Buying a House will Slow Down Your Path to Financial Independence (But You Should Do it Anyway)

TLDR: buying a house isn’t the best way to build wealth – the stock market is better – but buying a home is still a great idea if you do it right.

Buying a House is Still Part of Our “American Dream”

Despite the buzz about renting being the new hottie, buying a home is still something the vast majority of us (like 80%) want to do.

And it’s natural.

You finish school, you find a spouse, and you want to set up camp. Everyone’s doing it! Well, not everyone, but there’s a reason this common pathway exists. It works and it fulfills our basic human desires.

I certainly wanted to buy a house once I got married. I wanted to “participate in the real estate market.” “Yeah, bro!”

I will admit now that buying a house to live in isn’t the best way to participate in the real estate market. But it is A WAY.

And that fact didn’t stop me from wanting a home. And it isn’t going to stop young Americans from wanting the same thing. Is it stopping you?

There are too many homes up for grabs and only so many landlords to go around. Someone has to do some buying. And the market will adjust (either through prices, regulation, format, or some combination of all of these) and people will want to buy.

The act of the home purchase will continue to be a part of the American dream. And…buying a house CAN make you wealthy.

Buying a House – If Done Right – Has a Side Effect of Making You Wealthy

There’s no getting around it, the majority of houses appreciate over time, and this creates a large amount of wealth for a large number of people.

Exact numbers are hard to come by (due to changing home sizes and other factors) but historically, houses appreciate on average 3-4% each year.

And because the vast majority of homeowners put all of their “investment” into their house, they tend to credit this as being the source of their wealth. And it is.

For most people, their home is their greatest asset and given the appreciation they see throughout their lifetime (4% each year), it’s no wonder they feel positive about it.

Good for us!

The problem with this situation is that some people think that because home ownership creates some wealth for many, it must be the key to wealth for everyone. This leads, in part, to things like the subprime housing crises of the ’00s.

Just because a house creates wealth for many, it doesn’t mean it was the best path they could have taken, and it doesn’t mean it’s best for everyone.

Here’s why it works. A mortgage is somewhat of a forced savings account. And for a majority of people, it’s the only tool strong enough to allow them to stash some money way (albeit in their home) long enough to amass wealth. It satisfies both the desire to spend and “save”.

I’ve purchased two houses in my life and thanks to some strong appreciation in my area, they have helped to make me wealthy (on paper at least). I’m not complaining. But I also realize what I’ve missed out on.

Buying a House is Not the Most Efficient Way to Build Wealth – Investing in the Stock Market Is Better

Historically, the stock market has returned an average of 7% annually. Real estate appreciates on average 4% annually. Stocks win. If you want your money to grow as fast as possible, you would put your money in the stock market (or a business) vs a house. End of story.

If you are pursuing FI/RE, and want to get there as fast as possible, you would be better off skipping home ownership and investing the money you would have used for a down payment and mortgage payments (and home improvements and repairs and taxes and insurance – ha).

But getting to FI ASAP isn’t everyone’s goal. My story even shows that you can beat the averages and actually come out ahead over something like a 10 year period.

My Story: AKA The 10 Year Counter-Anecdote

To add a real-world example, I’m going to share my story with homeownership. My story is actually an argument against the idea that stocks win over the long haul, but I’m still sharing it to: be transparent about my story and to give you an idea how to do your own evaluations.

I purchased my first house in 2007 for $205K. I put 20% ($41K) down. At the time, my wife and I were newlyweds and didn’t have kids yet – DINKs. You can read more about how we purchased this home here.

In 2012, we decided we wanted to move across town – closer to a school we wanted our kids to attend and into a house with a yard. At the time, our house value was about the same as when we purchased (i.e. it rebounded from the housing crises of late 2007/2008).

But, the value wasn’t enough for us to sell with the help of a Realtor and come out ahead. I didn’t want to “lose”. So we held on the house and converted it to a rental property.

Then, we purchased our next house for $250K and put another 20% ($50K) down.

The first home is now worth $325K (6% average annual gain over 10 years), and the second home is now worth $384K (9% average annual gain over 10 years).

Had I taken my $41K in 2007 and my $50K in 2012 and invested it, they would be worth $60,000 and $88,500, respectively. That’s an annual average gain of 3.6% and 10%, respectively. (calc used for this)

In summary:

  • 2007 House 6% > 2007 Investment 3.6%
  • 2012 House 9% < 2012 Investment 10%

My situation shows that you can, in some cases, buck the averages over a short period.

A Home – Not Just a House – Can Be Worth It

Just because it isn’t an efficient path to wealth, it doesn’t mean you shouldn’t do it. There’s more to life than money, after all. “Build the life you want, then save for it.”

Owning the place you reside – your home – has many benefits.

For starters, you get to call all the shots (within HOA and municipality rules, of course). Want a new floor covering? Do it. Want a pool in the backyard. Go for it.

Sure, you can still do this by renting, but I argue that it’s more common amongst homeowners to “own” their relationships with neighbors and other community members and organizations.

Having a home is also a natural way to diversify your assets. Most people will never become a real estate investor or buy a REIT or buy real estate in another way, so a home is a way to hedge against the rest of your finances.

