Owning a home can be more financially advantageous than renting because, over time, homeowners can live essentially “rent-free” through strategies like cash flow and property appreciation. Renters, on the other hand, accumulate no equity despite years of payments, whereas homeowners build substantial equity and benefit from inflation.
Mortgage as Forced Savings
Each mortgage payment increases your equity, which is like forced savings. Even though less of your payment goes to interest over time, meaning fewer tax deductions, it’s still financially beneficial if your income is high enough to benefit from the deductions. The beauty of a fixed-rate mortgage is watching your equity grow without worrying about rising interest rates, which adds a fun element of watching your financial progress.
Living Rent-Free Through Positive Cash Flow
To live rent-free, secure a mortgage rate that’s equal to or less than what you’d earn from a risk-free investment like treasury bonds. This makes your effective borrowing cost very low. For instance, I’ve been living “rent-free” in San Francisco because the returns from my CDs and municipal bonds are higher than my mortgage rate. This approach hinges on locking in low mortgage rates and investing an equal amount in higher-yielding assets.
Continuing to Live For Free
To sustain this setup, reinvest in assets that yield more than your mortgage rate when your initial investments mature. Although rising interest rates can slow down property value appreciation, they indicate inflation, which can actually increase the value of your property while decreasing the real value of your debt. Just be cautious about market timing; buying at the peak could mean waiting for the market to recover.
Appreciating Your Way to Free Housing
The second strategy involves purchasing a property that appreciates faster than the total costs of ownership (interest, taxes, maintenance). If you can buy in an area with strong long-term growth prospects, the appreciation can offset your costs, allowing you to live for free. This requires understanding local market conditions and potential for growth, which might include areas recovering from temporary declines.
Investing in Real Estate for Passive Income
If you’re not ready to buy, consider real estate investment platforms like Fundrise. They allow investment in diversified real estate portfolios with minimal starting capital, making real estate investment accessible and relatively passive.
Refinancing to Lower Your Costs
Regularly check if you can refinance your mortgage to a lower rate. Lower rates can significantly reduce your monthly expenses, making homeownership more affordable and possibly freeing up cash for other investments.
In summary, owning a home can potentially free you from housing costs through strategic investment and market participation. Whether through cash flow management or investing in appreciating assets, the key is to make informed decisions based on thorough market analysis and personal financial goals.
