Is Home Ownership the Best Path to Wealth?
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Here's an important money question. Is homeownership the best path to will?

brand. I am so excited to talk about this because we hear a lot of personal finance creators and really the american popular in hole talk about home owner ship like IT is the all b to wealth creation and to being able to build wealth. And so in show, we want to put that to the test. Is that in fact, true?

Often wondered, is that because people don't save and invest money, a lot of people will house because it's just part of what you do is you go through life. But very few people actually let their money start doing the workroom. So this be a great experiment to say, hey, let's actually separate the different behaviors you can do, whether it's running and investing or whether it's buying or if it's one. These people, because there are dead cruciate ors to just go hog wild and to pay off as possible. I can't wait .

to see the answer to personal finance, personal. So IT may turn out that the right decision for one person might not be the perfect decision for another person. So we want to dive into that and see how making one small decision, or really one large decision for most focus of large decision they'll ever make in terms of dollars and six, how IT can impact your financial life, which you know, it's another decision you can make that have a huge impact your financial life, right? Everybody said the table here, he said, let's talk about the three different options that generally exists when IT comes to housing.

What are those things? Got Nancy, who never bought a house and rents. But here's the good news because I know this is a Young people are struggling with the housing markets, got a lot more expensive, Nancy saving the dow payment.

She's investing all the difference between what he brings in and then he pays in red. And then you've got john who bought a home and he pays IT off in the traditional thirty years. We also assumed he bought the house with three percent down know, because we want to make this minimal. And then we moved to the third one, which is earl earl bota home. But he is a debt crucial and he's going to take up to fifty percent of his income to paid out that debt as fast as possible and get that mortgage wiped out.

So let's walk through our assumptions for this case study. Let's assume that all three of our individuals have a household income of a one hundred and twenty thousand dollars home. If they were one of the two that bought a home, they're gonna have a mortgage payment equal to twenty five percent of their growth income.

So it's gonna be twenty five hundred dollars. We're going assume they put three percent down. We know right now the mortality rate on a thirty year fixed mortgage is six point seven nine percent. And so that means that they gonna able to buy a home that's worth three hundred, seventy four thousand and one hundred and ninety eight dollars.

And we're gonna sume for nanty, who decided not to buy a house that she's going to pay the media ring in this country right now, which is two thousand and fifty dollars a month. So when we lay out these three individuals, Nancy rents for two thousand and fifty dollars, and SHE invest twenty five percent of her gross income, plus the differential between the rent payment and what the mortgage payment would have been has he bought. So in total, Nancy is going to invest two thousand nine hundred and fifty dollars every single month.

if I get with all would.

So now looks like a john. John is going to spend twenty five hundred dollars on housing. That's the twenty five percent.

He's follow the money guy rule. And with the other twenty five percent, he is going to save and invest that. So john is just gonna plan on paying the mortgage on its Normal term over a thirty year cycle. And then we have earl early, you ve already mentioned as a decorator, is going to put all five thousand dollars, fifty percent of his monthly growth income tories home. Then once it's paid off, he's gna begin investing all of that, all five thousand dollars.

So the question becomes, which one of these ends up Better? Who ends up in the Better spot? Well, if we just look at the data, we just look at the raw numbers, we can see that after thirty years, Nancy does not have a paid for home.

SHE was been renting the whole time and will continue to do so. But because she's been saving and investing, SHE has actually been able to accumulate a portfolio worth over four and a half million dollars. So certainly training a high vel .

of earth, L I notate. SHE did put down eleven thousand, two hundred and twenty six dollars as a house stamp. I mean, not is a house stamp, but actually market SHE didn't have to come up with the house down payment.

And then we also used a moderate eight percent rate of return on growing the assets. We have, of course, could have gone higher, but we wanted to keep IT everything equal. So we capit at eight percent .

because that's pretty reason. So then we, john, john decided he was gonna pay the house off over the Normal thirty year period and invest the whole time. Well, not only does johns house grow in value, remember he paid something like three hundred and thirty thousand dollars in the house, just increased the .

the real of three hundred and seventy hundred .

and seventy thousand dollars, and the house grows with inflation, is now worth over nine hundred thousand dollars. And his portfolio was grown to be worth four point six million dollars. So i'm sorry, his net t orth is four point six total portfolio value of three point seven million dollars. So again, pretty solid. Not quite as liquid is Nancy, but a slightly higher network.

