Written by Christopher Steward, Director of Investments and Partner
Sometimes it pays to break the status quo – literally.
For decades, one achievement has been positioned as the ultimate attainment of the American dream: Homeownership. Depending on your financial assets and future goals, however, following the masses into a 30-year mortgage might not be the investment that yields the best returns.
Here are considerations for when it may benefit real estate investors to rent, buy, or build a new home.
Renting a home
45 million homes are rented – about 34% of all units across the United States. Though there can be a stigma around renting, when approached with discipline, renting can increase someone’s wealth by saving costs up front.
The U.S. Census Bureau recently released a report highlighting how the cost of homeownership continues to rise. These costs include, but are not limited to, mortgage payments, home insurance, taxes, utilities, and fees like those from a homeowner’s association. In 2024, the median percentage of income homeowners spent on these costs was more than 20%. Instead of having a portion of your income dedicated to long-term housing costs, renting provides the ability to invest some income into future financial goals like saving for retirement.
Renting also offers less fiscal risk than homeownership. If a specific market sinks, and home values go down, your money isn’t tied to that investment long-term. Earlier this year, home values were falling month-over-month in more than 60% of the country according to Newsweek. While a correction in the market could salvage those values, there may be places that do not recover and homeowners who lose a percentage of their investment.
Finally, from a personal standpoint, renting allows more flexibility around life-changing decisions. If you are not ready to put roots down in one specific place, renting makes it easier to keep short leases rather than worry about being committed to a long-term mortgage. Relocating is certainly an option for homeowners and home builders, but it comes with more strings attached (like the need for a successful sale).
Buying a home
While buying a home usually requires a hefty fee upfront, you’re paying for the privilege of building equity. After dedicating your savings or securing a loan to get into a new home, every mortgage payment pays down your principal and interest, cementing your ownership on an asset that will more than likely grow in value – something renters don’t have access to.
Homeowners also benefit from breaks during tax season. Those who itemize expenses on their tax returns can write off the interest they pay on their mortgage, for instance. Homeowners who itemize their expenses can deduct mortgage interest up to $750,000 of mortgage debt (with a higher debt ceiling for those who bought before the end of 2017).
Additionally, it’s possible to replace the savings you spent on buying a home by renting part or all of it for an additional income stream. Many landlords do not allow subletting, or tenant rental of property that isn’t theirs. If the deed is in your name, you can take advantage of this asset to grow your wealth in real time — a great option if this is your second home or if you’re looking to relocate.
Without the luck of selecting a builder who picks up your margin, building can come with a smorgasbord of challenges. Depending on the nature of the project, those who choose to build a new home may face issues like cost overruns that mean generating equity won’t happen as quickly.
If you lose money up front from buying an existing home, you can make it back in a more predictable method through returns later and spend your replaced savings on efforts like college savings for kids or grandkids.
Building a home
With the right contractors in the right market, building a custom home can be more economical than buying property with an existing residence.
It’s true that new construction can be unpredictable, but safeguards are put in place by professionals with proper project management to avoid the obstacles alluded to above. For instance, a simple and straightforward design that minimizes complexities can decrease labor costs and material waste. Discuss with your architect how you can make the home cost-effective without sacrificing style.
If you find a builder who can help you save on the cost margin with incentives like a fixed-fee or no-profit percentage, you might potentially pay less than you would to a builder or previous owner who held onto those profits and resold for a higher price — all while customizing the space to your liking.
Lastly, new homes statistically require fewer repairs. This means that even if you spend more on your project, you will spend less on your maintenance than those who own an older home. That’s more money to put away for upkeep, like preventative HVAC work, or value-add projects, like fresh landscaping.
Will you choose the path less traveled?
In real estate and in most matters, no one knows the future. All we can do is consider our circumstances and make educated guesses from trends past and present.
Rather than jumping at the chance to achieve the same milestones as your peers, take in the facts of your own situation and weigh what will and will not work for you and your household.
Start with questions like:
- Am I in a position to rent, buy, or build?
- Do I plan on sticking around, and if not, is the property I’m considering purchasing or building one I could turn into a rental asset?
- Does renting, buying, or building offer more financial growth in the area in which I reside?
Evaluating your personal circumstances and goals is the surest way to grow your wealth by choosing the path that works best for you.
