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A Plan B For Millennials Who Aren't or Won't Be Homeowners

06/09/2015 04:43 pm ET | Updated Jun 08, 2016

The topic of Millennials opting out of homeownership has become a major phenomenon in recent years. There is plenty of research, as well as various theories, as to why this is happening. Wage stagnation, job instability, high debt levels, lack of ability to save for a down payment, and the need for employment mobility are commonly cited causes.

But whatever the reasons are for the generational shift away from home ownership, Millennials are going to have to find a way to attain something similar to the financial benefits that homeowners enjoy. Inability to own a home shouldn't doom you to long-term financial insecurity.

Let's consider three major benefits you won't be getting as a result of not being a homeowner - and how you can overcome them with specific strategies.

Building Equity Passively

This is probably the biggest single advantage of homeownership. Through a combination of both price appreciation and mortgage amortization, the house steadily - and passively - builds equity. While it's doing that, it's also providing shelter for the occupying household. In that regard, the home functions primarily as a place to live, with the growth in equity happening largely out of view.

That passive equity accumulation is a large part of why so many current retirees have been able to live in relative comfort, even if they haven't been devoted savers. The sale of a home with several hundred thousand dollars worth of equity can help make retirement dreams come true.

If you do not believe that homeownership is in your future, you will be at a decided disadvantage as a result of not having this benefit. However there is a way that you can create a financial strategy that can provide similar advantages.

As a renter, you can create your own equity accumulation program by committing yourself to saving and investing money. This is usually best done through a dedicated, tax-sheltered retirement plan, but there are other ways as well. You can simply contribute money to a brokerage account or mutual fund on a regular basis. And by investing primarily in index funds, you can avoid the capital gains tax liabilities that come with most other fund-related investing (this is something of a backdoor tax-deferral method).

This will come at a cost. Where the homeowner builds equity simply by making his or her monthly house payment, you as a renter, will have to make savings contributions over and above your monthly rent payment.

For example, let's say that your rent is $1,000 per month, and you contribute $350 per month, or $4,200 per year, into a traditional or Roth IRA. After 30 years - the length of a typical mortgage - your contributions will grow to nearly $500,000, assuming an 8% average annual rate of investment return. That's pretty close to the equity that many more well-off people have just before retiring.

Now it may be true that paying $1,000 in rent, plus $350 in IRA contributions may be higher than a mortgage payment in your area. But it also needs to be considered that as a tenant, you won't need to pay for repairs and maintenance to the property. This is especially significant in regard to major repairs, such as replacing the roof or HVAC system, repaving the driveway, or making major system repairs, such as plumbing or electrical work. If the absence of these repairs doesn't completely cover $350 per month in investment contributions, it will certainly come very close.

Amortizing Your Mortgage Out of Existence

Even if a homeowner makes no effort whatsoever to pay off his mortgage early, the loan will still be amortized out of existence, generally in no more than 30 years. As a renter, you may not have a mortgage, but it's likely that you have other debt. It's equally likely that the debt that you have is large enough that it's one of the major reasons why you're not a homeowner, or do not expect to be one.

Your alternative renter strategy could be to commit to getting completely out of debt. This is especially true if you have large student loan debts. These loans can be large enough that they are something like a mortgage, only there is no real estate behind the loan. But you can still commit to pay off your student loan debts, and all of your debts, in much the same way that a homeowner pays off her mortgage.

A big pile of debt - particularly student loans - can be intimidating. But that may not be the case if you give yourself 10, 15, or 20 years to pay them off. The idea is to treat your debts like a mortgage. In doing so, it's critically important that you at least make your regularly scheduled monthly payments - and a little extra if possible - and not take on any new debt.

In due time, you'll be debt free, and that's one of the most important long-term financial goals that you can have, whether you are a homeowner or renter.

Generous Income Tax Deductions

Homeowners get a generous tax deduction for the mortgage interest, real estate taxes, and sometimes private mortgage insurance portions of their house payments. This is a difficult benefit to duplicate if you're a renter, but you may be able to get close nonetheless.

The biggest alternative tax break that you can get is saving for retirement. Contributions to most retirement plans (the Roth IRA being the notable exception) will get you an immediate reduction in your taxable income. For this reason, you should seek to save and invest primarily through any retirement plans you have available.

This will not only give you an increased income tax deduction, but it will also represent a dollar-for-dollar increase in your savings, and therefore in your net worth.

And for what it's worth, tax deductions for homeownership aren't nearly as generous as they once were. With the standard deductions for 2015 raised to $12,600 for married filers, and $6,300 for single filers, homeowners can only deduct their housing expenses to the degree that they exceed these thresholds. That cuts way down on the homeowner tax advantage.

Just because you aren't a homeowner - and even if you think you never will be one - doesn't mean that you can't at least partially duplicate the benefits of being one. Your financial future may even depend on you're doing just that.

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