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Should You Buy A House to Build Wealth?

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Last week, I went to the dentist for a teeth cleaning and checkup. The good news is my teeth are very healthy. Whew! I’ve been going to the same dentist for 28 years and they always do a great job. It’s hard to find a good dentist. I was fortunate his office was right next to my first apartment in Portland. We chatted about families and stuff. You know, the usual small talk. Anyway, the hygienist mentioned that his 27-year-old son is planning to move out soon. Oh wow, young people are staying with their parents longer. I moved out when I left for college and never looked back. Life is harder for young people these days, though. The cost of living is higher than ever.

Homeowners are 40x wealthier

I lived in a dorm when I was 17, rented my own apartment when I was 22, and purchased my first house when I was 27. That’s a simple formula for adulting and building wealth. We moved a few times since then, but the equity from our first home enabled us to grow our net worth. I’m very glad we purchased a home when we did.

Did you know homeowners are 40 times wealthier than renters? A home usually helps a family build wealth. The mortgage is like a forced savings account. You pay down the balance every month while the home price usually appreciates. That’s better than renting unless rent is super cheap in your area.  

Unfortunately, it’s more difficult than ever to buy a home, especially when you’re a first-time home buyer. The home price is extremely high in the US and the average 30-year fixed rate mortgage is over 8%. The inventory is also very low because homeowners don’t want to let go of their sub-4 % mortgages. Should young people forget about buying a house and just rent?

A house can help you build wealth

I’m a bit biased because it worked out well for us. Our first house cost $190,000 in 2000. Now (2023), our duplex is worth around $750,000. Our home equity increased from $40,000 to $500,000 over 23 years. That’s not bad.

*$40,000 was the 20% down payment on our first home.

If you can find the right house, I say go for it. The mortgage rate is high, but you can refinance when it comes down. You know what? In 2000, my first mortgage was 8.25%. However, the monthly payment was still affordable for us. I think it was just around $1,700 per month. I had a solid income back then and we rented a room out. The banking regulation was more relaxed in those days as well. It was easier to get a mortgage.

Tips for youngsters

Homeownership is a great way to build your net worth. The monthly payments build equity and the home price usually appreciates over time. It was easier 25 years ago, but I could have said the same thing when I was young. Houses were downright cheap for the Baby boomers when they were young. I suspect the trend will continue. Housing will be less affordable for future generations. In 2050, young people will complain that Millennials and Gen Z were lucky. Anyway, I think buying a home is still the right choice for young people looking to get ahead.

Here are some unsolicited tips for my hygienist’s son. He’s planning to move out next year. Hopefully, he saved up plenty of money from living with his parents. He’ll need it for the down payment.

  • Don’t borrow too much. Buyers need to make sure they can comfortably afford the monthly housing expenses. That includes the mortgage, property tax, insurance, utilities, repair and maintenance, HOA fee, PMI, and other bills. Financial experts recommend keeping housing expenses to 30% of your gross income. However, I think spending more than 30% on housing is okay. You can make it up later by earning more and refinancing.
  • Generate some income. In 2000, one of my friends purchased a 4-bedroom house and rented out 3 rooms. That is a great idea if you can pull it off. The rent should cover all the expenses. This is a great way to generate some passive income. The downside is you have to be a landlord. Just make sure you pick the right housemates. It was easy for my friend. He worked at a big company and there were always new hires.  
  • Sweat equity. Another benefit to being a homeowner when you’re young is sweat equity. Young people can easily learn new skills. They can learn how to DIY and pour sweat equity into a home. Buy a fixer-upper, clean it up, and you can make good money in several years. This will build a lot of equity and it is one of the rare ways to generate tax-free income. Homeowners can exclude up to $250,000 of capital gains when they sell their primary residence. That’s per person so $500,000 if you’re married. It’s a great way to build wealth. The exclusion period is 5 years so you can rinse and repeat.  
  • Refinance. Currently, the mortgage rate is pretty high. However, I’m pretty sure it will come down over the next few years. The Fed is almost done raising the interest rates. Once the mortgage rates decrease a bit, you can refinance and reduce the monthly payment. We refinanced many times in the last 23 years but never took any money out. I just wanted to lower the monthly payment.

Alright, that’s all I got. Buying a home is a great way to build wealth. Even if it’s cheaper to rent than buy, being a homeowner is better in the long run.

What do you think? Do you have any tips for youngsters looking to buy a home?

Image credit: Tierra Mallorca

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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