It's fascinating how two people can interpret a single image so differently. The same holds true for how homeowners and renters perceive the current economy. According to all the data, it's clear that the economy is robust. However, the degree of its strength depends on whom you ask.
The rent versus buy debate has raged on since I started Financial Samurai in 2009, and it will continue long after I'm gone. My position is that it's best to buy property as young as possible because inflation is too powerful a force to combat. You want to ride the inflation wave, not get pounded by it.
More than fifteen years later, I am even more convinced that homeownership is better for building long-term wealth than renting for the vast majority of people.
Homeownership forces you to stay disciplined with your finances by paying your mortgage each month. Meanwhile, thanks to a fixed mortgage, your disposable income will likely grow over time, allowing you to save and invest more money.
When it's time to sell your property, you can bank $250,000 in tax-free profits as an individual or $500,000 as a married couple. Now that's hard to beat.
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Don't Short the Real Estate Market Long Term
Renting long-term is like shorting the real estate market because you're a price taker. Renters are at the mercy of ever-rising rents. Just as it's not a good idea to short the S&P 500 long term, it's not a good idea to short the real estate market.
Even though it's clear that most people will build more wealth owning than renting, there are still plenty of naysayers. Why? Because people always justify their decisions. As long as there are renters, there will always be people against homeownership.
It doesn't matter what the data says about how much home prices have increased or how the average net worth of a homeowner is much greater than that of a renter. Once you miss an opportunity, your default setting is to be against it.
It's like the person who hates Google after the company didn't give them a job offer. Even though Google's stock price is up 200% since the rejection, the person still thinks Google is a terrible company. More gains brings about more dissension.
The outlook of doom and gloom can easily consume a long-time renter who has missed out on enormous real estate gains.
Wealth Creators Don't Let Emotions Get In Their Way
However, one key to being a good-enough investor is recognizing when you're wrong to make better decisions going forward. You can't afford to get too emotional if you want to build greater wealth.
For those who are renting and aspire to become homeowners, please continue saving and investing. You may want to consider investing in a real estate ETF, REIT, or private real estate fund to gain exposure, just in case real estate significantly outperforms other investments.
However, for those of you who are against homeownership, and perhaps harbor deep-seated resentment towards homeowners, I hope you will reconsider your stance. This post is directed at you.
How Is The Economy Doing? Depends If You're A Homeowner Or Renter
If you need another reason to be a homeowner versus a renter, consider that homeowners tend to have a more optimistic outlook. And when you are more optimistic, you tend to be happier!
You can have all the money in the world, but if you're not happy, then what's the point? Money is only a means to a better life.
As a renter, you might get more disgruntled every time your rent increases. Cynically, you might hope the economy goes into a recession and lays off a bunch of people so rents can go down. After all, if others suffer more than you, you benefit!
Whereas if you're a homeowner, you're always on the side of economic growth. You want more people to get jobs, more restaurants to open, and more schools to grow their enrollments. You love local economic catalysts that tend to be good for everyone. And when things turn down, you're hopeful people will find a way to recover.
Now doesn't it sound better to be an optimist than a pessimist? Being a cynic is exhausting, similar to how a hedge-fund manager is always trying to look for what’s wrong so he can profit from his shorts.
The economy is clearly doing well. The stock market is near an all-time high, unemployment is low, wage growth continues to be robust, and GDP growth continues to be positive. The stock market is the economy if you’re long!
However, your viewpoint on how the economy is doing may depend on whether you are a homeowner or a renter.
Renters Are Getting Squeezed
“The post-pandemic economy is treating people very differently, creating a headache for central bankers,” Jeffrey Roach, chief economist of LPL Financial, wrote in a research note. “The extreme differences can often be traced back to living situations, as renters have a very different experience than homeowners.”
“Since the start of the pandemic, rents have increased by more than 20%,” Roach noted, “with renters paying about $370 more each month on average. As rents continue to increase, so does a feeling of economic insecurity.”
Nearly 1 in 5 renters (19%) reported being behind on their rent at some point in the past year, a Federal Reserve report found, up from 17% in 2022.
Renters were also more likely than homeowners to report missing bill payments in the previous month, even when income was accounted for. This trend was consistent across various types of bills, including water, gas, electric, phone, internet, and cable. To renters, there might be a silent recession going on.
Homeowners are less sensitive to higher rates and higher inflation because most refinanced or don't have mortgages. The average American spends about 33% of their income on housing. When your largest cost is fixed or low, higher interest rates and inflation simply aren't as impactful.
Homeowners Feel Better About The Economy
Any homeowner with a mortgage (~60% of all homeowners) could have refinanced to a lower rate in 2020 and 2021. We discussed refinancing your mortgage extensively on Financial Samurai back then, including whether to choose an ARM or a 30-year fixed-rate mortgage.
