Home Ownership Doesn't Build Wealth

42 Replies

Originally posted by @Trip Guinan :

In building wealth, there is no certain path. Diversification in wealth accumulation is key-personal residence, 401(k), stocks, rentals etc. are all ways to accumulate wealth. Erasing debt over time is critical.

Paying rent each month is a waste of money. Paying a mortgage is forced savings that you get back when you sell. When you move from a rental, you have nothing to show for it. 

Assets-Liabilities = Net Worth (wealth).

I purchased a house in 2010 from a young couple that had lived there five years. I paid $15,000 less than they paid. They had to write a check at closing. They could have rented for less then their house payment and invested their down payment in the stock market. They lost money on the sale, but could have gained wealth renting.

I think there is a common belief that renting is a waste of money, which drives people to home ownership. My point is that it is not always true. It depends on location and when you buy and sell.

I totally agree there are many paths to wealth and for some home ownership is part of that journey.

This is a real life example from the area I live in VA.

$200,000 buys a modest 3b/2b townhouse. 

$7,000 down

$8,000 closing costs

HOA $200 per month ($72,000 total)

Insurance $500 per year ($15,000 total)

Taxes $1500 per year ($45,000 total)

Estimated repairs over 30 years: $33,000 (replacing appliances, HVAC, flooring etc)

Total repaidover 30 year term at 4%

$331,708

Plus all expenses 

$511,708 or 1,421.31 per month for 360 months. 

Appreciation is probably null when you consider inflation is neck to neck. 

Rent for this house currently $1,500 but will obviously increase. 

I think the best you can hope for is breaking even on a retail house with a traditional mortgage. 

A lot of this is contingent on where you live as mentioned by @Lesley Resnick among others.  For a national media outfit to make a blanket statement that renting is better than owning (for everyone) is ridiculous.  

No reference to being able to buy at a discount or improve your own place with sweat equity/forced appreciation either as @Anthony Gayden mentions.  Guess we're all just dumb sheeple who get a realtor and buy off the mls at full retail? 

My primary has a mother-in-law unit that doesn't bother us. We can literally go weeks without seeing her.  She has her own parking area, yard, patio, etc. Luxury house-hacking as @Ben Leybovich has coined it.  We bought this place on purpose with a rental so it would actually be an asset.

The rental helps us be net positive every month we live here.  My balance sheet is being net 'paid' $200/mo not including appreciation and the freedom to not have to ask the landlord if I can paint a room or have a dog and the freedom from rent raises and leases not being renewed.

I could rent out my main house portion for more than my payment, easily.  If I had been renting the last 10 years, I estimate I would have had to move at least twice and would be paying $1800/mo instead of 'receiving' $200. Plus moving totally sucks.

My brother spends $2400/mo to rent a house in Bend, OR. My brother also drives his net worth. Not because he is frivolous, but because he never bought. His landlord bought it for $225k in 2012 or so.  Timing of purchase, discount negotiated and location matter.  Blanket statements like never buy are always broadcast from the back of the short bus.

Never really viewed my home as a positive investment....since I live in CA, it has been, but that was never my primary mindset when I bought it.

I bought it because I wanted some form of freedom.....its MY house...and I can do whatever I want to in it or to it (within reason obviously). I don't have to ask for someone else's permission or worry about their opinion....its mine....and sometimes that freedom comes with a bit of a price...

Lets face it....a lot of stuff we do in life are bad investments if you really look at them...... eat at a better restaurant?  travel? cable TV? going to the movies? paying for your kids sports?....the majority of the stuff we pay for, doesn't pay for itself ......

And I assume their model to compare is towards the "best case scenario" when it comes to saving and investing....as in, the person doing it is actually disciplined to actually save money each month and invest it in sound investments....rather than go out and buy the latest iPhone....or a bigger TV....or a new car.....

In other words, the person saving $500/month renting over buying a home actually takes that $$ and invests it in something that reliably and consistently makes $$.....and what % of the population fits that category?

I rent right now but plan on buying a primary residence soon. I am trying to purchase from an investment standpoint, but the driving factor for me isn't wealth creation, its quality of life and cutting down on stress. I won't overleverage and buy a place where I will struggle to make payments, but there are certain things I want to do in life that rentals simply don't afford. I'm married, have two step children and four rabbits (plus my girls want a dog). I would like to be able to invite family over to visit and want an outdoor area where i can barbecue and where my girls can play outside. I want to be able to change the oil in my car and use my tools. All of these things are made almost impossible with renting. Many rental i've come across list things like "no pets, visitors must be approved with landlord etc" and don't have backyards or anything of the sort. I've had landlords tell me straight up that they won't rent to couples or couples with children(discriminatory I know, but in a hot rental market with multiple applications on a unit its hard to prove in court). There is also the stress of thinking that your lease may not be renewed, or that a good owner will sell the building to someone else who starts hounding me. What happens if I have to move in five years, but market rents have appreciated to the point where I can't find a similar replacement?  At that point do I just get rid of my pets and my stuff?

