Don't Own a Home? Here's How You Can Still Build Long-term Wealth
For most people, home ownership isn’t just about a living space – it’s the biggest financial asset of their lives. Rising home values build fast equity. And for many years, American home values rose at a phenomenal rate.
Yet while homes usually make a good investment, home ownership in America has declined. After reaching an all-time high of 70-percent in 2004, ownership rates plummeted to just 63-percent ten years later. The number of renters in the U.S. jumped by 25-percent during the same period.
This isn’t a matter of people souring on owning a home, however. History, in the form of the subprime loan debacle, punctured our housing bubble. The frenzied days of Americans making money by selling homes to each other had passed.
If you’re a renter lamenting the fact that you aren’t building equity, here’s some good news. You can still build long-term wealth. You just have to get a little more creative.
In fact, it’s fair to say that the financial advantages of owning are home are overstated. While increasing values and equity are good things, they must be weighed against the costs of owning a home. Many of these costs aren’t obvious. They include permits, closing costs, insurance, fees, utilities and repairs.
For many people, renting is cheaper. This is especially true in high-cost areas such as San Francisco or New York.
If you’re going to build wealth while renting, you’ll need one thing above all else: discipline. The discipline to take the money you save by renting and routing it into investments.
That’s the tough part. Once you’ve got that under control, you can start thinking about the best places to invest that money.
Ideally you’ll want something in your portfolio to approximate the investment effects of home ownership. A holding that provides sustained, long-term asset growth.
Equities are one path. By investing in low-cost index funds, you can virtually assure yourself of steady, reliable gains.
Real Estate Investment Trusts (REITs) are another option. These trusts allow you invest in real estate rather than the stock market. Investment in REITs is an excellent way to build a durable income portfolio.
Investors have largely been very happy with the performance of REITs over the last few years. Low interest rates and a recovering housing market have help create some serious dividends. While an imminent rate hike might provide a brief hiccup, the future for these investment vehicles is rosy.
Are you looking for a bit more direct involvement? Then consider owning a property while you rent. This isn’t an option for everyone. Yet if you can find the right deal, the benefits may be considerable.
Finally, it’s important to remember that a home isn’t a great investment. At least not relative to other avenues for your money. Long-term returns for real estate are only about two-percent. That’s about one-third as much as equities return.
If you’re feeling like you’re missing a great wealth building opportunity by not owning a home, that’s a reassuring figure.
If you have the discipline to invest any money you save by renting, you’ll be one step ahead of the game.