Recent real estate trends show that young people may be setting themselves up to never retire by opting out of participating in one key facet of growing up: homeownership.
By choosing to not become homeowners, these two most recent generations are ultimately deciding to work much longer than past generations, maybe even their entire lives. Homeownership has been a key part of past generations’ retirement plans and investment strategies, so where does this leave the younger generations?
Your First Home Purchase Could Result in a Million Dollar Asset
This decision is going to cost them a lot more than just the rent they’re paying to landlords for the foreseeable future. We’ll talk more about the astonishing figure of how much this will cost them, but the more important thing is that they’re missing out on the greatest wealth generator of all time. Just owning a home could make you a millionaire in 30 years, doing nothing other than making your monthly payments.
Here’s how it works: The average increase in home value nationwide is 3.7% per year. Starter homes increase at an even faster rate. Let’s say you buy a home right now for $336,000; if you do nothing but make your payments, you will own that home free and clear in 30 years. That home could be worth $1,000,000 if average home values keep increasing at the national average. Congratulations, you’re a millionaire!
I don’t know about you, but a cool million (if you were to sell) or no mortgage or rent is an excellent goal that should be part of retirement planning. If you decide to rent forever, you just missed out on being a millionaire. But the next set of numbers is going to disgust you even more….
The True Cost of Renting Long-Term
The average rent in Portland is $1547 and the average rental unit is 766 square feet (hope you like living small). Rent, on average, goes up around 4% per year. In 30 years, based on annual average increases, that same 766 square foot apartment will rent for about $4825. Now if you plan to rent over the next 30 years, that will cost you $1,041,161 over that 30 years.
But there are more costs to come.
Getting back to retirement planning, once you enter retirement, will you still be renting? How’s your health? Remember, life expectancies keep climbing right along with rent so if you’re in good health and have a family history of longevity, you could live quite a long life.
For discussion purposes, let’s say you’re 25 right now. If you rent that 766 square foot apartment for 30 years before you retire (assuming you have the income to retire and never in that 30 years need a bigger apartment), now you’re 55 and decide to keep on renting. Life expectancy keeps increasing, so let’s say you expect to live another 30 years. You decide you really have no desire to move from that little apartment, so you plan on staying there until you pass away.
How much will it cost you?
The next 30 years of renting the same apartment will cost you $3,376,899.14. All of this, of course, will be paid for through any retirement income and Social Security benefits you eventually receive.
Responsible Retirement Planning
Now if you had decided to make your first home purchase at age 25 and buy that $336,000 home, and you bought it at a 4.375% interest rate (current at the time of this writing), with 20% down so you could avoid carrying mortgage insurance, your monthly payment excluding taxes and insurance would be right around $1,270.
If you pay that house off in 30 years, simply by paying your mortgage each month, you will have only paid $457,200 and you would most likely have a house worth $1,000,000 at the end of the loan term. You would also have some place to live for the next 30 years mortgage-free. It’s a much better alternative to paying rent for 60 years, to the tune of $4.4 million that you’ll never see again.
Which of these options sounds like a more stable and sustainable plan for retirement? With renting, you could very well end up working until you die and never being able to afford to retire. If you purchase a home while you’re young, you will have plenty of time to pay it off and start putting money aside in savings.
If you would rather buck current real estate trends and start exploring the process of buying a home anywhere in the country, please reach out to me. I’m connected with top professionals who can make your first home purchase a reality instead of an investment dream.
This article is not to be taken as financial advice. Please consult your personal financial advisor about your specific situation.