Rethinking Real Estate: Why That $900K Profit From A House Sale Might Be a Mirage
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For many, homeownership is the quintessential dream, often seen as the surefire path to wealth. But is the perceived profitability of real estate as clear-cut as it seems? In a podcast clip posted to Twitter, Ramit Sethi, well-known for his financial insights on How to Get Rich on Netflix, provides a compelling example that prompts us to rethink.
Drawing from Sethi’s analogy: Picture a house in Austin, Texas, purchased in 1970 for $100,000. Fast forward 50 years, it sells for $1 million. A quick calculation suggests a profit of $900,000.
t’s easy to hear such figures and think, “Buying property is the best investment!”
However, as Sethi points out, this narrative can be misleading. Here are four considerations into the true profits of a house.
1. Maintenance & Upkeep: Houses age, and over five decades, require repairs and renovations. These aren’t insignificant expenses. When considering homeownership, have you accounted for ongoing maintenance costs?
2. The Reality of Inflation: $100,000 in 1970 isn’t equivalent to the same amount today. Inflation erodes the value of money over time. So, when calculating long-term property gains, always factor in inflation’s impact.
3. What About Opportunity Cost? The initial down payment on a house can be substantial. What if those funds were invested in an appreciating asset, like stocks or bonds? Might the returns outpace the house’s appreciation? Always weigh your investment options.
4. Unseen Costs of Owning: Beyond the obvious mortgage payments, homeowners face interest on loans, property taxes, insurance, and more. These “phantom” costs can significantly diminish perceived profits.
MYTH: "Grandma bought a house in Austin, Texas in 1970 for $100,000. She just sold it for $1,000,000. Grandma made $900,000!"
REALITY: That's not true
— Ramit Sethi (@ramit) August 15, 2023
Further deepening this perspective, Sethi shares a practical comparison. Imagine two properties side by side, one for rent and the other for sale. If the costs of owning the property are substantially higher than renting an identical one, it challenges the assumption that owning is always better. That cost difference, if invested wisely, can sometimes yield better returns than the equity build-up in a home.
So, what should potential homeowners take from this?
Look beyond the surface. Alluring as the promise of real estate might be, it’s crucial to consider all costs, seen and unseen. House flipping has become an enormously popular and, often, profitable venture, but it doesn’t come without its risks. Ask yourself if homeownership aligns with your broader financial goals, or if there might be more profitable avenues to explore.
Sethi’s insights serve as a potent reminder: in the realm of investments and wealth creation, there’s no one-size-fits-all. Make informed, well-researched decisions that suit your financial situation and goals.
Wealth isn’t merely about owning assets; it’s about maximizing their potential.