Personal Finance

Forget the American Dream—Renting, Not Homeownership, is the Path to Financial Freedom

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
129 Articles Written

Conventional wisdom isn’t always wise.

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The conventional wisdom in 2007 was to buy a home before prices shot up even further. How’d that work out for those homebuyers?

For as long as anyone can remember, buying a home has been a dream for most Americans and Canadians. And buying a home has its perks, from equity building to the freedom to knock down walls or paint those walls bubble-gum pink. But just because a strategy has advantages doesn't mean it's the best strategy out there.

I've been a homeowner, and I've been a renter. I've been a landlord since I was 24, long before I became a homeowner. And I'm a renter once again.

Goals and dreams are great, but let’s get more creative with them. Here’s why financial independence makes for a better dream than homeownership—and why you shouldn’t assume renting is the slower route to get there.

Flexibility to Move & Pursue Jobs, Opportunities, & Mates

When you buy a home, you take an initial loss. That's because it costs thousands of dollars in closing costs to buy a home, and when you go to sell, it will cost thousands more.

Over time, most homes appreciate in value, while the principal value slowly ticks downward. After a period of years, homeowners usually reach a breakeven point, where if they sold the property, their net payout would cover all the of the costs they’ve incurred (each round of closing costs, maintenance costs, etc.).

But what happens if six months after buying a home, you get a job offer that pays double what you're earning now—in another city? Or if your spouse gets such an offer? Or what if you meet the man or woman of your dreams, but they live in another state? Perhaps you have children, and a new report comes out showing that the local schools are far worse than previously reported?

What happens if you find yourself expecting another child (surprise!) that you weren’t, well, expecting? Maybe that 2-bedroom home isn’t big enough after all, and you’ll have to move in a year or two.

The point is that it’s hard to predict your wants and needs in two, five, 10 years from now. Our realities are constantly shifting, so tying ourselves to one home for a period of years is dangerous. The ability to move to pursue our dreams has very real value.


Related: Liability or Asset: Is Owning the House You Live in a Wise Financial Decision?

Real Estate Benefits Without Being Tied to One Home

I own 15 properties in the U.S., but I live in Abu Dhabi. Why? For the heck of it. My wife took a job over here so we left the United States and started traveling.

As a landlord, I can capitalize on the benefits of real estate ownership without being tied to one place. I have all the tax benefits (and then some) that homeowners have, I have a hedge against inflation, and I benefit from appreciation. But I spent a month living in Italy last summer and didn't have to pay a mortgage at home while I did so.

And I get it—not everyone wants to be a digital nomad. Consider a closer-to-home example: Let’s say that it’s expensive to buy a home in the neighborhood you want to live in. But rents in that neighborhood aren’t outrageous. You can move in for a year or two, enjoy living there, and then move again at your leisure.

Some markets make sense to buy into, while others don’t. But if you buy as an investor rather than as a homebuyer, you separate your financial interests in real estate from your personal, emotional interests about where you want to live.

More Balanced Net Worth Allocation

For most American homeowners, the vast majority of their net worth is made up of their home equity. That's a problem.

Homes are illiquid and cost money rather than earn money on a monthly basis. Why have so much of your net worth comprising an “asset” that you can’t sell quickly or cheaply and that costs money every month?

And is your home even an asset?

Your Home Is (Almost) Always a Liability, Not an Asset

I agree with Robert Kiyosaki on this one: An asset brings in money every month, while a liability costs money.

We all need a roof over our heads; it’s a necessary expense. But that doesn’t mean it’s an asset. I need food, but that doesn’t mean that a loaf of bread in my pantry is an asset.

Whether you rent or own, you spend a certain amount of money for the right to live somewhere. Sure, many homes appreciate in value over time and might provide a payout one day in the indefinite future. But we don’t live in the indefinite future; we live in the here and now, where your home costs you money that may or may not ever come back to you.

The one exception: If you “house hack” and buy a multi-unit building, where other residents pay for your mortgage plus some cash flow.

Related: Forget Everything You’ve Read: Buying a House is NOT For Suckers

Don’t Ignore Opportunity Costs

Imagine having $50,000 in cash, which you could use for a down payment on a home or a down payment on a multifamily building.

Even if we set aside the flexibility issues already raised, tying up so much of your capital in a liability rather than an asset is problematic. If you take the $50,000 to buy a home, that’s money you can’t invest elsewhere, in a real asset.

In contrast, if you rent, you're free to invest that $50,000 in an income-producing building. Perhaps you leverage that $50,000 to buy a $250,000 five-unit building, borrowing the other $200,000 and earning $1,500/month in cash flow?

So yes, you might spend a few more dollars each month on a rent payment rather than a mortgage payment for a comparable property. But does the $50/month savings justify missing out on $1,500/month passive income?

Increasing Demand for Rental Housing

The homeownership rate in the U.S. clocked in at 63.5% at the end of 2016, a far cry from 2004’s peak of 69.2%.

Indeed, Trulia ran a report last year, finding that older Millennials, men, Hispanics and the upper-middle classes are particularly leaving homeownership behind in favor of becoming renters.

If demand is rising for rental housing, then what's a better investment for that imaginary $50,000 of yours: a multifamily apartment building or a single-family home?

Buying Wholesale vs. Buying Retail

When you buy a home for yourself, competing with other homebuyers, you’re buying at retail prices.

When you buy a multifamily investment property, you’re competing against other investors. In other words, you’re buying at wholesale prices.

The per-unit costs of multifamily buildings are far lower than single-family homes or even than condos priced to sell retail. House-hacking by buying a multifamily building and moving in means not just having renters pay your mortgage but also a lower price for your own housing unit.

