Should I rent or buy? This is a question that many people struggle with.
Rent vs Buy

Should I rent or buy? This is a question that many people struggle with.
It depends. I know that seems like a cop-out but everyone’s situation is different.
Raising A Family
If you are raising a family and want to be in a neighborhood with good schools and good neighbors with kids near the ages of your kids, then your decision is not just a financial decision. This will be where you grow and raise your family. This will be where you create family memories. If this is your decision then owning your home may be very important.
Peace Of Mind
There are many advisors that counsel people to pay off their mortgages as soon as they can. The thought of owning your own home and not having a mortgage is attractive to many people. If you fall into this camp, it may be right for you to own a home and pay off the mortgage as soon as you can.
Financial Comparison
There are others that believe their house is their biggest asset and either don’t want to look for other opportunities or don’t know how to look for other opportunities.
I raised my family in a nice house in a nice neighborhood and would probably do the same thing if I had to do it all over again. I then fell into the “peace of mind” camp and was paying off my mortgage as quickly as I could. I then met other real estate investors and started reading books and listening to podcasts. My views have since changed.
Let’s assume someone bought a $500,000 home with $100,000 as a down payment. Their annual costs will include the mortgage, property taxes, insurance, maintenance costs and any improvements they make to the property. A renter would pay rent which would cover all these factors. Let’s say over a period of five years, this family pays off another $100,000 in principal ($20,000 per year). Let’s also assume that housing prices on average increase by 4% per year. After the five years the home is valued at $608,326. If they were to sell they would have typical 5-6% realtor commissions, let’s say 5% so net to the family would be $577,910 less $300,000 mortgage equals net equity to the couple of $277,910.
Now let’s assume the couple instead invested in a multifamily syndication for $100,000 rather than paying off additional principal in the mortgage and let’s assume the return over 5 years for that syndication was $80,000. Let’s also assume the couple pays 20% capital gains tax on the $80,000 for a net return of $64,000. Let’s assume the house would still appreciate by the same 4% annually so the net equity to the family for the home would be $577,910 less $400,000 equals $177,910 plus $164,000 (after taxes) from the syndication equals total equity of $341,910 which is 23% greater than the first scenario where the couple paid down the mortgage.
Note: I kept this comparison simple and did not include principal paydown of the mortgage over the five years which would have an impact if you were paying down the mortgage quicker (ie interest would decrease in that situation but impact of comparison should not be materially different). I also did not take into consideration the arbitrage of obtaining higher annual distributions as compared to the interest rate on the mortgage. I also did not take into consideration the tax benefits of investing in the multifamily syndication.
This was meant to be a simple comparison showing that if you leverage your equity into two assets (your home and a second investment into a multifamily syndication), you receive returns on both assets vs only one asset. As noted above, the return differential can be dramatic.
Why do I share this story with you?
I used to think paying down my mortgage was the smart thing to do. I still believe for some people that could be the case if you want the extra peace of mind. However, if you are looking to grow your wealth and leverage the equity and the assets you have, I believe using your equity to buy more cash flowing assets is a way to potentially increase your returns dramatically. With any investment, there is risk of loss. Having said that, this just makes sense to me now. Use my equity to buy more assets that produce cash flow and appreciation vs having the majority of my equity in one asset, my home.
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