Yes, You Can Build Wealth Without Owning a Home
You need to own assets. You Don't have to live in them.
It’s time we stop fetishizing homeownership.
Homeownership has long been associated with “The American Dream.” I think it’s time we completely disconnect homeownership from living some kind of dream life. Back when most people had a Defined Benefit pension, having a paid-off mortgage meant you probably had a pretty solid life in retirement.
Those were also times when you could afford to buy an average house on an average salary. Those days are gone, and it’s time we move on to a new narrative. To quote Kylo Ren: “Let the past die. Kill it if you have to.”
Instead of associating The American Dream with homeownership, let’s redefine it as owning enough financial assets to let you provide for your family and eventually make work optional regardless of whether you own or rent your home.
Yes, owning a home can help many people build wealth
Owning a home helps build wealth in four ways.
1. You own an asset.
As much as I would like it if people wanted to invest in the stock market as badly as they want to own a home, that is not the reality we live in.
The fact is that when many people buy their first home, that house is their first asset outside a checking account.
Is it the best asset to own?
No.
But, despite what the Rich Dad, Poor Dad crowd will tell you, a house is an asset.
We tend to overthink things, so let’s keep this simple. If you want to build wealth, you’ll need to start acquiring assets, and the sooner, the better.
2. Owning a home creates forced savings.
While people are generally bad at saving, they are amazing at making their mortgage payments.
It’s easy for us to imagine what it would feel like to lose our home. As a result, most people will do whatever it takes to make their mortgage payments every month.
Every time you make a mortgage payment, a part of that payment goes towards paying the principal of your mortgage. And every dollar of principal payments increases your net worth by a dollar.
3. A paid off mortgage= risk-free income
In chapter 13 of the rational investor, I discussed how homeownership fits into an investment portfolio.
A paid-off mortgage is like receiving tax-free income from a bond. If your mortgage payment was $1,500, paying off that mortgage is no different than receiving $1,500 per month in tax-free and risk-free income.
That not only frees up more money for you to invest, but all else being equal, a paid-off mortgage increases your capacity to be more aggressive in your investment portfolio.
4. Home prices have the potential to go up
As demand for housing has rapidly increased over the decades, so have the values of homes. This has made many middle-class workers who own their homes wealthier.
While I never count on the price of my home increasing, when it does, it is a pleasant surprise and accelerates the wealth-building process.
There are many people who have become millionaires simply by buying a house and paying the mortgage off over a 30-year period while the value of the home continues to rise.
The Financial risks and downsides of homeownership
Here are four reasons homeownership is not an automatic ticket to your dream life.