Now it's kind of interesting to see right there that john is higher, the Nancy. So there awesome benefits of americans are not disappointed because I think it's is part of the american dream you want to get the house going. But I do think it's it's worth noting the spread is not as big as I think you would think.

But let let's think about the deck cruisers. What does that mean for them? Because they obviously, they forego investing until they got this debt extinguish.

And IT is important to note, we are in a unique time right now. Interest rates are a little bit higher, sure. So this probably is going to minimize the behavioral impact of being so aggressive. Whether if this was lower interest rate, there might be a different answer.

yes. So when we look at earl, what we can see is his house grew at the same rate, is john. So at the end of the thirty years, his houses also worth over nine hundred thousand dollars. But because he did not begin investing as early as job, because he didn't have that time, his portfolio only grows to about three and a half million dollars. Now again, when we look at the total network, he still comes in second with the network of four point five million dollars. What I think is wonderful about this illustration is that all three of these individuals, because they were disciplined, because dedicated to saving and investing over the long term, I would argue all three of them we're likely able to reach financial independent, is weather they bought a house, did not buy a house, or how they prioritized paying off the debt. In my opinion, this is really an example of how behavior over a long period of time can have a huge impact on your financial situation.

Yeah, I mean, I like the fact because we're going to talk about there are huge benefits to homeownership in the fact that IT does allow you to have stable housing cost. We go through a we go through inflationary period. Again, you kind of like IT when you have a house because nobody y's raising your rent on that.

There's also are some tax benefits. You get to deduct the mortgage interest. You got property taxes that are deductable and then of course, you get the capital gains exclusion for two hundred fifty thousand for an individual, five hundred thousand for a married couple. That's big to get out of taxes completely on the appreciation of what could happen in the house. And then the third one, this is not necessarily A A financial thing, but IT is nice to take out the transient part of life where you're moving around all over the place, especially if you're raising a family, you can grow roots, you can settle down your kids, can make neighborhood friends. There are a lot of those aren't necessarily financial, but those are definitely benefits for .

having a house. Now though, in reality, we recognized that this case study is super simplified. It's not as easy as just looking at the hard numbers here, thinking about the tax benefits. We think that home ownership can be a wonderful wealth building opportunity, but personal finance is personal.

And so before you jump in the homeownership and before you decide, is this part of your financial journey or should this be part of your financial journey, we want to walk you through some key factors that you ought to think about to determine. Does this make sense for me? I want the very first factors, and this is probably gonna come on as a surprise, especially in today's day in ages where you live.

Yeah, I was kind of shocker as we are metas a content team. And when Megan showed me the contrast between the two cities we chose, IT is shocking. And I feel for you people who live in a hot cost of living area is because the meeting, housing pricing and some of these cities is, is just job dropping. The easiest example I can think of as we look at los Angeles.

if you think about los Angeles, the median home Price, there's about one point to million dollars, while the medium rate to be able to in a place in los Angeles is only about twenty eight hundred dollars. So there's a wide difference, al, between these two.

If you think about buying a home in L A, when you factor run the downpayment of three percent plus the closing costs, you can have to spend eighty four thousand dollars of initial costs in over the life of paying the mortgage. You going to spend another three million, two hundred thousand dollars, well, at the end of that, you are going to have equity built up in the home, and the home value will have increased. But even when you back out the whole value, IT takes about twenty four years before IT was more advantages to buy N.

L. A. That IT would have been to rent from l if you're only measuring IT in terms of capital outflow. So if you live in a high cost of living area like that, IT makes a lot of sense likely to continue to rent over.

So we want to compare that. So that way, when people look at this is obviously where you live matters. And that's why we want to focus on this key point of the first factory is where you live.

But we want to contrast IT with where we're from. We're both from metro lana. We're from the outside and look at this. The median home Price is three hundred and sixty nine thousand dollars. Medium rent is one thousand eight hundred and seventy five dollars IT creates a different .

scenario ah when you think about buying a home in metro land. Again, if you factor in downpayment plus closing calls, you'll have a total buying about twenty two thousand dollars. And then over the course of the break in period, while you're making your mortgage payment, you'll pay in four hundred and forty five thousand dollars, but you will have built equity in the home of about one hundred eighty two thousand. So when you track the math in metro atlantic, if you can buy a home and you can live in the home for at least eleven years, it's likely that you will have come out Better owning the home than renting. So when you think about where you're choosing to live and whether or not you're going to buy a house in geography, IT really depends on how high the cost of living in that specific area.

