Renting is OK. If you do not know what to do with your life, have a lot of debt, or are not sure whether you want to live in one place for more than five years, then renting is the way to go. The return on rent, however is always 0% every month. The chances of increasing your net worth are far higher with homeownership or purchasing multiple properties. Let me show you some examples.
When it comes to investing, everything is relative. Since you have to live somewhere, you are a property owner or a renter. If you are a property owner and the the market goes up, your house value goes up, but it does not matter because you are not selling.
Let’s say your $500,000 home appreciates by 20% to $600,000 over 10 years. You put 20% down ($100,000) and now your equity is worth $200,000 for a 100% increase. Awesome! But the house you want to upgrade to now costs $1 million from $800,000, because it too has gone up! The only thing that allows you to purchase more house is not your own home equity, but your savings and investments.
On the other hand, if you want to downsize from a $1 million dollar house to a $600,000 house, you have benefitted more financially. You made $200,000 ($800,000 to $1 million) and only have to put $120,000 down on a $600,000 house. You therefore bank the $80,000 and pay a smaller $480,000 mortgage if you are fine with simpler living. As a homeowner, you are in a neutral positive situation.
The only way to benefit from real estate is to buy more than one property. When the markets are hot, you can raise the rent or sell the property to realise a gain. If you only own one property that you live in, you cannot do much at all except to downsize.
· Homeownership is an investment and it provides shelter.
· There is limited land and population growth and the long term trend is always up
· You can potentially become financially free through real estate.
· More control over your lifestyle e.g. never have to move, remodel as you will.
· Build real assets that can be passed along to your children.
· Inflation hedge.
There are countless examples of people who have created wealth through real estate. They made their money (and lost some as well) through buying multiple properties on debt. Many have also gone bust buying at the wrong time, being over levered, and not holding on long enough. Over the long run, property has proven to be a consistent wealth builder for many.
If you are still renting 40 years from now, you will not have a place to live rent-free in retirement, nor will you have an accumulated asset you can pass down or draw from. Like gasoline and tuition, the rent you pay now will undoubtedly be much higher when you become a senior citizen. Don’t believe me? Just ask your parents or grandparents what they were paying in rent during their working days.