You'll often hear that the longer you rent a home, the more money you'll end up throwing away. By contrast, if you purchase a home to live in rather than rent one, you'll have a chance to build equity in an asset that's likely to gain value over time.
Now to be clear, homes do tend to appreciate in value. But that doesn't mean owning a home is the right move for you. And if you buy into the myth that a home is a great investment, you could end up regretting it later.
Keep your expenses and investments separate
Some people invest in real estate by purchasing income properties that they rent out. That counts as an investment. But your primary home -- the one you live in -- shouldn't.
The reason? When you invest in an income property, you can make the decision to purchase a given home based on factors like how saturated the rental market is and what the area demographics look like. When you buy a home to live in yourself, the decision becomes a personal one -- not a business decision. And that's OK. But it's hard to make a sound investment based on things like your layout and design preferences, among other things.
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Furthermore, when you buy an income property, you might manage to collect enough rent to cover your mortgage and related costs so you're spending very little of your own capital to maintain that property. Then, when the time comes to sell it, you could end up with a nice profit.
When you buy a home to live in yourself, you don't have rental income coming in to offset your costs. And so what may end up happening is that you don't make any money on your home, even if its market value increases as time goes on.
Imagine you spend $300,000 to purchase an income property and another $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 and then sell your home for $600,000 after 20 years, you'll be looking at a $300,000 profit.
Now, imagine you buy a home to live in yourself for $300,000 and spend $30,000 a year on maintenance and taxes -- only without any rental income to offset your costs. If you sell that home for $600,000 after 20 years, you're actually not looking at a profit at all when you account for all the money you've sunk into it over those two decades.
A better way to invest in real estate
There are plenty of options you can explore for investing in real estate, like owning income properties or loading your portfolio with REITs, or real estate investment trusts. But don't make the mistake of looking at your primary home as a real estate investment.
Also, don't assume that buying a home is the right decision for you. It may be possible for you to spend a lot less money on housing by renting and investing your saved cash in other assets, like stocks. Plus, 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 does not automatically have to be one of them.