As a result, homeowners saved approximately $220 per month on average, with their mortgage payments taking up a historically low share of their disposable income, according to LPL's Roach. Saving money feels great! Plus, it creates more economic security thanks to fixed payments.
Meanwhile, the median price of a home has increased by roughly 40% from January 1, 2020, to June 1, 2024. According to one report, 48 million U.S. homeowners with mortgages have tappable equity at an average of $206,000 per borrower, up from $185,000 at the same time last year.
The combination of lowering your monthly mortgage payments and seeing your home equity grow naturally makes you feel much better about the economy. When you feel better, you become more optimistic and happier.
But Renters Are Benefitting From Their Stock Investments Going Up
The most common argument against homeownership is that renters can save and invest the difference in the stock market. Given the stock market has historically returned a higher rate than real estate (~10% vs. ~5%), renters could potentially make more money.
This argument holds if renters and homeowners invested the same amount of capital in stocks and real estate. However, homeowners typically invest a much larger amount of capital into their homes than stock investors do into stocks, primarily due to leverage.
The median home price in America is about $421,000, according to the St. Louis Fed. Meanwhile, the median stock portfolio balance for a 30-something investor is well below $100,000.
Even for 30-something users of Empower, a free financial app where users are more financially focused, the median stock portfolio balance is only about $150,000.
Moreover, homeowners are more likely to own stocks than renters by a ratio of 2:1. According to an Oxford Academic study, homeowners have a 61.9% stock market participation rate versus only 25.7% for renters.
Therefore, homeowners have not only benefited from refinancing and higher home prices, but they've also seen their stock portfolios increase in value. It's hard not to feel more positive about the economy under this scenario.
Net Worth Differential Between Homeowners And Renters
According to the Oxford Academic study, the median net worth of a homeowner is $496,000, compared to only $19,000 for the median renter—a difference of 26 times. See the chart above.
Of course, a large percentage of the population simply cannot afford to own, even if they want to. Housing affordability is a problem, partially thanks to Fed policies. And this reality can be seen in the median income of a renter of just $27,500. As a result, for those who rent and want to buy, government assistance programs are in place for first-time buyers.
The power of homeownership lies in its passive wealth-building nature. You don’t have to actively manage investments; you simply need to pay your bills, maintain your home, and enjoy living in it. Inflation will naturally increase your home’s value over time.
New homeowners do face higher homeowners insurance costs and mortgage rates no doubt. The Fed study found that the average monthly mortgage payment today is $2,100, which is $700 more than those who bought before the pandemic.
However, the vast majority of homeowners are in a much better financial position now than they were before the pandemic.
Renting Is A Good Temporary Solution
Renting is absolutely fine in the short term. Maybe you’ve relocated to a new city and are trying to figure out which neighborhood you like best. Perhaps you’re considering going back to school because the industry you’re in just isn’t right for you. Renting is a great solution.
However, as soon as you are more than 70% sure you plan to stay somewhere for at least five years, I’d recommend buying. Just don’t get caught up in bidding wars. Be strategic about when you buy and at what price.
The next time someone says renting is a better way to build wealth, understand their perspective. Are they a renter or an owner, and for how long? How are they making and investing their money? Are they stable people?
Certainly, a financial expert might advise you that homeownership is not an effective way to build wealth. However, if this “money guru” has been renting for the past 20 years and makes millions as an expert marketer selling financial courses, you might want to take their advice with a grain of salt. They can afford to rent because they're already making substantial amounts of money.
In 20 years, your children will be astonished at how inexpensive real estate prices were today. If you're not going to purchase property to build wealth for yourself, at least do so for your kids. This way you'll prevent them from shaking their fists at the sky because they cannot afford to buy property in the future.
Reader Questions
Are you a renter or a homeowner? How do you view the economy right now? Are renters more pessimistic and cynical about the economy than homeowners? Why do you think there are still so many people who are vehemently agains homeownership? Will you be telling your children to rent forever?
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I am always a renter. I don’t agree buying a house is a good investment. Buying a house, one has to pay for property tax, interest, maintain, insurance and other fees. Many people don’t consider these fees. The real return for a house is rarely more than 10% per year if one lives inside the house. The SP500 can easily beat 10% per year in long term.
I invest more aggressively in the market, I pick my own stocks. QQQ annual return is close to 18% in long term. So it is double the investment every 4.5years in long term.
