In an earlier post, I assessed homeownership
from an investment perspective and found that homes are terrible
investments that barely keep pace with inflation.
This poor investment, however, does force the average American to
save the money they’d otherwise spend.
The result? The median net worth of American home ownersis
over 30 times the median net worth of American renters. Home owners might not get
back every dollar they put into a home, but they’re getting back
a lot more than the American who rents.
But it need not be that way. Here is how any renter can beat the
average American home ownerin the long run.
First off, you need to save a down payment by age 33
That’s the average age of the first-time home buyer.
Instead of using it for a physical home, you’re putting a down
payment on what I call a “money mansion.” You can’t live in your
money mansion, but it will make you rich. According to
themedian American home price($229,000), a
20 percent down payment is $45,800. Invest this in a brokerage
account that tracks the market — where you can hope for a
7 percent annual return.
Here you have one major advantage over the home owner: You can
open the account right away and begin collecting interest instead
of piling up a lump sum in savings. Just make sure your money
mansion is worth $45,800 by age 33. Assuming you collect 7
percent interest per year, you could save as little as $3,000 per
year and still make it, even after taxes. Or you can play it safe
and save $4,580 per year from 23 to 33 — on top of your 10
percent retirement savings.
Once your money mansion hits $45,800, you need to feed it a
portion of your monthly income equal to what the home buyer
spends on their mortgage. See, the home buyer is essentially
saving this money because at the end of a 30-year mortgage, they
own a house worth all the money they put into it, which has
(hopefully) matched inflation. But this is the tricky part.
On average, homeowners spend 15 percent of their after tax
income on their mortgage, while renters spend 30 percent of their
after tax income on rent. That means you need to put 15
percent of your income into your money mansion on top of
your rental payment if you want to beat the average home owner.
This would be the time to move into a one bedroom with your
significant other to save on rent. Every dollar you don’t spend
there is a dollar you can put toward your 15 percent.
If you take these steps, 45 percent of your take-home pay goes to
rent (lt; 30 percent) + money mansion (gt; 15 percent). This
means you’re living off of only 55 percent of your take-home pay.
Do you currently do this? Probably not. But that’s what it takes
to beat the home owner.
So, lets talk numbers
If you manage to rent + save + invest, how much do you win in the
Using the average American household income of $54,000 as a
guideline, your 15 percent money mansion contribution becomes
roughly $5,100 per year after taxes. If you start with a “down
payment” of $45,800 and contribute 15 percent of your monthly
income every year for a “30-year mortgage,” you’ll have $728,000
in your money mansion (that’s after taxes, with a conservative 7
percent yearly return).
So the gamble you’re making is that today’s average American
house will not exceed $728,000 in value after 30 years of appreciation. If our
$229,000 house keeps pace with inflation, it will be worth only
$555,000 — and that’s a big if. A hundredyears of
inflation-adjusted US housing prices suggest that a home
increases only 0.1 percent in value per year on average.
Your home probably won’t be the exception.
Looks like the renter wins
He or she gains25 percent more net worth, and all of it
liquid and free of closing costs. Some would say the liquid
capital is worth a premium.
But the renter only gets to live on 55 percent of their take-home
pay during their life while the home ownerlives on 85
percent. That’s an extra 30 percent of income — not spent on rent
— to spend on life. The home ownercould easily invest the
difference and beat the renter.
The home ownerhas other home-related expenses, however.
Home upkeep and repair costs average 1 percent of the value of the home per year.
On our $229,000 home, that’s $2,290 per year. But taking
inflation into account, you can expect the costs to rise over
time. Over 30 years, that could be $114,000 or more.
The home owneralso pays property taxes. These vary widely
by state and county. For the sake of simplicity, let’s assume our
median American home ownerpays a median American property
tax of 1 percent of the home value per year — which is lower than
many countries surrounding major metros.
So how does that figure in? Over 30 years, those home upkeep
costs and property taxes will eat into 50 percent of the income
the home owner isn’t spending on rent. So the home owner’s true
take-home savings are just 15 percent of income. They get to live
on 70 percent of their income, while the renter, on average,
lives on just 55 percent. But at the end of the road, the renter
is 20 percent richer.
Suddenly, homeownership doesn’t seem like such a great
deal. By renting and investing, you can end up with enough
money to buy a homein cash by the end of your life —
and you will never pay a penny of interest, or property taxes, or
buy a new sump pump along the way. What’s more, homes are risky
investments. You never know how the community, city, or state
will turn. By comparison, investing in the market seems like a
pretty safe bet. I don’t know about you, but it’s a renter’s life