people who have the power in America, homeowners who tend to be older, who then vote in local city elections. And guess what the consequence is? Once you restrict Supply prices skyrocket. And remember, the people who own their houses are sitting on this equity that has grown, not just because they made a good decision, because they bought a house and then restricted the supply all around them. This isn't the only way that existing homeowners are fueling the housing crisis, by the way. In every city in America, as I mentioned, there are things called zoning laws. They tell you what what you can and cannot build within certain neighborhoods, and they exist for a reason. Okay, you don't necessarily want to live next door to an industrial or nuclear power plant. Fine. You certainly don't want to live next door to an Arby's. That would be truly disastrous. And a lot of these zoning laws were originally based in racism. Have you ever heard of the phrase redlining? These were specific laws meant to prevent Black people and other communities of color from buying and building housing. Those have changed, but they still have the same exclusionary policies. Don't build here. Oh, sure, we need housing somewhere, but do it over there. Not in my backyard. NIMBY. And what is the consequence? Once again, it drives up prices and it gets worse. Not only are these homeowners blocking new housing, which makes your housing expensive, The government is actually rewarding them for it. Think about it. In order to buy a house, you already have to be in a higher percentage of earners in America. In general, poor people are not buying houses. It is the upper middle class and wealthier people now that are buying houses. Then you get government subsidies like a 30-year mortgage, tax benefits, and other incentives like credit score benefits. Your house grows in value not just because you're a genius, but because the very people who bought houses have now colluded to prevent more housing from being built. Again, I don't mind if you decide on your own property, we're not going to build an ADU in the back because we're just happy with our single-family home. But you should not be allowed to control what your neighbor builds. Do you think you can vote and tell me what type of toaster to use in my kitchen? Of course not. That's ridiculous. Get out of my house. Oh, Ramit, I don't like that you use that type of vacuum cleaner. I don't care. And yet neighbors can tell their neighbors what they are allowed to build on their own property by virtue of the type of zoning laws we allow in this country. In this system, the people who are already wealthy get all of these incentives and power. But renters, the people who tend to be younger, poorer, often people of color, are locked out of the club. So just think about it. We are punishing the people who have less money while lavishly rewarding the people who already have more. You want to know what we can do about it? I'm about to tell you. We have to fight NIMBYism and vote for more housing. NIMBY stands for Not in My Backyard. These are the people who tend to have bought their houses in the '70s, '80s. They tend to be older. They tend to be wealthier, and they don't want anything to change. They've used every single excuse in the book, the same one since the '60s. We want to respect the character of our neighborhood. We're concerned about traffic and parking. I'm not against development, but— and what they really mean when they say these phrases is, I don't want more housing built because I don't like change. And more importantly, it will negatively impact my property value. You have to understand that their incentives are directly at odds with yours, which is to have more housing and to make it more affordable for you. And, you know, you might think this is an undefeatable majority, that there's no way to fight NIMBYs now that they have taken control. But the crazy thing is, NIMBYs are actually the minority. 82% of all Americans actually support building more housing in their neighborhoods. Even the majority of homeowners are anti-NIMBY. So think about it. Why are we stuck with policies no one wants? What is happening here? I'll tell you what's going on. A small group of wealthy homeowners have captured control, rigged local city governments to make it illegal to build more housing around them. And this doesn't get as much press as presidential elections. Local city council, who cares? You don't even know your local city councilor's name. It's irrelevant for most people. And yet that is why your housing is so expensive. And you have to remember, these homeowners vote at much higher rates than younger people. They've also rigged power in such ways that you might not even realize it. For example, a lot of these city council meetings, you know what time they're held? They're held at like 11 a.m. on a Wednesday. Guess who can attend those meetings? Old NIMBY retirees. But two parents who are working, they can't go to those meetings. This is the level of power that has been disseminated to make sure that no housing is built. And because they hold this political power, these older NIMBYs have been able to block what the majority of people actually want. So I'm going to give you 3 main ways that you can fight back. First, you need to vote these NIMBYs out. When it comes time to local elections, it's actually really important for you to vote. You need to look for specific YIMBY politicians. YIMBY means Yes In My Backyard. You'll know a YIMBY when you see them because they will say, yes, we want to