Housing is less risky investment but the return is not good and too much work for me
While I don’t change my investment strategies regardless of personal optimism toward the economy (or lack thereof), I felt this article falsely equates the stock market to the economy. Sure, stocks have done very well- you only need to look at a graph to see it. But there are huge affordability problems right now in many parts of the country- groceries, insurance, and so forth. Many things homeowners are every bit as vulnerable to as renters. Meanwhile, since renters are more likely to be lower income, they’re even more vulnerable to these costs!
Companies will have to concede some of their record profits to allow for wages to catch up with inflation before wealth polarization becomes more serious. Real wages haven’t caught up with nominal wages over any sort of pre covid trend analysis. If anything, my pessimism about these changes actually happening is why I view investing in stocks and real estate as a necessity.
Sure, let me clarify. The stock market and the health of economy are correlated. But they are not equal since not everybody invests in the stock market. Let me emphasize that in the article and put up a chart on the percentage of Americans that own Stocks.
Are you pessimistic about your own financial situation as well as the economy? Or are you pessimistic about the economy but feel great about your own financial situation?
I would say it’s hard to provide a black and white answer. My personal situation is I am married, have a house with a reasonable interest rate (just shy of 5%), and have a combined net worth of $200k invested in the stock market- all of which we accomplished while still in our 20s. I feel great about these achievements! However… I am becoming more pessimistic about the ability of the US economy and the “American dream” to continue as it has. For me, real estate is only accessible because of the VA loan. I have a government job with excellent insurance and regular annual increases in pay and allowances, that more or less track inflation. Overall I have been pretty sheltered from the realities many others from my high school and college graduation classes have been dealing with.
But with real estate prices such as they are (and I don’t expect them to go down), the typical conventional loan with a 20% down payment is beyond reach until people are into their 30s. From my perspective, the chart showing the growth of home equity vs debt is more showing how increasingly difficult it is becoming for first time homeowners to enter the market. My wife saw this firsthand while working in the mortgage department at a very large national credit union. I realize this comment has been very youth focused, so it’s worth mentioning folks on the other side of the coin- entering their retirement years with inadequate 401k’s and valid worries about social security and other programs. In the short term these issues aren’t affecting me, but in the long term I question if they’ll affect the average American’s ability to build and generate wealth for themselves and family
Hi Ryan – Thanks for sharing. Sounds like you are doing well for your age, and there are certainly peers who are not doing as well.
I think you will enjoy this post as it explains a phenomenon of people who say the economy is not doing well, but who say they are doing OK or well.
https://www.financialsamurai.com/you-will-never-run-out-of-money/
What are your thoughts on owning vs renting in a HCOL area like Vancouver?
I ran the numbers, if I were to purchase my rental at todays prices and interest rates my mortgage would be $4800/mo. Add property taxes, utilities, maintenance, strata fees, and insurance and I’m closer to $6000/mo.
I pay $2500 all inclusive for my rent and due to my line of work I am fortunate enough to invest the difference into index funds.
I also used what would’ve been my down payment towards the deposit on a 3 bedroom presale condo in Kelowna that will be ready in 2 years. Due to the slower market recently I received a ton of incentives. I expect it to be worth around $120-150k above what I paid, but as a worst case scenario I will break even.
Any feedback would be appreciated.
I’m worried about the Canadian housing market. It seems unsustainable. I wrote a post called If The U.S. Housing Market Turns Into The Canadian Housing Market…
I just don’t see jobs and income supporting such high prices in Vancouver. Whereas at least here in San Francisco, six-figure jobs are a dime a dozen here, and there’s big tech stocks and AI mania.
I would rent, and invest OUTSIDE of Vancouver in higher yielding cities. See my: Buy Utility, Rent Luxury post.
I think what is often overlooked in these discussions about rent vs buy and paying off a low mortgage rate vs investing the money and keeping the mortgage is once one has a full paid off house; one’s ability to get involved in riskier investments (higher returns) is much easier. If only physiological (keeping one’s emotions in check) which is the biggest obstacle to overcome in personal financial,
True. And riskier career and life moves as well, that could pay off.
I’m a homeowner and had to guffaw at the “homeowners are on the side of growth” bit. Owning a home actually puts you on the side of keeping home and rent prices high, which is why you see homeowners all over the country fighting affordable housing.
What side are you on and what are your views? Did you feel more economic stress since the pandemic?
Anyone else getting cash offers to buy your home? I get mailings, people knocking my door, phone calls offering cash offers. Just irritates me to know end. Market value on my house is about 400k give or take a few thousand. Got a phone call last week offering to buy my house with solid cash offer. When I said not interested, he asked if no meant no, or no meant ever. I said well offer me a million and we’ll see. For a million, I might sell.
I would think that’s a good thing, that someone wants what you have, no?
