If you want to grow your wealth but don’t want to buy a house, this tip could be for you.
- Generally, homeowners have a higher net worth than renters because owning a home can help build wealth.
- Financial expert Ramit Sethi has some suggestions on how to end up richer as a renter.
- He recommends investing the money he saves on housing costs by renting instead of owning.
In general, home ownership is one of the easiest paths to building wealth — if you make smart home buying decisions. If you get an affordable home loan and pay it off on time, you’ll own an asset that’s valuable enough (especially if your property has appreciated) just to make a monthly housing payment. This is a big reason why homeowners tend to have a higher net worth than renters.
But, that doesn’t mean that buying a house is the right way for everyone to get rich. In fact, its author I will teach you to be rich, Ramit Sethi, explained how you can make more money owning than renting. Here’s what he suggests you do.
Sethi’s proposal for building wealth as a renter
On Twitter, Sethi explained that he makes “more money renting than owning,” taking a few basic actions.
Sethi explained that he lives in an area where the cost of living is high. He has chosen to rent a nice place there, rather than buy a property. However, renting a home has a lower monthly cost than owning a property. He then invests the difference between what he would pay in rent and what he would pay to own a home.
So his recipe for success is basically to spend less on renting than he would on ownership and put the money into assets that generate a reasonable return for him. It is this invested money that will make him over time more than he thinks he could earn through property appreciation.
Will this approach work for you?
Sethi’s approach is correct. After all, if you could rent a place to live for a few hundred or a few thousand dollars less than it would cost to buy one, that can give you a lot of extra money that you can put into investments that will hopefully pay off well for you .
And given the stock market’s historical performance against real estate, it’s reasonable to assume that you can often earn better returns by putting your money into the market than you would by hoping that your property will increase in value.
However, this approach won’t work for everyone for a few key reasons.
Here’s why it might not be
First, you cannot live in an area where you can rent a comparable property for less than the cost of owning one. Rental inventory is larger in some areas than others, and if you can’t find an affordable place to rent that you really want to live in, then you might be better off buying.
Second, you really need to be disciplined enough to invest money every month if you take this approach. If you’re renting for $1,000 less than it would cost you to buy, you should make sure you put that $1,000 into the stock market or other investments. And this is a big problem for many people.
Most of us will do whatever it takes to make our mortgage payments, even if that means selling things or getting an extra job. But most people won’t go the same distance to make sure they invest. In fact, there is a very good chance that the $1,000 or whatever amount you have to invest will be eaten up by other expenses.
The fact that a home is a form of forced savings is often what makes it the best wealth building tool for many. So you’ll have to decide whether you’re disciplined enough to really invest diligently — and check to see if there are affordable rental options where you live — if you want to follow Sethi’s plan to end up renter-rich.
The Ascent’s Best Mortgage Lender for 2022
Mortgage rates are at their highest level in years — and are expected to keep rising. It’s more important than ever to check your rates with multiple lenders to ensure you get the best possible rate while minimizing fees. Even a small difference in your price could shave hundreds off your monthly payment.
That’s where Better Mortgage comes in.
You can get pre-approved in just 3 minutes, no hard credit check and lock in your rate at any time. Another plus? They don’t charge origination or lender fees (which can be as high as 2% of the loan amount for some lenders).
Read our free review