Buying a house with a white picket fence is the American dream. But owning a home is not necessarily a wealth builder.
Research released last year indicates most folks are better off renting a home and investing the savings in stocks and bonds. That’s because gains from stocks and bonds historically exceed gains from property appreciation, according to faculty at three U.S. universities.
Study co-author Ken Johnson, a real estate economist at Florida Atlantic University, explained their findings:
“On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds.”
Therein lies the hitch, though: To build wealth, renters must actually reinvest savings. In other words, renters will only build wealth if they take the money they would have put into buying a home and instead invest it in stocks and bonds, rather than spend it.
As the study puts it, “households that fail to reinvest buy-rent cash flow differentials accumulate less wealth.”
Getting the best deal on a rental
If this study has convinced you that renting is the way to build wealth, make sure you find the right rental at the best price.
Educating yourself about the rental market is the best way to get a good deal. For example, now is a great time of the year to rent. As we have written:
Landlords are especially anxious to rent between October and February. You’ll find more specials and choices when you shop for a rental at a nonpeak time.
For more tips on landing a great rental, check out “10 Ways to Save Big on Renting Your Next Home.”
However, if you just can’t resist the pull of owning a piece of the American dream, save yourself some money by checking out “How to Buy a House — Getting the Best Deal on a Mortgage.”
What are your thoughts on renting versus buying a home and how homeownership impacts wealth? Share them with us by commenting below or over on our Facebook page.