As someone who has rented for many years, I have to say the stress associated with renting is just not worth it. I hate having to ask the landlord if I want my mom to come and visit for two weeks, or if I want to build shelves. I don't like the thought of being told out of thin air that my lease won't be renewed and feel like I have to walk on eggshells to stay on the good side of a landlord lest he/she decide to get rid of me.

In sum, Like @Ned J.  

@Ned Jacksonundefined says, lots of stuff we do is a "bad investment" but there are other things to consider besides purely financial rewards. There are plenty of people with lots of money who are miserable. The freedom to do what you please in your own residence and the decrease in stress can be worth the financial tradeoffs. 

If you think making house payments is not investing, try renting.

The trouble with relying on statistical metrics to make blanket conclusions is that it's silly and those metrics never reflect reality anyway. Consider the following statistics:

- Average number of people in american household: 2.6

- Confidence level that there is a household with 2.6 people living in it: 0%

LOL. Sounds good. The more renters the better. That just means rents will be higher for me. Thanks CNBC.

Sure, anyone can invest and end up better off than owning a house. Anyone can be president too. Anyone can do as well as Rockefeller, Morgan, Ford, Gates and Buffet. Yes you can! You can do it! Now go sell that house, rent an apartment and get right on it!!! LOL.

I am not young or old, or very smart or wise, but I am not stupid either. One thing I have learned is I have to self evaluate and do what it is I can do. I can buy and fix up houses. Not only that, I love to buy and fix up houses. I will likely never be CEO of a fortune 500 company. I will likely not invent something as wonderful as a toaster or the internet. Could either of those happen? I suppose so. Would I bet my financial life on it? Not in a million years. There is a balance between aiming high and aiming for something I can actually hit. I also become annoyed when people say anyone can make money in REI - it's simply not a good fit for everyone and shame on those "gurus" who take peoples dream money while making that claim.

When it comes to owning my home and paying my mortgage, I think a mortgage is horrible and the sooner I am free of it the better. That said, homes tend to keep their value so long as they are maintained, they are not disposable like a car. If all I do is pay off my home in time to die and gift it to my kid, that is mission accomplished. And at what cost? For less than if I had rented all those years? Every person on here knows it is cheaper to own than rent - none of us would be here if that were not true. Truly large amounts of wealth are usually created generationally.

I tend to agree that home ownership for the typical person is nothing more than a forced savings account at a low interest rate when all expenses are considered (excluding hot locations in the path of progress or something).  Having said that, very often a home ends up being many peoples biggest investment when they are old and retiring, so at least they end up with some positive net worth. 

Personally for me every house I have ever lived in I purchased as an investment.  I have always bought houses way below retail value whether or not if I bought them as rentals or for my primary residence.

Personally I see nothing wrong with renting, if and only if, the renter is investing the money they would be spending on repairs, maintenance, etc.  If someone is renting and not investing as a lifestyle then they are definitely on the road to poverty.

I think it partly depends on what you define as wealth. True, the equity on a home can't be spent like money in a bank account, but it does still have value. I've rented and I've owned at different stages in my life. Each has it'd benefits. my first house I bought at the beginning of what became the bubble. Sold it about 5 years after the bubble and still sold for $65k more than I bought and paid down $50k in mortgage while I was there. That gave me $90k toward the next house. What would I have had if I had rented all those years? Maybe my security deposit if I was lucky. When I bought my first house it was cheaper than renting in the apartment complexes for the same square footage. But yes, there is the maintenance and upkeep. So there's the plus side and the down sides.
The other upside to me is that eventually I hope to pay the loan off in full (yeah, I know, lots of dead equity), but once that happens, I only have to pay taxes and insurance which is a lot less than the mortgage payment and/or rent. Rent doesn't end after 15-30 yrs.

These studies that say stocks are better than real estate never seem to consider leverage. Leverage is key. Especially if you are talking about someone buying with a low down payment loan like FHA (3.5% down). But even at 20% down it's still 5X leverage. As Donald Trump once said, ""I've made a fortune by using debt,"

You can't walk into a Bank and say you want to buy $100,000 of Apple stock or whatever stock for $3,500..they'd laugh. But if you said you wanted to buy a house with an FHA loan it would be a different story.

This article below claims that , homeowners have a median net worth 45 times the typical renter.

