If the average net worth of an apartment tenant equates to the size of a carry-on suitcase, it would take a loaded Ford F550 dump truck to carry the average net worth for one homeowner.
A tenant sitting in their apartment absorbing their neighbors surround-sound and their abutters cooking smells for the 488th day straight waiting for their “dump truck” to arrive should pay attention to this.
News flash – it’s not coming.
Your net worth dump truck has been detoured by the Private Equity Fund that owns your apartment campus. Maybe even hijacked.
You probably don’t want to know that PE fund owns the equivalent of a fleet of dump trucks representing an army of tenants’ net worth that will never materialize. Approximately 1 dump truck for every tenant.
Why the 4,300% disparagement between the average tenant net worth versus homeowner net worth as reported by Kiplinger?
Reasons for Tenant vs. Homeowner net-worth differences
Reason #1 – You become a Saver.
Speaking with a client this morning (still renting), a self-described “spender”, we took conversational solace in the fact his future mortgage payment would contain a percentage of “principal repayment” on his mortgage debt. A forced savings account, if you will.
On “Day One” (of home ownership), his identify changes by default. A “Spender” now becomes a “Saver”.
Discover more in our Tenants Lounge of resources and migrate over to our HomeOwnership Score, if you dare.
Reason #2 – Make payments in yesterday’s dollars.
Inflation is a dirty little secret. The government uses inflation as a “hidden tax”. It pays back debt it previously borrowed in todays deflated dollars. When inflation kicks in, the price of the assets increase and therefore the value of the currency decreases.
Use the same secret that the big bankers and your government have known all about. They have been using this secret for 250 years.
Acquire your “asset” (house) in yesterday’s dollars. Let generalized inflation (over time. Patience Grasshopper) rise the tide for your boat. Pay back your mortgage in “yesterday’s” dollars.
Reason #3 – Lock down your biggest expense.
Let’s face it – your housing expense is off-the-hook. Apartment prices seemingly auto-adjust every year. Your rent costs more than your car payment. It’s possibly even more than your car PLUS your student loans (your next two biggest expenses after rent).
One landlord proclaims that this on their homepage as a Competitive Advantage:
Basically your rent is ONLY going up by $2,784 per year.
It doesn’t take many years before a Tenants rent becomes MORE than the Mortgage Payment they could have had just a few years prior.
As building material costs increase and labor cost pork up, consequently insurance premiums elevate, like the Cog Railway on Mt Washington.
Ever meet a government entity that lives within it’s means? Neither have I – therefore Real Estate taxes predictably swell.
Utilites? Fuhgeddaboudit.
Fast food drive-thrus update the displayed kiosk board prices with an app. They pricing increases are coming so quickly they don’t have time to send an employee outside to hang new numbers on a board.
Virtually no expenses in life are fixed.
Except your future mortgage payment.
It’s EXEMPT from inflation.
When you buy your first house you sign a mortgage contract. The payment you will make for the next 30 years cannot change – per the contract. The first “payment change” you experience on your mortgage is when it changes from $3,852 per month, to ZERO – when it’s paid off.
Imagine getting in the wayback machine and obtaining (or matching) an average mortgage payment from 2003?
That would be a winning lottery ticket.
Get your crampon imbedded in the ice with a solid foothold before the summit peak vanishes into the clouds.
John Donlon
Reason #4 – Sweat Equity
Let’s assume that upon Home Ownership you’ll adopt Pride of Ownership. This is a mindset conversion that comes naturally.
In an apartment you learn to live with a leaky low pressure kitchen sink sprayer.
But in YOUR house, you may replace the plastic eyesore with a stainless-steel fixture – even going as far as to purchase the braided metal retractable hose.
While an “upgrade” of this manner many never show a quantifiable increase in resale value – it will augment the value appreciation over time – the same way the sparkling clean glass of door sidelight would for an open house.
Do enough of these improvements and perspiration turns into a paycheck.
You can’t build Sweat Equity in your apartment.
- It violates your lease.
- And even IF you get the not of approval to adorn your apartment with quality fixtures – those fixtures become property of your Landlord, by law.
- I’ve sat with more than one pissed-off carpenter who improved their apartment.
The tenant carpenter thought they won big when the landlord allowed them to deduct the cost of new cabinets for the kitchen from the rent. The carpenter installed the cabinets easily when his girlfriend was visiting her parents back in the Berkshires.
But what came to be a year later, was a much nicer apartment. The couple sure enjoyed cooking and having meals in it.
But by the lease renewal stage another renter was willing to pay more in rent for that apartment – the only one with a remodeled kitchen.
