Real Estate the Ramsey Way - Is It Possible To Build Wealth While Renting?

Episode Date: December 2, 2024

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Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate home ownership with confidence. Today's question comes from Jenny in Illinois. Jenny says I'm a single woman and I rent an apartment in a great city. I'm very happy here as it is close to my work, my church and most of my social activities. I have no desire to own my own home because I'm afraid I have to have maintenance and long care people on speed dial. And to buy something even remotely affordable, I would have to move way outside of town. Is it okay to rent forever? I hear you talk about a paid off home being a large piece of people's net worth. But is it still possible to build wealth if you don't own a home?

So, yeah, I mean, I think the biggest piece in this Jenny is looking far in the future. and I always look to when it comes to retirement time, the singular expense that continues to go up that you will not have control over is your house, is your housing. So rent will continue to rise. And if you own your home and you pay it off, then that's an expense that you don't have and it's continuing to work for you building equity.

So it is a part of your financial picture that I would want you to have a part of it. It doesn't have to be today. It doesn't have to be in the next five years, but eventually I would have homeownership in your financial picture for many reasons, but I think mostly when you look towards times like retirement, you won't have to have that expense that continues to rise and you actually have an asset for you.

I can completely endorse that where you are today in your life, Jenny, that this particular situation makes sense. It sounds like you got it made right now. There's nothing wrong with that at all. It just doesn't scale long term. So here's the problem. You know, she doesn't say how old she is. Let's just say she's 30, okay?

Every single year from 30 to 70, your rent's going to go up. Or your landlord's asleep at the wheel. They will die, and the next person will jack it through the roof to make up the difference. But the value of the rent goes up every single year from age 30 to age 70. Your most expensive line item in your budget is housing. So the most expensive line item in your budget is out of your control, variable, and increasing. That is not scalable. That's not sustainable long term.

Again, what Rachel said, if you want to do it for four or five years, I think you got a good gig. Go ahead and do it for four or five years. But let's not translate that to is it okay to rent forever. It's okay, but it's going to kill you because what you're paying in rent now is nothing compared to what it'll be 40 years from now. I think we can all agree with that. And so when you buy, if you buy on a fixed rate 15 year, you now have a fixed payment for a property. It doesn't have to have a loan.

It can have it be a condo. You have a fixed rate. And then when you get paid off, you have a fixed rate, which is zero other than your taxes and your property insurance, right? Those are two things that will go up as well. But they don't, they're a much smaller percentage. And they don't land, they don't end up being the largest thing. in your budget anymore, usually. And I will say this too, Jenny, that it doesn't have to be a single-family home.

If you are single, you don't need a lot of room. It could be a condo, right? But owning property that you eventually own full-out is what the key is. That's the goal. I don't want you to confuse the fact that you've got a really good situation right now, and I endorse you staying there with a forever plan. It's not a good forever plan. It's a really good short-term plan, though.

I would sit there and I wouldn't let your first-term plan. friends shame you into buying something. And that's what's happening. And people are going, you got to buy a house! I've got to buy a house! You don't have to buy a house right now. You've got a not got a bad deal. But you do need to stabilize the most expensive line item in your budget

before it gets out of control and starts messing up your life. I mean, can you imagine being 70 years old and broken your rent goes up every year? Yeah, that'd be no fun. All right. Jordan is up next in St. Louis. What's happening, Jordan? Hi, how are you guys? Doing well. What's going on?

So my question is this. My wife and I kind of the height of all the real estate craziness purchase a house, and so we're at a 7.5% interest rate right now. Obviously they've come down and people keep saying they're going to continue to come down. So my question

is, is it worth refinancing now to drop it and paying all the closing costs? And then if it just continues to go down, just repay the closing costs again, or just smarter to just kind of hold off and see if the side continues to drop rates or what would you guys recommend on that? I wouldn't be in a crazy rush. I wouldn't be like, hey, you got to go out today and do it because here's what's going to happen. The rate by the end of the year probably

going to go down again. And the next year could go down by another point by the end of next year. And I get that you're paying all this interest on seven and a half percent. And so what I would do, though, is, you know, you can call our friends at Churchill Mortgage and they'll crunch the numbers right there for you and go, nah, doesn't make sense. It's going to take three years to break even or you might realize, hey, going from seven and a half to a five and a half on a 15, now that's serious savings, 2% my monthly payment. I'm going to save this much in interest, and based on closing costs, we'll break even on this thing a year from now. And so, you know, we don't know all the numbers to crunch, but I would at least get some info on that to give you

some peace. What are your thoughts, Jade? Listen, I agree 100% with George if I were in your situation. I think for me, I'd want to see, obviously the Fed doesn't. directly affect mortgage rates, but there's some correlation there. So I think that that's in our favor right now. We saw mortgage prices drop, I think, but they kind of went up again slightly again. And so the day the Fed cut the right, mortgage rates actually ticked up. Yeah, they ticked up a little bit. So it's not a direct, you know, connection. There's sort of a lagging indicator there. They tend to move in the same direction. That's right. And so it likely will continue to go down. I don't have a crystal ball of Jordan. So we can look back at this clip and laugh at how stupid I am.

True. I'd wait for after the election, though, at least. I want to know what's going to happen. Like, I feel like there's a lot of uncertainty in the air. And for me, this is just Jay talking, I would want to just let things settle a little bit so I can go, okay, I'm not acting out of in any sort of way. I'm acting out of, yeah, it's cool, man, let's go. So that's how I am. Okay, yeah, perfect.

I really appreciate it. Absolutely. And we've got a whole hub, Jordan, at Ramsey Solutions.com slash real estate, including resources about refinements. We've got a whole blog articles that'll help you crunch the numbers, do the math, all the things to think through, links to all the resources and tools and services and people that can help with this. Whether you're looking to buy, sell, refinance, invest, whatever it is. Our team built a really great free hub with tools and resources. Just go to Ramsey Solutions.com slash real estate, and we'll put a link in the description as well. George, tell us right now. Let's pretend. Your mortgage rate 7.6%. What are you doing? What are you doing? Tell me. my life? No, yeah, tell me your, tell me your course of action. I'm a nerd.

So I'm always crunching the numbers. I'd be on the phone with my friends at Churchill going, hey, can you actually show me how long it's going to take? Because I know we're going to be in the house this long. Okay, it's going to take me a year to recoup based on closing costs, but I can save this much my monthly payment. Because you don't want to do it again. Like you don't want to, you don't want to turn around and be like, oh, yes, they're

down. I'm refinancing. And then February comes and you're like, oh, another. Yes. And what does the future look like? Do we plan on moving the next two years? Because you've got to pay fees for that. new closing costs for the new home.

And so you kind of have to make sure that you're going to be in, this is a long-term decision. So it's not a flipping, hey, let's go ahead and refi. Yeah, because every time you refinance, you're paying those closing costs unless you have a stack of cash laying around, which would be pretty cool if you could not roll that into the mortgage, by the way. So it might be a good move in Jordan's case, but we just don't know until we crunch those numbers.