Yesou often hear that the longer you rent a house, the more money you waste. On the other hand, if you buy a house to live in rather than renting one, you will have the opportunity to accumulate equity in an asset that is likely to increase in value over time.
Now, to be clear, the houses do tend to increase in value. But that doesn’t mean owning a home is the right decision for you. And if you buy into the myth that a house is a great investment, you might end up regretting it later.
Separate your expenses and investments
Some people invest in real estate by buying income properties that they rent out. It counts as an investment. But your primary residence – the one you live in – shouldn’t.
The reason? When investing in a revenue property, you may make the decision to purchase a particular home based on factors such as rental market saturation and area demographics. When you buy a house to live in, the decision becomes a personal decision, not a business decision. And that’s OK. But it’s hard to make a good investment based on things like your layout and design preferences, among others.
Additionally, when you buy an income property, you may be able to collect enough rent to cover your mortgage and related costs, so you are spending very little of your own capital to maintain that property. Then, when it comes time to sell it, you could end up with a nice profit.
When you buy a house to live in, you don’t have rental income to offset your costs. And so, what can end up happening is that you don’t make money on your house, even though its market value increases over time.
Imagine spending $300,000 to buy a revenue property and an extra $30,000 a year on maintenance and taxes to keep it in good shape. If you also manage to collect $30,000 a year in rental income, then sell your house for $600,000 after 20 years, you will have a profit of $300,000.
Now imagine buying a house to live in for $300,000 and spending $30,000 a year on maintenance and taxes, but with no rental income to offset your costs. If you sell that house for $600,000 after 20 years, you’re actually not looking at any profit when you factor in all the money you’ve put into it over those two decades.
A better way to invest in real estate
There are many options you can explore when investing in real estate, such as owning income properties or loading your portfolio with REITs or real estate investment trusts. But don’t make the mistake of viewing your primary residence as a real estate investment.
Also, don’t assume that buying a home is the right decision for you. You may be able to spend a lot less money on housing by renting out and investing your saved money in other assets, such as stocks. Also, you may not want the responsibility of having to maintain a home, and that’s OK.
There are many paths you can take on the road to growing wealth. Buying a home should not automatically be part of this.
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