You don’t need to own real estate to create wealth, according to CFP

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  • Buying a home may be the “American dream”, but it is certainly not a prerequisite for building wealth.
  • Owning a house is expensive, even if you rent it, and you are never guaranteed a profit.
  • Instead, consider REITs and maximize your investments in the market to create 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 estate can increase your balance sheet and play a role in growing your wealth, it is vital to understand that you don’t to have buy property to get rich.

Let’s break down some of the myths about real estate as an investment that can mislead you, and in the meantime, show why real estate isn’t a prerequisite for building assets.

The real estate sector is not always a good investment (or even an investment)

“Always” and “never” have no place in the vocabulary of an experienced investor. There are no safe bets or guarantees, especially when it comes to real estate, because there are so many variables that fall both in and out of your control.

Factors beyond your control include:

If you are interested in becoming an owner or changing ownership, you may have a little more influence between these variables as well. For example, you may be able to hold onto a property until the market is no longer favorable, but then cash and expense issues come into play.

Homes are expensive and illiquid assets that incur expenses every step of the way, from maintenance to the buying and selling transaction. Every dollar that goes towards cost is a dollar that consumes your potential profit.

When it comes to a single-family home in which you live as your primary residence and from which you do not derive a rental income, the idea of ​​an “investment” falls away entirely. At that point, a house is more of a utility than anything else.

For many people, making money, breaking even or losing a real estate deal depends on timing and luck, which is a major reason why relying on property as a way to increase wealth is not the ideal strategy.

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Renting is not a waste of money and the purchase could be riskier

Maybe you understand that homes are expensive to buy and maintain, but you still feel compelled to invest your money in real estate because the alternative looks worse.

After all, you have the opportunity to build equity in a home you own. In the meantime, you throw your money away every month that you remain a renter.

Right?

Not so fast. To begin with, a lot depends on your location and the prices of rentals and homes in your specific area.

When I rented in Boston from 2015 to 2020, the rent was actually a lot cheaper than owning – and I took the money I had saved in housekeeping expenses and invested it in the stock exchange for a greater return than I would have gotten. buying and selling a property in the same amount of time.

Renting involves less financial risk than buying a home. The most you pay for your accommodation each month when you rent is the cost of that rent (and a small amount for renter’s insurance). When you own a home, the less the mortgage is likely to pay off every month.

But you’re likely to spend a lot more on all the expenses associated with home ownership, from property taxes and homeowner’s insurance to upkeep and maintenance (which you can estimate will cost you around 4-5% of the value. of a house per year).

Renting also gives you its kind of leverage: by renting, you are more flexible and agile with your finances than you would be if you were burdened with a large illiquid asset that may or may not be easy to dump when you want. When you rent, you buy convenience and choice.

You can build up wealth while renting by directing some of your available cash flow to savings, retirement accounts, brokerage accounts, or even other investments such as education or starting a business.

It is not necessary to purchase a property to invest in real estate, however

None of this means that buying real estate is the wrong move or it won’t work in your favor. The point here is that you must not to increase wealth.

And you can also buy real estate without actually buying physical property. You can invest in REITs or real estate investment funds. By investing in a REIT, you invest in a company that professionally buys, sells and manages real estate properties for profit.

As an investor in a REIT, you receive some of that profit to you. There are no guarantees here yet and REITs can lose value and they do. But they give you an opportunity for real estate exposure without directly assuming the risk and expense of owning and managing a specific property.

Instead, consider this path to wealth: systematically investing in the financial markets

Buying a home can be part of your financial plan, but it doesn’t have to be your primary investment vehicle. If your goal is to create wealth, then you need a systematic, reliable, tested and repeatable process to use over and over in the long run.

This is where real estate often falls short of most people. It is difficult to replicate because you need large sums of capital upfront for each purchase and you are limited to the physical inventory available in a given place at a given time.

You are also taking on much greater financial risk than you actually need to ensure a reasonable rate of return (as homes are expensive to maintain, tenants are unpredictable, and you are subject to market conditions in your specific location if you wish. liquidate).

Besides, it’s just hard! There are much easier ways to increase wealth, especially if you start early. Namely, this is using a globally diversified investment portfolio to buy in the financial markets.

If you want what could be the simplest, most reliable and easily repeatable process to create wealth? Try this:

  1. Take advantage of all the qualified retirement accounts at your disposal. These can provide tax benefits (by deferring taxes or helping your wealth grow tax-free). These can include 401 (k) s, a variety of IRAs and HSAs. Try to contribute the maximum amount allowed each year to the accounts you can access.
  2. Once you have exhausted those accounts, open a taxable investment account. This is also known as a brokerage account. Contribute yourself with a fixed amount every year. (We recommend our wealth management clients to save 25% of their gross income each year on a mix of retirement and brokerage accounts.)
  3. Invest in a globally diversified low-cost 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 stocks that can give you exposure to a wide range of asset classes and types, but spread your investment risk across a variety of sectors and locations.
  4. Contribute systematically. Consider using an average dollar cost strategy to help you stay consistent. This means investing the same amount on a regular basis rather than investing a lump sum.
  5. Make a commitment to leave this money invested for the long term. Compounding only works if you give it time to do it. Once the investment system and strategy have been set up, insist. This means not stopping and starting contributions depending on how you are feeling that month, or what current events are happening or what the market has been up to recently.

There is no need to invest in real estate, use complicated plans, buy expensive products, or know some financial secrets that no one else does to increase wealth. You just have to set up a simple system that you can stick to over time and then get to work.

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