We live in a fairly expensive housing market so it’s not easy to save and purchase a home here. I’ve been trying to consider other avenues for Millennials to build wealth other than saving every penny they have towards a home and then becoming house-poor.

You see, in our local housing market, you can rent a town-home between $2,000-$2,500 but if you purchase that same home with low down payment of 5-10%, the total mortgage payment will be above $3,000.

Here, renting a home is cheaper every month. What happens when we project the next 30 years, though?

A $500,000 Home Purchase with 5% down payment

$475,000 loan amount

$3,154.07 monthly mortgage payment

5% mortgage interest rate or 442,964 total interest paid

30 year mortgage, that’s 360 payments

$10,000 in closing costs

Property taxes of $6,250 per year or $530.83 per month. This comes out to be $187,500 total paid in property taxes over 30 years.

Home insurance of 41,000 per year or $83.33 per month or about $30,000 over the total of 30 years.

That’s a total of $1,145,464 in payments but that also includes the principal paid. Now we need to start figuring out the tax breaks of home ownership so we can be more specific with our numbers.

If we take $442,964 of the total interest paid on your mortgage and give yourself a total tax break of $132,889.20 based on an average of 30% income tax bracket that would come to $310,074.80 of actual interest paid. In other words, you get some of the interest paid back through filing your income tax returns (note: I am not a CPA and these are estimations. Everyone has different income/tax situations. You should consult with a CPA).

Now we have to figure out the tax breaks on your property taxes. If we take $187,000 of property taxes paid and give yourself a 30% break, that’s $56,250 of savings over the course of filing your taxes for 30 years and receiving the property tax break. That means your actually only paying $130,750 over 30 years once you factor in the current property tax rules. Only $130,750! haha.

By taking the total amount of payments of $1,145,464 from above and minus out the interest tax break of $132,889 and property tax break of $56,250, that’s an actual cost of $956,325 to own your home over 30 years. This includes your interest paid, property taxes paid, home insurance paid and the closing costs to buy the home. But if we take out the principal paid (because it’s really just an expense but not a financed expense) we would have a total cost of $440,824 of interest, taxes and home insurance. So you spent that amount of money to have a paid off asset of $905,680. That’s a difference of $464,856. Put another way, you spend $440,824 to have your home paid off.

But what about the future value of my home? I’m going to be really conservative with this approach but I’ll also give some higher projections at the end of the article.

Based on a 2.00% inflation rate over the next 30 years, a $500,000 home will be worth $905,680. Simply put, every $1.00 today will be worth $1.81 in thirty years. I realize that estimating home values through inflation isn’t the only way or the best way but if you found a way to see into the future come talk to me.

So if the home costs you $956,325 over 30 years and the value at the time you pay off our mortgage becomes $905,680 this means you’ll have a paid off asset valued at $905,680. So you spend $956,325 to lose $50,000? Does that even make sense? Is there another way to look at this.

Before we dive into the numbers I need to make it clear that the rent prices will naturally go up over time. Especially over the course of 30 years, that’s like, guaranteed. So eventually, this strategy will stop making sense. For now, let’s figure out if investing heavy at first while you have extra money is better than buying a home and instantly paying a lot more on a monthly basis.

If we rent for $2,250 per month for the next 10 years, then $2,750 for 10 years after that, then $3,250 for 10 years…let’s roll with that. So your rent will go up every 10 years. I could be way off on this but, hey, it’s just projections.

Based on these monthly rent costs, that’s $270,000 paid in rent for the first 10 years, then $330,000 for the next 10 years, then $390,000 for the last 10 years = $990,000 in total rent expense. Almost a million bucks to rent for the next 30 years. Whhhhhhhaaaat.

If the difference between rent at $2,250 and our mortgage is at $3,154 that means you can invest the extra $904 per month or $108,480 for 10 years and it will grow to $156,468, based on a 7% average investment return.

Then the next 10 years you will invest the difference between $2,750 of your rent and $3,154 “would be” mortgage. That’s $404 per month. So taking the $158,285 you’ve earned so far and slowing down your investment to $404/per month would give you $384,373 at the end of the next 10 years. So we are 20 years down the road and you’ve been paid $600,000 in rent and have earned $384,373 in your investments. The year is 2038 and you are 20 years older, keep this mind. Would you be happy in this situation?

The next ten years, or the last 10 years of our scenario, your rent is at $3,250 which is 96 dollars more than the monthly mortgage payment. So instead of investing, since we have no extra money, we will let our investment just sit and grow. We will also deduct 94 dollars every month since renting has become a higher monthly cost than paying a mortgage and this comes to $11,520 “lost” over the final 10 years of 30. But wait, you can’t forget your investment has grown to be $384,373 after 20 years. Now the final 10 years, this will grow to…$772,459. Minus out the $11,520 lost and your final number is…drumroll please…$760,939. 

 https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator .

