Yesterday I wrote my review on The Automatic Millionaire Homeowner, so today it seems fitting to cover this article from that book's author, David Bach, that tells why homeowners get rich and renters stay poor. Here's the heart of David's message:
Of course, just because home prices have been rising for the last half-century doesn't mean they're going to continue doing so. But real estate's phenomenal track record is not the only reason you should want to become a homeowner. Here are five more.
1. Owning Is Cheaper Than Renting
2. Homeowners Get Leverage
3. Homeowners Get Tax Breaks, Renters Don't
4. Homeowners Can Earn Tax-Free Profits
5. Homeowners Become Savers
He then ends with this fact to drive his point home:
According to statistics compiled by the Federal Reserve, the average homeowner is 34 times richer than the average renter.
My thoughts:
1. I don't dispute the fact that it's almost always better to own a home than rent.
2. I have my own formula for buying a house that I prefer over David's.
3. In general, I agree with David (and he's one of my favorite personal finance experts). However, I don't really like the "let's all get rich" sort of feel that this piece (and the book for that matter) borders on. I know he needs to hype it a bit to sell books, but it's just a bit over the top for me personally.
4. If you want more information on this topic from David, click through to the whole article above or see my review of The Automatic Millionaire Homeowner.
5. If you want to read some other posts (and my thoughts on them) on real estate, see these links:
- To Pay or Not to Pay Off Your Mortgage
- The 3 Worst Reasons to Buy a House
- The Hidden Costs of Homeownership
- How to Get Rid of Private Mortgage Insurance
FMF recommends Emigrant Direct.
I enjoyed the article, but do have a couple comments...
It's true that leverage can increase returns, but it can also put you in the hole pretty quickly if your house value decreases.
I'm also not convinced that buying is cheaper than renting. There are a lot of hidden costs involved in home ownership. For example a house is usually bigger then an apartment. That means more furniture to buy. Have you ever seen a house with storage space that was empty? People tend to buy stuff to fill up any empty spaces.
Also, when you buy a home you're now responsible for things like landscaping and painting. Those can add up over time to become pretty significant costs.
That's not to say that a house isn't a better choice than renting for many, but I don't think the case is quite as clear-cut as many experts make it out to be.
Posted by: samerwriter | February 22, 2006 at 03:49 AM
I recently checked out some free quotes at http://www.insurancepaylite.com they have a couple of known companies here and found out good benefits from there service.. Maybe it can help some of you who needs affordable renters insurance..
Posted by: Alston Curry | April 09, 2006 at 11:50 PM
Theres one thing you left out in your analysis.... savings on interest of 4% a year of $60,000 - $150,000 can yield you an amount each month to draw which can pay your rent which basically makes you live rent free or a major discount off it.
Of course you have to have this much of your own money due to saving which brings us back to unison on step 1.
Posted by: The ABC's | January 24, 2007 at 07:56 AM
It would be excellent if in australia, the government would allow deductions on payments on your principal place of residence, it would make the burden of home ownership that much easier.
Posted by: bigbuddha | February 22, 2007 at 01:59 AM
I know I'm the exception to the rule on this...but I'm a 36 year old renter with a net worth over 150K. I did it by having roommates until I was 35, while putting the money I saved on rent toward debt and then into my 401K plan and IRAs. Then when my net worth hit around 100K, I couldn't stand living like a college student more and moved up to a studio apartment. It wasn't easy in my high cost area to do this, but I don't have any regrets. Unfortunately, I don't think most renters do this...they just spend whatever extra money they have on something else or they spend a lot on rent. But I just wanted to let all the renters out there know it IS possible to build wealth and be a renter...but you have to be determined to build savings and go against mainstream thinking.
Posted by: mysticaltyger | March 03, 2007 at 05:25 PM
Argh, I can't stand the "average homeowner is worth 34 times more than the average renter." There is an enormous difference between mean and median. Once you specify "homeowner" you throw into the "homeowner" category the enormously megawealthy who have a tendency to mess with statistics. I have no doubt whatsoever taht the median net worth of the homeowner exceeds that of the renter. However, it feels deceptive to say average to average, its a useful statistic.
Posted by: robalob | April 30, 2007 at 09:59 AM
Hi!
another way to become rich is simply inheriting from a relative!
but what if you don t have a relative that you can inherit from?
maybe you do, you just don t know about it!
Posted by: Sandra | January 28, 2008 at 04:40 AM
I am a disabled widow and now need to sell my house. The house is only 3 years old and I have no mortgage. I've been thinking that maybe the best way to sell in this soft market would be to offer to take back the mortgage. Is this a good idea???
Posted by: SpecialKny | February 19, 2008 at 04:46 PM
What do you mean by "take back the mortgage"?
Posted by: FMF | February 20, 2008 at 07:49 AM
I thought that since the mortgage lenders are also getting tougher on who they are giving mortgages out to that I could be the lender....I have no debt, with the exception of the costs related to running of this home. The house is a mother/daughter with 2 seperate apartments with private entrances and connect only through the laundry room.
I thought that If I were to be the "lender" this might add to the likelyhood of a quicker sale??....If you have any ideas other than me living here I would love to hear them..I honestly don't know what to do but can not handle the burden of such a large house and property any longer....I am out of ideas and do not want to lose my last dime in keeping this place up especially since i don't need to live here....I found your site through Real Simple magazine and thought maybe you could help with some answers...because i'm fresh out.......and thanks for answering..(-:
Posted by: SpecialKny | February 21, 2008 at 10:25 AM
Special --
How about this:
Write me up a complete detail of your situation, then email it to me. (here's how to contact me: http://www.freemoneyfinance.com/2005/04/free_money_fina_4.html ) Then I'll post it and my readers will give you a ton advice. How's that sound?
Posted by: FMF | February 21, 2008 at 11:02 AM
Thats sounds great!!...and very generous of you...i will send all info to you....Thanks again for the kind offer....(-:
K~
Posted by: SpecialKny | February 23, 2008 at 03:54 PM