Why Homeownership Holds the Key to Wealth Creation in America
- Christopher Breland
- Oct 5, 2021
- 8 min read
There’s more than one reason that becoming a homeowner is the “American Dream.”
Not only can homeownership provide stability for families and anchor them in their communities, it can also be a catalyst for wealth creation and building a legacy of generational wealth.
What's in this Article?
The homeownership-wealth creation connection
Homeowner wealth by the numbers
The long-term impact of homeownership vs renting
How to get started
FAQs
The homeownership-wealth creation connection
You can boil down the link between buying a house and building wealth in a single word: equity.
“Most people do not see real estate as an investment. They see it as a roof over their head. Yet they celebrate when they are able to move up in two, three, five years due to the incredible equity they’ve gained in their current home,” said Nicole Rueth, a senior vice president and branch manager with Fairway Independent Mortgage Corporation (Fairway owns Home.com). “This equity, if viewed as investment returns, can be reused to produce income and asset growth. But you have to look at it correctly — not just as a roof over your head.”
The equity you build in your home creates new opportunities for you and your family in a number of ways. One is making a profit if you sell the home.
Let’s say you buy a home today for $200,000. The home’s value appreciates during the next several years, and when it comes time to sell, you’re able to sell it for $350,000. You can use the money from that sale to buy a higher-value home, purchase a rental property, or be more aggressive in your other investments.
“Taking out a mortgage, holding onto a property, and then cashing out tax-free at a low-interest rate (as long as the property is your primary residence) is one of the best ways to build wealth,” said Dawn Pfaff, president of My State MLS.
You can also borrow against the equity in the home. Once you have substantial equity, you can take out a home equity loan or cash-out refinance and use the proceeds to put a down payment on an investment property.
“Equity, if viewed as investment returns, can be reused to produce income and asset growth. But you have to look at it correctly — not just as a roof over your head.” Nicole Rueth, a senior vice president and branch manager with Fairway Independent Mortgage Corporation
Then you can start earning rental income from tenants. When you’ve established cash flow and built enough equity in the investment home, you can take out a home equity loan or cash-out refinance on it and repeat the cycle.
Owning a home is not without risks, and no investment is guaranteed. But historically, owning property leads to stable and significant returns — no risky stock investments required.
Although your home is just that, your home, and you want it to be a place of warmth, connection, and safety, you can also put it to work for you. Seeing your house as both a home and an investment enables you to be strategic about the purchase.
Homeowner wealth by the numbers
“Sixty-three percent of the net wealth of 80% of Americans is in their primary home. Their singular primary home,” Rueth said.
As home values rise and homeowners pay down their mortgage balances, their equity affords them cash needed not just for new economic opportunities but to fund their regular expenses.
“Harvard did a study showing [that] those 65 years old who owned a home were worth 44 times more than those who rented,” Rueth said. “And what’s even more disturbing is that those 65-year-olds who were renting were only worth $5,200. You cannot retire on $5,200.”
Homeowners’ median wealth was a stunning 89 times higher than that of renters. The two biggest factors in the wealth gap were home equity and retirement accounts.
Even if you aren’t sure if homeownership is the best wealth-building plan, the numbers reveal that there’s a strong correlation between higher household net worth and homeownership. A report from the U.S. Census Bureau found that homeowner households had a median wealth of $269,100 compared to $3,036 for renters.
In fact, homeowners’ median wealth was a stunning 89 times higher than that of renters. The two biggest factors in the wealth gap were home equity and retirement accounts.
Homeownership leads to significant wealth gains over time. According to a study conducted by the National Association of Realtors, the typical homeowner accumulated $176,123 in home equity in a span of 10 years on a median-priced single-family home. Over 30 years, the wealth gain increased to $307,979.
Other positive financial outcomes associated with homeownership:
Homeowners tend to have higher savings balances
Homeowners in urban areas tend to earn higher incomes than renters are higher income earners
There are tax advantages to owning a home
In short, homeownership is strongly correlated with better financial outcomes and opportunities for wealth creation.
The long-term impact of homeownership vs renting
Owning a home has positive benefits in the near and long terms.
In the short term, buying can stabilize your housing payments if you choose a fixed-rate mortgage. Your payments will remain generally the same month after month (with relatively small changes possible once or twice a year due to fluctuating taxes and insurance), enabling you to budget for those costs.
Rent can — and often does — increase, and you have no control over whether your landlord raises your rate. A spike in rental costs can leave you scrambling to come up with the extra money or find a new place to live.
Run the numbers: Find out whether renting or buying makes more sense with our Rent vs Buy Calculator
Then, as we mentioned, there’s equity.
