Is Renting or Buying a Home the Better Way to Wealth?

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In 2007 and 2008, property values nationwide dropped dramatically in sympathy with the banking crisis, mortgage crisis and the stock market crash. Never before had values of residential real estate fallen so far, so fast and in so many places. It seemed that one of the staples of American wealth was a lousy place to invest money.

During those brutal times, many investment advisers started suggesting renting a home was the way to wealth. Their theory was that if you invest your down payment money in equities, you would have piles of money in 20 years. Rubbish! These recommendations always come from people who broker your money into equities and are backed up by dubious math.

Some Simple Arithmetic

Let's look at buying a $175,000 home -- and renting one of comparable value. In most areas of the country, due to the down market (although values have had a nice rebound over the last seven years) and very low interest rates, your payment to own will be less than the rent for a comparable home.

If you bought a $175,000 home and put $8,750 down and negotiated the seller to pay most of your closing costs, you could get into this home for around $10,000 total investment. Your 30-year mortgage for $166,250, at 5 percent, would produce an $892 monthly payment. Taxes of $200 and insurance for $70 gives you subtotal payment of $1,162. Because you put less than 20 percent down, you will also pay mortgage insurance until you hit that 20 percent equity. This will give you a total payment of about $1,232.

Rental markets vary (look at www.rentometer.com), but in most areas of the country a $175,000 home will rent for $1,300 to $1,600. Let's use $1,400 -- or annual payments of $16,800 -- with nothing to show for it but receipts. If you lease homes for 20 years and rents increase even a little, you will pay approximately $360,000 in rent and have nothing but rent receipts.

Consider These Variations

If you bought the home with the numbers described above, what might your situation look like? In 20 years you will have paid $295,680. You will owe $88,000 on your mortgage balance. But what if you had used the $1,400 that a home like that would rent for and paid down your mortgage balance by an extra $168 per month? In 20 years, your mortgage balance is only $18,500 -- so your payments have created equity and wealth.

What about the increase in value of the home? I never try to predict the ups and downs of any market, but even with a modest appreciation rate of 4 percent, your $175,000 home is valued 20 years later at $389,000. The house is almost paid off (if you used that $1,400 rental payment) and is worth $389,000.

But what if the value increases less, stays the same or falls? Who cares? You had to pay to live somewhere. Whatever the value is, you own it free and clear and have only the taxes and insurance in your later years. Almost all successful retirees own their properties free and clear. If you are always renting, you create wealth for the landlord.

But Wait, There's More

I didn't forget the theory about putting your down payment money into equities. If that $10,000 grows at a strong 8 percent, it would grow to just under $50,000 in those same 20 years. This is a far cry from financial stability -- or the equity in your home that you can access in several ways.

Even if you factor in the additional expenses of owning a home -- say $50,000 for repairs and updates -- most of that will be offset by your tax write-offs of your interest and property taxes.

According to the Federal Reserve, the average net worth of a homeowner is over $174,000 and average net worth of a tenant is $5,100. This is where financial theory collides with the realities of human nature. Home ownership is a natural forced savings and possible investment account that requires nothing but you to make your payment and enjoy your home. You also have the ability to alter the home as you see fit and are in charge of how long you stay. A home is where you will create memories for you and your family. The investment part is a bonus.

John Jamieson is the best-selling author of "The Perpetual Wealth System." If you are interested in pure investment and cash flow real estate, visit Perpetual Real Estate Machine.

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metalangel1

I purchased a home with 35% down at 25. The loan was for $80,000. My home is now worth about 300K and it's almost paid off. For the first 15 years of the loan, I took in friends who paid my mortgage. Property taxes & insurance are about 4k a year. For me, it was a great investment. Our mortage payment is about $450 a month. You can't touch any house or even a studio apartment for that price where I live. I have my own business and use just about everything as a tax write off. Average rent for a very small place would average about $1500 a month, so I'd say I'm very well off. If you were a renter where I live, you would be throwing your money away every month making someone else rich. I think we pay approximately a little over $1,000 a year in interest on what's left of the mortgage, but in exchange the bank gives us as many free checking accounts as we want, in addition to a free safe deposit box. We write off the interest every year anyway. I'd say that was a great investment. I think location has a lot to do with it and what you can afford. But you don't need to be a rocket scientist to do the math on homeownership where I live. It's a good investment!

Friday at 12:50 PM Report abuse rate up rate down Reply
vladimirhucko

This is correct. What did you miss in your article, the rent money-$1400 is not going to be same 20 or 30 years later. Even in modest inflation of 4% would pass $2000. Mortgage payments would stay same for a life of the mortgage.

July 29 2014 at 7:20 PM Report abuse rate up rate down Reply
Valerie

Didn't we just have this "renting versus buying a house" debate, last week???? Why is it necessary to rehash this subject, again???

July 29 2014 at 1:12 PM Report abuse rate up rate down Reply