So as the Renter at the end of 30 years you have spent $990,000 in rent and have with you $760,939 in invested money. Practically speaking, at this point you’ll either have to continue to rent or use that $760,939 to purchase a home outright. That’s a difference of $229,061 between what you’ve paid in rent and the investment total. This number isn’t something to analyze really but it is interesting.

This is what I see so far:

$464,856 earned by paying off your home after 30 years.

$229,061 “lost” by renting and investing the difference.

That’s a $639,917 difference between your future net worth in in 2048. Or in other words, it’s $639,917 cheaper to own a home then rent for 30 years. What?!?!?!? This isn’t even close!

Average home appreciation is 3-5% per year depending on where you live.   For the above example I was SUPER conservative and only considered a 2% increase in home value to match expected inflation.

If we wanted to get even crazier…

3% home value appreciation over 30 years would turn your $500,000 home value into $1,213,631.

4% home value appreciation over 30 years would turn your $500,000 home value into $1,621,699.

5% home value appreciation over 30 years would turn your $500,000 home value into $2,160,971.

Private Mortgage Insurance. If your down payment is less than 20% of the home purchase price you will have to pay Mortgage Insurance. This will increase your monthly housing payment. Once you get to 20% Equity or what the bank calls 80% Loan to Value, you can refinance out of Mortgage Insurance or you’ll have to ask the Lender if they’ll drop it. If you have decent credit you’ll be paying around $200/month on Mortgage Insurance and probably need to pay it for 8 years. So that’s $19,200 total for what I consider to be an extra expense of owning a home. This is a complicated topic and needs its own article for an explanation so for now just roll with the numbers.

Home Owner’s Association Costs. The average cost in the US is around $250 per month but let’s go higher to $350 to be ultra-conservative because the Association will probably raise their dues at some point during the next 30 years. So $350 per month comes to $126,000 over 30 years spent on those dues.

Repairs and Maintenance. I’ve heard you should save 1% of your home price per year for repairs. This would mean you’d need $5,000 saved per year for a $500,000 home, but in general you’ll probably spend $2,000-$3,000 per year on repairs and maintenance. The lower number seems more likely unless you bought a dump. The average in the US is close to $2,000 per year so let’s roll with that number.

Future renovations. Roofs don’t last forever. Yard designs need updating. Paint chips and peels. Bathrooms become outdated. Kitchens get old. Maybe your family grows and you turn your 3 bedroom home into a 4 bedroom home. There’s so many reasons why you should expect future renovations to your home. Let’s say $10,000 for a roof, $20,000 for kitchen and bathroom upgrades, $10,000 for outdoor upgrades and exterior paint and other upgrades.  Let’s throw another $20,000 in there to build a buffer against other renovation costs you might expect. That’s $60,000 total. Renovations actually help your home value to be increased so it’s a valuable cost. You will recover some of this money if you eventually sell but for simplicity sake let’s just call it an expense.

Here’s the totals of extra repairs and expenses on ownership:

$126,000 HOA dues

$19,200 in Mortgage Insurance

$60,000 in Repairs and Maintenance

$60,000 in Renovation Upgrades

$265,200 total in “pure” costs

If we divide this number by your 360 months of paying back your mortgage you’ll be paying an extra $736 per month in expenses to own a home. If you rent you should not be paying any of the costs listed above.

Earlier I stated there would be a $639,917 difference between your future net worth in 2048 by owning a home. We now need to minus out the HOA and other expenses of $265,200 and you are still $374,717 ahead of where you would be as a renter. This is considering your future home value to keep up with inflation at only 2%, so very conservative.  If your home value appreciates at a higher rate, remember the average in the US falls between 3-5%, you will come out ahead even further.

My hope with this article was to tell you that renting + investing in the market will yield you better results than owning a home. Believe me, I really wanted to prove that. After analyzing the numbers I cannot say that to be true. Renting a home is easy and convenient. If it made more financial sense than companies like McDonald’s wouldn’t be buying their properties, they would be renting them.

On a personal finance level, BUY AND HOLD is the best strategy for building wealth with a home. I really do believe that your home is not a short term investment and maybe that’s what is wrong with our generation’s mindset of home ownership. It’s a long-term discipline that will give you financial freedom in the future…but that future should be 20-30 years, not 5-7 years like most of us hope for. That is why buying a home in any market is still a wise financial decision if you hold it. If you can handle the extra monthly expenses of home ownership while still contributing to your 401k and avoiding credit card debt, your future-self will love you.

Person A, the Renter: $760,939 in invested money. You will rent and know your costs. You’ll continue to pay a $3,000-$5,000 monthly cost or have to use all of your invested money to purchase a home outright. Then you’d have no extra invested but have a paid off home.

Person B, the Owner: have no mortgage and a paid off home valued at somewhere between $1,000,000-$2,000,000.