Retired and my home is paid off. Costs me less then $700 a month all in for taxes, insurance, upkeep. Plus it’s relatively stable valuation. It’s less then half my net worth, but if I was renting, I would have to walk farther, have less room, noisy neighbors, no yard for the dog. Plus a bunch of rules. Renting would cost me over $20k a year compared to $8400 a year living in my house. Plus it would take a lot to kick my out of my house compared to an apartment. I sleep well at night compared to wondering where I would come up with rent money. Don’t rent, you are only making someone else well off.
I always enjoy your commentaries on finance. I note however, that you reference people who own homes as having a better perspective on life than renters, as if homeownership provides their “security” and “happiness.” Our state of mind is a personal choice. You can be an optimistic and happy renter too if that’s your choice. I’m in the poll as a homeowner who thinks the economy is doing swell BUT … I am about to sell my home, move into retirement, and feel no desire to ever own again. When I bought TOO MUCH REAL ESTATE (18+ acre “farmette”) I envisioned maybe my kids would all build homes on the property one day, that it could become a happy family complex with them inheriting an asset. Instead, like most kids these days, they’re scattering across the country and the world. As much as one daughter wants me to keep the farmette in the family forever, she also has no desire to live there, sees herself in Chicago, Australia, Germany, two-year stints instead of anything permanent anywhere. I too just LONG for the freedom of impermanence, travelling across the country and across the world. I fully expect to keep my happy outlook on the economy and my good fortune to live in a friendly universe long after my home ownership ends. ESPECIALLY when I get out of the US and spend periods of time living abroad. My dollar will go farther in virtually every other country on earth (aside from Canada and Great Britain) than it does here at home. Mere social security income alone can provide a comfortable living abroad, and naturally I have invested and accumulated a good amount of personal wealth not dependent on the U.S. government.
As much as investing in real estate is one way to build long-term wealth and provide passive income, it’s a much more labor-intensive way to do it than sound investments in long-term holdings in the stock market. Every property owned comes with responsibilities to maintain it, and if you don’t live there to find nice tenants. Your tenants can be destroying your net worth for you (we’ve been looking at rentals with tenants still in place and seen horrific damage done by them to the homeowner’s property), you’re still responsible for every repair needed to your real estate holdings, and you have to clean your own pool! How fondly I look forward to using an HOA pool maintained by someone else instead.
That higher net worth attributed to home owners is a bit deceptive in my opinion. My $525k valued home can be viewed as increasing my net worth by that amount on a spreadsheet, but in reality, it means I also have hundreds of thousands of dollars in DEBT that renters do not have. Unless and until the house sells, hopefully for far more than what is still owed on the mortgage, it’s a larger liability than it is an asset.
I think I will choose to stay optimistic about the economy, invest whatever profits this home sale creates for us in the market instead of more real estate (albeit maybe a real estate fund where I do no work as you suggest), and be a more carefree, less burdened happy renter later this year with no stress about maintaining property(ies).
Good perspective. 18 acres is a lot to maintain.
Don’t you think that part of your optimism is due to the wealth you’ve accumulated from your home and how you don’t / didn’t have to worry about housing costs going up all these years? Instead, thanks to inflation, your housing cost has been coming down.
I’ll be curious to hear your perspective a couple years later after you’ve sold. Going on an adventure is fun. So is having enough money to do so.
Home ownership is certainly not for everyone. A 24 year old veteran just posted on the TSP group that he and his wife were $25K in high-interest credit card debt and he wanted advice on whether or not he should withdraw money from his TSP to pay off the debt so he could get his credit score up to buy a 0% down (as a veteran) home. If he can’t keep up with credit card payments, he’s not the right candidate to have mortgage payments. People like him are better off renting until they can get their financial act together and be mature enough not to rack up high-interest debt.
On the flip side, no one in their 70s and 80s wants to worry about making rent payments, being evicted by their landlord, having rent payments jacked up suddenly by 25%, dealing with a landlord who refuses to fix something vital like a hole in the roof, and having to potentially move around yearly.
Sam I enjoyed this article very much.
I learned quickly that equity investing was not secure enough for us, then to confirm it Black Monday hit & when the DotCom bubble burst we had many of our friends afraid to look at their 401(k)’s. We just kept buying predominantly seller financed homes @ 18-19%, some with partners to spread the risk, others we just suffered through & rented every room. Then the rates subsided, properties values appreciated so we sold off a few to pay off debt. Then got the idea to seller finance our properties that had appreciated significantly, which we still do today.
After many years of very frugal living & hard labor rehabbing I retired in ’98 with a nice portfolio. In fact a couple of our 1980’s buys ($72k & $109k) we still own are now worth over $1.2mill a piece.
