Even as housing affordability plummets around the world, many people still pursue the dream of owning their own home. Renting and buying a house carry their respective advantages and drawbacks, and for the generations raised on monthly subscriptions to streaming services and products, the idea of continuing to rent may seem more palatable than throwing down tens of thousands of dollars on a house that requires frequent and expensive maintenance. However, sometimes owning a house offers less tangible benefits. Sometimes owning a house can be the key to building real wealth.
Buying a house means building your net worth
Buying a home comes with a host of costs, not the least of which are your mortgage and maintenance costs. Yet owning a home offers one great advantage that renting does not: through buying a home, you’re able to build your own net worth instead of paying for someone else’s.
Housing costs constitute one of the greatest costs you pay throughout your life, and so it makes sense that turning a major money drain to your advantage can help you build wealth. Mortgage payments include interest paid to the bank for financing your home loan, as well as a portion that pays down the principal of your loan. Every mortgage payment will slowly build up the percentage of the home’s value that belongs to you, reducing the total amount owed to the bank. That’s home equity.
When you’re renting, on the other hand, you’re paying for your home’s owner’s mortgage (plus any extra on top for maintenance and profit). Your rent goes money down the drain for you, but for the property’s owner, you’re literally building their equity and wealth for them.
Of course, renting may be a better choice if you don’t expect to live in or own the same house for a minimum number of years. It takes roughly 3-5 years for you to break even on the purchase, depending on how high your closing costs and interest rate were at the time of closing. But from a longer-term perspective, buying a property and holding it long enough to recoup those costs will help you build equity and therefore your wealth.
Increase your disposable income later on by paying off your mortgage
Another long-term benefit to owning a home is the possibility of increasing your disposable income later on in life. If you rent throughout your lifetime, you’re not capturing the opportunity to build wealth through homeownership. You’ll also be forever stuck with paying for housing until you die.
But, if you buy a home, you’ll likely have a mortgage that lasts from 15-30 years, which means that someday, if you stick with it, you’ll actually pay off your home loan and own the property in full. You won’t have to pay monthly housing costs anymore, thereby increasing the amount of money you can spend on other things. While you’ll still be responsible for taxes and maintenance, paying off your mortgage means you’ll have freed up a significant portion of your budget. Your disposable income can potentially increase by 30-40%.
In fact, that’s why Financially Independent, Retire Early (FIRE) adherents advocate paying off your house as soon as possible. By not having to dedicate thousands of dollars to housing payments, early retirees can dedicate their retirement funds to fun.
Depending on the economic environment and your mortgage interest rate, it may not be beneficial to pay off your mortgage faster using extra savings. Instead, one tried-and-true method is making bi-weekly payments, a strategy whereby homeowners pay their mortgage loan every two weeks in lieu of once a month.
For example, if you have a traditional 30-year $200,000 home loan with an interest rate of 6.5%, you’d have a monthly payment of $1,264.14. By paying bi-weekly, a homeowner would pay $632.07 every two weeks and save $58,747 in interest off the total amount of the loan.
Basically, if you pay half your mortgage every 15 days, you can lower the total interest you’ll pay over the life of the loan. In the scenario given above, bi-weekly payments actually shave off six years from the mortgage length. The first payment pays down more of the loan’s interest, while the second payment pays off more of the principal. This payment method adds up to a whole month’s payment extra every year.
Not all lenders allow bi-weekly payments, but a DIY alternative with a similar effect would be to take your monthly mortgage amount, divide it by 12 and add that number to your mortgage payment every month. Note that you’d still be paying extra from your savings though.
Think like the rich and build an investment portfolio
Another benefit to owning a house is the ability to build your wealth by creating a real estate portfolio. Every time you want to move or buy a new house, consider renting out your old abode and have someone else pay your mortgage for you. Remember how renting pays for someone else’s net worth? You can take advantage of that by building your own small property portfolio every time you move.
Some serial property investors can also take advantage of the one-year rule. Many homeowners willing to put in “sweat equity” will buy a cheaper house and invest in home improvements. After one year, they can move, buying a new house to repeat the process, and because they lived in each of their homes a minimum of one year, they won’t have to pay investment property interest rates for those mortgages. This lowers their monthly mortgage payments and allows them to benefit from a system that has renters building their wealth for them.
Occasionally being a landlord may not seem advantageous. If rent prices are not significantly higher than your mortgage and maintenance costs, rent may not allow you to earn any passive profits at all.
However, don’t rush to discount breakeven rentals.
Even if you don’t earn passive income at first, remember that as long as the rent you charge covers your mortgage and annual maintenance, someone else is still paying off your property’s mortgage for you and building your net worth. Even better, after some time, you may be able to refinance that mortgage, lowering the property’s monthly loan payment and allowing you to rake in the profits you wanted in the beginning – but with wealth already built because you had a renter build your equity for you.
Think like the rich and selectively leverage your debt
Even if you buy a home solely for investment purposes, if you think like the rich and selectively leverage your debt you can build a substantial real estate portfolio that could build wealth for you for a long time to come.
The wealthy don’t take on debt to finance their own shopping habits; they use debt to finance profitable ventures to pay for their things.
Take a house that you’re considering buying to rent or flip. If you have the funds for a down payment and closing costs, you can buy that property, potentially make improvements, rent it out for a year or two to build equity, refinance and then sink that profit back into buying another property. On paper you’ll look like you have a ton of debt. In fact, with two or more mortgages under your name or your business’ name, you actually do. But you’re leveraging that debt to expand your investments and your wealth-building portfolio. That wouldn’t be possible if you never took the plunge to buy a house in the first place.
Bottom line
Although housing affordability is reaching crisis levels, for many people it’s still worthwhile pursuing home ownership. Owning a home not only allows you to turn one of your biggest expenses to your advantage, but being a homeowner opens up a world of wealth-building possibilities that you never could have accessed otherwise. You can increase your disposable income if you pay off your home mortgage; you can rent out your previous house every time you move and have someone else build your equity for you; and you can leverage home loan debt to continuously build a real estate portfolio to create wealth with less effort than long-term saving.
While getting to the point that you can buy even one home might seem insurmountable, don’t give up. No matter when you’re able to buy your first home property, that major purchase will more than likely help you on your way towards financial freedom.