build more duplexes, more housing of all kinds. We want to make it legal to build whatever the market wants. Those are the people that I recommend you vote for. We will not solve this by telling young people to stop buying coffee. That's not how we solve this problem. This problem is solved by building more housing in the places where people actually want to live. Here are a couple of organizations you can look for. There's one called CA YIMBY. I actually help advise them. They're going to point you to all the local chapters around you. There's Open New York, there's YIMBY Action, there's Welcoming Neighbors Network. They're all great options. More housing equals lower prices. It is that simple. And if you're a homeowner watching this, I want you to be honest with yourself. Have you unwittingly become part of the problem? Because when new housing gets proposed in your neighborhood, do you support it because you want a vibrant community? Do you want more walkability? Do you want perhaps more public transportation allowing people to walk and live there? Or do you find reasons to oppose it? When we as a society legalize duplexes and multifamily housing, more people can actually afford to live near good jobs, schools, and transit. And you know what these neighborhoods are like because you've seen them or visited them when you go to Europe. They are incredible. To be able to walk to a coffee shop, to be able to take your kids to parks that are close by, to be able to have a safe neighborhood where different families can come out and play, that is a beautiful thing. Not to have a bunch of wealthy homeowners who own massive houses and all other people are struggling. Here's the second thing you could do. Push for renter-friendly policies. Imagine a different system where renters were treated more like homeowners are treated. What if we removed biased tax benefits for homeowners? Or what if renters had stronger legal protection against unfair evictions? What if renters could improve their credit score by being good tenants? You know, the last one's actually starting to happen in some areas of the country, like California. Landlords are giving tenants the option to report their rent payment history to credit bureaus like homeowners do, which can increase their credit scores. Changes like this really rewire our broken system so renting can start to feel like a long-term option again. And when renters have better protection and benefits, fewer people feel pressured to buy just so they can gain stability. And third, stop treating yourself like a second-class citizen, because even if we do build more housing, even if we do change these policies, there's still one massive problem holding society back. And until we break free from it, the housing crisis will continue to be a major problem. By the way, if you've made it this far into the video, I know you are not here to just complain about housing prices. You actually want to do something about it. You want to take control. You want to build your rich life, whether that includes a house or not. So do yourself a favor, hit subscribe right now, because every week I'm breaking down these money myths that keep people stuck and showing what you can do for your rich life instead. So hit subscribe right now before we talk about the biggest change we need to make to end this housing crisis. Part 4: End the culture of buy at all costs. This idea that you have to buy a house to be successful is simply a myth. It means you stay in places you want to leave because you're locked in for 20 years. It means you sacrifice your peak years just to make a down payment on a house that actually, if you ran the numbers, you would discover underperforms an index fund. Is that freedom? Is that a rich life? Here's what very few people will tell you. The buy at all costs mentality is not really about helping you build wealth. Your parents bought into homeownership when it made sense, but even they did not run the numbers. Yes, they probably built wealth, but then what they did is they pulled up the ladder behind them, and now they're giving you the same advice in a world where houses cost 5 times the median household income. It's different. Than when they bought a house. The math has changed, but their story has not. And think about the implications of buying a house, especially early on in your life. When you are locked into a 30-year mortgage, you cannot take risks like quitting a job to make more money and moving somewhere else, because unless you've stayed there for 5, 10, 15 years, you've incurred massive costs. And that pressure to buy no matter what, that also keeps prices artificially high, which compounds this crisis. In order to solve this housing crisis, it is a multifactorial problem. Here's what I want you to do. I want you to flip the script. I want you to start with your rich life and work backwards. Maybe your rich life means traveling 6 weeks a year. Maybe it means picking up your kids from school every day. Maybe it means getting to move to a different city as your career changes instead of being locked into the idea of the perfect place you had 10 years ago. What I want is for us to make small changes on the important things like voting for Yimby politicians, which can change this toxic culture of pure home ownership for single-family home alone. So push back. Never let society decide what your rich life is. You design your own rich life. And if you want to dig deeper into another American myth that could be setting your finances back for years, Check out this video next.