Sethi’s advice can help you avoid disaster.
- Buying a home can increase your net worth in many circumstances.
- Financial expert Ramit Sethi warns that a mistake could almost certainly result in a loss.
- It’s generally not a good idea to buy a house if you don’t intend to stay there for at least a decade, according to Sethi.
When you buy a home, you often improve your long-term financial situation. You increase your net worth when you acquire equity and own your home as your mortgage is paid off. And you also increase your wealth when property values increase. This tends to explain why landlords often end up wealthier than renters.
But that doesn’t mean buying a home is always a smart financial move. In fact, financial expert Ramit Sethi explained a situation where you are almost guaranteed to take a financial hit if you become a homeowner.
It’s a time you might not want to buy a house
According to Sethi, buying a house with no intention of staying there for a while will almost always be a bad economic decision.
“If you’re buying for a short period of time, when you factor in all the costs, you’ll almost certainly lose money,” Sethi explained on her blog, I will teach you how to be rich.
Sethi has detailed some of these costs that you must pay upfront when buying and selling real estate. “There are closing costs, taxes, furniture, realtor fees and maintenance,” he said. And he warned that selling is even more expensive than buying since you have to pay a commission to estate agents representing both the buyer and the seller. This means your closing costs can be around 10% of the home’s value. You need to think about this when buying to get a clearer idea of long-term expenses.
In order to break even on your home, you need to sell your property enough to cover all the costs you paid when buying it. and when you sold. And if you want to get richer from your purchase, you will have to earn even more and more.
Sethi made it clear that this would not happen for most people buying in the short term and in fact a loss of funds is a much more likely outcome than a gain.
How long should you plan to stay at home?
So since Sethi thinks buying a house and selling it soon after is a recipe for financial disaster, how long do you should plan to be at home to reduce the risk of losing money on the transaction?
“If you know you want to move in less than 10 years, you’ll probably make more money renting and investing in S&P index funds,” Sethi said.
This is a longer time horizon than many experts recommend as the minimum duration. Many financial gurus suggest that if you plan to stay in one place for at least five years, it may be a good idea to buy. But if you want to be on the safe side and make sure your purchase doesn’t cause you a loss — or if your goal is to make the most money out of your dollars — then listening to Sethi’s 10-year suggestion makes a lot of sense.
The bottom line, however, is that buying a home and selling it soon after will not work for the vast majority of people. So unless you’re sure about your future plans, you might want to hold off on making that offer.
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