"The Fed is likely to show a figure of $225,000 to $230,000 in median net worth for homeowners in 2016 and around $5,000 for renters. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale."

https://www.forbes.com/sites/lawrenceyun/2015/10/1...

I can see the benefits of renting short term but long term it doesn't seem to be the best idea. I guess if you bought Amazon at the IPO and held the whole time or some other stock that has gone up like crazy...but how many people have actually done that? Or you bought bitcoin when it was pennies. 

Much worse odds to pick a winning stock like that versus picking the right region to buy a house in.

The podcasts very often say and reiterate that buying a home, any home, with appreciation as your goal, is foolhardy. Whether you're living in it or renting it, if it doesn't cash flow for you as a rental, there's better investments out there. 

I'm a big fan of real estate and the stock market for very different reasons. My liquid cash that is just sitting around usually goes into my brokerage account, and a percentage of that goes towards stocks of companies in various sectors that I'm confident will rise in value and earnings. It also acts as a savings of sorts while I think about where to go buy the next property. Why buy more properties? Because a property that you "invest" in, should be FREE, essentially. Someone else is paying for it.

When friends ask me about real estate, and investing, of course I'm in favor of buying a house over renting. With rates as low as they are you're paying about as much in rent in some areas as you are for a mortgage, but buying gives you the option of becoming a landlord, or selling later if need be. Owning a home doesn't build wealth, but being a landlord certainly can.

Even in expensive markets, I have a really hard time seeing the benefits in renting. I have a boss at work already, I don't want a boss at home. For another thing, rents rise, your mortgage really doesn't (except for taxes of course, or ARMS... stay away). 

I could ramble all day on the subject, but if real estate wasn't such a bloody wonderful investment this frikkin website wouldn't exist in the first place!!!

So all the renters have higher net worth than owners? Studies show that for most Americans the ONLY place they have positive net worth is their home equity and maybe some retirement money. Thats because mortgages become a forced savings in a country where most people spend more than they earn. Its not just math. Its culture and psychology too.

Plus, a home is a place to live. I dont want my personal residence to be at the whim of some landlord. And having lived in the Bay Area I have made much more from my homes than any other investment. But I also didnt buy GOOG  when it went IPO either or else the story would be different I suppose.

I read through this entire thread, and I have to say it was excellent. So many great points brought out. 

My thoughts are this: 
An investor most likely thinks like an investor in all aspects of his life, weighing the pros and cons of every decision and picking the most beneficial outcome. If a real estate investor is going to buy, they're likely to choose an appropriate residence that will maximize the benefits pertinent to their situation (social, financial, personal etc). They're going to buy right and continue to make good decisions with that property. The same goes for an investor that decides to rent. They're going to maximize the benefits of that situation. They are going to get a return, some way shape or form, whether it's money and/or satisfaction. So in either situation, an investor will come out way ahead of the general public, and they're going to choose to do what makes the most sense for their situation. And because of this, that study might be completely irrelevant to these wise investors and will not predict their outcome in any way, but the findings of the study might be relevant to their neighbors. 

I am new to REI and I inherited a home years ago and I just recklessly rented it over the years. Now that I am learning more, I want to re-hab the property, bring its value up and then rent it, any suggestions on how to obtain financing to do this other than the conventional or traditional way?

@Anthony Gayden I completely agree.  Most people, when buying a home are paying premium dollars because they want everything perfect. Its an emotional transaction for them.  If you look at your home like an investment (ie value add) you can buy homes to live in that immediately have equity because you saw that a flaw in the house driving buyers away was easily fixed. My wife and I have made over $600K in tax free money in our last 2 purchases because of this. 

The first admittedly, was a bit of luck as we purchased in December 2011 at the very bottom(which we couldn't have known)  and sold in 2014 after the market corrected. Anyone can look like a genius when that happens. 

Our second home, a short sale that had taken 2 years to get approved by the lender. At this point the buyer had found something else. So this was at a price from 2 YEARS previous. Even though my wife is a broker, we let the listing agent double end and get both commissions. Immediately upon closing we had $150K of Equity. With a few minor updates and seasoning we were able to realize that and do a cash out VA refinance to 90% LTV and invest that money elsewhere in other projects.

The point is. If you are flexible on your needs, you can find deals for personal homes and still make money. 

Originally posted by @Latanya Richardson :

I am new to REI and I inherited a home years ago and I just recklessly rented it over the years. Now that I am learning more, I want to re-hab the property, bring its value up and then rent it, any suggestions on how to obtain financing to do this other than the conventional or traditional way?

Is there any equity in the home in its current condition? You could either refinance (pull some cash out) or get a HELOC (google it) on this property if there is.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you