An economist teaches you how to answer the 'rent vs own' question

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One of my followers asked me about some of the financial benefits of owning your home as opposed to renting.

I find this topic interesting as there really is a “laundry list” of reasons that — from a financial standpoint — owning a home is better than renting.

Of course, I don’t have time to go through them all today but here are the ones that I think are the most compelling: wealth-building and tax benefits.

Increasing ownership affordability

The first thing to understand is that, over time, a mortgage becomes easier to afford. 

You see, when you buy a home, the mortgage payments themselves don’t change. Over time, your earnings rise but the mortgage payment doesn’t. Simply put, unlike renters who generally see their rents going up every year, your mortgage payment never will and because you’ll hopefully be making more money as time goes by, the share of your income that you spend on a mortgage payment becomes less and less.

ROI of homeownership

The next advantage to owning your home is that it is a good long-term investment.

Of course, some will say that this is not the case because we went through the housing bubble bursting back in 2006, but there have actually been very few times in history when home prices have seen any long-term downward adjustment. 

Now I know some will say that investing in stocks would give you a higher long-term return. My response to that would be, “I’ve never seen anyone living under a stock certificate. Have you?”

Wealth-building potential

My next reason for believing that ownership is better than renting is rather simple, and that is because a portion of every mortgage payment you make goes toward reducing the principal amount of the loan. Of course, during a majority of the term of the mortgage, most of the payment is going towards interest, but a small portion is paying down the debt itself — in essence making it a forced savings plan, building wealth along the way.

Tax-saving advantages

But what about the tax advantages? Owning a home offers unique and substantial ways to save on your taxes every year. 

Firstly, you can deduct your real estate taxes every year. Now, tax reform has limited the total allowed deduction, but it is still meaningful.

You can also deduct the interest you pay on your mortgage. Again there are some limitations but, depending on where you live you could save a significant amount. 

And finally, let’s talk capital gains taxes. When you sell your primary residence and have seen its value grow since you purchased it, up to $250,000 of that profit (if you’re a single person) or $500,000 if you’re married and filing jointly is tax-free. Now, this is only true if you meet certain requirements with the biggest one being that you have to have lived in the house for a minimum of two years during the preceding five-year period.

If that’s not enough to convince you that there are very significant advantages to owning a home over renting, I will leave you with one last datapoint that you may find of interest.

Net-worth impact

Using Federal Reserve data as a base, I’ve been able to calculate the median net worth of a household in America that owned their homes versus a household that rents.

In 2022, the median household wealth of a homeowner household here in America was approximately $330,000.

The median household wealth for a renter household in this country last year was just $8,000.

As you can see, there’s quite a discrepancy between the two and I think it’s very clear that homeownership, for a vast majority of families, is how they create most of their wealth.