How even renters can build wealth

One of the most persistent personal finance myths you’ll hear repeated often is, “If you rent, you’re just wasting your money!” People who spout this believe that buying a home is the only way to build wealth. Fortunately, it looks like this concept is finally going in the dodo’s direction.

According to Zumper’s 2023 Annual Rent Report, 52.7% of those surveyed believe “the new American dream has nothing to do with homeownership.” Clearly, these people have realized the benefits of renting and recognize that taking out a mortgage and paying it off over time is not the only way to find happiness and financial security. In fact, renting is a very effective way to keep a roof over your head. And investing your extra money in work can help you increase your wealth.

Leasing offers clear advantages

Although I’m currently preparing to become a homeowner again (and in a much better situation than I was when I last owned a home), I don’t regret my years as a renter. Renting comes with some pretty nice benefits. First of all, it’s much cheaper than owning a home. The costs of ownership are wide and deep and go far beyond what you pay your mortgage lender.

You will need homeowners insurance and pay property taxes. You may have to pay homeowners association fees (depending on where you live). But one of the biggest costs of owning a home is maintenance and repairs. These can range from routine and predictable tasks (landscaping, cleaning your gutters a few times a year, getting your furnace serviced) to unplanned and often costly tasks (such as a new water heater or major plumbing repairs). Homeowners paid an average of $8,609 more per year than renters in 2019, according to research by The Ascent.

In addition to cost savings, leasing offers flexibility. This is the privilege for which I am most grateful. I spent most of my adult life in jobs that required me to constantly move to advance my career and gain experience. If I had bought and sold a house every time I moved, it would have been a huge net loss to my finances (let’s be honest). , even moving frequently as a renter was expensive). It is much easier and cheaper to break a lease than to sell your home.

Buying a house to buy a home, not as an investment

Despite all the extra costs that come with owning a home, it’s something many people dream of (trust me, because owning a home is my New Year’s resolution). One reason is that when you purchase a home, you gain an ownership stake in an asset that, in many cases, increases in value. As you repay your mortgage, you build assets that you can borrow from. And ideally, one day you will own your home outright and be able to sell it for a profit.

This means that for all the extra costs you incur, it’s better to think of buying a home as providing you with a stable and safe place to live rather than as an investment.

How much can you grow your wealth as a renter?

Investing in the stock market over the long term can be a great way to get rich over time, and it requires no maintenance fees or homeowners insurance.

If you think owning something isn’t for you but are wondering what you could do with direct investing instead, give this a try. Get a realistic estimate of how much more you could pay if you buy a home instead of renting. It may take a bit of research to arrive at that figure. Start by checking home listings in your area to find out prices, find out what the average mortgage interest rate is these days, and ask people you know how much you pay for things like property taxes. Homeowners Insurance.

Plugging these numbers into a mortgage calculator will give you a rough estimate of your monthly costs as a homeowner. (This doesn’t include what you’ll pay for a new roof in a few years, but remember that unpredictable costs make homeownership such an expensive prospect.)

Let’s say you hit that $2,500 per month figure, but you’re renting for $2,000 per month. If you invest an extra $500 a month and earn only an 8% return (a conservative estimate; the average annual return for the stock market over the past 50 years is 10%), how much that money can grow over time is as follows: Same as:

Data source: Author’s calculations using Investor.gov.

Yes, you can purchase a home and watch its value grow up to $685,000 upon ownership. But it requires a lot of effort and investment of time. Don’t fall into the trap of thinking that becoming a homeowner is your only ticket to financial security. If you get serious about investing, you might get there.