Isn’t renting and investing the difference smarter?
David Bach took on that question on The Diary of a CEO, and his answer makes the case for owning in four parts. Here it is, in plain terms.
David Bach’s example
$40,000 down$200,000 gain
A $200,000 home bought with 20% down, worth $400,000 ten years later. The gain is measured against the $40,000 you put in, not the full price.
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Leverage
Comparing home values to stock-market returns isn’t apples to apples. Most buyers don’t pay cash. They put a portion down and borrow the rest, so any growth in the home’s value works on the whole house while your own money is only the down payment.
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Tax advantages
In the U.S., when you sell a home you’ve owned and lived in for at least two of the last five years, up to $250,000 of profit ($500,000 for married couples filing jointly) can be excluded from tax. Mortgage interest may also be deductible if you itemize.
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Forced savings
“Rent and invest the difference” works on paper. In real life, most people don’t invest it. They rent a nicer place than they can afford, spend the rest, and reach their mid-thirties with no equity and no savings. A mortgage payment builds ownership whether you’re disciplined that month or not.
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Where wealth actually lives
Look at where ordinary American families hold their wealth and it’s mostly two places: home equity and the stock market. Skipping the first one means betting everything on the second.
Summarized from David Bach on The Diary of a CEO. The figures are his illustration, not a forecast; home values can fall as well as rise. Tax rules have conditions and limits, so talk with a tax professional about your situation.
