Renting is better than owning to build wealth — if you’re disciplined to invest as well
Millennials, take note: If you’re looking to build up your nest egg, home ownership isn’t really all it’s cracked up to be. In fact, a new study published on Thursday shows that renting may very well be the best way to go about it.
The numbers, crunched by Florida Atlantic University, Florida International University and the University of Wyoming, determined that the property appreciation most homeowners expect doesn’t necessarily stack up in terms of wealth building.
Hence, FAU economist and co-author of the study Ken Johnson says that while the American Dream is alive and well, it needs a revision.
“When considering buying and building wealth through equity appreciation versus renting and reinvesting in a portfolio of stocks and bonds, property appreciation does not change the results,” he said. “On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds.”
In other words, the old adage that those who don’t, or can’t, buy a home are “throwing their money away on rent” isn’t necessarily true.
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Why? Because it assumes the money that would have been used for a down payment and/or rent savings is spent on consumption.
But what if it’s put to work, instead?
“When you assume that those monies are reinvested at a rate of return, renting, on average, wins in terms of wealth creation,” Johnson said. They assumed a portfolio made up of stocks and Treasurys that yields the same eight-year standard deviation as the equity of a home purchased with a 20% down payment.
But he did note that, as a forced-savings vehicle, it’s hard to beat home ownership, primarily because many Americans aren’t invested in the stock market, and having money left over at the end of the month likely wouldn’t change that.
“To that end,” he wrote, “we suggest not all but most should own rather than rent due to ownership’s embedded commitment to save.”