Is Buying a Home Necessary to Build Wealth?

Buying a home is seen by many as a financial milestone and pathway to building long-term wealth. But with high prices, rising interest rates, and broader access to investment options, is homeownership still the cornerstone of financial success?

Alternatively, renting may offer a more cost-effective and flexible life. Without the burden of homeownership costs and a sizable down payment, renters may be able to redirect more money into retirement accounts, taxable brokerage portfolios, or other liquid investments that may offer similar or greater growth potential over time.

In this article, we’ll take an in-depth look at whether owning a home is truly essential for building wealth. This includes an assessment of the benefits and trade-offs of renting and investing in the market versus buying property, including how this may impact your retirement and long-term financial goals.

Case for Buying to Build Wealth

Owning a home is a common path individuals choose to build long-term wealth, providing several benefits along the way. As you pay down your mortgage over several years, you’re able to gain equity in the property. Unlike rent payments, which go to a landlord with no return, mortgage payments contribute to an asset you will ultimately own.

In addition to equity, your home’s value may have the capacity to appreciate over time. Depending on how much you paid originally, it could turn a substantial profit when you sell. You might also be able to take advantage of tax benefits as a result of owning a home, such as mortgage interest deductions and the capital gains exclusion.

Owning a home can also offer long-term stability. Not only do you lock in a place to live, but your housing costs can remain relatively predictable, unlike rent, which tends to increase by 3% to 5% annually. For retirees, staying in a paid-off home may also free up additional cash flow that would otherwise go toward rent, easing long-term budget constraints.

On the whole, choosing to own gives you the chance to add a built-in way to save and build long-term wealth by making monthly mortgage payments. You also ensure long-term stability, hedging against hefty tax increases and potential displacement.

Downsides of Buying as an Investment

Homeownership, while often a worthwhile investment, can come with a range of costs and responsibilities. Unlike the hands-off ownership of a stock or index fund, real estate requires ongoing maintenance, property taxes, and insurance. Over time, these may cut into your returns and limit upside.

The cost of homeownership is magnified if you intend to live in it, rather than rent it out for cash flow. “Many people think of their home as an investment when, in reality, it’s often a lifestyle purchase,” says Paul Miller, CPA, managing partner at Miller & Company, LLP. It’s common for homeowners to “underestimate costs like repairs, taxes, insurance, and the opportunity cost of not having that cash invested elsewhere. Plus, unlike stocks or bonds, a home doesn’t produce cash flow unless you’re renting it out,” he explains.

Homes are also relatively illiquid compared to a diversified portfolio of stocks, index funds, or bonds. Accessing the equity in your home requires either selling the property or taking out a home equity line of credit (HELOC), which can be time-consuming and dependent on market conditions.

A lack of liquidity, Miller notes, can become especially problematic in retirement if your primary residence holds much of your net worth. “Some clients are surprised to learn that being ‘house rich, cash poor’ can be a real roadblock in retirement planning,” he explains. When your home isn’t producing income and the equity isn’t accessible, it can limit your lifestyle and flexibility.

Case for Renting and Investing to Build Wealth

An alternative to owning a home is to rent and consistently invest in a diversified portfolio of assets. While renting doesn’t build equity in a property, it typically comes with lower upfront costs and fewer surprise expenses. In turn, this creates more opportunities to save and invest in long-term growth strategies.

For example, imagine someone choosing between buying a $500,000 home with a 10% down payment or continuing to rent for $2,000 per month. To purchase the home, they’d need to put down $50,000 upfront, plus cover closing costs and ongoing expenses like:

• Property taxes
• Home insurance
• Maintenance and repairs
• Utilities

Alternatively, they could invest that $50,000 into a diversified portfolio. If they also contributed $500 per month in savings from avoiding the added costs of ownership and earned a 7% average annual return, they’d have about $293,500 after 15 years. Consequently, a phrase you’ll often hear about this method is “investing the difference” between owning and renting, making the latter worth it.

