Whatever “wealth” means to you; chances are that you’re making financial moves in an effort to get you there. For some, the definition of wealth might be a well-funded retirement. For others, it might mean being debt-free and financially independent.Regardless of your exact financial goals, buying a home is likely an important part of the plan. In fact, homeownership is still one of the best ways to build wealth in America.
How exactly does homeownership build your wealth? And what’s a good approach to getting there?
What Is Wealth?
At what point would you consider yourself wealthy? Is it a specific dollar amount in the bank, or simply the point at which you recognize you’ve hit certain milestones, like retirement or paying off debt?
The road to financial freedom looks different for everyone, as do the unique factors that determine what “wealth” is. This makes it difficult to create one specific roadmap for building wealth; instead, everyone will have a unique path curated to reach their own important financial milestones.
Several specific factors can impact your financial journey, including your:
- Existing debt
- Goal setting
Of course, there are many other factors that may impact how you build wealth, how you define wealth, and how long it takes you to reach your goal. Determining what wealth means to you -- and how you’ll know when you’ve achieved it -- is an important first step.
How Homeownership Can Build Wealth
While no one type of investing is fool proof, investing in real estate is often a better and quicker method of gaining profit than other forms of investment. Because investment is based on preference, we can’t really say if homeownership is better than stock investments, but real estate will build you wealth steadily over time due to appreciation. It’s statistically proven that homeowners have a higher net worth than renters. The median net worth of homeowners is 80 times larger than renters, according to data from the US Census Bureau.
Looking at simple math can illustrate this point of steady wealth building. A typical homebuyer takes out a 30-year fixed-rate mortgage. After 30 years, there is no mortgage (or rent) payment. The average price of a home thirty years ago in 1990 was $122,900. Today, that home costs at least $315,000. That $315,000 is the housing component of the owner’s wealth. Even if home prices did not rise in thirty years, that person would still have $122,900 in wealth today on top of not having to make mortgage payments after thirty years.
Put simply, homeownership “forces” you to save each month. Housing costs aren’t optional, whether you opt to pay rent or make an equity-building mortgage payment. These automatically become a budget priority. With a mortgage, you are actually building something each month that you can draw from in the future through equity.
While saving and investing should always be an important part of your monthly allocation, these can be easy to sacrifice when unexpected expenses pop up or money gets tight. If you’re the type who has ever skipped saving “just this month,” a mortgage might be the foolproof choice you need.
Homeownership also builds wealth because of the housing market. While this has a lot to do with what, when, and where you buy -- and there are always temporary downturns -- the market as a whole is on a steady climb. It’s very likely that the home you buy today will be worth quite a bit more in 30 years, leaving you with a large, all-equity asset.
Buying a Home vs Renting
Many Americans struggle with the idea of buying a house versus renting. Renting may seem cheaper -- especially in terms of insurance, taxes, and maintenance -- but for many, homeownership is actually the fiscally responsible option.
It’s important to look at your own personal financial profile before deciding whether investing in homeownership is your best path toward wealth, versus renting. This means looking at prices (and property taxes!) in your city, as well as local market trends.
Things to Remember
There are a few things to keep in mind if you want to maximize the impact that buying a home can have on your wealth-building.
The first is that, unlike an investment portfolio or savings account, your home will not be a liquid investment. So, it’s still important to create an emergency fund and have other savings in case of unexpected situations. Don’t put all of your eggs in one basket!
There’s also the concern of natural market declines. These are usually temporary but can be an issue if you need to move or sell your home in the midst of one. The easiest way to avoid this is to buy for a great price and plan to hold onto the home for many years as you build equity in your investment.
Homeownership is not without its challenges and added expenses. There are things like Homeowners Association (HOA) fees, maintenance and upkeep, the down payment, homeowner’s insurance, and property taxes. But if you make a solid financial plan, and are working on saving towards a down payment, homeownership may actually be more fiscally responsible than renting.
If homeownership has been on your mind, give us a call and we can start talking about a financial plan that works for you.