You Don’t Have to Own Real Estate to Build Wealth, According to CFP


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  • Buying your own home may be the “American Dream,” but it’s certainly not a requirement for building wealth.
  • Owning a home is expensive, even if you rent it out, and profit is never guaranteed.
  • Instead, consider REITs and maximize your investments in the market to build long-term wealth.
  • Find a financial planner near you with SmartAsset.

We are often told that buying a home is one of the largest investments we can make. But just because it’s the “American Dream” and, for many, a tangible sign of success, doesn’t mean it’s the best option if your goal is to build wealth.

While real estate can improve your balance sheet and play a role in growing your wealth, it’s important to understand that you don’t to have Buy property to get rich.

Let’s clear up some of the myths surrounding real estate as an investment that can mislead you – and show why real estate is not a prerequisite for wealth accumulation.

It’s not real estate always a good investment (or any investment at all)

“Always” and “never” have no place in the vocabulary of a savvy investor. There are no sure bets or guarantees, especially when it comes to real estate, as there are so many variables that are both within and outside of your control.

Factors beyond your control include:

If you’re interested in becoming a landlord or exchanging properties, you might even have a little more leverage amid these variables. For example, you can hold a property until the market is cheaper, but then liquidity and cost issues come into play.

Homes are expensive, illiquid assets that involve costs at every step, from upkeep and maintenance to buying and selling transactions. Every dollar spent on expenses is a dollar eating away at your potential profit.

If you are talking about a single-family house that you live in as your main residence and from which you do not derive any rental income, the term “investment” is completely omitted. At this point, a home is more of a benefit than anything else.

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For many people, making money, breaking even or losing on a real estate deal comes down to timing and luck — which is a big reason why real estate banking isn’t the ideal strategy as a way to build wealth.

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Renting is not a waste of money and buying might be riskier

You may understand that houses are expensive to buy and maintain, but you still feel compelled to put your money into real estate because the alternative seems worse.

Finally, you get the opportunity to build equity in your own home. Meanwhile, you’re throwing your money away every month while you remain a renter.

Right?

Not so fast. For one thing, so much depends on your location and the rental and apartment prices in your area.

In fact, when I rented in Boston from 2015-2020, renting was significantly cheaper than owning — and I took the money I had saved on housing and invested it in the stock market for a bigger return than I did would have achieved when buying and selling a property in the same period.

Renting involves less financial risk than buying a house. The most you pay for your home each month when you rent is the cost of that rent (and a small amount for the renter’s insurance). If you own a home that at least You’ll probably be paying off every month is the mortgage.

But you’ll likely be spending a lot more between all the associated costs of home ownership, from property taxes and homeowners insurance to upkeep and maintenance (which is estimated to cost you around 4-5% of a home’s value each year).

Renting also gives you its own kind of leverage: Renting gives you more flexibility and agility with your finances than you likely would be if you were burdened with a large, illiquid asset that may or may not be easy to sell at any time. When you rent, you buy convenience and choice.

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

You don’t have to buy a property to invest in real estate anyway

None of this is to say that buying real estate is a bad move or doesn’t work in your favor. The point here is that you must not to increase wealth.

And you can even buy real estate without actually buying any physical property. You can invest in REITs or real estate investment trusts. By investing in a REIT, you are investing in a company that professionally buys, sells, and manages real estate to make a profit.

As an investor in a REIT, you get a portion of that profit back. There are no guarantees here yet, and REITs can and will fall in value. However, they offer you a chance to get involved with real estate without directly incurring the risk and expense of owning and managing a specific property.

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

Buying a home can be part of your financial plan – but it doesn’t have to be your most important investment vehicle. If your goal is to build wealth, then you need a systematic, reliable, tested, and repeatable process that you can use over and over again over the long term.

This is where real estate often falls short for the majority of people. It’s difficult to replicate because you need large amounts of upfront capital for each purchase and you’re limited to the physical inventory available at a given time in a given location.

You’re also taking on far more financial risk than you actually need to make a reasonable return (since homes are expensive to maintain, renters are unpredictable, and you’re subject to market conditions in your specific location if you choose to liquidate).

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Besides, it’s just hard! There are far easier ways to grow wealth, especially if you start early. That means using a globally diversified investment portfolio to buy into the financial markets.

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

  1. Use any qualifying retirement accounts available to you. These can provide tax benefits (by deferring taxes or helping your wealth grow tax-free). This can include 401(k)s, a variety of IRAs, and HSAs. Try to deposit the maximum amount allowed each year into the accounts you have access to.
  2. Once you’ve exhausted these accounts, open a taxable investment account. This is also known as a brokerage account. You also contribute a fixed amount every year. (We recommend our wealth management clients invest 25% of their gross income each year in a mix of retirement and brokerage accounts.)
  3. Invest in a low-cost, globally diversified portfolio. Once you start using investment accounts, set up your portfolio with low-cost investment options (like mutual funds and ETFs). These are baskets of securities that give you exposure to a range of asset classes and types, but spread your investment risk across a variety of sectors and locations.
  4. Contribute systematically. Consider using a dollar cost average strategy to stay consistent. This means that you invest the same amount regularly, instead of investing a one-time sum.
  5. Make a commitment to keep that money invested for the long term. Compounding only works if you give it the time to do it. Once you have set up your investment system and strategy, keep doing. This means you don’t have to stop and start posting based on how you’re feeling this month, or what current events are happening, or what the market has been doing lately.

You don’t have to invest in real estate, use complicated plans, buy expensive products, or know a financial secret no one else does to grow wealth. All you have to do is set up a simple system to stick to over time and then get to work.



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