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- Buying a home may be the “American Dream,” but it certainly isn’t a prerequisite for building wealth.
- Owning a home is expensive, even if you rent it out, and you’re never guaranteed a profit.
- Consider REITs instead, and maximize your exposure to the market to build long-term wealth.
- Find a financial planner near you with SmartAsset.
We are often told that buying a home is one of the biggest investments we can make. But just because it’s the “American Dream” and a tangible sign of success for many, doesn’t mean it’s your best option if your goal is to build wealth.
While real assets can enhance your balance sheet and play a role in growing your wealth, it is important to understand that you passed To get rich to buy property.
Let’s break down some myths about real estate as an investment that may be misleading you—and in the process, show why real estate isn’t a prerequisite for building wealth.
no real estate Always A Good Investment (Or an Investment at All)
“Always” and “never” have no place in the vocabulary of the savvy investor. There are no fixed bets or guarantees, especially when it comes to real estate, as there are so many variables that fall both within and outside your control.
Factors beyond your control include:
If you’re interested in becoming a landlord or flipping properties, you may have a bit more influence even among these variables. For example, you may be able to hold onto an asset until the market is more favorable – but then questions of liquidity and expenses come into play.
Homes are expensive, non-cash assets that come with expenses every step of the way, from upkeep and maintenance to buying and selling transactions. Every dollar that goes toward cost is a dollar that eats up your potential profit.
When you’re talking about a single-family home in which you live as your primary residence and don’t take in rental income, the idea of ”investment” completely falls through. at that point, A house is more useful than anything,
For many people, making money, breaking in, or losing out on a real estate deal comes down to timing and luck—which is a big reason why banking on property isn’t an ideal strategy as a way to grow wealth.
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Renting isn’t throwing money away, and buying can be risky
maybe you understand Buying and maintaining a home is expensiveBut you still feel compelled to put your money in real estate because the alternative seems worse.
after all, You get an opportunity to build equity in one of your houses. Meanwhile, you throw away your money every month you remain a tenant.
not so fast. For one, a lot depends on your location and the prices of rents and homes in your specific area.
When I rented in Boston from 2015 to 2020, renting was actually much cheaper than owning – and I took the money I saved in housing expenses for bigger returns than buying and selling a property Invested in the stock market. within the same time frame.
Renting carries less financial risk than buying a home. The more you pay for your housing each month when you rent, is the cost of that rent (and a smaller amount for renter’s insurance). When you have a house, least What you’re likely to pay each month is the mortgage.
But you’re likely to incur far more among all associated homeownership expenses, from property taxes and homeowner’s insurance to maintenance and upkeep (which you can estimate will cost you about 4-5% of the home’s value per year). have to spend).
Renting also gives you its own kind of advantage: By renting, you’re more flexible and nimble with your finances than if you’re saddled with a large, illiquid property that’s easy to take off when you want. may or may not be. , When you rent, you buy convenience and choice.
You can build wealth while renting by directing some of your available cash flow into other investments such as savings, retirement accounts, brokerage accounts, or even education. or a business startup,
You don’t have to buy a property to invest in real estate, anyway.
None of this is to say that buying real estate is a bad move or won’t work in your favor. the thing here is you don’t have to to increase wealth.
And you can buy real estate without actually buying physical assets. You can invest in REITs, or real estate investment trust, By investing in a REIT, you invest in a company that professionally buys, sells and manages for-profit real estate.
As an investor in a REIT, you get some of that profit back to you. There are still no guarantees here, and REITs can and do lose value. But they give you the opportunity of exposure to real estate without directly incurring the risk and expense of owning and managing a specific property.
Consider this route to wealth instead: Investing systematically in the financial markets.
Buying a home can be part of your financial plan But it doesn’t need to be your main investment vehicle. If your goal is to build wealth, you need a systematic, reliable, tested and repeatable process to use over and over for a long period of time.
This is where real estate often falls short for most people. This is hard to replicate because you need large upfront capital for each purchase and you are limited to the physical inventory that is available at a particular location at any given time.
You’re actually taking on a lot more financial risk than you’d like to secure a reasonable rate of return (given that homes are expensive to maintain, tenants are unpredictable, and you can market to your specific location if you want to). are subject to the conditions of liquidation).
Besides, it’s hard! There are very easy ways to grow wealth, especially if you start early. that is, he is Using a globally diversified investment portfolio To buy in the financial markets.
If you want what could be the simplest, most reliable, easily repeatable process of making money? Use this:
- Take advantage of any qualified retirement accounts available to you, These can provide tax benefits (by deferring taxes, or helping your money grow tax-free). These include 401(k)s, a . may be involved Variety of IRAs, and HSA. Aim to contribute the maximum allowable amount each year to the accounts you can access.
- Once you’ve maxed out those accounts, open a taxable investment account. it is also known as brokerage account, Contribute a fixed amount every year to it. (We recommend that our wealth management clients save 25% of their gross income each year in a mix of retirement and brokerage accounts.)
- Invest in a low-cost, globally diversified portfolio, Once you start using investment accounts, set up your portfolio using low-cost investment options (such as mutual funds and ETFs). These are baskets of securities that can give you exposure to a wide variety of asset classes and types, but can spread your investment risk across different sectors and locations.
- Contribute systematically. Consider using a dollar-cost averaging strategy to help you stay consistent. This means investing the same amount at regular times instead of investing in lump sum.
- Commit to investing this money for the long term. Compounding only works if you give it the time to do so. Once you have established your investment system and strategy, stick with it, This means stopping and not starting contributions. Depends on how you feel that monthOr what are the current events, or what the market did recently.
You don’t need to invest in real estate, use complicated schemes, buy expensive products, or know some financial secret that no one else does to increase wealth. You just need to set up a simple system that you can stick to over time, and then get to work.