There’s an enduring tug-of-war between the value of renting versus homeownership.
Long-term renting is often perceived as a waste of money, while owning a home is seen as a valuable asset that provides long-term financial gain — in other words, it’s a good investment.
But here’s the plain truth: While homeownership may be a smart “investment” for your health, stability, or family life, there’s a better place to put your money to maximise returns: the stock market.
Chris Reining, a self-made millionaire who retired at 37, says buying a home 11 years earlier was “probably the worst financial decision” he ever made. It took Reining three years to save up a $US40,000 down payment to buy a $US200,000 house near Madison, Wisconsin.
“As it turns out, what I believed about buying was flat-out wrong, and because I didn’t do the maths for the biggest financial decision of my life, I’ll eventually realise two losses — the property selling for less than what I paid, and the potential profit from putting the $US40,000 to work for me,” he wrote in a blog post. “That’s called the opportunity cost — when you choose to use your money one way, rather than another.”
Reining further broke down the maths in a recent post for Business Insider:
“OK, so from 1890 to 2012 the inflation-adjusted return on a house was 0.17%. That means if you bought a house for $US5,000 in 1890 it’d be worth $US6,150 in 2012. And over the same time period the inflation-adjusted return of the stock market was 6.27%. That means if you invested the $US5,000 you’d have $US8 million.”
If you’re angling for the biggest return on your money — rather than finding a forever home to raise a family — it’s clear that homeownership is not the way to go.
That said, some of the most successful investors have portfolios which include real estate — but there’s an important distinction. Buying a home as a rental property gives you, the investor, the power to determine your profits.
For instance, say you purchase a duplex with a $US1,500 mortgage. If you have two renters who you charge $US1,250 each, that’s a total of $US2,500 in rental income a month. That gives you a monthly excess of $US1,000 to cover insurance, taxes, and maintenance costs, and pocket what’s left over. In that case, you’re getting paid to own something, rather than paying to own it. In the end, the mortgage is covered and you’ll profit from the rental income. That’s different from expecting a big return when it comes time to sell the home.
The bottom line: “Buy a house. But don’t buy a house, live in it, and think it’s the best investment,” says Reining.