If you know you’ll live in a specific home for 15 years, by all means, buy. But for the rest of us who have trouble glimpsing more than a year or two into the future, consider renting instead and investing your cash in rental properties. You’ll still get all the benefits of owning real estate, without tying yourself indefinitely to one specific residence.

Is homeownership the dream, or is living the exact life you want the real dream? That perfect life might change over time, so aim for financial independence, rather than thoughtlessly settling for other people’s dreams.

[Editor’s Note: We’re republishing this article to help out our newer members.]

Thoughts? Opinions? Outrage?

It’s a contrarian stance, no question. Let’s hear where you weigh in on the subject!

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Chad Olsen Lender from Sunnyvale, California
    Replied about 3 years ago
    Seem’s many are on both sides of this coin. My wife and I regularly have this conversation. We live in the SF Bay, where aside from DC which i saw on this thread, few other markets are as “hot.” We discuss buying v. leaving a number of times a year. The complication is with our jobs, somewhat transferable, and our three kids, highly portable but needing roots as well. Renting is troubling because of the lack of reliability, the ever increasing rents and the diminished (somewhat) pride of ownership. That being said, we have 9 doors, which roughly cover our child care expenses, and have been making good strides in moving closer to financial independence. Having a house would be great to have some permanence, fixed monthly payment and all the rest. But coming up with 200-400k for a down payment it tough. And the opportunity costs of that money to sink in to a single house is just mind boggling to think about. The emotional side of home ownership and the rational, logical side of how to best increase your financial means are in constant competition on this one. I think that is why this is such a hot button topic for people. Everyone’s situation is different and thus the solution is different all the time. I had originally clicked this in hopes of finding some new way to analyze the problem and sway or be swayed one way or the other. Alas, it comes back to the original answer. It depends on your situation and what your spouse wants. I’ll quote my mentor in closing, “can you sleep at night knowing you made the right decision or not?” Peace of mind can be worth more than a profit. But it depends.
    Replied about 3 years ago
    I’m a millennial home owner, and this post spoke to me greatly. I wasn’t totally on board for setting down roots when I bought last year, but the numbers worked out so that renting and buying in my desired neighborhood were about the same, so I took the plunge and enjoyed the tax benefits of home ownership. BUT, as soon as I was settled, I was offered an amazing job opportunity abroad that I had to turn down because I couldn’t move. It was an awful feeling. And spending my weekends maintaining my home when, as a renter, I could just take off for a quick hike or road trip, is unsatisfying. For what? So in 30 years I don’t have to pay for housing? I think a lot of folks my age value unfettered, worldly living and experiences more than they do roots or owning things. We are a generation that pays more for services than we do for goods. I could easily be investing the money I put into the house (repairs, utilities, property taxes) into my 401k instead, and just renting for the same price as my mortgage. Then I’d have the freedom to move about whenever and know that I’m still saving for my retirement or a rainy day. Many people my age saw our families struggle through the great recession, saw our grandparents lose retirements during the dot com bubble, came home from college and saw foreclosures all up and down our neighborhoods during the housing bubble, and now we are struggling with our own burden of student loans. We see home ownership as just another encumbrance. It’s purchasing a right to housing, not buying an asset. And we know that even then it’s not guaranteed – you can’t plan or insure against every risk or disaster. Investing, saving, and knowing we are free to adapt to an unpredictable future is the trend among my friends. I can’t wait to unload my house or turn it into a rental, and go back to traveling the world and investing in myself.
    Tim Boehm Investor from Tillamook, Oregon
    Replied about 3 years ago
    I wish I was young again, I remember those days when life was grand and I knew everything. Instead I became a merchant seaman and sailed for 6 months a year and worked construction for another 6 months, picking up the trades like plumbing and wiring, drywall and roofing, painting and concrete forming. Seeing the world and learning skills what fun it was, but now poor me!!! in the top one percent of net worth individuals, with nothing to do but live comfortably and spend income that keeps flowing into my hands form people that think like you! Bless you a thousand times for you and people that think like you enrich me everyday! Now enough of the sarcasm, listen if I can buy it and rent it to you, why can’t you buy it and rent it to me!
    Ben Biggs Real Estate Agent from San Diego, California
    Replied almost 3 years ago
    Disagree whole-heartedly. Almost all of these “arguments” I have heard before and they’re all bogus. Grant Cardone has been pushing this agenda big time, because he owns 4,000 apartment units and plans to own a ton more and he sells info products on how to buy apartments. He’s building his customer base. The whole “look at what happened to people who bought in 2007” argument is also bogus. Don’t buy shit you can’t afford. All those people had no savings, over leveraged, and lost their jobs etc. with no safety net. Buy smart and have 6+ months of your bills in the bank and you will be fine. You buy when you need it when you can afford it, everyone waiting around for some phantom “shift” in the market 1. Can’t time the market and 2. Will still have excuses when the market is “low” “Don’t be tied down to one place!!” Have you ever heard of renting? Here in San Diego we enjoy around a 2% vacancy rate so almost all the homes rent out very easy. But if you’re not I a hot market then smart marketing and a good property manager will get you there. I see what you’re saying but the logic in this article is simply a personal preference. For every reason not to buy I have an equally viable “opinion” of why you should. At the end of the day we all do what makes sense for us.
    Eric Petersen Rental Property Investor from Lehi, UT
    Replied almost 3 years ago
    I loved this. Thanks for your opinion. If more people have this mentality, well then, it helps us buy and hold strategy investors 😉
    Roger Mason from Md Wash D, Virginia
    Replied 8 months ago
    Do you still offer the free mastermind class on "How to reach your financial independence within 5 "?
    G. Brian Davis from Baltimore, MD
    Replied 8 months ago
    Hi Roger, we do as a matter of fact. You can sign up for it on SparkRental's blog page, at the very top of the page.