Once upon a time, if you were going to achieve the “American Dream” you’d need to be a homeowner. However, recent studies have indicated that many are starting to believe that owning property isn’t the best financial investment with 43% of participants in a study believing this to be the case. Furthermore, nearly 50% felt that financial success could be achieved just as easily by those renting property as those who owned it.
So, is owning property a good long-term investment? Or, are people given more financial flexibility and just as much security if they rent a property?
Long-term Investments in Property
As mentioned previously, many Americans now believe that strong long-term investments aren’t achieved through housing. A leading expert on housing in the U.S., Robert Shiller, found that from 1890 to 1990, there was almost no change in the real inflation-corrected prices of houses.
Evidently, these statistics go against the reasons why people will purchase property to invest, as most will believe that buying property will provide them with a financial gain in the future when they come to sell it. With decreasing housing prices witnessed during the early stages of this century and in the 20th century, the instability of housing prices doesn’t seem to be at the forefront of everyone’s mind.
While housing does stay in line with inflation (historically speaking), there are a vast amount of changeable factors that can have a negative effect, including changes in style preferences, technological advancements and changes in amenities.
Higher returns over time are far more likely to come from the stock market than property investments and are perhaps a more clear-cut answer for those looking to invest. Places like Money Morning offer advice on where the best investments can be made, helping to protect money from inflation. Nevertheless, many would still argue that housing offers security and a sense of pride when investing in this.
The Financial Security of Renters
Even though attitudes are changing towards buying homes and renting, it is still clear that being a homeowner is more likely to be a better financial decision than renting. A report conducted in 2013 found that a higher net worth was generated by those households who had a low- and moderate-income, compared to their equivalents who rented property.
While the study didn’t provide conclusive evidence that homeownership is the right avenue to take, it did show that over three years, those with mortgages increased their net worth by $20,000 compared to those renting who achieved $15,000.
Many do argue that renting should increase wealth faster but research always tends to find that homeowners have this advantage instead.
Should You Invest in Property?
Homeownership isn’t for everyone and it may not be the right decision for you. To start with, you’ll need to find a large payment that you’ll have to make upfront, which will affect your liquid assets for quite some time. And, mortgages can vary so you’ll need to look into the rates, fees and payment schedules of these before proceeding. Also, take into consideration where you’re looking at property because some areas will provide greater benefits for renters than homeowners, and vice versa.
Should you be thinking about investing in property to rent out to others, there are also a number of financial considerations you’ll need to make here. Like a dividend-paying utility stock, rental income will provide you with steady payment amounts each month, where any price appreciation you achieve will be a welcome addition. However, unlike buying a low-cost index fund, you’ll have to consider the additional work of having to deal with tenants and maintaining the property.
You’ll need to establish whether you can take on this extra work and whether you’re prepared to deal with tenant calls out-of-hours and what you would do if a tenant stopped paying their rent. Make sure you’re aware of what ongoing maintenance costs you may have as well as the initial costs of renovations. If all of these aspects aren’t taken into consideration at the start of your investment, it could severely impact the returns you receive.
In summary; if you’re looking to buy a property to get your first step on the property ladder or you want to make some investments for the future, carefully consider what options are available to you. Analyze what return on investment you can realistically expect and calculate this against other avenues, such as investing in stocks. Doing your homework first will enable you to make an informed decision that provides you with the right financial investment for you.
Jade Gould is a consultant who works with individuals and selected small businesses. Keen to share his knowledge and always ready to offer his opinion he really enjoys writing articles and seeing his words help others.