‘Automatic Millionaire’ Author David Bach Says Being an Owner — Not a Renter — Is Key to Financial Health

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“Buy a home, don’t rent. Renters stay poor — homeowners and landlords build wealth.” This is but one timeless truth from esteemed financial expert, self-made millionaire, and author of the New York Times bestseller, “The Automatic Millionaire,” David Bach.

According to Bach, prioritizing homeownership is one of the best ways to ensure financial health. Unfortunately, many people — particularly millennials — aren’t buying and are instead renting. While this might seem like the right decision in the moment, it could actually be one of their biggest financial mistakes.

Here’s why being an owner instead of a renter is key to financial health, according to Bach.

Renters Help Landlords Become Rich — Not the Other Way Around

Although some people argue against the idea of homeownership, Bach holds fast to the idea that real estate is still one of the most effective ways to build financial stability. In a CNBC article he even wrote, “The fact is, you aren’t really in the game of building wealth until you own some real estate.”

All it takes is you purchasing that first piece of property.

Now, that first home might not be your dream home, but it’s still a step in the right direction to building wealth and a healthy financial future for yourself — especially if you’re young.

As a renter, you’re paying money every month to someone else — usually a landlord or a rental agency. The landlord is becoming rich, while the renter ultimately doesn’t have anything to show for it. But since people have to live somewhere, why not buy instead of rent?

In “The Automatic Millionaire,” Bach gave an example to illustrate just how much money the average renter could be spending that they could have instead used to buy a home. In this book he said, “As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started — owning nothing. Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your own home free and clear!”

Run the Numbers Before You Buy

One of Bach’s major tenets is that people should make themselves rich rather than somebody else. And the somebody else in this case is the landlord.

Real estate is still an investment, though, so it’s important to do that math before making any major financial decisions. Take some time to truly figure out what things will cost. Doing this can help you set some clear financial goals and determine whether you can actually afford to buy a home or not.

According to Bach, a general rule of thumb is to spend no more than 30% of your net income on your monthly mortgage payment. This leaves you with enough money to cover other expenses and gives you the opportunity to prepare for a more financially stable future.

Bach also suggests having a minimum down payment of 10% before purchasing a home. Of course, the larger the down payment, the better.

One of the best ways to save up for a down payment is to set up automatic withdrawals from your monthly paychecks. Even setting aside a small percentage of your income can help you achieve homeownership and set you on the path to financial health.

Homeownership Is an ‘Escalator to Wealth’

According to Bach, homeowners are roughly 38 times wealthier than renters. That’s why he considers purchasing a home one of the “escalators to wealth.”

Bach himself has purchased several homes, which have contributed to his wealth. In a CNBC article, he said, “I first bought a home in San Francisco. It skyrocketed in price. I moved to New York and bought another home. It skyrocketed in price. My net worth has gone up millions and millions of dollars, simply because I’ve lived.”

Is There Ever a Good Time To Rent?

Although homeownership is an escalator to wealth, there may still be times when renting is better than buying — at least in the short term. In another CNBC article, David Bach suggested that there are only a few times in which you might want to rent instead of buy.

For example, you might want to consider renting if you frequently move around or aren’t sure where you want to live in the next few years. Or you may want to wait on a home purchase if your job or family situation is in flux.

While it may be better to think long-term, if that’s not feasible right now, then it might be better to wait to buy until you’re more settled.

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