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It's no secret that homeowners often have a higher net worth than renters. Even though renters face unique affordability challenges, they can still take steps to improve their financial situation.
The typical renter in the U.S. had an average net worth of $10,400 in 2022, according to a new report from the Aspen Institute. That's a record figure — even if it represents less than 3% of homeowners' net worth of nearly $400,000.
Renters generally face financial challenges such as lower income, higher debt, lower savings and lower homeownership rates, the report said.
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The wealth gap is not just due to home equity. The average home equity is just over half of the average homeowners' net worth, at $200,000, suggesting that an owner's wealth comes from other assets, the Aspen Institute found.
Across all income levels, renters are less likely than homeowners to own assets such as cars, retirement accounts and securities, the report said. Renters who own such assets tend to have lower average values compared to homeowners.
Experts say renters can start building wealth by paying off outstanding debts, increasing their income and savings, and considering whether and when a home purchase makes sense.
Here are some of the financial challenges renter households face in three sample income brackets, according to the Aspen Institute, and ways they can build wealth.
Renters making less than $25,000 per year
The Aspen Institute found that in 2022, more than a quarter of all renter households earned less than $25,000 per year.
Renter households in this income group are more likely to be “cost-burdened,” or have to spend a significant portion of their income on housing and utilities, said Janneke Ratcliffe, vice president of housing finance policy at the Urban Institute in Washington, D.C. That makes it difficult for them to cover other essentials, let alone because building wealth.
“If you rely on benefits of any kind, once you reach a certain level of income or savings, you will be laid off,” Ratcliffe said.
A hypothetical family in this category “needs financial stability first in order to meet the requirements for wealth accumulation,” the Aspen report says.
“They need positive cash flow on a regular basis – through higher income, lower expenses, or both – more savings and personal resources, and better access to benefits that contribute to greater stability,” the report says.
Dealing with high-interest debt can be a smart move, said Clifford Cornell, a certified financial planner and associate financial advisor at Bone Fide Wealth in New York City. A credit card balance negates any progress toward saving, he said.
“It’s incredibly toxic and can completely ruin someone’s financial situation if you let it,” Cornell said.
Given that housing costs can be the largest budget item, you should think about where you live, said Shaun Williams, private wealth advisor and partner at Paragon Capital Management in Denver, the No. 38 firm on CNBC's 2024 Financial Advisor 100 list.
You could have better job prospects and increase your income if you live in a different area or state, he said.
“Trying to move to where there are better options and lower costs is a key element there,” Williams said.
Renters making $50,000 to $75,000 per year
According to the report, in 2022, about 18% of all renter households earned between $50,000 and $75,000 per year.
A hypothetical family in this income bracket “has some basic financial security, although higher cash flow through higher income and/or lower debt service could allow for a stronger position,” the report says.
Renters in this income bracket can monitor their cash flow to find ways to save money each month, Cornell said: “What's left after all expenses are paid?”
A “good job” is finding ways to save about 5 to 10 percent of your income while also looking for ways to increase your income, Williams said.
“That’s when you start saving a little bit,” he said.
Renters making $100,000 or more per year
According to the Aspen Institute, about 20% of all renting households earned more than $100,000 per year in 2022.
Although this cohort of renters has the best financial situation, they may choose to rent rather than buy for a variety of reasons, experts say.
In some places, renting is cheaper than owning. Although tenants may pay renter's insurance, utilities, and incidental expenses, landlords typically cover the unit's maintenance and property taxes.
For homeowners, “your mortgage is the bare minimum you're going to spend each month,” Cornell said.
While these renters aren't building up home equity, they can focus on building their investments and savings, experts say.
Say your hypothetical mortgage payment is $2,500 while your rent is $2,000, Williams said. A mortgage payment puts $500 “into a savings account called ‘your house,’” he said.
If you rent, take the $500 difference and save it in a retirement account. That way, you're still saving money and it may grow faster than real estate, Williams said.