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- Buying a home may be the “American dream,” but it’s certainly not a prerequisite for building wealth.
- Owning a home is expensive, even if you rent it, and you will never guarantee a profit.
- Consider REITs instead, and maximize your investments in the market to build long-term wealth.
- Find a financial planner near you using SmartAsset.
We are often told that buying a home is one of the greatest investments we can make. But just because it’s the “American Dream” and a tangible sign of success for many, that doesn’t mean it’s your best option if your goal is to build wealth.
While real estate can boost your balance sheet and play a role in growing your wealth, it’s important to understand that you don’t. You have To buy real estate in order to get rich.
Let’s break down some myths about real estate as an investment that can mislead you – and in the process, show why real estate is not a prerequisite for building an asset.
Real estate is not Always A good investment (or an investment at all)
“Always” and “never” have no place in the vocabulary of a skillful investor. There are no sure bets or guarantees, especially when it comes to real estate, because there are so many variables that fall in and out of your control.
Factors outside of your control include:
If you are interested in becoming a landlord or flipping real estate, you may have a slightly greater impact even amid these variables. You might be able to hold on to the property until the market becomes more favorable, for example – but then the questions of liquidity and expenses come into play.
Homes are expensive and illiquid assets that come with expenses every step of the way, from maintenance and upkeep to transactions for buying and selling. Every dollar that goes toward cost is a dollar that wipes out your potential earnings.
When you talk about a single family home you live in as your primary residence and you don’t get rental income from it, the idea of ”investment” completely vanishes. at that point, Home is more useful than anything else.
For many people, making money, breaking even, or losing in a real estate deal comes down to timing and luck—a big reason why property banking as a way to grow wealth isn’t the ideal strategy.
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Renting doesn’t waste money, and buying can be riskier
You might understand that Homes are expensive to buy and maintainBut you still feel compelled to invest your money in real estate because the alternative looks worse.
after every thing, You get a chance to build equity in a home you own. In the meantime, you throw your money away every month that you remain a renter.
Not so fast. For one, a lot depends on your location and the rental prices and homes in your specific area.
When I rented in Boston from 2015 to 2020, it was actually much cheaper to rent than to own — and I took the money I saved on housing expenses and invested it in the stock market for a greater return than I would have gotten from buying and selling real estate in the same time frame.
Renting poses less financial risk than buying a home. The maximum amount you pay for housing each month when renting is the cost of that rent (and a small amount for the tenant’s insurance). When you own a home, the least The likely payment each month is the mortgage.
But you’ll likely spend a lot more among all the expenses associated with home ownership, from property taxes and home insurance to upkeep and upkeep (which you can estimate will cost you around 4-5% of the home’s value annually).
Leasing also gives you a special kind of leverage: With leasing, you are more flexible and flexible with your money than you would be if you were saddled with a large, illiquid asset that may or may not be easy to offload when you want. When you rent, you buy convenience and choice.
You can build wealth while renting by directing some of your available cash flow into savings accounts, retirement accounts, brokerages, or even other investments like education. or a startup company.
You don’t have to buy a property to invest in real estate, anyway
None of this means that buying real estate is a bad move or won’t work in your favor. The point here is that You don’t have to for wealth development.
And you can even buy real estate without actually buying physical property. You can invest in REITs, or real estate investment trusts. By investing in a REIT, you are investing in a company that professionally buys, sells and manages real estate for profit.
As a REIT investor, you receive some of that profit back to you. There are still no guarantees here, and REITs can lose their value. But they give you an opportunity to get exposure to real estate without incurring the risks and expenses of owning and managing a particular property.
Consider this path to wealth instead: regular investing in the financial markets
Buying a home can be part of your financial plan But it doesn’t have to be your primary investment vehicle. If your goal is to build wealth, you need a systematic, reliable, tested and repeatable process to use over and over for the long term.
This is where real estate is often lacking for the majority of people. It’s hard to replicate because you need large amounts of upfront capital for each purchase and you are limited to the physical inventory available in a particular location at any time.
You also take on much more financial risk than you actually need to secure a reasonable rate of return (since home maintenance is expensive, renters are unpredictable, and subject to market conditions in your specific location if you want to classify).
Plus, it’s tough! There are much easier ways to grow wealth, especially if you start early. Which Using a globally diversified investment portfolio to buy in the financial markets.
If you want what process can be simpler, more reliable and easily repeatable to build wealth? try this:
- Take advantage of any eligible retirement accounts available to you. It can provide tax benefits (by deferring taxes, or helping your wealth grow tax-free). These may include 401(k)s, a Variety of IRAsand HSAs. It aims to contribute the maximum amount allowed each year to the accounts you have access to.
- Once these accounts are maximized, open a taxable investment account. This is also known as brokerage account. Contribute a set amount to that each year as well. (We recommend our wealth management clients save 25% of their total income each year into a combination of retirement and brokerage accounts.)
- Invest in a low-cost, globally diversified portfolio. Once you start using investment accounts, set up your portfolio with low-cost investment options (such as mutual funds and ETFs). These are baskets of securities that can give you exposure to a range of asset classes and types, but spread investment risk across a variety of sectors and locations.
- Contribute systematically. Consider using a dollar-cost averaging strategy to help you stay consistent. This means investing the same amount in a regular schedule, rather than investing a lump sum.
- Commit to leaving this money invested for the long term. The multiplier only works if you give it time to do so. Once you have set up your investment system and strategy, keep going. This means not stopping and starting contributions Depending on how you feel in that monthor what are current events, or what the market has done recently.
You don’t need to invest in real estate, use complicated plans, buy expensive products, or know some financial secrets that no one else does to grow wealth. You just need to set up a simple system that you can stick to over time, and then get to work.