How to Build Generational Wealth Through Homeownership

Not everyone comes from money, but there are decisions you can make today to set up future generations for long-term success. And by long-term success, we mean a true financial legacy. One of the easiest ways for the average person to do this is through real estate.

That’s right: Buying a home not only creates a stable living environment for your family, but it also builds wealth that can be enjoyed for generations to come.

The Definition of Generational Wealth

Generational wealth is created by transferring your assets to other family members. These assets—whether they’re real estate, savings accounts, life insurance, retirement accounts, or money made in the stock market—can be passed down from one generation to the next.

The most common example is a parent willing their assets to their children. This then gives the children a leg up financially, allowing them to combine this wealth with what they had already established on their own. It can create a snowball effect as the cumulative assets continue to roll to the next family member in line.

How to Create Generational Wealth

You can try to save money or be prudent about paying off debt, but these acts alone won’t typically yield significant wealth that can be passed on. A solid saving and investing strategy can add some more money to the pot, of course. But many people find that buying a home is the easiest and best way to create generational wealth.

That’s because the equity in your home will continue to rise as you pay down the principal of your loan and as the market value of your home increases at the same time.

On average, you can expect a 4% increase in the value of your home every year—although that’s not always the case. The New York Times notes that existing home prices increased by 45% between December 2019 and June 2022, due to the COVID-19 pandemic.

Of course, home values do fluctuate, meaning that there is always the potential for a house to lose some value. Even with those blips, however, homeowners tend to create wealth over time. And if you’re buying a home with the goal of creating generational wealth, then you’re likely viewing the purchase as a long-term investment.

Now, establishing a financial legacy may mean playing the long game, but it doesn’t mean you have to buy a home and just sit on it until you can pass it onto your children. That is one approach, but it’s not the only one. Read on to learn how to build generational wealth through real estate.

Building on That Home Purchase

Many people piggyback off their initial home investment. They may sell the home for a profit and then purchase a larger home. Or they may choose to improve, upgrade, or expand their home to increase its value. This can be done through a home equity loan, a cash-out refinance, or a home equity line of credit (HELOC).

These same tools can also be used to purchase an additional home, whether that’s a second home, a vacation home, or an investment property that provides an additional stream of income.

All of these strategies are possible thanks to that first home purchase. Now imagine what you can do with the equity in your home after it’s been building up for 10, 20, or 30 years. That’s why homeownership is often at the crux of any conversation about how to create wealth.

There are other benefits to building home equity, too. You can use that home equity loan, cash-out refinance, or HELOC for other purposes. This might be paying off debt, saving for retirement, or taking a bite out of a student loan.

Without home equity, many people would have to dip into their savings accounts or retirement accounts if a large, unexpected cost came up, such as a medical bill, home repair, or car purchase. Naturally, credit cards and private loans can help with these purchases as well, but they often carry much higher interest rates than a home loan.

Helping Your Children Achieve the American Dream

Think about it for a second: If the home you own appreciates by about 4% every year, then so too does the cost to buy a home for your kids. Not only do they have to save money, improve their credit score and financial literacy, and worry about interest rates, but many will also face the prospect of being priced out of the homes they want.

Buying a home for the purpose of passing down wealth gives you a few options:

Your children can live in the home as they save money for their own real estate purchase—a bonus for you if you’re yearning to have your kids nearby!

You can give the home to your children when you’re ready to downsize, or you can will it to them in your estate planning.

You can use your home equity to help them with a down payment on a new home, thereby easing some of the burden associated with buying a home.

Creating a Stable Life for Future Generations

We’ve talked about what a home may mean to the next generation (and the one beyond that), but what does it mean for you? It means security, stability, and predictability. If you lock in a 30-year, fixed-rate mortgage, then your monthly payment will never change. This is a big deal as homes appreciate and the cost of rent continues to climb.

Knowing what your monthly housing expenses will be frees up your cash for a variety of other uses. If you’re still strategizing about how to build wealth, then this extra money can go toward investments like the stock market or a Roth IRA. Or maybe your goal is paying off debt like student loans—whether those loans are yours or your children’s.

The point is, when you don’t have to worry about housing costs increasing, the world is your oyster when you find extra money in your pocket.

Of course, you don’t have to worry about saving and investing and leaving as much as possible for future generations all the time. You can use your hard-earned money however you see fit. You can take a trip, buy a boat, or simply sock it away as you watch your net worth grow through your other investments.

There is a fine line between preparing for the future and living in the present. Fortunately, the purchase of a home allows you to do both as you enjoy a wonderful place to live while knowing that that dwelling will one day help your children achieve their own dreams. There’s nothing a loving parent wants more!