Think Renting Will Hurt Your Finances? Here's What Warren Buffett Has to Say
- Warren Buffett has made billions of dollars by investing in stocks.
- Although he owns a home, he says that renting could free up more money for investments.
Renting may not be such a poor financial choice.
Warren Buffett is often regarded as one of the most successful investors of our time. Given his multi-billion-dollar net worth, that's understandable.
But while the bulk of his success is attributable to his stock-picking prowess, Buffett is also known for his frugal tendencies. Case in point: He still lives in the modest home he purchased for $31,500 back in 1958 when upsizing has clearly since been an option.
Now not surprisingly, the value of Buffett's home has increased over time. Zillow estimates that its current value is over $1.3 million, which means Buffett is sitting on a nice gain for that property.
But ultimately, buying a home wasn't necessarily the savviest move Buffett could've made back then. And if you're currently renting a home and feeling down on yourself for not owning instead, you may want to adjust your line of thinking.
Why a home may not be your best investment
While Buffett acknowledges that his home has been a source of great memories, he also says he would've made a lot more money had he rented a home and used his home purchase funds to buy stocks instead. In fact, had he invested his $31,500 into an S&P 500 index fund (a fund that aims to match the performance of the S&P 500 index), he'd now be sitting on $13.5 million. That's a much more substantial gain than what he's looking at based on home price appreciation.
Of course, by putting money into his home, Buffett also achieved the important goal of putting a roof over his head. But still, buying a home requires a large sum of money upfront, not to mention the ongoing expenses involved, from mortgage payment to property taxes to maintenance. And in some cases, putting that money into the stock market rather than a down payment could ultimately make you richer.
Imagine you're looking to put $100,000 down on a home purchase for a $500,000 property. In 30 years, that home may end up being worth $1 million, in which case you'd be looking at a $500,000 gain.
But if you were to invest $100,000 in S&P 500 index funds delivering an average yearly 10% return (which is in line with the index's historical performance), you'd end up with $1.74 million. So in that case, you'd have a $1.24 million gain rather than $500,000.
Don't feel bad about renting
It's often said that owning a home is a better financial move than renting, because when you rent, you throw your money away. But clearly, that's not necessarily true.
If you spend less money to rent a home than to own one, and you put the money you're not spending to work by investing it, then you might come out ahead financially by not purchasing a place of your own. And so if owning a home isn't something you have the desire to do, don't do it -- and don't stress about wrecking your finances in the process.
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