To Buy or to Rent?

In many places where real estate advice is offered, from the Internet to advice columns and late-night infomercials, listeners and readers are told some variation of:  “Across every income bracket, homeowners are rich and renters are poor.” And, on the whole, this is true; examine the captioned chart, which summarizes findings from the Federal Reserve Board. But does homeownership cause people to be rich? It would be nice if the key to wealth were so clear, but it’s just as likely that buying houses is just something that wealthy people do, and buying houses didn’t create wealth. Unfortunately, this distinction is largely glossed over or ignored by those with a vested interest in getting people to buy homes, or who are simply blinded by the homeownership craze.

Wealth is often built by investment, and prospective homeowners should compare the investment opportunities gained and lost when they purchase a home. A homeowner may bag a healthy profit if the property appreciates sharply, but s/he loses the option to redirect the funds for the down payment and hidden costs to other forms of investment, such as a mutual fund or starting a business. Just make sure that you choose an investment that you’ll enjoy, as you won’t “wake up in the middle of the night and say 'Wow! Look at my tax deduction!'" as Lewis Wallensky told The Wall Street Journal.