Once retired we paid cash for every acquisition & have no debt at all. Our free & clear portfolio is over $4mill & my wife had all our kids onboard & well invested by 18. All graduated without student debt & had their own homes within 2 years of graduating & also own rentals.
Our passive income is very comfortable & we raise rents religiously 5-15%, unless it’s a vacancy whereby we will raise it to current mkt levels.
We do have a family member (a consultant & financial equities guy) who told us many times we’d go broke if we kept buying properties, especially during the 2008 RE crash. That person had to take Soc Security early (62) & at 70yrs still has to work. Neither of us has taken Soc Sec yet.
Hindsight is always 20/20. In a different reality, home ownership might have been a disaster. In our reality, over the last several decades, it was the best investment overall. I am very firmly on the side of homeownership for many reasons, and I am also a firm believer in getting rid of a mortgage as quickly as possible. NOT having a big monthly mortgage payment is enormously freeing. For that reason alone I do not understand folks who stay in expensive areas when they don’t have to be there for a job. Sell, get a nicer place in a lower cost part of the country, and invest what’s left over productively.
Maybe they stay to be near friends and family? Quality of life? Not always about the $$$
Yeah friends I’ve made and the communities I’m in are the main reasons why we’ve stayed.
But we’re also too lazy to move, even though we can. My goal is to move to Hawaii in the last quarter of my life.
Hi Sam, We currently live in Hawaii one quarter of the year. We arrived Waikoloa Beach mid May and will stay to mid August for scuba and fun. My observations the 128 condos are mostly dark, cars covered and parking lot at 1/4 . Reminds me of the 2018 when volcano took out tide pool area. Some owners are here remodeling. These condos the price increased from about 500k to one million from 2019 to now.
year 90 day price to rent 2 br/ 2 bath condos on VRBO
2018 $15500
2019 $14465
2020 and 2021 no visit scam-demic
2022 $27,383
2023 $25,428
2024 $18,300
2025 $18934
I have rented with the same owner many times since 2018. He was very happy to offer the 18k this year and next year. The short term rental laws pending on Maui may have owners concerned.
Another observation we stayed in Hernando FLA terra vista many times since retirement in 2015. No activities in community 2020 & 2021 and no rentals. The zillow map of community is now red with for sale. Also the availability of rentals is starting to return. I look for the furnished house monthly rental. The Florida cycle has returned.
We kept our ranch house on Eastern Shore of Maryland with 2 acres one mile from a great town and low property/school taxes. We have used monthly rentals to enjoy traveling.
I love the arrangement of staying in Hawaii for three months a year. That was one of my goals when I left in 2012, but I never made it happen. The idea was to be in Hawaii for three months, Lake Tahoe, for two or three months, overseas for two or three months, and the rest of the time in San Francisco.
Curious, given you have a lot of free time now, why not rent during the winter months in Hawaii instead to escape the cold of the mainland?
Hi Sam, The scuba diving is best in Waikoloa April to November with clear warm ocean The first 5 years of retirement was 3 months FLA in winter, 3 months Hawaii for good scuba and other travel. Example Fall 2019 we traveled 2 weeks Egypt tour with Freddy Silva, 3 weeks France and 6 weeks in Malta & Gozo. Interesting fact Malta early November 2019 we had “covid” for 3 days. The Pharmacist said something is going around. This $50 bag will get you healthy fast. The Eastern Shore of Maryland has excellent spring & fall and almost winter free as you know from NVA and Williamsburg. I enjoy your writing and expertise. All the best !
Ah hah! Good to know! I went scuba diving to Loreto, Mexico once. Water felt like 97 degrees. Went down 90 feet to test myself and I was afraid a shark would come out of the blackness and bite me.
As I was coming up, at the 40 feet level, my oxygen ran out! Luckily, I stayed calm and signaled my wife to come over and I shared her auxiliary supply.
The Bogglehead forums have many members that rent and pour all their savings into low cost funds. They claim a home is a consumption item (not an investment) and should be compared to things like cars or designer clothes. I don’t agree with this philosophy but they do have a huge following. They also only justify buying a home if it’s cheaper to own than rent. I.e. the recommendation is to never buy a home in a HCOL or VHCOL area because it’s almost exclusively cheaper to rent than to own in those areas.
I don’t want my kids growing up, asking me why I didn’t buy cheap real estate 20 or 30 years ago either.
Yeah, a lot of people think they can make more money in stocks bc of the higher historical returns, or from the latest hot stock they see in the headlines. But the typical Investor has a hard time staying invested in the stock market. The temptation to sell spend the stock market money on something that doesn’t build wealth is too high for most people. As a result, the majority of people never really hold stocks long enough to benefit from tremendous wealth creation
But with real estate, it protects people from themselves. The median homeownership tenure is 13 years, which allows for compounding and more gains, especially if the homeowner has a mortgage.
