Rent or Buy? Which is the Better Way to Build Your Wealth?
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It is widely known that renting is less financially complicated than home-ownership.
It is also known that renters are free from home-ownership costs such as mortgage (bond) payments, rates and taxes, levies, insurance, maintenance and all other costs related to owning a home.
My take on this topic is not based on choosing to rent to save on home ownership costs, forecasting that the return one could expect if one were to invest all of these saved funds in the markets over a typical mortgage repayment period would be greater than the value of your house after the same period.
While I find this hypothesis to be a cogent alternative, it is still based on the premise that being wealthy is something one can basically save up towards. This, by my personal definition, would not be the true definition of wealth nor does it have a track record to validate it.
Learning from the Best
As a financial advisor, I get to observe in great detail the financial portfolios of a myriad of individuals.
My clients of preference are financial professionals, admittedly this is mostly because I am sometimes simply too lazy to explain complex financial concepts to people who weren’t trained in finance.
Ironically, the longer I did this the more something dawned on me: Corporations and the people that work for them have one thing in common – They do it for the money. “Go figure”, right?
What is ironic though is that corporations use completely different methods to grow their money than the individuals that work for them.
For instance, corporations do not try to save their way to financial success, yet individuals seem to hope that they can. Moreover, corporations use access to credit to ultimately build their balance sheet, not just in the long term. Individuals, for the most part, use their access to credit to gain access today to things they can afford tomorrow.
Said differently, individuals tend to use credit to finance debt, where corporations use credit as leverage.
Herein lies the premise for why I would dissuade anybody from getting a mortgage on the property they want to live in.
Getting a Mortgage/Bond
Let’s look at the typical circumstances under which people decide to get a mortgage.
Getting a mortgage is usually preceded by buzz-phrases such as:
- “I want to own the house I live in”,
- “I don’t want to pay off somebody else’s mortgage”,
- “A house is an asset”,
- “You can never go wrong with property”,
- and all the rest.
Typically this decision will come about once an individual feels stable in their career, or soon after getting married and/or starting a family.
This classically sets a tone where the type of property one purchases is one for the future version of one’s self, the person you hope to grow to become, your future life stage. The result usually becomes using the maximum allowable credit facility that the bank will allow you and hoping that the burden of financing the monthly repayments will decrease over time as the debt will remain fixed while your income will increase during the repayment term.
This is all good and well, only it poses one problem: having used all of your available credit facility to finance a debt (your home does not make you money) and you will no longer have credit available to make use of leverage to grow your balance sheet.
More about this in, Your Mortgage is a Poverty Trap.
Choosing to Rent
Renting, for the most part, is cheaper than home ownership and all the additional costs that come with it. Even if it wasn’t, renting leaves your access to credit unencumbered, the prime place to be if you want to grow your balance sheet.
Furthermore, renting is fluid and can thus be customized to your current life stage. For instance, you don’t hear of a young couple renting a four bedroom house because they plan to have three children in the distant future.
This position allows you to be able to use your credit facility
Property is not the only way to use your access to credit to build wealth, but it is my favourite for various reasons. I will refrain from talking about other options as I do not want to risk pontification around topics that I am not well versed in, but the principle is clear.
Property investment has far more moving parts than the average inexperienced investor would anticipate, so I would suggest that a lot of time in learning the science behind successful property investment before taking the plunge.
It must be said that property investing is not all that difficult to learn, but far more complex than the average person thinks or can be explained in a single blog post.
If you haven’t gotten to the point where
I blog about this topic a lot, so to understand more about this I suggest that you read more of my blog posts on this topic and subscribe to my YouTube channel.
About Me
Mechanical Engineer,
turned Financial Advisor,
turned Personal Finance Blogger.
I learned early on in my career that it doesn’t matter how much money you make if you don’t know how to spend it and make it work for you.
Reading about personal finance, business and entrepreneurship became my passion. I knew that if I wanted to be successful, I would need to learn how to sell.
I quit my engineering to become a Financial Advisor, earning on commission only, to learn about money.
Here, I share what I have learned with you.