By the if you want to know when the things we did to kind of help us with this calculation, the new york times has this calculator where you can compare ownership versus running. And that's one of things we used to kind of power this analysis and IT was very helpful. So youtube can go out there and play around with that yourself. Now number two here is the second factor is what you can afford .

yeah so you may determine, okay, well, i'm in an area and home ownership in this area makes sense. Have to figure out, are there actually homes here that I can afford? And if you follow our content for you on the time you we have a few rules of thumb.

And one of our rules of thumb that when he comes to buying a house, you want your monthly housing costs to not exceed twenty five percent of your monthly growth income. So if you even decide that this is a place where I should live, then you have to factor. And can I afford to do that if we have a great tool that can help you do that? If you go to money, guy, that comes last, resources. We have a home affordability calculator that will actually walk you through. You input the variables, you input your data, will show you how much can I afford based on my income, based on my interest rate, based on the term of loan i'm going to go with to determine other homes in my air that would satisfy the affordability.

Yeah, we want to make sure if you are asking yourself, what when they talk about twenty five percent, what does that include? We're talking about principle, talking about interest. We're talking about the taxes, of course, the insurance, but there's a lot more that goes into housing.

But we wanted to kind of show you we know it's a unique time to be buying houses right now. So we want to give you the definition of what twenty five percent was. But especially since rates have change so much, we have come, look, you guys know this because the majority of americans still have mortgages that are less than four and a half percent. But here we are in the market now where rates are greater than six and a half percent. Mortgage rates impact your payment significantly.

It's wild when you think about for the same Price house if you are going to buy a four hundred thousand dollar home. What that looks like from an affordability standpoint there is wildly based on the interest strates.

If we had a three percent interstate like what we saw a number of years ago and you were good going to follow the money guy rules and you are going to put five percent down, you are to make sure that you're tracking your monthly payment with a three percent interest IT is gonna be a little under seventeen hundred dollars a month. The income that you would need to have as a household to be able to afford that hole would be about eighty one thousand dollars. If interest rates were five and a half percent.

Now your mortgage goes from seventeen hundred a month to almost twenty three hundred month. That means again, to stay inside the money guy rules, you will need a household income of about one hundred and nine thousand dollars to make sure you're staying inside the affordability range. And then if interest strates are closer to where they are now seven percent, it's likely that you monthly mortgage payments gona be almost twenty seven hundred dollars a month.

That means that the income that you would need those interest strates to buy the same size house, the same Price house of hundred thousand house, is going to be nearly a hundred and thirty thousand dollars a year. So interest strates can have a huge impact on decisions. Home makes .

sense in you all moving. You would think that, okay, when these guys talk about three percent rates, I remember that was probably like pandemic and before. But we have a great slide showing you this is influx right now.

We get from november of twenty and twenty three to now november twenty twenty four. That's just one year. And look at the spread here. I mean, this is significant. We've got on the thirty is highest, seven and a half percent, but there were periods. And look, I know that maybe because we are only looking at this on a weekly basis, there was a day or so where rates did go on thirty years below six percent. So we've seen massive fluctuations in just a twelve months period, and hopefully.

that s going to settled down at some point. But don't miss here is like we understand that housing is difficult and it's a throws out there. We we recognize it's not easy and it's difficult out there, but far too many folks are not doing this.

They're not following these rules. And we know that right now, the typical homebuyer spent forty percent of their growth income on their mortgage payment in this last year. And if you're spending forty percent of your capital just on housing, IT begins to crowd out all of the other financial goals you have, begins to crowd out your ability to build and safe for the future. That's why we put these gardens.

And what I get worried about, the people who because if that is your principle, your taxes and in your insurance, what happens when you put in there the utilities, when you put in there the the maintenance, you can quickly see how housing can become fifty percent of your, you know, you're take home. And then what scares me is that there are too many people that are house rich, life poor and IT puts you and squeeze you.

And where you're not getting to save for the future, you're not getting to build. You're just you're on this tread mill to basically pay for the house. We've got to figure out how we can help people get out of that.

right? So we want to show you, okay, how much does this actually squeeze that? If I am one of those first time home buyers who spending forty percent on housing as opposed to only spending twenty five percent on housing, look at this. If we assume that you have an income of one hundred thousand dollars and let's assume that interest strates on mortgage or around six percent and then lets assume that when you buy house, you're to have about one percent of the value of the home in make its costs, you're going have another seventy five basis points or point seven five percent. Maybe that's P M I, the japan, or maybe there's home association deals your paying and you're going to come up with the downpayment of five percent.

