Your relatives are coming and they are armed with nosy questions — no, not the ones about whether you’ve got a “special someone” in your life, but the “When are you going to stop throwing money away and buy a place?” ones that usually come up sometime between the turkey and pumpkin pie.
Let them in on a newsflash: The age-old American Dream of homeownership isn’t the only way to build wealth. In fact, you may be better off continuing to rent and then investing the difference between what you would pay to rent versus own, according to a new study from economists at Florida Atlantic University, Florida International University and the University of Wyoming.
The researchers compared data between 1978 to 2011 on property appreciation versus how much a renter in a similar quality home would make if they invested money instead. Their data took into consideration factors like home prices, mortgage rates, inflation, stock-market performance and long-term rent growth, among others. The result? Except for a few years in the early-to-mid 1990s and post-2008, renters who invested fared better than homeowners who didn’t, according to a MarketWatch report on the study results.
Of course, the data assumes that renters are actually taking the time to invest their savings rather than spend it. And homeownership is about more than just building your wealth; there’s also the emotional aspect of simply looking for the perfect spot to call your own for more than just a year at a time. Here are a couple of other factors to keep in mind (besides your potential rate of return) if you’re trying to decide whether to buy or rent.
Will you be moving in the next five years? Coughing up enough cash for a 20% down payment may not be worth it if you suspect a job, relationship or just plain old wanderlust will prompt you to pick up and move in just a few short years.
Is your desired housing market too hot to handle? If you yearn to live in a neighborhood with an overpriced housing market, you may want to wait it out until it cools down — especially if you’ve already got a pretty sweet deal on rent. Otherwise, you may get caught in a bidding war that will drive you above your home budget.
How’s that credit score looking? Your credit score and the history in your credit report will have an effect on how much you ultimately pay on your home because it will impact the type of interest rate you get. So if you could use a little help in the credit department, work on building that up first (hint: on-time bill payments make a big difference) before you go shopping for a mortgage.
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No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.