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What role does homeownership play in generational wealth?

By Taylor Medine

August 2022

A home is a place to lay down roots, celebrate holidays and create lasting memories – but buying a home may also have long-term financial benefits. Property that appreciates over decades can grow your net worth, offering wealth that can be passed on to future generations. 

Chances are you’ve heard the term “generational wealth” as a topic of discussion in the news and on social media, but what exactly does it mean, and what role does homeownership play in building it?

Here, we dig deeper to explain what generational wealth is, the challenges you may face while building it and how homeownership could benefit you.  

What is generational wealth?  

Generational wealth is assets – such as cash, investments or property – passed onto offspring. The benefit of gifting assets or giving an inheritance is that it can provide future generations a leg up financially as they enter adulthood. 

For example, gifting down payment funds to a child could help them purchase a home so they can start building equity at an early age. 

Transferring wealth might even look like paying for a child or grandchild’s college education so they can earn a degree that increases their earning potential.  

With less student loan debt to worry about, a college graduate could get a head start in growing personal assets, ideally leading to a cycle of generational wealth. 

How homeownership contributes to wealth building 

A home is one of the largest assets many of us will own in our lifetimes, and equity built up through property appreciation and paying down the mortgage can grow your net worth.  

Property isn’t a liquid asset – you can’t draw from the equity ATM to buy your kid a pony, for example. However, you could gift a home while you’re alive or leave the home to your heirs when you die. Another option is selling the home and passing down cash. 

Renting, on the other hand, doesn’t offer the same wealth transfer opportunity.

In fact, the Federal Reserve’s Survey of Consumer Finances report shows renters have a fraction of the wealth that homeowners do. In 2019, the median net worth of renters was $6,300 compared to $255,000 for homeowners. 

Challenges to building generational wealth  

Building generational wealth isn’t as easy as speaking it into existence. Factors like your education, income and where you live can affect your access to opportunity. For minorities, systematic barriers also exist, and data shows a staggering wealth disparity among races.

According to the Fed’s report, white families had a median net worth of $188,200 in 2019. Meanwhile, the median net worth of Black and Hispanic or Latino families was $24,100 and $36,200, respectively. Families characterized as “other” or mixed-race had a median net worth of $74,500.  

Several challenges may contribute to the wealth gap, including the following: 

  • Income inequality. Unequal pay could make it harder for certain groups to accumulate cash to save or invest  
  • Lower rates of homeownership. According to US Census data, minorities are less likely to own a home than white Americans, and as illustrated above, homeownership can be a contributor to wealth 
  • Racial bias. Unconscious or conscious biases can also hijack opportunities to build wealth. For example, a study by Freddie Mac found that appraisers are more likely to undervalue homes in Black and Hispanic neighborhoods. This could mean less money in the pockets of homeowners when they choose to sell 

How to build generational wealth 

Here are a few steps that could jumpstart your generational wealth-building process: 

  1. Come up with an investment strategy. Building an investment portfolio that includes stocks, bonds, index funds and property can help grow your assets.
  2. Create an education savings fund. Saving early and often in an education savings account can help you pay for a child’s education.
  3. Explore homebuying options. If you’re considering buying a house, start figuring out the down payment you need and plan how to save those funds.
  4. Review your life insurance coverage. The payout that beneficiaries receive from a life insurance policy is another financial vehicle that could help them build wealth.
  5. Update your will and beneficiaries. When assets or final wishes change, adjust your will and change beneficiaries on specific accounts, such as your 401(k), to designate who gets funds upon your death. 
  6. Teach financial principles. Guide the future generation on how to maintain wealth by teaching budgeting, saving and investing skills. 

Building wealth takes time

Building generational wealth is important because it can give your children and their children a leg up in life. This is a head start you may not have had when you started out.

Accumulating assets may not happen overnight, but consistently saving, investing and making a strategic home purchase could grow your net worth over time.

The average path to building wealth may not be as exciting as making billions with crypto or winning the lottery, but that’s completely normal.

Take your time, and remember – it’s a marathon, not a sprint.

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Taylor

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Taylor Medine is a personal finance writer who has covered money topics for various media outlets over the past 7 years. Her work has been published on USA Today, Business Insider, MSN, Yahoo! and more. When she’s not writing, you’ll likely find her attempting (and possibly failing at) a new recipe or chasing after her 1-year-old daughter, Elise.
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