As a Realtor and a student of wealth building, I am always seeking to understand how a home purchase can be maximized to serve as a long-term financial blessing. I try to observe first-hand what has worked for my clients and I read and research to see what has worked for others.
As I have researched and observed, one thing has emerged for certain: when it comes to housing, those who ultimately build wealth tend to do things differently than the typical consumer. From initial purchase to thirty years down the road, these contrasting decisions are undeniable.
Let me share a few of the stark differences I have come to understand that help wealth builders get the most out of their housing.
#1- They are owners rather than renters.
For starters, wealthy people definitely believe in and benefit from the value of home ownership. According to author and researcher Dr. Thomas Stanley in his book Stop Acting Rich, 98% of America’s millionaires (those folks with at least $1 million in net worth) are homeowners (248).
It should come as no shock that homeowners in general hold more wealth than renters. In 2019, the median net worth for a family who owns a home was $255,000, while the net worth of those families who rent was only $6,300 (Federal Reserve Bulletin, 11). But of course, correlation does not always mean causation. You don’t get rich just because you own a home. But homeowners do have a substantial leg up on renters in the effort to build wealth. Their payments build equity, their properties generally appreciate in value, and they benefit from tax advantages.
Wealthy people understand that home ownership affords them opportunities to build wealth that renting simply does not.
But though they understand the value of home ownership, wealth builders also understand there are those methods of home ownership that hinder wealth building and those that help.
While the general public tend to approach home purchasing as retail consumers, millionaires tend to look at home ownership more like investors. They understand that houses are not just a place to live, but also an investment.
Nowhere is this more sharply illustrated than by the way in which millionaires tend to purchase their first home.
#2 – Rule 1.49 – Their first house purchase was very small relative to their income.
In his original bestseller, The Millionaire Next Door, Tom Stanley provides some surprising advice to those who want to build wealth: he advises them never to spend more than twice their annual realized income on a house.
This advice may shock the general American home buyer. After all, this guideline would mean that the family currently making $100,000 per year should not purchase a home for any more than $200,000. Sounds crazy conservative. But while this standard may seem extreme, it’s actually slightly more extravagant than the course the typical American millionaire followed.
According to Stanley’s research, when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 (median). (ThomasJStanley.com). This is the equivalent of a home buyer who brings in $100,000 annually purchasing a home for only $149,000.
Why are these individuals so conservative with their initial home purchase?
A large income relative to home price allows the homeowner to quickly pay off the mortgage, minimizing interest and other fees. But the cost-saving doesn’t end there. A more expensive house also means higher spending on almost everything else. Taxes, utility bills, maintenance, and even pressure to drive and dress like more affluent neighbors can cause household spending to skyrocket.
Those who stretch themselves too thin end up with no money to invest elsewhere and not enough to cover the inevitable emergencies and expenses that accompany home ownership. In other words, they become house poor.
On the other hand, living well below one’s means frees up income to be invested elsewhere and pay off debt.
#3 – They pay off their houses fast.
And wealthy people do tend to pay off their houses. In his book Everyday Millionaires, author Chris Hogan chronicles the results of the largest study of millionaires ever done. That study found that 67% of America’s millionaires live in houses with paid off mortgages. Not only that, but they do it in a relatively short period of time. According to the study, the average millionaire pays off their house in 10.2 years (Everyday Millionaires, 154). As a result, they end up paying back less than half the total amount a typical 30-year borrower would pay and they free up more of their income to be transformed into wealth nearly 20 years ahead of schedule.
I know what you’re thinking: “If I was a millionaire, I could afford to pay off my house too.” But that line of thinking gets things precisely backwards. For most of these folks, paying off their home was an integral step in reaching millionaire status, not an afterthought once they had acquired wealth.
#4 – They stay put.
Even after their house is paid off, wealthy people still have some tricks up their sleeves to maximize the financial benefits of home ownership.
Houses are one of the most consistent appreciating assets any American can own. But most Americans don’t hang on to their houses for very long. According to Stanley’s research, about 20% of Americans move every year. Not so for the wealthy. They tend to find a home and stay put. 53% of America’s millionaires have not moved in the last decade (Millionaire Mind, 306).
But what does this do for their balance sheet?
For starters, staying put allows wealthy people to avoid large transaction costs associated with moving. Realtor fees, closing costs, and moving expenses can add up to a princely sum. According to DaveRamsey.com, the average cost of a sale and move is as high as 15% of the sale price. That’s money that simply evaporates. Do this two or three times and you’ve burned a ton of cash.
By finding the right home and staying in it, wealthy people avoid these expenses. They also enjoy more consistent appreciation.
Most people realize that houses tend to appreciate in value, but that increase does not occur in a straight line. Disruptions like the Great Recession of 08’- 09’ can cause significant but generally temporary losses in value. Those who hold on to their real estate though, can ride out the storms and benefit from long-term appreciation.
This is where an incredible amount of wealth can be built. Due to this buy-and-hold strategy, the typical American millionaire was able to purchase their house for only 40% of its current value (Millionaire Mind, 306). That means that during the time they have owned them, their houses have more than doubled in value.
Like it or not, if you and I would like to build wealth, we will have to do things differently than the crowd. As far as I can tell, it really boils down to four things that wealth builders do when it comes to home ownership:
- They are owners rather than renters.
- When they purchase a home, it is for a price less than twice their annual realized income.
- They pay it off quickly – 10 years on average.
- They stay in the home for the long-term, minimizing costs and maximizing appreciation.
The good news here is that these strategies are not available only to the wealthy elite. They are as accessible to me and you as they are to anyone else. In fact, they are some of the key strategies that have allowed folks who ten and twenty years ago did not possess wealth to develop net worths of more than $1 million.
We would be wise to emulate them.
