Welcome Back, Future Funder!

If you and your family are moving or are considering moving any time soon, you face a choice. Whether it’s because you got a new job, you need to save money, or you want to invest, you need to decide whether to rent or buy your next home.

Renting can be the way to go at times—mainly because it’s cheaper than a mortgage and maintenance costs. It also enables you to invest more money in the stock market or save more for your kids’ college funds.

But buying is attractive for other reasons. It enables you to build equity, and once the mortgage is paid off, you and your family would never have to pay for housing again. Maybe you’d even sell the house for a profit at some point.

How do you make the decision? By asking yourself a few key questions.

Inside today’s issue:

✅ What Is Your American Dream?
✅ The Pros and Cons of Renting vs. Buying Long-Term
✅ How Much Home Can You Truly Afford?

Time to open the books and take a look at what makes the most sense for your family’s long-term housing.

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🍽️ Main Course: Is the American Dream Changing?

Just like with any meaningful financial decision, if you don’t know your future goals, you can’t determine your present actions. And even if you know that the American Dream is your goal (and it may not be), which version of that dream do you aspire to achieve?

Here’s what we mean. For decades, the classic dream of “making it” in America involved owning a home with a yard, having several children, holding down a solid job at one company for most of your career, and retiring in your home—maybe even purchasing a second one later.

But now the target has shifted for a lot of people. Whereas the goal was once homeownership over everything else, some Americans are less interested in paying a mortgage and are more likely to rent while putting money in the stock market or investing in a business idea. They value economic mobility and freedom.

Which one’s right for you, though?

That depends on your values and goals, of course.

Here are the main questions you want to answer for yourself and your family to determine if you should buy or rent:

🤔 Will You Own the House for a Long Time?

If you’re just going to live in a home for a year or two and then sell it, it would probably be better to rent instead.

Why? Two reasons: first, if you sell before living there 2 years, you might owe capital gains taxes on the full profit. Stay 2+ years, and you can exclude up to $250k ($500k for couples).

Second, it typically takes a number of years before you start making real progress paying down principal (the original amount of the loan) on your mortgage. Paying off principal is how you build equity, which is the portion of your house that you actually own. If you sell the house before you have any equity in it, you’ll just be losing money, and would have been better off renting. That’s why it’s key to find your “breakeven point”—the amount of time you’d have to live in a house you bought before it became cheaper for you than just renting. Here’s a calculator to help you find your specific breakeven point.

Especially with 30-year mortgages, you could be paying off mostly interest for 10 years or more before you really start to chip away at principal and build equity.

This is the reason why people like Dave Ramsey are so adamant about taking 15-year mortgages instead of 30-year mortgages—because:

1. You start building equity faster

2. You end up paying less in interest than with a 30-year.

The downside is that 15-year mortgages have higher monthly payments, but it’s worth it and could save you hundreds of thousands in interest. To figure out how much your monthly payment will be with a 15-year mortgage and to see when you’ll start to pay more principal than interest (i.e., really begin to build equity), you can use a loan calculator and an amortization table like this one.

Key points: 

• Don’t buy a house if you won’t live in it long enough to build any equity

• 15-year mortgages are cheaper and faster than 30-year, even though payments are higher

😬 Are You Able to Pay the “Extra Costs” of Homeownership?

For many people, if they were faced with the choice between renting an apartment for $2,500 a month or buying a house with a mortgage payment of $2,500 a month, they would choose to buy the house, no question. If it’s the same price, why not own the place, right?

Well, it’s not really the same price. When you buy a house, you aren’t just going to be paying your mortgage. There’s a whole slew of other fees and costs that you must be prepared to pay before signing the contract. 

Here are the “hidden costs” of homeownership:

• Closing costs

• Taxes & Insurance

• Repairs

• Renovations

These costs can add up quickly and overwhelm new homeowners who didn’t see them coming.

Is the answer to just rent instead of buying, since a $2,500 mortgage payment could cost way more than that in reality?

No, the answer is to make sure that you buy a home with a mortgage you can afford while factoring in the hidden costs as well. Practically speaking, that probably means buying a house with a mortgage payment that’s lower than the monthly rent you could afford to pay (if you were renting).

So, to figure out if you can afford a home, estimate your average yearly costs over the period you’ll own it and divide that by 12. Make sure to include all hidden costs in addition to the mortgage. If that monthly number is unaffordable, consider buying a cheaper home, increasing your income, or continuing to rent if none of the houses in your price range are attractive to you at the moment.

🤷‍♂️ Would You Prefer to Invest in a Home or in Stocks?

This final question comes down to your strategy as an investor. Whether you view your purchase of a home as an investment or not, you will be putting a large portion of your income over the next 15 years into real estate by paying off your loan. If that sounds great to you, then go for it! But if you’d rather invest more money in the stock market, you may want to consider renting so you’ll have more investable cash.

Why would you want to invest in the stock market instead of in a home? Don’t house prices only ever go up over time?

Not quite. Between 1928-2023, stocks averaged a 9.8% return, while real estate only averaged a 4.2% return, according to A Wealth of Common Sense and NYU. $100 invested in real estate in 1928 would be worth $5,553.70, but $100 invested in the S&P 500 (an index fund) in 1928 would be worth an absurd $982,817.82 today.

So, historically speaking, stocks have done a lot better than real estate as an investment over time.

But that final phrase is important: as an investment. It’s true that stocks outperformed houses as far as their rate of return.

But you know what?

Houses outperform stocks as a place you can live in.

You can’t live in your stock portfolio. 😂 

And investments in the S&P 500 don’t include your rent payment!

Meanwhile, you could be paying a mortgage, which is a form of housing cost, yes—but it also doubles as an investment.

So the issue isn’t black and white, and it depends on your personal goals. We can’t decide those for you, but here are some screening questions to ask yourself to help decide what to do:

1. Do you put a high value on owning and customizing the space you live in?

Yes → lean toward buying a home
No → lean toward renting and investing in other assets

2. Do you want to 100% maximize your potential for investment gains over everything else?

Yes → lean toward renting somewhere cheap and investing
No → lean toward buying a home (still building equity!)

3. Do you want to be able to pass down a physical home to your children?

Yes → definitely lean toward buying a home
No → definitely lean toward investing in other assets to pass down

Bottom Line

What kind of legacy do you want to build for your family? There are multiple valid answers to that question. Do you want to rent a home for your family and put all your cash into the stock market or other assets with high potential for growth? Or would you rather buy and build equity in a physical house you can call your own, and that your family can live in for generations?

Either way, we salute you for planning a financial future for your family.

Cheers to getting 1% better each week! 🥂

👂 We’d love to hear from you

👂 Are you saving for a home or investing in stocks while renting?

We’d love to hear about it—and your story could help someone else do the same.
Just hit reply and share.

Thanks for reading,
—Your friends @ Future Funders 🍽️

P.S. Forward this to a friend who would be mortified by the term “amortization table.” 😂