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Median American home price in USA is $229,000 GTS Productions /

In an earlier post, I assessed homeownership from an investment perspective and found that homes are terrible investments that barely keep pace with inflation.

This poor investment, however, does force the average American to save the money they’d otherwise spend. The result? The median net worth of American homeowners is over 30 times the median net worth of American renters. Homeowners might not get back every dollar they put into a home, but they’re getting back a lot more than the American who rents.

But it need not be that way. Here is how any renter can beat the average American homeowner in the long run.

First off, you need to save a down payment by age 33

That’s the average age of the first-time home buyer.

Instead of using it for a physical home, you’re putting a down payment on what I call a “money mansion.” You can’t live in your money mansion, but it will make you rich. According to the median American home price ($229,000), a 20 percent down payment is $45,800. Invest this in a brokerage account that tracks the market — where you can hope for a 7 percent annual return.

Here you have one major advantage over the homeowner: You can open the account right away and begin collecting interest instead of piling up a lump sum in savings. Just make sure your money mansion is worth $45,800 by age 33. Assuming you collect 7 percent interest per year, you could save as little as $3,000 per year and still make it, even after taxes. Or you can play it safe and save $4,580 per year from 23 to 33 — on top of your 10 percent retirement savings.

Once your money mansion hits $45,800, you need to feed it a portion of your monthly income equal to what the home buyer spends on their mortgage. See, the homebuyer is essentially saving this money because at the end of a 30-year mortgage, they own a house worth all the money they put into it, which has (hopefully) matched inflation. But this is the tricky part. On average, homeowners spend 15 percent of their after tax income on their mortgage, while renters spend 30 percent of their after tax income on rent. That means you need to put 15 percent of your income into your money mansion on top of your rental payment if you want to beat the average homeowner. This would be the time to move into a one bedroom with your significant other to save on rent. Every dollar you don’t spend there is a dollar you can put toward your 15 percent.

If you take these steps, 45 percent of your take-home pay goes to rent (<30 percent) + money mansion (>15 percent). This means you’re living off of only 55 percent of your take-home pay. Do you currently do this? Probably not. But that’s what it takes to beat the homeowner.

So let’s talk numbers

If you manage to rent + save + invest, how much do you win in the end?

Using the average American household income of $54,000 as a guideline, your 15 percent money mansion contribution becomes roughly $5,100 per year after taxes. If you start with a “down payment” of $45,800 and contribute 15 percent of your monthly income every year for a “30-year-mortgage,” you’ll have $728,000 in your money mansion (that’s after taxes, with a conservative 7 percent yearly return).

So the gamble you’re making is that today’s average American house will not exceed $728,000 in value after 30 years of appreciation. If our $229,000 house keeps pace with inflation, it will be worth only $555,000 — and that’s a big if. A hundred years of inflation-adjusted US housing prices suggest that a home increases only 0.1 percent in value per year on average. Your home probably won’t be the exception.

Looks like the renter wins handedly

He or she gains 25 percent more net worth, and all of it liquid and free of closing costs. Some would say the liquid capital is worth a premium.

But the renter only gets to live on 55 percent of their take-home pay during their life while the homeowner lives on 85 percent. That’s an extra 30 percent of income — not spent on rent — to spend on life. The homeowner could easily invest the difference and beat the renter.

The homeowner has other home-related expenses, however. Home upkeep and repair costs average 1 percent of the value of the home per year. On our $229,000 home, that’s $2,290 per year. But taking inflation into account, you can expect the costs to rise over time. Over 30 years, that could be $114,000 or more.

The homeowner also pays property taxes. These vary widely by state and county. For the sake of simplicity, let’s assume our median American homeowner pays a median American property tax of 1 percent of the home value per year — which is lower than many countries surrounding major metros.

So how does that figure in? Over 30 years, those home upkeep costs and property taxes will eat into 50 percent of the income the homeowner isn’t spending on rent. So the homeowner’s true take-home savings are just 15 percent of income. They get to live on 70 percent of their income, while the renter, on average, lives on just 55 percent. But at the end of the road, the renter is 20 percent richer.

Suddenly, home ownership doesn’t seem like such a great deal. By renting and investing, you can end up with enough money to buy a home in cash by the end of your life — and you will never pay a penny of interest, or property taxes, or buy a new sump pump along the way. What’s more, homes are risky investments. You never know how the community, city, or state will turn. By comparison, investing in the market seems like a pretty safe bet. I don’t know about you, but it’s a renter’s life for me.

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  • cheeseburgerbob

    I don’t think you would need to save as much as a renter to beat a homeowner. Lots of costs of homeownership always seem to be ignored. An owner will pay annual property taxes, maintenance (on everything from roofs, to exterior to landscaping, as well as appliances and plumbing, etc,…) as just a start. If renting something without land, the renter wouldn’t even have regular lawn care. The deductions for property taxes & interest may not be deductible unless they are large enough to itemize (so that benefit is not their for many homeowners). And, lastly, the real estate commissions and other costs (especially if moving a few times) are an additional cost that eats into “profit” in owning a house.

    • David

      I’m inclined to agree with you. The hidden costs of home ownership are more numerous than we realize. Simply furnishing a home is expensive. The smaller square footage of an apartment (and lack of storage space) prevents you from buying more things. Many people do not realize how few possessions they need to be happy.

  • UrbanMan

    If you just buy some shitty house in some shitty suburb and don’t invest squat into it then, no, that’s probably not a good investment. But if you’re not a lazy idiot, then you might be able to earn some better returns. Using the average return makes no sense because the vast majority of people buy homes out of necessity rather than for financial gain. If you’ve looked at markets in and around many major cities lately, you might notice a different trend. Nobody *needs* stocks, everybody needs housing. You also don’t need anywhere near the 20% down payment you claim. A primary residence can easily be purchased for as little as 3.5% down. Your math doesn’t add up, and I call bullshit, David Incandenza, on this whole “get rich renting” scheme. Bullshit.

    • David

      Hey UrbanMan! This article is by no means intended to offer a surefire method to beating a homeowner. The purpose is to show that it IS in fact possible to develop significant personal equity through means other than homeownership. You are right to remain skeptical about my figures — they are medians or averages, and both are poor measures of reality, though they’re the best measures we have. My math does add up, however. In fact, if you were to make a down payment of only 3.5%, as you suggest, the interest you would pay on that loan over time would only decrease the amount of money you stand to make from your home investment.

      A home purchase should be a very careful decision. But no amount of research will allow you to predict the future. 30 years is a long time for a mortgage, a neighborhood, or a city. In that light, renting seems risk-averse. And my larger point here is to encourage people to consider renting as a viable alternative to home ownership that will not necessarily leave you with low equity later in life.

  • matt77

    I love renting for a simple fact of saving money on renovations. I move every 3-4 years into a new apartment that is newly renovated or new construction. That alone saves me at least 20K-50K in renovations! Also, some renters based on income can have a tax write-off of property taxes that are passed from landlords.