THE MILLION DOLLAR DIFFERENCE: HOW REAL ESTATE MAKES AN IMPACT ON FINANCES

To help provide you with great strategies for your financial future, I’ve invited Forbes Financial Blogger and great friend of mine, Nancy L. Anderson to create an informational article on the benefits of Real Estate as an investment in your future.  I hope you all enjoy the article and Nancy’s perspective on living and prospering.

THE MILLION DOLLAR DIFFERENCE:
HOW REAL ESTATE MAKES AN IMPACT ON FINANCES

This is a guest article by Nancy Anderson, CFP, Financial Writer at Acres of Acorns – Financial Strategies for Late Starters and lover of real estate, saving money and skiing in Park City.

Owning real estate is key to growing your net worth.

Here’s the issue:  Housing is expensive – very expensive. Housing costs comprise take up much of a worker’s monthly income.  The Consumer Price Index (CPI) pegs “housing” at 38% of monthly income. So close to 40% of your paycheck goes for housing every month of every year. When you rent, that money goes into a black hole.  Your rent payment is going to pay for someone else’s (your landlord’s) mortgage payment.  Sadly, as a renter, that payment never ends. Renting is cheaper at first but more expensive later.

When you own your home, it’s more expensive at first and more economical later.  To buy a home, you pay a downpayment as well as property taxes, insurance and water/garbage services.  Owning costs more upfront. You take care of the upkeep, too.  The phone call you made to your landlord when the dishwasher broker is no longer.  You get to repair and replace everything yourself. In the long run, owning your home can be a huge a moneymaker — a cornerstone asset in your financial plan.  If you want to grow your net worth, adding real estate is important.

In fact, over the past 30 years as a financial planner, all of my clients, with very few exceptions, own their home versus renting one.  In one of my favorite finance books, The Millionaire Next Door, author and researcher Thomas Stanley, shared found a common trait among millionaires is they own their own home.

Let’s compare renting versus homeownership:

For our case study, let’s compare buying a $360,000 home with a 30-year fixed mortgage payment of $1,500 with $300/mo. in taxes and insurance.  The downpayment is $60,000 and our homeowner pays $1,800/mo to live in the house. Our renter pays less at $1,500 a month in rent. Since a renter has no downpayment, maintenance or upkeep costs, their total cost is $1,500.

How renting impacts your finances.

Let’s start with our renter.  We’ll call her Amber. Amber pays $1,500 a month for rent that goes up by 2% each year.  Simple math tells us she pays $18,000 in rent the first year. When the rent increases by 2% the next year, she forks out $18,360 in rent the following year. This 2% increase is no big deal to Amber but it creeps up over time.  But by year 30, Amber is paying $2,700 a month — $32,600 a year in rent – almost double what she started with. Over 30 years, she has paid out a whopping $745,000 in rent. That’s a big drag on her net worth.

Contrast this to Lisa who purchases a home. Lisa’s down payment was $60,000 and she got a fixed mortgage for 30 years.  All in with taxes and insurance is $1,800 a month. Simple math tells us she pays $21,600 a year.  With a 30-year fixed mortgage, Lisa’s payment is frozen in time. While rents go up, her payment is fixed. Her property taxes and insurance may increase along the way but her major payment, her house payment, is fixed. Fast forward 30 years and Lisa makes her last payment.  Her cost all along has been $1,800 a month but now she owns the home free and clear. Over 30 years, Lisa paid $648,000 in mortgage payments plus her down-payment of $60,000 so she paid in a total of  $708,000. The key difference here is she owns the house.

Resource:  Calculate your monthly payment with this mortgage calculator

At year 30, our renter and homeowner are looking at very different financial scenarios. At year 30, Lisa’s mortgage payment is zero.  Her taxes and insurance are $300/mo. (Her property taxes may have gone up a bit but we’ll not over complicate our case study.)  Her cost of housing is $3,600 a year compared to Amber’s at $32,600 a year to rent. Lisa’s house went up in value, too.  If she paid $360,000 for her home today and it increased in value by 4% per year, the value of her home is $1,017,000.

Resource: Check out this Rent versus Buy calculator from Realtor.com.

Lisa is sitting on a million dollars worth of equity in her home AND lives mortgage free!  Amber, our renter, is still paying rent and has no equity. Lisa, our homeowner, made her last mortgage payment and the equity in her home is a valuable asset.  With no house payment, Lisa has about $30,000 more a year to spend. She could retire earlier and travel.  With less drag on her cash flow, she could buy a new car for cash.  She’s got an extra $30,000 a year and equity in her home. The bottom line is she has more wealth and more options.

Buying a home versus renting a home is a million dollar difference in net worth. Buying a home costs more in the beginning but pays off tremendously later.  Start saving up for that down payment!

Nancy L. Anderson, CFP

As a 30-year Certified Financial Planner (TM) Professional and retirement writer for Acres of Acorns (for late starters to retirement planning) and  Forbes.com with over 6 million page views, she’s helped millions of people with ideas and tips on saving and investing for retirement.

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