Is Buying a Home the Ticket to Financial Freedom?

This story originally aired May 19, 2006.

Is buying a house the ticket to financial freedom? According to financial expert and author David Bach, home ownership is the key to personal wealth.

"You can't get rich if you're a renter. The American dream of home ownership has really separated the rich from the poor in this country. The average renter in America today is worth less than $5,000. The average homeowner is worth over $172,000," Bach said.

Bach is spreading that message in his best-seller "The Automatic Millionaire: Homeowner." He took that message on a bus tour, with the zeal of a gospel preacher.

"It's more than just the gospel of home ownership. It's the gospel of freedom," he said.

Nearly 10 Million Renters Could Afford a Home

Bach isn't opposed to other investment strategies, he's just convinced that homeownership is a sure bet. "I'm not against the stock market, but the simplest investment people will ever make that really performs well for them is their home. It's the ultimate retirement account," he said.

"There are nearly 10 million renters today that could actually afford to buy a home, to get a mortgage, but they don't know it," he said. "You don't need a big down payment. You don't have to have perfect credit."

"20/20" challenged Bach to help two families out of that 10 million realize the American dream of buying their first home.

Alison and Greg Kenyon, from the metro Detroit area, make nearly $60,000. Last year, they had a 2-year-old and a baby on the way and were quickly outgrowing their rental apartment but they admit they didn't know a thing about buying a home.

During a meeting with the Kenyons, Bach had surprising news for them: Their monthly payments might actually be less if they buy.

"Because you get a tax write-off for your mortgage, it will actually be less expensive for you to own than rent," he told them.

He told them that based on their strong credit history, they should have no trouble getting a $180,000 loan.

Tracking 'the Latte Factor'

Even though they have a nest egg of $10,000, Bach advised them to take a hard look at their spending, especially at Greg's specialty beer collection.

"I teach people to look at what I call the 'latte factor,' because it helps to find money. We all spend money on little things, like lattes at Starbucks or bottled water or cigarettes, eating out," he said.

Next, Bach met Bambi and John Norris. They live in a rented home outside Fresno, Calif., with their two children. Bambi is a schoolteacher and Jason sells tires. With a combined salary of $40,000 — less than the national average — the Norrises are a bigger challenge for Bach. Although the Norrises are eager to have a place of their own, it's an uphill battle as they struggle to pay the bills every month.

When Bach visited, he took one look in the kids' rooms and immediately discovered their latte factor: their son's video games and their daughter's pricey hobby, beauty pageants.

"I'm not trying to take all the fun out of your life here, but just cutting that back would probably be a difference between a $150,000 home and a $200,000 home," Bach told them.

It was a welcome and important dose of reality for the Norrises.

"My stomach hurts to think of all the money that we've put into games and silly things that we could do without," Bambi said.

Bach says saving money is serious business if you want to buy a home. The Norrises have only $4,000 in savings, just a drop in the bucket in the pricey California market especially because they have big dreams.

They're hoping for a home with three bedrooms, a good-size garage and nice yard.

Aim for a Starter Home Before a Dream Home

Bach has a bit of a reality check for the Norrises and Kenyons.

"Here's the truth. You can't buy your dream home first. You have to get your starter home. And often your starter home is not going to be as nice as what you rent. In fact, in most cases, you have to go backward in the real estate game to go forward. You have to make a sacrifice. And that's the hardest hurdle for many people," Bach said.

But that sacrifice will make you rich, Bach said, especially if you buy more than one home and rent the others.

Mark Ruggiero is practically a walking advertisement for Bach's advice. Even though he makes less than $50,000 in New York City — one of the country's most expensive markets — he scrounged up a down payment to buy a studio apartment two years ago. When it went up in value, he was able to take out another loan, for another studio. Finally, with a roommate he bought a one-bedroom apartment that's almost triple the size of his first place.

This was the key for Ruggiero — instead of selling his first two places, he rented them out — and the rent covers almost all three of his mortgages.

So, to people who feel there is no way they could possibly afford to buy their own home, Ruggiero says, yes you can.

"I honestly believe that if I did it two years ago, that anybody can do it," he said.

There's Risk, but It's Worth It in the Long Run

But should everybody do it? Ruggiero had a hot market on his side, but with the market cooling, foreclosures increasing and interest rates rising, some critics say returns on home buying are less of a sure thing.

Bach acknowledges that the market has cycles and that real estate is not a risk-free transaction. "It's not enough to be able to afford your home, you have to be able to afford your mortgage. Just because the bank will loan you $200,000 doesn't mean that you should borrow $200,000. In fact, I recommend that people borrow 10 [percent] to 20 percent less than the bank has told them they can borrow," he said.

"Real estate is not a risk-free transaction. A lot of it comes down to time. The more time you have, the better chance you have to ride out a bad real estate market," he said.

Given that real estate values have been going up for 40 years, however, Bach says the biggest risk is never buying at all.

The Norris and Kenyon families followed Bach's advice.

Just two months after their first meeting, the Norrises made an offer on a house not far from their current rental. At $180,000, and no down payment, the house was at the upper limit of what they could afford. Still, they say the house is priced under market and, best of all, fulfills some of their dreams — in particular, having three bedrooms.

They were careful not to take an adjustable rate mortgage, the type that's causing increasing foreclosures in today's slowing housing market. The Norrises got a fixed 30-year mortgage at 7.75 percent, and were able to refinance to 6 percent.

The Kenyons in Detroit are also thrilled with their progress. With Bach's advice, they got a mortgage and found a house they could afford. At $170,000, it still had most of what they wanted. Now that the house is officially theirs, they have settled in with their second child. The Kenyons are making improvements on their property and plan to stay in the house for a long time.

Allison Kenyon is glad she and her husband followed Bach's advice.

"The possibilities are endless with this home," she said. "We can do anything to this, and it's ours. Hopefully, the choices that we make will do nothing but add value to the home and to our pockets."