It is not necessary to own real estate to generate wealth, according to CFP

It is not necessary to own real estate to generate wealth, according to CFP

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  • Buying a home may be the “American dream,” but it’s certainly not a prerequisite for building wealth.
  • Owning a home is expensive, even if you rent it, and a profit is never guaranteed.
  • Consider REITs instead 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 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 add to your balance sheet and play a role in growing your wealth, it’s critical to understand that it doesn’t to have buy properties to get rich.

Let’s break down some of the myths surrounding real estate as an investment that can mislead you and, in the process, show why real estate is not a prerequisite for building assets.

real estate is not forever a good investment (or an investment at all)

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

Factors outside of your control include:

If you’re interested in owning or selling properties, you may have a little more leverage even amid these variables. You may be able to hold on to a property until the market is more favorable, for example, but then liquidity and expense issues come into play.

Homes are expensive, illiquid assets that incur expenses every step of the way, from care and maintenance to the transaction of purchase and sale. Every dollar spent on cost is a dollar consuming your potential benefit.

When you talk about a single-family home that you live in as your primary residence and get no rental income from, the idea of ​​an “investment” completely vanishes. At that time, a house is more of a utility than anything else.

For many people, making money, breaking even, or losing in a real estate deal comes down to timing and luck, which is a major reason why home banking as a way to increase wealth is not the way to go. perfect strategy.

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Renting is not throwing money away and buying can be riskier

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

After all, you have the opportunity to build equity in a home you own. Meanwhile, you throw your money away every month you stay as a tenant.

Right?

Not so fast. For one thing, a lot depends on your location and the prices of rents and houses in your specific area.

When I rented in Boston from 2015 to 2020, renting was considerably cheaper than owning, and I took the money I saved on housing costs and put it into the stock market for a higher return than I would have gotten buying and selling a property . in the same time frame.

Renting represents 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 renters insurance). When you own a home, the least is likely to pay each month is the mortgage.

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

Renting also gives you its own kind of leverage: By renting, you are more flexible and nimble with your finances than you likely would be if you were saddled with a large, illiquid asset that may or may not be easy to unload whenever you want. . When you rent, you buy convenience and choice.

You can build wealth while renting by directing some of your available cash flow into savings, retirement accounts, brokerage accounts, or even other investments like education or a new 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 decision or that it won’t work in your favor. The point here is that you do not have to do it to grow wealth.

And you can even buy real estate without buying 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 for profit.

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

Consider This Path To Riches Instead: 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 build wealth, then you need a systematic, reliable, proven, and repeatable process to use over and over again for the long haul.

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

You’re also taking on a lot more financial risk than you really need to in order to secure a reasonable rate of return (since houses are expensive to maintain, renters are unpredictable, and you’re subject to market conditions in your specific location if you want to liquidate).

Plus, it’s just hard! There are much easier ways to increase wealth, especially if you start early. In other words, that 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 build wealth? Try this:

  1. Take advantage of qualified retirement accounts available to you. These can provide tax benefits (by deferring taxes or helping your wealth grow tax-free). These can include 401(k), a variety of IRAs and HSAs. Try to contribute the maximum amount allowed each year to accounts you can access.
  2. Once you max out those accounts, open a taxable investment account. This is also known as a brokerage account. It also contributes a fixed amount each year. (We recommend that our wealth management clients save 25% of their gross income each year in a combination of retirement and brokerage accounts.)
  3. Invest in a low-cost, globally diversified portfolio. Once you start using investment accounts, build your portfolio using low-cost investment options (such as mutual funds and ETFs). These are baskets of securities that can give you exposure to a variety 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 averaging strategy to help you stay consistent. That means investing the same amount on a regular schedule, rather than investing a lump sum.
  5. Commit to leaving this money invested for the long term. Compounding only works if you give it time to do it. Once you set up your investment system and strategy, stay with it. That means not stopping and starting contributions based on how you feel that month, or what current events are happening, or what the market did recently.

You don’t need to invest in real estate, use complicated plans, buy expensive products, or know some financial secret that no one else knows to increase your wealth. You just need to set up a simple system that you can maintain over time and then get to work.

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