When we think about affordability, if i'm GTA follow the money guy rule and i'm going to say that i'm gna put twenty five percent down, that means that just my principal interest, taxes and insurance, you're going to be a little under twenty one hundred hours a month. The average first time home buyer last year went up to forty percent in principal interest, taxes and insurance. That's over thirty three hundred dollars a month.

Or now when you begin to boat on, make its cost, and then you add on P, M, I, R, H, O, A, do what you thought was only gonna be forty percent of your gross housing cost is actually almost fifty percent, even for those folks who stayed at twenty five percent threshold. When you add maintenance cost, and when you add P, M, I, you add these other expenses, your actual gross gets to thirty one percent of your mouth take off. So when we think about housing and we want to stay inside the afford range, IT would not be horribly of you to even be conserved. Say, how might all in housing costs to stay below twenty five percent, if that were your goal? Then when you just think about principal interest, taxes and insurance, if you can even get closer to the twenty percent threshold, you're just going to set your future self for success to actually be able to save and bill .

for the future. Um I think it's important to say, look, we are very sympathetic with how hard IT is to get into your first home right now. But I also want to lean in and talk to my financial mutants who sometimes as you start getting pay raise es and things are going well, you start getting that is to upgrade and don't I love showing this because you see the cost, the cash flow impact on a monthly basis.

This is very important for you guys to pay attention to you, because there is so much of life. If you are letting IT all go into housing, you're creating a huge obligation for yourself. And I think so many people, we often say money is just a tool.

And and if you are losing focus on the fact that you have all your money going towards housing, you have to go to work, you have to wake up and go to a job maybe you even don't even love, but so you can afford this house, you're losing the flexibility. I think what all most of you actually are craving is the ability to do with your time, what you choose to do. And the sooner you can actually create margin ing your life and actually control what you're spending to start saving and building your army of dollar bills, the sooner you be able to make decisions out of your choice, not out of the obligation. That's why when people get into housing decisions where they are paying forty, fifty percent IT, not only puts them on the dangerous edge of a failure because I ve always been you ask your job or any of the assumptions change, you be in trouble, but he also puts you in this whole that you're that much further having the margin to build journey of bills and build dependent.

If we just think about the illustration we went through, said that months ly payment, just looking at principal interest, taxes and insurance, something like thirty three hundred dollars, if you were like to average first time home by the last year, there was spinning. Forty percent of the growth in come there. If you can figure out how to maybe you buy the more reasonable home.

You're not buying the five hundred and twelve thousand dollar home, you two hundred and sixty thousand thousand or home that freeze up about fifteen hundred dollars a month in your budget. Well, then fifteen hundred dollars a month can go towards retirement contributions, go towards groceries, go towards creating memories, go towards saving for the kids, go towards all of the other things in life that you want to fun. We don't come up with the money guy rules as a means of putting a restriction or a color around the things that you're doing.

We try to put them there to keep you from boxing yourself into a helpless situation that you can get out out of. And the reality is, if you do find yourself in a situation where, man, the numbers just don't make sense, I just can't make this work. That's why we started with the case at the very beginning shown that you don't have to buy a house, you don't have to be a homework to be able to build two financial independence, to be able to build for financial success. There's nothing wrong with renting, even if renting might be what you're just doing for this specific and particular season of your life.

Yeah I think the bigger thing and it's what I was looting to, is what are you doing to watch the cost of housing versus everything else in your life? And do you have enough margin to where you can own your life that much sooner? You know, we but we did something key when we did that first analysis at the beginning, we gave everybody the benefit doubt that they were actually optimistic decision, meaning that they were you're running then you were saving the the part that was not going towards buying a house, you were investing that for the future.

If you were buying a home, you still were investing for the future, even outside of the house, even for the decade, I think sadly. And this is what we the the third thing we wanna talk about this factor. Number three, what are you doing with your margin is unfortunately for the majority americans, you guys, it's like an either or you're either choosing to be good with money where you have a house and you're saving, investing, or there's the other americans were the only decisions theyve seen to be making or buy a house. But they never save and build wild, sad of their housing decision.

This is not just antal evidence from us. Look at we actually have from the federal serve data showing household set hold network as well as growth and financial assets inflation adJusting from one nine hundred and eighty nine all the way through all the way through twenty twenty two.

