Should you buy or rent your home?

Renting versus buying where you live is a hotly contested discussion amongst investors and non-investors alike. For most homeowners, their home is the single largest asset and people commonly refer to their home as a great investment. Additionally, many see renting as “throwing money away” as they will never get that money back. However, to truly see the full picture of this argument, one must identify the opportunity cost of capital. It is important to recognize that while your home certainly can be an investment, it does not produce income and you are personally responsible for paying the mortgage every single month. This means that no matter how much your home is worth or if it has doubled in value since you purchased it because these are unrealized gains and do not increase the size of your bank account in that current moment. Conversely, if you were to purchase an income real estate investment with the same money you would have spent on a down payment for your home, you would have a piece of property that would increase in value over time as well as pay you monthly through the cash flow thrown off by the investment. Additionally, your “investment” in your personal residence is not able to benefit from the myriad of tax advantages that buying real estate as an investment has. For example, you are not able to 1031 exchange your personal residence (read my previous blogs about other tax strategies which allow you to yield a real estate investment’s full potential).

Grant Cardone, a best selling author and famous investor, claims that only about one out of 100 people should own their home (super rich people)! He also goes so far as to say that a purchase of a home should not be done with debt as this is technically bad debt (bad debt that you pay, while good debt refers to leverage in an investment which pays you, such as an income producing rental property which makes enough rental income in order to pay the mortgage on its own). I don’t fully agree with Cardone’s extreme view that a home should be purchased with all cash if purchased at all. But people need to re-evaluate the adage that your home is a great investment. Unfortunately, far too many people buy the biggest home possible and stretch themselves to pay a large mortgage. Homeowners have their largest chunk of equity trapped in their home and must continually make mortgage payments, which does not allow them to have money left over to purchase income-yielding investments. Investments that provide you with passive income month after month is the key to financial freedom. At the end of the day, if your home is worth $10,000,000 dollars but you work like a dog all week long to pay the mortgage, you probably feel more trapped than financially free!

To temper this argument, I will admit that for some people, investing is a very difficult proposition. For these people, buying a home in an area with stable appreciation may not be the wrong route. However, these people should also look to use some of their savings, no matter how small, to begin building an investment portfolio focused on yield. Since your home’s value will grow over time, to balance out this wealth strategy, a homeowner should look for investments that produce a steady cash flow such as multifamily apartment buildings.