A home a bought for $1.4 million in 2014 with 20% down is conservatively worth about $2.2 million today. A comp four fours down just sold for $2.25 million and is older and 200 sqft smaller without a deck and smaller lot.
I have $800K left on my mortgage, so that is $1.4 million equity before fees and capital gains taxes, $500,000 of which is tax free.
None of my stock gains, not even my big tech stocks have come close to amassing $1.4 million. A $280,000 down payment investment in the S&P 500 in 2014 is worth about $700,000. That’s great, if one held. But the thing is, or you don’t even get to enjoy your Stocks, whereas, with a home, you do.
Respectfully, your math is off. The S&P 500 is up more than 200% since 2014 including dividends, and that is arbitrarily cutting off 2013 when the S&P 500 was up more than 30% in that year alone. It is not realistic to expect a primary residence to outpace the stock market, especially if you are investing in better returning segments of the market like small cap value. When you factor in the equity gain in your house, you have to back out property taxes paid, repairs, renovations, mortgage interest, and any other hidden costs before comparing to gains in the stock market (especially when they are invested in tax sheltered retirement accounts).
I agree with your last point about enjoying living in the house. I too love living in our home.
If the $280,000 in 2014 doesn’t turn into $700,000 today, what do you think is the right number then? Whatever it is, it’s certainly not going to be $1.4 million.
The S&P 500 was at 2,000 in 2014 and is now at 5,227, or 2.61X.
Those costs add up, but you have to then back out the cost to rent that home. So you can just call that a wash.
Can you share some specific numbers about yourself and your home and equity gains as I have done? Thanks
280k in the s&p 500 from 2014 to today would be worth 970k. From 2013 to today it would be 1.22 million. Maybe you aren’t including dividends?
Finally, the comment I was looking for. Don’t forget to also deduct the expenses of closing costs, selling costs, maintenance costs and insurance for every year of ownership in addition to the ones Brian mentioned. We have records going back 100 years. Houses appreciate between 3.2 and 3.7% per year or about 1% more than typical inflation. 2000 to 2020 closer to 3.7% because we have not built enough houses. And then there’s the pandemic effect. I wouldn’t count on higher house appreciation rates indefinitely. Compare those after expense returns with the returns of an S&P 500 ETF with its .05% expense ratio. (full disclosure. Yes I own a house and yes, I love it. But there’s nothing wrong with renting, and it fits the budget and lifestyle of many people.)
Sam, sometimes I wonder if your views of home ownership are colored by the California market that you live in and your personal experiences, which may not line up with those of the average American.
Yes, I’m sure my views are colored based on where I live. Where do you live?
With the calculation you must also add back the money saved not renting.
Have you made more from Stocks than you have real estate?
The Annual returns for real estate in America or closer to 5% now, but much higher since 2012.
Pennsylvania.
Yes, I’ve made more from stocks than I have on my house. I also have rental properties and agree with your comments in your book about that. The returns can be quite good. But oh the headaches.
Gotcha. Thanks for sharing.
Oh, and given you read my book, I’d appreciate a review on Amazon if you don’t mind. Every review counts! Thx
PS. There was another factor. My father was a refugee from Nazi Germany. The idea of putting down roots that were too hard to pick up and go was a big part of our thought process I think. So buy as small a house as you can and invest in more liquid assets was the thinking. My mother was an immigrant from Australia to the UK.
One thing that you missed is living in VHCOL areas. Would it be better to move and take the income/opportunity hit for the sake of homeownership?
Depends on your income. In general, I recommend living in an expensive city because you have a greater income growth. You can then practice BURL: Buy Utility, Rent Luxury.
I don’t think I missed living in VHCOL areas. I’ve lived in San Francisco since 2001 and NYC from 1999-2001. If necessary, the bank of mom and dad must be enlisted, which is common with about 30% of buyers.
What’s your situation? And where do you live? Thx
I’m in SF, born and raised in the general Bay Area. I don’t have the privilege of lending from parents and realistically unless I increase income significantly I’m not seeing how buying anything beyond a condo is even feasible. Mortgage aside, the expenses (increased utilities, homeowners insurance, repairs/maintenance costs) really swing towards renting. The taxes alone on a basic SFH is more than my apartment!
I explain to my tenants that, ideally, renting is meant to be a step in the process while saving for a home because long-term, it’s best for most people to own their home.
However, there is a massive demographic who simply cannot afford a home.