And what's really, really interesting when you look at financial assets, these are the checking accounts and saving accounts and four one case and rough s, those types of accounts aren't really increasing. So when we see individuals networks increasing, its not because the liquid asset, what IT actually is, the network is actually increasing is just because of the housing decision they made because their house has increased. So even for folks that are able to make the decision and get into a home that they can afford, they're not actually taking that margin and applying IT towards a building for a great, big, beautiful tomorrow. And what's amazing is IT doesn't take a lot a little bit, can go a long way if you can just give me enough time to let that happen.

Yeah, I mean, I really does make me sad when I see all those you big announcements where they say how much people's networks i've gone up and always the cinnamon is like take out house and you can see how much is happening. You'll see there's not. So we actually want to go a step further.

We said, okay, look if if people the typical person is doing forty percent, we're saying I had to be twenty five percent that fifteen hundred dollars a month that margin and we said, but maybe that's too aggressive if you said, hey, fifteen hundred dollars is too much money, let's just take half of through seven hundred and sixty five dollars a month because member, small incremental decisions really do have huge impacts in your future life we said, let's take seven, sixty five a month. What does that look like twenty years? What does that look like in twenty years? What does that look like in thirty years? And you guys to see the results of this small decision.

that one small decision, again, this is assuming, can earn eight percent on average. After ten years, just saving that seven hundred and sixty five dollars a month will turn into one hundred and forty two thousand dollars by the time you make IT to twenty years, it's turned into four hundred and fifty four thousand dollars of the time you make IT all the way through a thirty year full mortgage life cycle, buying that more expensive home. That likely is only onna increase that product at the rate of inflation over the long term. That small incremental decision to save that margin and built for the future could be worth one point one million dollars by the time you have I ve in.

That also shows letting your army of dollar bills grow upon themselves is the compounding effect. IT doesn't grow linear arly. IT grows in a compounding way. And that's why this really is a seven figure decision.

If you can cause you can't eat your house, I mean, in retirement, you're going unless you sell the house and you're moving to a lower cost of living area and you're going to use the equity for retirement, you're going to need some assets outside of living in that house. So that's why this is so important for us. And let's focus on, on the past, the wealth after going through these illustrations and working on this, what were the key observations .

we can figure out, whole ownership, the best path, the wealth wall, maybe IT depends. You want to make sure that you're in an area where buying is actually worth the investment that is actually makes sense to buy over. And if you make that decision, you want to make sure that you're in the home long enough to justify the decision. You also want to know, what can I actually afford and how do I build a budget that sustains that? I don't want my eyes to be a get myself in a situation where my housing decision crowds out all of the other financial goals that I want to find. And I have to make sure that while i'm making those decisions are not just banking on the house to be my piggy bag, i'm also putting money to work outside of the home so that when I get to financial dependence, when I get to retirement, i've actually done the hard work of letting my army ellar bills works for me.

Yeah, this is one is, I always tell people, when you start the house shopping endeavor is exciting, but you have to be careful, don't skip out on doing your homework of actually figure out what you can afford, what is your cash flow, what are your obligations.

And don't let somebody just don't assume that the real set agent or the mortgage broker is going to be looking out for your retirement, all your things because they might give you a number that is forty to fifty percent of your income. And just because I can get you approved at that does not necessary mean you can afford that. And I think that and I also for all of you who are feeling scared or you're feeling behind because you want this american dream, but IT feels like it's running from you because housing Prices have gone up, we come to this inflationary period.

I do want you guys take a deep breath, realize we had a huge rate of return on real estate that happened at the beginning of the twenty, twenty years with this in inflationary period. And I just I think that, yes, housing will continue to go up. But I don't think it's gonna run from you as fast as maybe IT does.

I don't like that recency bias make you feel like, hey, I have to go make a desperate bad decision when you really need to be thinking about this more from a holistic, what is your whole financial life look like you? Are you thinking about retirement? Are you thinking about housing? Are you thinking about how all these things work? Is a reason we have the financial order of Operations, so you can take the emotion out of things and actually have a non step system to navigate this world.

Making the right decision at the wrong time can often be just as bad as making the wrong decision altogether. That's why we put together tools like our house buying chocolates and have the hole buying calculate so that if hometown is part of your financial journey, you can make sure you do. And I hope everybody .

takes away was not an either or decision on housing versus investing is really a both because your money should work harder than you do on your host brand. Pressing mister boo hanson money, our team out the money .

guy show is hosted by brian president. A bound wealth management is a registered investment advisory firm regulated by the securities and exchange commission in accordance and compliance with the securities laws and regulations abound, wealth management does not render or offer to render personalized investment or tax advice through the money I show. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.