For me, buying my first home was a gateway to becoming a landlord. I knew it was possible that one day I could rent out my first home. And that’s just what we’re doing – generating an extra $4,000 a year with it. I’m not sure I would have that now if I was still renting.

Buying a Home the Right Way

If you’re going to buy a home, here’s the best way to do it:

First, be at a place in life where it makes sense to make this kind of investment. For most people, this will be when they have a stable career, they are married, and they have the majority of the kids they are going to end up with.

Because of the public school system, people that meet this description have a high likelihood of remaining in their home for 15+ years. Given the cost of buying/selling a home (closing costs, realtors, repairs, etc.) it makes a big difference in the overall cost of ownership if you can stay in your home a long time.

Second, once you decide you’re ready to buy, you’ll want to have as much money as possible towards the purchase. At a minimum, you’d want 20% to avoid PMI, give yourself some cushion against market downturns, and to simply prove that you are ready for homeownership.

There are, however, legit ways to buy a house without putting 20% down. I don’t necessarily recommend this.

Of course, saving 20% is no small feat. For many people, it requires sacrifice in your budget, implementing an automatic savings plan over a long time, and even adding new streams of revenue.

To encourage you to save your 20% I would find some accountability.

The Down Payment Movement – Join In

For me, back in 2007, it was other personal finance blogs that motivated me.

Today, you can still follow your favorite blogs, podcasts, or Youtubers for inspiration, and you can even join a special movement dedicated to helping you save your downpayment.

So what’s your take? Are you pursuing FIRE and homeownership at the same time like me? Or are you on the fast track?

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  1. Avatar A Millionaire Next Door says:

    Real estate is 24% of my portfolio. I ran some numbers yesterday. My stocks (mutual funds) which are 74% of my portfolio have averaged 11.0% return since 2013. My real estate (four houses owned free and clear) have generated a whopping 20.7% (increase in value) over the same period, plus 3 of them (rentals) generate cash flow of $2790 per month. Real estate done right is a great wealth building tool. (We are living in good times right now financially.)

  2. Renting was awesome. I loved having all maintenance/repairs covered by a fairly responsive management company.

    Now, rent is 50% higher than my mortgage payment in my area (I bought when houses were dirt cheap) so I can afford to get a $500 housing repair every single month and still break even. Plus, all that tax and interest I pay works out as a tax deduction anyways.

    Still, I sometimes miss not having to scrutinize the siding and deal with the landscaping. I like having one number I call when anything goes wrong and be able to expect it will be fixed the next day without having to pull out my checkbook (I still have one for repair companies that don’t take plastic). There was a wonderful simplicity to renting an apartment.

  3. Great article PT.

    I was wondering if the repayment on those loans (and its interest rates) needs to be factored in the calculations to get to a figure considering all the scenarios.

    But, I do agree on the tenets of the article and looking forward to more articles on this site!

  4. Avatar Smile If You Dare says:

    There are non-financial benefits of owning a home which you touch on. The connection to neighborhood and neighbors and the community.
    The feeling of capability to pay it off someday so eventually no longer have the debt hanging over one’s head… once I own it free and clear, I cannot be evicted; whereas as a tenant a landlord can always try to kick me out.
    I can feel rooted and its my own home. I can garden and plant things knowing I could be there to enjoy them later; I can plant trees with the expectation that I can enjoy their fruits when they decide to fruit.
    It is much quieter and private than living in an apartment house.
    And so on!

  5. This is great and I totally agree! We just accepted an offer yesterday to sell our first house (we are relocating to be closer to my mom while the boys are young, yay!) and I’m working on a post to show our annual return over 3 years. And what it would have looked like if we rented instead.

    While it worked out for us, we will be renting until we are ready to settle down somewhere for the long-term. We had the misfortune of having to do a lot of deferred maintenance on our house in the 3 short years we have been here and that benefits the new owners, not us.

    The goal is to make the next house our forever home and pay cash for it! Fingers crossed!

  6. Avatar Ryan Anderson says:

    What you are not taking into consideration in your calculations is that you only put down $41k. And the house went up $120k in 11 years. That’s a lot more than 6% return. That’s what makes real estate a great investment is that you can use leverage. So that is more like 15% average return. Also you should include the principle portion of your mortgage payments because that is equity you wouldn’t have if you were renting. Not to mention the 300-400 month premium you would be paying to rent a similar house over your mortgage amount.

  7. Avatar Wise Money Tips says:

    If you plan on settling down in one area and do not expect to move around too much, buying a home can indeed be a good investment. And you do have to buy at the right price and with reasonable debt levels. Even if it doesn’t throw off any rental income, the appreciation over time and “forced savings” by paying down the mortgage can allow you to build up some significant equity. And the diversification into “real estate” will be an added benefit.

  8. Avatar Mrs. Farmhouse Finance says:

    Great advice, PT! My husband and I are getting ready to build our first home, but luckily we are in a good financial position to do so. We have been saving for the past couple years to put 20% down, and we will be doing some of the work ourselves (don’t worry, my husband is experienced:) ). Our rent right now is so cheap that if financial independence was our primary goal, it would make more sense for us to keep renting, but the pull of homeownership is too strong.

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