For example, in my market I can buy a 1100-1500 sqft average condition home on a small parcel for $250k. With 5% down and a 7.086% mortgage rate, that’s $1,594mo BEFORE taxes, insurance, PMI, utilities, maintenance, risk, etc. Whereas a clean, C-B condition, 1-2 bedroom apartment is about $950-$1,000 including water, sewer, trash. So if a renter is happy with a smaller living space, they can save and invest the difference compared to buying.
Granted, there’s going to be commenters who will point out that $250k is cheap for a house, however in my market it’s difficult to break $50k in annual wages, so the house will require about half of a single owner’s after-tax income.
The irony is that I own about $1mm in real estate, (including my owner occupied duplex) but if I had to rely solely on my W2 job to qualify for a mortgage, I couldn’t afford a $250k house without a substantial downpayment or a working spouse.
Growing up my parents were homeowners but it was an apartment in a duplex. I didn’t get the message from them that investing in real estate was a good idea. Rather, I got the message that investing in stocks and bonds was a good idea. So, that was my default investment thinking. I didn’t buy a house till I was 50 years old because I valued flexibility and often moved country. Owner occupied houses can be a good investment in areas with land shortage, but not necessarily that great in some other areas. Comparing renters to homeowners you need to control for other variables like income, education, family size etc. to get a good comparison of the effect of renting on financial outcomes. I agree though that for most people the forced saving of a mortgage is good discipline.
If you had bought a duplex or house in your 20s in Australia (which city), using a regular standard percentage down payment, how do you think the performance would have compared to the stocks you invested in? How much more or less would you have?
I’m ingraining in my children the importance of at least getting neutral real estate by owning their primary residence. They can and will certainly invest in both stocks and real estate as I will discuss the merits of both.
I grew up in England. My parents bought their apartment for £4,500 in 1966 and sold for about £60k in 1995. This went through a period of very high inflation in the 1970s. Using an online inflation calculator, £4,500 in 1966 was equivalent to £44k in 1995 so it made about 1.1% p.a. above the rate of inflation not counting leverage. Mortgages have variable interest rates same as in Australia. So payments would have zoomed up as inflation went as high as 25% in the mid-70s. They never talked about it as an investment, while my Dad did talk quite a lot about other investments. So, I never had this idea in my head of real estate as an investment vehicle. They probably bought, because renting sucks or used to in England. There was far more government housing than private rentals. Incentives seemed to have been against landlords – again why the idea of real estate investing never came into my head until I first went to Australia and people were talking about buying apartments to rent out as an investment, which was a bit weird to me… In Australia in most cities in the last decades house prices have gone up a lot and interest rates been reasonable and incentives good for being a landlord. Very different to where and when I grew up. But when I first came here I didn’t intend to stay long and was on a fixed term contract as a researcher, so my next job would likely be in another country (as it was) and buying a house seemed a huge commitment relative to my salary. I remember my manager said – “you should buy a house” – and I thought “no way”. This was in 1996.
Got it. Yeah, housing as an investment asset class has changed a lot since then and has now become one.
I reckon if you had purchased a home in Sydney or London in 1996, it would be worth a nice amount today. I wonder what the return would be.
Based on checking a UK real estate site the apartment I grew up in would now cost about £450k. £60k in 1995 is now worth around £120k. So that is a real gain of 4.7% p.a. from 1995 to 2024. Much higher than the real gain from 1966 to 1995!
Doesn’t sound too shabby to me!
Hi Sam, the poster above is correct. Many homeowners like to state how the median net worth of homeowners is 40x that of renters. That statistic on its surface is not very relevant. There are wealthy renters that have all of their wealth in other assets. Most renters however do not own because they cannot afford it. It is not the act of buying a home that makes you wealthy. It is the gap between your income and your spending, and directing those proceeds into something productive. If you stratified the renters and owners into equal cohorts by income and education level as the above poster mentioned, the numbers would look drastically different. It is a tragically flawed statistic, and I am not sure why it is still being circulated (not just by you, but other public figures who love real estate as well).
To be clear, I am a happy homeowner, but built a robust net worth for a decade as a renter prior to buying a home. It is the equity investments that will continue to compound that will be responsible for the majority of our family’s wealth, not the equity in our home (especially as we plan to stay here until our children leave, and potentially retire in this house as well). Some of this comes down to personal preference, but renting long term is perfectly fine if you are building wealth outside of a personal residence (which is where you should be focusing on anyway). All the best, and hope that your family is enjoying your new home!
Hi Brian,
Yes, I believe this is true. But I don’t think I stated 40X net worth, did I? I wrote,
“ According to the Oxford Academic study, the median net worth of a homeowner is $496,000, compared to only $19,000 for the median renter—a difference of 26 times. See the chart above.
