As a financial planner, I always say you don't have to buy real estate to build wealth — a better strategy is much easier (2024)

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• Buying a home may be the "American Dream," but it's certainly not a prerequisite for building wealth.
• Owning a home is expensive, even if you rent it out, and you're never guaranteed a profit.
• Consider REITs instead, and maximize your investments in the market to build long-term wealth.

We're often told that buying a home is one of the greatest investments we can make. But just because it's the "American Dream" and a tangible sign of success for many, it doesn't mean it's your best option if your goal is building wealth.

While real property can boost your balance sheet and play a part in growing your wealth, it's critical to understand that you don't have to buy property to get rich.

Let's break down some of the myths around real estate as an investment that can mislead you — and in the process, show why real estate isn't a prerequisite for building assets.

Real estate isn't always a good investment (or an investment at all)

"Always" and "never" don't have a place in a savvy investor's vocabulary. There are no sure bets or guarantees, especially when it comes to real estate, because there are so many variables that fall both within and outside of your control.

Factors outside of your control include:

• Overall economic conditions, including the current interest rate environment
• How the housing market in your area performs
• Your specific location in a community
• The timing of buying and selling

If you're interested in becoming a landlord or flipping properties, you may have a bit more influence even amid these variables. You may be able to hold onto a property until the market is more favorable, for example — but then questions of liquidity and expenses come into play.

Homes are expensive, illiquid assets that come with expenses every step of the way, from upkeep and maintenance to the transaction to buy and sell. Every dollar that goes towards cost is a dollar that eats away at your potential profit.

When you're talking about a single-family home that you live in as your primary residence and don't pull rental income from, the idea of an "investment" falls away entirely. At that point, a home is more of a utility than anything else.

For many people, making money, breaking even, or losing out on a real estate deal comes down to timing and luck — which is a big reason banking on property as a way to grow wealth isn't the ideal strategy.

Renting isn't throwing money away, and buying might be riskier

Maybe you understand that homes are expensive to buy and maintain, but you still feel compelled to put your money into real estate because the alternative seems worse.

After all, you get the opportunity to build equity in a house you own. Meanwhile, you throw your money away every month you remain a renter.

Right?

Not so fast. For one, so much depends on your location and the prices of rents and homes in your specific area.

When I rented in Boston from 2015 to 2020, renting was actually considerably cheaper than owning — and I took the money I saved in housing expenses and invested in the stock market for a bigger return than I would have gotten from buying and selling a property in the same timeframe.

Renting poses less financial risk than buying a home. The most you pay for your housing each month when you rent is the cost of that rent (and a small amount for renters insurance). When you own a home, the least you're likely to pay each month is the mortgage.

But you're likely to spend far more between all the associated expenses of homeownership, from property taxes and homeowners insurance to upkeep and maintenance (which you can estimate will cost you around 4% to 5% of a home's value a year).

Renting also gives you its own kind of leverage: By renting, you're more flexible and agile with your finances than you would likely be if you were saddled with a large, illiquid asset that may or may not be easy to offload when you want. When you rent, you purchase convenience and choice.

You can build wealth while you rent by directing some of your available cash flow to savings, retirement accounts, brokerage accounts, or even other investments like education or a business startup.

You don't have to purchase a property to invest in real estate, anyway

None of this is to say that buying real estate is a bad move or won't work out in your favor. The point here is that you don't have to in order to grow wealth.

And you can even buy real estate without actually buying physical property. You can invest in REITs, or real estate investment trusts. By investing in an REIT, you invest in a company that professionally buys, sells, and manages real estate properties for profit.

As an investor in an REIT, you receive some of that profit back to you. There are still no guarantees here, and REITs can and do lose value. But they give you an opportunity for exposure to real estate without directly taking on the risk and expense of owning and managing a specific property.

Consider this path to wealth instead: systematically investing in financial markets

Buying a home can be part of your financial plan — but it doesn't need to be your main investment vehicle. If your goal is to build wealth, then you need a systematic, reliable, tested, and repeatable process to use over and over again for the long term.

This is where real estate often falls short for the majority of people. It's hard to replicate because you need large upfront sums of capital for every purchase, and you're limited to the physical inventory that is available in a particular location at any given time.

You're also taking on much more financial risk than you actually need to secure a reasonable rate of return (given that houses are expensive to maintain, tenants are unpredictable, and you're subject to market conditions in your specific location if you want to liquidate).

Plus, it's just hard! There are much easier ways to grow wealth, especially if you start early. Namely, that's using a globally diversified investment portfolio to buy into financial markets.

If you want what might be the simplest, most reliable, easily repeatable process to build wealth? Try this:

1. Take advantage of any qualified retirement accounts available to you. These can provide tax benefits (by deferring taxes, or helping your wealth grow tax-free). These may include 401(k)s, a variety of IRAs, and HSAs. Aim to contribute the maximum allowable amount each year to the accounts you can access.
2. Once you max out those accounts, open a taxable investment account. This is also known as a brokerage account. Contribute a set amount to that each year, as well. (We recommend our wealth management clients save 25% of their gross income each year to a mix of retirement and brokerage accounts.)
3. Invest in a low-cost, globally diversified portfolio. Once you start using investment accounts, set up your portfolio using low-cost investment options (like mutual funds and ETFs). These are baskets of securities that can give you exposure to a range of asset classes and types, but spread your investment risk across a variety of sectors and locations.
4. Contribute systematically. Consider using a dollar-cost averaging strategy to help you stay consistent. That means investing the same amount on a regular schedule, rather than investing a lump sum.
5. Commit to leaving this money invested for the long-term. Compounding only works if you give it the time to do so. Once you set up your investment system and strategy, stick with it. That means not stopping and starting contributions depending on how you feel that month, or what current events happen, or what the market did recently.

You don't need to invest in real estate, use complicated plans, buy expensive products, or know some financial secret that no one else does to grow wealth. You just need to set up a simple system that you can stick to over time, and then get to work.