How Renters Can Build Wealth Without Buying a House
You’ve probably heard it said many times that you can’t build long-term wealth by renting. Perhaps the advice has been as harsh as, “Renting is just throwing money away.” But that’s not necessarily the case.
In some ways, renting actually gives you some advantages over homeowners when it comes to the ability to save money. It’s certainly a more flexible lifestyle. And if you’re smart, you can use that to your advantage in terms of building wealth.
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What’s most important is what you do with the rest of your money, not whether you rent or own.
Investing in the Market Instead of a Home
Homeowners build equity every time they make a mortgage payment. They may also benefit from the appreciation in the value of their properties. But owning can be expensive, and it comes with hidden costs that many don’t factor in properly.
A mortgage typically costs anywhere from a few hundred to a few thousand more dollars per month than rent. But homeowners also have a flurry of additional costs that can tack on thousands of dollars to their monthly bills. Maintenance and repairs may be sporadic, but property taxes, homeowners' insurance, utility costs and HOA fees, if applicable, are a significant monthly burden.
Renters, on the other hand, usually only have to pay their rent and perhaps some utilities.
If you have the discipline to invest the hundreds or thousands of extra dollars you’d be spending monthly if you owned a home, you can build your own equity in the markets rather than in a house. Over time, the stock market has outperformed the return of the general housing market, so in terms of a pure investment standpoint, renters can have the upper hand.
Paying Down Debt
High-interest debt can rapidly grow out of control if you don’t have extra capital to pay it down. Homeowners can find themselves in this trap if they buy more home than they can afford. If you rent, however, you should have enough flexibility in your budget to address your debt.
If you’re paying 25% interest on your credit card debt, for example, every dollar you use to pay that off effectively “earns” that same 25% rate. This is far better than you can expect in even the stock market, at least in terms of long-term averages.
Paying down debt can also increase your credit score, which is another way to save additional money. A better credit score could translate to lower interest rates on loans and even lower insurance premiums in some states.
Building an Emergency Fund
Renting can make it easier to build liquidity in the form of an emergency fund. If you’re stretched thin making your home payments, a financial emergency could put you in a hole that you’re forced to resolve by taking on debt. But if you have the extra money to build a sizable emergency fund, you can avoid taking on high-interest debt or being forced to sell investments at the wrong time.
Increasing Your Income
The flexibility that comes with renting can affect the income side of the equation as well. If you’re not tied to a home, it’s easier to move to a new city for a better job or to pursue other opportunities.
This is especially true if you lose your job. As a homeowner, you’ll either be tied to your mortgage and other home expenses until you find a job in your area, or you’ll be forced to sell your home at a potential market low. But as a renter, it’s much easier to either get out of your lease or wait out the short period until it ends.
Remember: Buying and Selling Homes Can Be Expensive
Many experts suggest that you should rent instead of buy if you intend to move within five years. This is because there are costs attached to real estate transactions, especially when you sell.
According to Experian, you should expect to pay 10% to 15% of your home’s value when you sell it, with the bulk of these expenses coming in the form of agent commissions and closing costs. That can take a sizable bite out of your home equity, especially if you’ve only held the property for a short period of time.
The Bottom Line: There’s No Shame in Renting
Owning a home does come with some level of prestige in today’s society. But there’s no reason to be embarrassed about renting. In fact, in some cases, renting can actually make you stronger financially. If you’re able to stock your emergency fund, pay off high-interest debt, get a better job and invest for the long run, renting can be a great way to build wealth.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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