Of course, a large percentage of the population simply cannot afford to own, even if they want to. Housing affordability is a problem, partially thanks to Fed policies. And this reality can be seen in the median income of a renter of just $27,500. As a result, for those who rent and want to buy, government assistance programs are in place for first-time buyers.”
If you had bought a portfolio of rental properties instead of stocks, how would your wealth today compare? I’m hoping more people will crunch the numbers and make the comparison.
Finally, what would you advise your children about owning versus renting?
I think a portfolio of rental properties is very different from owning a primary residence. One of these is an investment and an alternative to equities, the other is a purchase. Not bad per se, just not really an investment.
I plan to teach my children to prioritize spending on what they truly value and not on what they don’t value as much, so that they can direct the proceeds into wealth building investments (equities and rental real estate would both qualify, but you have to want to be a landlord and give up more of your precious time for rental real estate). I will tell them that it probably does not make sense to buy until you have settled down and are with your long term partner, and potentially not until you have children. Then, you can buy a home to enjoy all of the non-financial and intangible benefits of purchasing a home. Until then, the most important thing is spending less than you make and investing the difference into something that will compound over time.
Good words of wisdom for your children.
How has the equity in just your primary residence compared to your investments and stocks during the time you’ve held your house? Return percentage and absolute dollar amount?
I feel that owning a primary residence will help the vast majority of Americans build wealth because it makes the homeowner more disciplined in terms of saving and spending.
In that same token, I also believe building a rental property portfolio will build more wealth for the typical American as well versus a stock portfolio. The combination of regularly paying down debt while real estate prices grow is incredibly powerful long-term.
I don’t think that is a question that can be answered. What Redfin and Zillow project my house to be worth I take with a grain of salt. In reality, no one knows what their house will sell for. It is very circumstantial. I would also have to have a very itemized receipt of everything I have spent related to my house, and subtract those out. It’s a much more complicated equation than the return I am getting in the stock market.
I am sympathetic to the forced savings argument, but I think automatic enrollment into 401ks with only an opt out is a more effective means of “forced savings” that will make average people wealthier in the end than their primary residence will, after accounting for everything they are paying for over the years related to their home.
No arguments from me about rental real estate versus stock market returns. I do think you really have to do your homework to do well in rental real estate (cap rates etc) and it is way more time consuming and stressful. Yes you can hire a property manager, but that eats significantly into your margins, and as you and your wife mentioned on a recent podcast episode, you feel like you need a manager for your property manager.
Hopefully people will max out their 401k and pay down their primary residence mortgage over time. A great combo to surely set oneself up for financial independence after 20+ years.
I completely agree Sam! It is hard to go wrong with that plan. That is the path we are currently on.
Hi Sam. Appreciate your advice. I “hired” Empower financial services over a year ago and am happy with them—although I am by no means wealthy.
My husband and I (I’m 63, he’s 56) retired from our jobs in Chicago in 2021 and relocated to Mexico for a variety of reasons: to be closer to family (his), the moderate climate of Puebla, and to make our US dollars go further. We are renting a fully furnished, three bedroom house with a pool in a country club (on the tee of the 8th hole with a view of one of Mexico’s largest volcanoes) for about the same amount as we could rent a one bedroom, unfurnished apartment on the north side of Chicago—where we owned a 2 BR condo for about 20 years and sold for a nice profit in July of 2021. We are paying about $20K a year in rent and love our landlord and where we live (even though we don’t golf!).
My husband thinks it’s time to buy or build a place we can call our own and start furnishing more to our tastes. We could probably find a nice place for around $250,000 (which we have in savings). I would just as soon stay where we are and rent, only because his mother is 87 and we’re not sure we want to stay in the town we’re in after she passes—although she could outlive us. (Did I mention we’re soon to be 64 and 57? Oh, and we have a 20 year old son who currently lives in Chicago with financial support from us.)
Any thoughts you might have, we’d be thankful for.
Yours truly,
Joe Lindeman
During my childhood my parents when from renting to owning, moving, then renting again, and back to owning. I didn’t really think about this before but I do think those changes had an influence on my perceptions of homeownership. I just remember how excited and proud they were to own and how much work my dad put in DIY style to the homes.
I grew up hoping to own myself and even though I had no idea how to do it for a while, eventually things came together. Now I can’t imagine my life without homeownership. I love to make improvements and maintain good curb appeal. It brings me a lot of pride and joy.
Well, I paid off my house mortgage today. My ARM loan has gone to 7% now in year 8. I had some company stock vest a little more than a year ago, and it was up 18% since then. Ot seemed like a high point, I have plenty more from other years, and I’ve lost value in company stock from previous jobs. So I sold, and paid off my house today.