Why Higher Rentals Can Be a Good Investment
Owning a home has been part of the American Dream for decades. It was a sign of reaching a certain level of wealth and the stability associated with it. And for many, it was a great investment.
But the realization of this dream is now rather a delusion. Because the cost of housing across the country rises to the unattainable level, a growing number of people under the age of 40 years have to resign ourselves to the fact that they have never not be owning a home . Instead, they continue to rent long before their parents were home owners, spending more than half of their monthly income on housing they will never own. While this is being used as a (pertinent) example of the deteriorating financial health of the average American, a new National Bureau of Economic Research working paper argues that in fact rent is a good investment in and of itself.
It makes sense. According to the authors of the article, Esteban Rossi-Hansberg and Adrien Bilal, professor of economics at Princeton University and a graduate student, respectively, “the location of people determines their employment opportunities, housing amenities and the cost of housing.” Rather than investing in real estate that can be turned over after a few decades, tenants are investing in an asset located on site. And like any asset, you have to think about the rate of return – what do you get by living there?
Many people rent in places with a high cost of living due to job opportunities, good school, cultural offerings, etc. (On my own behalf, as I wrote yesterday , living in New York not only puts me at the epicenter of the media world ., but in close proximity to any number of classes and seminars conducted by experts from every profession imaginable.)
“Buying a larger amount of an asset implies moving to more profitable places that are more expensive today, but bring higher profits tomorrow, while selling an asset implies moving to cheaper places with few opportunities,” the authors write .
CityLab refutes the newspaper’s argument:
Rossi-Hansberg and Bilal argue that if you decide to move to a more expensive and more comfortable city, you are transferring resources to the future, i.e. you save! … On the other hand, when you move to a community with a lower cost of living, but with fewer economic benefits, you are currently pulling resources that you might receive in the future, i.e. by borrowing.
Of course, it should be noted that not everyone can afford to “save” in this sense, just like not everyone can afford to set aside money every month for their emergency fund or 401 (k).
But as CityLab writes, this can be a good psychological trick for a permanent tenant: think of your rent as an investment gain in the future for you and your children, not as a loss because you will never own the property.