If you have seen my other post about real estate you know the benefits of investing in it as well as the negatives.
In my opinion the way we live is backwards. We should be buying property first when we are young not renting and we should be renting when we are older.
Example:
Young adult:
You are 22 years old and just finished college. Starting your first professional career in banking. You earn $50000 per year. You do all the right things maximizing retirement, emergency fund, doordash on the side, making some extra money, start SEP ira, have a Roth IRA, and have an HSA account. You have $0 for a home down payment and you don’t have a lengthy job history for the bank to give you a home loan. You will be stuck living in a rental. You end up paying $1000 per month. You are spending $12000 per year in rent. You stay there 5 years. That is $60000 (granted they don’t increase it on you) that you spent. You will not recover that cash. You did a great job saving and have a net worth of (30k ira, 5k hsa, sep ira 5k, 50k savings) 90k total. You could now maybe buy a home or invest the cash.
Conversely in an ideal financial world you would be able to buy in the beginning. Same scenario as before but we buy a home with 0 down payment. Home is $100000 condo of similar size to the rental. Mortgage is $800 per month but you have other expenses of ownership of $200 per month. Condo appreciates in value by 2% per year. Cost is 60k over the 5 years you are there but you get to sell it. Value is $110406. Loan is now $88000. You sell the condo closing cost 10k. You net $12406. Add this to the 90k you saved and you have $102406 net worth.
As you can see it is financially beneficial to buy. The rent will likely increase each year leaving you with less money. If you own then you are the landlord.
Let’s say the housing market goes down. The condo is valued at $50000. You either continue to live in it or you rent it out for income. The goal is to keep your cash so you can invest.
Retirement age:
Now later on in life you are 70 years old. You have 2 million in retirement. You rented starting out and bought a home when you could. Paid 200k for it 40 years ago. The home was well cared for and is worth 600k. Maintaining the home is troublesome and costs about $500 per month (insurance, tax, repairs, etc).
You have two choices. Either sell the home and rent or keep the home and live in it.
Choice 1:
You sell the home and now have an extra 600k to place in an account. You put it into an investment SPLV which yields 12% per year. That is 72k per year. Rent is 3k per month. No maintenance expenses. Rent will cost you 36k per year. You are living for free and making a profit!
Choice 2:
Living in the home costs $500 per month to maintain. You lose 6k per year keeping the cash in the home. One option here is to take an equity loan and invest that which could make this similar to choice 1.
Bottom line is that you want to have as much money as possible working for you. Leaving the cash in the house does not get you anything. Young people should buy and older people should rent.
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