You’ll often hear that buying a home has the potential to be a good investment. And there may be some truth in that.
Property values have the potential to rise a lot over time. Just look at the modest $31,000 home Warren Buffett bought in 1958. At this point, it’s worth $1.44 million. So that’s a pretty sweet gain for Buffett, should he choose to sell.
But actually, even Buffett himself admits that renting a home probably would’ve made him wealthier — and that’s with a property that’s gained over $1.3 million in value. So before you rush to sign a mortgage, you may want to consider the financial benefits of renting a home instead.
When buying a home stops you from accumulating wealth
You’ll often hear that renting a home is akin to throwing your money away. But remember, when you own a home, you have so many more expenses to cover on top of your monthly mortgage payments. There’s property taxes, homeowners insurance, maintenance, and repairs.
So even if it costs you a little more to rent than to pay a mortgage, you’re not covering all of those other expenses. And you’re also not forking over a giant wad of money in down payment form. So all told, renting might give you access to more cash you can then invest. And that could do a lot of great things for your finances.
Let’s say that by renting rather than owning a home, you’re spending $500 less per month over a 30-year period. Over the past half-century, the stock market’s average annual return has been 10%. So if you invest $500 a month over that time frame, you might end up with a stock portfolio worth about $987,000. That’s a gain of over $800,000.
In fact, let’s look at Buffett’s gain. Let’s assume he bought his $31,000 house in cash and made about $1.36 million. Had he rented a home, he perhaps could’ve put his $31,000 in the stock market back in 1958.
Assuming that same 10% average return, his $31,000 would now be worth about $16.7 million. So while he certainly did well for himself with his home, it’s easy to see how renting would’ve better served him financially.
These days, Buffett is a billionaire many times over. So for him, the loss of that $16.7 million probably isn’t a big deal.
The point, however, is that there’s a lot of money to be gained by investing. So if buying a home prevents you from being able to invest, then maybe you shouldn’t buy.
There are many paths to building wealth
Of course, most people buy a primary residence not to make money, but to gain stability and enjoy being able to live without having to follow a landlord’s rules. If that’s how you feel about homeownership and you can afford to buy while still having money left over to save and invest, then by all means, go for it.
But don’t push yourself to buy if it’s outside your financial comfort zone because you’ve been told that renting is a waste of money. And don’t write off the possibility of becoming wealthy if you don’t own a home. The money you save as a lifelong renter could be your ticket to a valuable investment portfolio — and a lot of accumulated wealth.
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