If you rent a place to live, you might feel like people judge you for not buying a house, or at least make you feel like you should want to buy a house eventually. But buying a house isn’t something everyone wants (or is able) to do!
So you might appreciate what Ramit Sethi — a self-made millionaire who teaches people how to build wealth and get rich — recently said: “Renting can make you wealthier than owning a home.”
However, “can” is the key word in that sentence.
He’s not wrong saying that renters shouldn’t feel bad, or like they’re failures for not owning a home. It’s the right decision for many people for a variety of scenarios, lifestyles, and reasons.
But to say that renting a home is a better way to become wealthy than owning one is a bit misleading.
Let’s break down why it can make you wealthier, but probably won’t:
- You have to be paying less for a rental than you could to own a home. According to his advice, you simply rent a place for considerably less than it would cost you to buy a place. This isn’t always possible, depending upon where you live. Sometimes owning is less expensive, or it’s not a significant enough amount of savings to do anything with.
- You need to invest the amount you save by renting versus owning a home in some other form of investment. In theory this is great, but the reality is, many people won’t actually invest the amount they save by renting. A lot of people tend to use the extra cash on hand to enjoy things they want to buy and do. If they do, the investments then have to be safe enough to not lose money, but aggressive enough to make a return on investment greater than owning a home would produce in the long term.
- Buying a home forces you to invest. By buying a house, you’re paying down the mortgage and gaining equity over the years. While many people aren’t great about saving and investing, most people are pretty good about making sure they’re always making enough to pay for their basic needs and costs, like their rent or mortgage payment; people are driven to protect the roof over their head.
- The majority of peoples’ wealth is built through homeownership. The National Association of Home Builders reported that according to the 2019 Survey of Consumer Finances, homeowners had a median net worth of $255,000 (much of it through equity in their home), which was more than 40 times the median net worth of $6,300 for renters. So, while it’s possible, it isn’t statistically common for renters to become wealthier than homeowners.
- Rent prices continue to rise over the years. According to this Forbes article, other than rents coming down between 1940-1950, rents have gone up every decade since. So you’ll always be paying more for a place to live as the years go by.
- Your mortgage payment can stay more or less the same for 30 years when you own a house. If you buy a house using a fixed rate mortgage, your payment will be relatively the same for the life of the loan, other than slight bumps up due to property tax increases and insurance rates. But while your payment doesn’t go up much, the value of your house (and your net worth) will likely be higher at that point.
- Eventually you won’t have a mortgage to pay. Rent never ends, but you can eventually pay off your mortgage. You’ll still have to pay for insurance and property taxes, but it will likely be less than whatever you’d have to pay in rent somewhere else. Having to pay rent that can continually increase, or have to move because your landlord decided to sell, or not renew your lease gets harder and harder the older you get.
Although it’s possible to become wealthier by renting, it doesn’t mean you will become wealthy simply because you rent a home instead of buying one. You need to crunch the numbers and see if you can save a significant amount of money by renting in your area, and then be diligent about investing the money you save.
That said, owning a home isn’t the best choice for everyone, and it also isn’t a guarantee that you’ll become wealthy. However, time and data show that homeowners tend to be wealthier than renters in the long run.
The Takeaway:
Can you become wealthier by renting a home rather than owning? Sure. But you need to be disciplined and profitably invest the amount you save by renting versus owning in some other forms of investment, which many people aren’t good about doing.
But most people are good about making sure they keep a roof over their head by paying their monthly rent or mortgage. By buying a house and paying your mortgage down over the years, you’ll gain equity and wealth you wouldn’t have as a tenant paying rent each month.
