Ramit Sethi says it often doesn’t make ‘financial sense’ for Americans to buy houses in ‘expensive’ cities like New York, San Francisco and LA — here’s his math

How crucial is owning a home for financial success?

With home prices still on the rise year-over-year, many young Americans feel locked out. But Sethi argues the belief that owning a home is critical to financial success is outdated, especially in cities where real estate prices are sky-high.

Sethi refers to “a very, very back of the napkin calculation” that a down payment, mortgage, repairs and other transaction costs should equal less than 28% of one’s gross income. More expensive cities can push that cap as high as one-third of a person’s total income, Sethi said, but “you are incurring massive risk particularly if one person loses their job or something unexpected happens.”

Sethi recalled his rental days in New York City, where he discovered it would have cost him 2.2 times more to own a comparable property than to rent it. So he continued renting and invested the extra $3,000 a month instead.

“I'm not saying owning is bad or renting is good,” Sethi said. “I'm saying, simply run the numbers, because just buying a house is not the same ticket to an upper middle-class life that it used to be.”

Invest in real estate without the headache of being a landlord

Imagine owning a portfolio of thousands of well-managed single family rentals or a collection of cutting-edge industrial warehouses. You can now gain access to a $1B portfolio of income-producing real estate assets designed to deliver long-term growth from the comforts of your couch.

The best part? You don’t have to be a millionaire and can start investing in minutes.

Learn More

Rent or buy: Metrics to consider

Several key metrics are worth considering when deciding whether to rent or buy.

Sethi emphasizes the importance of factoring in not just the mortgage payment but the total cost of homeownership — including often overlooked “phantom costs” like property taxes, home insurance, maintenance costs, renovations and repairs.

Sethi pointed to the price-to-rent ratio, which compares the cost of buying a home to the cost of renting a similar property. In cities like New York or San Francisco, this ratio is often heavily skewed in favor of renting — confirmed by his own experience in New York City.

Sethi advised first-time buyers to weigh these additional costs against their income and future financial goals. Buying a home is a big decision, especially in expensive markets where a big chunk of income might be consumed by housing costs alone — leaving little left over for entertainment, hobbies or retirement savings.

Homeownership has its advantages, chiefly the building of equity over time as home values appreciate. Unlike renting, where monthly payments don’t lead to ownership, owning a home under the right circumstances can provide long-term financial stability and a tangible asset that grows in value. Additionally, homeowners benefit from tax deductions on mortgage interest and property taxes.

Owning a home also allows for customization and long-term security, eliminating concerns over rent increases or landlord decisions.

Financial differences between renting and buying

Sethi’s financial reasoning boils down to two main factors: flexibility and opportunity cost.

He explained that while buying a home can build equity over time, the upfront costs and long-term financial commitment can present significant hurdles, especially for younger people. That’s why it pays to fully realize all of the potential benefits of each scenario and see which one has more drawbacks before choosing one living option over the other.

Renting’s flexibility is a big advantage. Homeownership often ties people to a specific location and requires a substantial financial commitment. Renting, on the other hand, allows for greater mobility and reduces the financial burden of home repairs and other unexpected costs.

While there is no definitive one-size-fits-all answer, there is likely a “right answer” for each potential buyer and renter based on income, goals and expectations.