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In general, homeownership is one of the easiest paths to building wealth -- if you make smart decisions about buying a home. If you get an affordable mortgage and pay it off on time, you will acquire an asset that is quite valuable (especially if your property has appreciated) just for making a monthly housing payment. That's one big reason why homeowners tend to have a higher net worth than renters.
But, this doesn't mean that buying a house is the right way for everyone to get rich. In fact, the author of I Will Teach You to be Rich, Ramit Sethi, has explained how you can actually make more money owning than renting. Here's what he suggests doing.
Sethi's suggestion for building wealth as a renter
On Twitter, Sethi explained that he makes "more money renting than owning," by taking a few key actions.
Sethi explained that he lives in an area where the cost of living is high. He has chosen to rent a nice place there, rather than to buy a property. However, the home he rents has a lower monthly cost than owning a property would. He then invests the difference between what he would pay in rent and what he would pay to own a home.
So, his recipe for success is basically to spend less on renting than he would on owning and put the money into assets that produce a reasonable return for him. It is this invested money that will make him more over time than he believes he could earn through property appreciation.
Will this approach work for you?
Sethi's approach is sound. After all, if you could rent a place to live for a few hundred, or a few thousand, dollars less than what it would cost to buy one, this can give you a lot of extra money that you can put into investments that will hopefully perform well for you.
And given the historical performance of the stock market versus real estate, it is reasonable to assume that you can often earn better returns putting your money into the market than you would from hoping your property value goes up.
But, this approach will not work for everyone for a few key reasons.
Here's why it might not
First, you may not live in an area where you can rent a comparable property for less than the cost of owning one. Rental inventory is larger in some areas than others, and if you can't find a place to rent for an affordable cost that you actually want to live in, then you may be better off buying.
Second, you actually must be disciplined enough to invest money every single month if you take this approach. If you are renting for $1,000 less than it would cost you to buy, you would have to make sure you're putting that $1,000 into the stock market or other investments. And this is a big problem for many people.
Most of us would do everything possible to make our mortgage payments, even if that means selling stuff or getting an extra job. But most people won't go the same distance to make sure they are investing. In fact, there's a really good chance that the $1,000 or whatever amount you should be investing will get eaten up by other expenses.
The fact that a home is a form of forced savings is often what makes it the best wealth-building tool for many. So, you'll need to decide if you are disciplined enough to actually invest diligently -- and check into whether there are affordable rental options where you live -- if you want to follow Sethi's plan for ending up richer as a renter.
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