Homeownership vs Renting: How Your Perception of the Economy Shapes Your Wealth
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 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.
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 bring about more dissension.
Wealth Creators Don’t Let Emotions Get In Their Way
However, one key to being a good 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 great 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.
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 almost 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 in your neighborhood. 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? I think so.