Equity in a home can be converted to cash through the sale of the property or a home equity or cash-out refinance loan.
Depending on the home’s value and how much equity you have, you could have an additional $50,000, $100,000, or more at your disposal. You can use those funds however you choose.
What could you accomplish with this money? A few options that come to mind:
Renovating your home to further increase the value
Converting the home into a rental property and use the equity to purchase a new primary residence
Invest in other real estate ventures
Start a business
Finance your children’s college education
Supplement your retirement income
Another homeownership benefit is the tax deductions.* You can deduct a portion of the interest you pay on your mortgage each year, and you may be able to deduct interest paid on a home equity loan or home equity line of credit as well. Homeowners can often deduct their property taxes as well.
Homeownership tax exemptions are “one of the very few breaks the IRS gives us normal people.” Larry Gibbons, president of The Gibbons Group in Bethesda, Md.
So not only can you stabilize your housing payment — and possibly spend less on your monthly mortgage payment than you are on rent — you also get tax breaks.
Renting can be more convenient in the short-term, especially because buying a home is a major commitment. But buying a home may help you save money, establish passive income streams, and make progress toward your financial goals. It will also help you with retirement planning, and allow you to build long-term wealth creation strategies.
How to get started
Owning a home is a pillar of a strong financial plan, and you don’t need a lot of money to start. There are a number of low and no down payment loan programs, as well as down payment and closing cost assistance options for qualifying homebuyers.
But it’s important to work with the right people. Rueth said.
“Buying a home can be extremely overwhelming. It’s a large purchase, a lot of debt, and considerable responsibility. It should not be taken lightly,” she said. She recommended assembling an “A team around you” who “you know has your back and is willing to support your questions, your decisions, and the purchase of your first home.”
That team can include your lender, real estate agent, and family members or friends who will help you during the homebuying process.
Set your expectations, too. Homebuying is challenging, especially if this is your first time.
“That is where the learning is, in the first one,” Rueth said.
Once you’ve done it once, you’ll be more knowledgeable the second — and third and fourth — times around.
“It’s also extremely helpful to know your goals, to know what you are aiming for,” Rueth added. “Real estate can support many goals, but if purchased without intent, it can be too big, too small, too late to provide the financial income you are looking for.”
In other words, assemble your team and don’t waste time getting started.
You don’t have to buy your dream home today. Buy a modest home with little money down to start building equity. From there, you can build personal finance skills as you pay down your mortgage and learn to budget for maintenance and renovations.
Then the home — and any subsequent homes you buy — can become part of a long-term investment strategy.
“I personally have become a millionaire doing nothing more than buying and selling my personal residence every two years,” said Larry Gibbons, president of The Gibbons Group, a residential real estate company in Bethesda, Md.
He added that the tax exemptions for homeowners helped him reach that point. “It is one of the very few breaks the IRS gives us normal people,” he said.
Wealth creation FAQs
How do I start wealth creation?
One of the best ways to start a wealth creation plan is to buy a home. As the home’s value increases and you pay down your mortgage, your equity will grow. You can borrow against the equity to pursue other financial goals in the future, or you can sell the home for a profit. However you opt to use it, equity is one of the biggest determinants of a person’s wealth in the U.S.
How can I grow wealth in my 30s?
Some of the key ways to grow your wealth in your 30s is to pay down debt, live within your means, and purchase a home. The equity you build in the property will unlock future wealth creation opportunities, and for most people, it is among the biggest factors in their financial success. Even if you aren’t ready to settle down in your current city, you can purchase a property and rent it out for an additional source of income. You’ll benefit as the property appreciates and your equity grows, and you’ll also be earning money from tenants that can fund other investments.
What are the advantages of wealth creation?
The advantages of creating wealth include having enough money to support the people and causes you care about, to live comfortably, and be able to afford care and lifestyle amenities you may want or need. Wealth creation strategies will help you achieve goals such as sending your children to college, investing in business ventures, and enjoying a high standard of living. Creating wealth can also benefit your family for generations to come.
The time is now
When it comes to investing, time is money. The longer you own assets, the longer they have to appreciate. If you become a homeowner in your 20s or 30s, you could own your home outright by the time you are in your 50s or 60s.
What’s more, is that your home will have increased in value over the years, and you’ll have the option to borrow against its equity or sell the house for a profit.
Though there are many ways to create wealth, buying a home is one of the most practical ways for most Americans. It can be part of a larger strategy that involves saving, investing, and establishing a legacy of generational wealth within your family.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
*This advertisement does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
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