Lesson: save your DIY skills and creative energy for your future home!
Read our article on the proper way to Create Sweat Equity
Reason #5 – Strategic Improvements
This is the step where you blur the line between HomeOwnership and Investment.
Certain homes have been underutilized their entire life.
This can occur for decades when owners have self-limitations on change. Or the owners lack the initiative or resources to undertake the change.
Our clients have a home under agreement that has, for 65 years, an unfinished basement. For the prior owners there was never a need to finish the basement (800 sq/ft with 8 foot ceilings). But for our new buyers making this cost-effective upgrade will have a Two for One dollar to equity gain. Spent $35K to finish the basement; pickup $70K in equity.
Not every home has this kind of low-hanging-fruit strategic equity improvement. But if you look carefully enough, most have some potential.
For example a home $2.8mm in Topsfield just strategically benefitted from $3,000 in tree removal work. The prior owners were too “attached” to the trees to realize they were impeding on the value of the home.
Try doing one of these stunts with your apartment.
It would be like doing an engine swap in a leased Toyota Prius and installing a motor built by Porsche … right before you turn the car in at lease termination.
Reason #6 – Take advantage of the One Big Beautiful Bill (OBBB).
Let’s face it the SALT (state and local taxes) deductions have been a joke for the past few years. Virtually NO HOMEOWNER chose to check the box to list out (itemize) their expenses. The $10,000 (per couple) high threshold was anemic compared to the standard deductions available.
Since most of our clients pay over $10,000 in SALT taxes this advancement to $40,000 allows a benefit to help offset the expensive real estate tax rates in Massachusetts and even more expensive in New Hampshire.
Now keep in mind, renters even at the upper end of living at say the The Metlo in Boston ($56,247 per month) can receive a maximum refund on their rental deduction refund of, hold on for it …..
$200 per year*
(*$4,000 maximum write off at 5% state tax rate = $200 refund).
And sorry that’s not even per person.
It’s per couple.
But what does $40,000 get you? At a 35% federal tax rate it has a cash value to you of $14,000.
Let’s go!!
Reason #7 – Capital Gains Exemption.
Capital Gains Exemption. This isn’t new. It’s been around for a while. But if you’ve had a relative that seems to be moving and upgrading houses every few years – then this may be the underlying principal behind their success in real estate.
The premise is this. If you live in a home for 2 years when you sell it you harvest Gains. The Capital Gain (the difference between your purchase price and sale price) is profit and is taxable on most things.
For example, lets say bought a share of Berkshire Hathaway stock in 1992 when it was “only” $9,347 per share and you sold it last year when it topped $709,347. You’d have $700,000 of gain (or profit). The IRS would take a share of that, right?
But on real estate – the first half million dollars in taxable gain? That’s exempt (as long as you lived in the house for 2 years). Good at improving your house? Wash, rinse and repeat that cycle and you’re well on your way to millionaire status.
Moving apartments every two years? First, last and security deposit for YOU.
Reason #8 – Leverage and OPM (Other Peoples Money)
When you buy a house you invest in an asset that tends to appreciate over time.
You didn’t however have enough saving to buy this house without financial help.
You leveraged the purchase of that asset. The leveraging came from the mortgage. You, the home buyer, used OPM (other peoples money).
Anaglogy:
If your homes purchase price is represented by the fingers on both of your hands, the bank brought (or provided) all the fingers and thumbs, except maybe you brought the equivalent of a half-of-a-pinky-finger.
The future growth (remember Capital Gains from the above paragraph), that growth isn’t based only on your half-pinky-finger – the growth is compounded on ALL the fingers (and thumbs) – yes, even the ones you borrowed.
It isn’t only your equity (downpayment + sweat equity) that grows. The entire asset (house price) grows. Even if you have very little equity (or “cash”) into the deal. You could be financed to the hilt, or paid for with cash (full mortgage or no mortgage), the asset will still gain (or lose) at a predetermined pace
You invest only half-a-pinky but in the future you get
2 (two) BIGGER HANDs.
Summary: From a financial perspective the differences between renting an apartment and owning a house are like comparing different sports.
This isn’t like the difference between Softball and Baseball (sports that may even share some DNA).
It’s more like the differences between Chess Boxing (yes it’s a real game) and Unicycle Hockey.
Get in the game.
Before you find yourself without a ticket to even play.
Related reading from GoldCoast
Our guide Wealth Management picks up the same thread. If that question is on your mind, read Why Owning Versus Renting Isn’t A Financial Consideration.