This approach also offers more flexibility. Renters aren’t locked into a mortgage, making it easier to relocate as life or job circumstances change. Renting can also preserve liquidity, giving you more access to your money when you need it and, depending on your portfolio’s structure, potentially more cash flow than a primary residence that doesn’t generate income.

Downsides of Renting and Investing

Renting and investing, however, has its challenges in comparison to home ownership. The first, and one you might hear most often, is that being a tenant grants you no long-term equity in a real estate property. Over time, you may feel an opportunity cost of not owning property, especially if markets continue to increase.

Your monthly rent is also subject to increasing due to inflation and market volatility. Unlike a mortgage, rental costs may increase 3% to 5% per year on average, depending on where you live and your landlord. If you’re planning on renting indefinitely or into retirement, it may be unsettling to know your cost of housing will likely continue to increase.

Finally, while investing in the market can offer strong long-term growth potential, it also requires you to be a disciplined investor. It can be easy to simply spend the additional income you gain from not buying, rather than save it. Without staying consistent, you risk building no wealth and, unfortunately, staying stagnant.

How to Decide What’s Right for You

Both paths, if followed optimally, are able to generate long-term wealth. The right choice, however, depends on your unique financial situation, goals, and long-term plans.

The first consideration to make is your time horizon. In the case of buying a home, it’s important to consider how long you’ll stay there. “Multiple moves with home ownership can erode the benefits,” says Chad Gammon, CFP^®, founder of Custom Fit Financial. Frequent buying and selling often leads to high transaction costs, minimal equity growth (due to early payments primarily being toward interest), and lost appreciation potential.

It’s also important to consider your financial readiness to own a home. Are you able to afford a down payment without becoming cash-poor? Can you handle the monthly and annual costs of homeownership? If you can’t, then it may make more sense to rent and invest as much as possible for intermediate and long-term goals.

Buying a home can also be just as much an emotional decision as it is financial. Beyond the numbers, the long-term security and possibilities a new home provides can be alluring. However, according to Dale L. Shafer II, CFP^®, CBEC^®, APMA^®, founder and financial advisor at Life Moves Wealth Management, it’s important to “talk about the non-emotional parts, do some math, and make sure [you] haven’t become house-blind.”

As you decide what option is right for you, consider your honest answer to the following questions:

• What’s my time horizon? Am I likely to stay in this area for the next 5-7 years, or do I value the flexibility to move?
• Can I afford the true cost of homeownership? Beyond the mortgage, can I cover taxes, maintenance, and unexpected repairs?
• Am I disciplined enough to invest consistently if I rent? Will I put my savings to work, or am I likely to spend the difference?

If you’re still not sure what to do, it may be time to speak with a financial advisor. A professional can help you determine the ideal move based on your larger financial plan and goals. This free matching tool can help you find a vetted advisor based on your goals, investment objectives, and current situation.

Words of Insight from Financial Experts

To help you think about whether buying or renting and investing is best for you to build wealth, we asked financial professionals to weigh in and provide their perspective. Here’s one piece of insight from each of them:

Paul Miller, CPA: “Don’t buy a home because you think you have to in order to build wealth. Run the numbers, think about where you want to live in 5–10 years, and consider your lifestyle goals. Sometimes renting and maxing out your retirement accounts (plus a solid investment strategy) puts you in a better position both financially and emotionally.”

Dale L. Shafer II, CFP^®, CBEC^®, APMA^®: “If one is considering buying a home, I recommend starting with why—family, location, work, stability, etc. Then, calculate what it cost on a monthly basis and compare to current expenses—if it will cost more, what does that mean to your cash flow and ability to save in other areas? If it will cost less, what’s the next best job for the ‘extra’ cash? And think about more than just the monthly payment… also consider the cost of landscaping, expected utilities, cost of driving from the new house to your place of employment and school, etc.”

Chad Gammon, CFP^®: “If you are in a stable financial position in an area you like, then consider purchasing a home. But if you want mobility and want to prioritize retirement savings, then renting can be a great option.”