Should you buy a home or invest?

The path toward retirement and financial independence usually involves buying a home and investing for retirement and the future. But, what if you had to choose?

William Cowie posed this question to me recently and asked which path I would take to financial independence if given the option. My answer: I would invest for the future and forgo the house in a New York minute. Let’s look at why I think that makes sense.

Performance Over Time – 1940 to Present

Throughout history, housing prices have appreciated over time. Because of this, both real estate investors and homeowners have built wealth with ease by building equity in their homes and properties.

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According to U.S. Census Bureau estimates, median home values nearly quadrupled over the 60-year period since the first housing census in 1940, adjusted for inflation. To give an example, a $30,600 home in 1940 would be worth approximately $119,600 in the year 2000.

Since 2000, the appreciation of home prices has slowed down considerably, with 2007 to 2011 actually sending home values downward. But what goes down, must come up, right? Just during 2014 alone, housing values increased nationally by 6.84 percent, 5.52 percent, and 4.55 percent for the first three quarters.

What am I getting at? Even though real estate booms and busts over time, housing prices consistently trend upward. And homeowners who get in at the right time can sometimes build a lot of wealth simply by buying the right house and staying put.

But here’s the thing. Real estate isn’t the only way to build wealth; investing consistently is the key to growing rich. The total S&P 500 return from 1940 to 2015 is 1104.268 percent, which works out to an annualized return of 7.42 percent.

Let’s imagine for a moment that someone opted to invest $30,600 in 1940 and simply leave it there. After earning compound interest at a rate of 7.42 percent for 60 years, they would have $2,243,005.35!

Personal Math Favors Investing

Obviously, that is an oversimplification. After all, the typical house hunter in 1940 probably wouldn’t have $30,600 laying around to invest, plus they needed a place to live! Still, it illustrates the power of compound interest, one of the many wonders in the world.

But there are other reasons why I personally think investing in stocks and bonds should be given preference over buying a home if you had to choose.

  • Repairs and upkeep
    It seems like few people take the cost of repairs and upkeep into account when purchasing a home. Not only do you have to keep the place in good shape, but you will also be responsible for making big upgrades that can cost big money – things like a new HVAC system, a new roof, and the replacement of appliances when they break.

    When you rent, you can rest assured that none of that will be your responsibility. Further, because your repairs should theoretically be taken care of for you (if you have a good landlord), making a budget should be easier for you.

  • The cost of buying and selling
    According to recent figures from the U.S. Census Bureau, a person in the United States can expect to move 11.7 times in their lifetime. Further, at age 18, a person can expect to move another 9.1 times in their remaining lifetime. While some of those moves may be from rental to rental, many people buy and sell multiple homes as they and their families need more space.

    While the moving costs may be the same whether you own or rent, the cost of moving when you’re a homeowner can be a tough pill to swallow. After all, realtors can charge anywhere from 3 to 7 percent of your home’s value to sell it – plus you might be on the hook for other costs, such as the costs for your new mortgage and even your buyer’s closing costs. When you rent, on the other hand, your main expenses are moving and putting down new deposits.

  • Bad market timing
    Raise your hand if you know someone who bought a home in 2006 to 2007 and had to sell before 2012! It seems like everyone knows someone who lost money by buying at the top of the market and selling at the bottom. And if you happen to be one of them, buying a home was anything but a good choice for your hard-earned dollars.

    But when you’re renting, the ups and downs of your local housing market aren’t as big a deal. Sure, your rent may inch up – even a lot – over time, but you’ll never lose money because you had to sell your home at the wrong time. Plus, if your rent grows too much, you have the option to move.

Money Equals Choices

While having a paid-off house in retirement is obviously ideal, I believe it is equally ideal to have a boatload of money in the bank. Why? Because I like to have choices. And for me, the more choices I have, the better.

When you don’t own a home, you can move anywhere in the world to take on a new and exciting job offer. You can live a nomadic lifestyle and roam from place to place. Further, if the place you are living becomes too expensive, you can move to a cheaper part of the country – or even the world – if you want. With a paid-off house, on the other hand, you can, well, stay home and relish in the fact that you don’t have a mortgage.

Work Toward Your Perfect World

Should you invest for retirement or buy a home you can live in forever? In a perfect world, you wouldn’t have to choose. After all, if a paid-off home and fat retirement account are goals we’re all after, wouldn’t it be great to have both?

I guess the point is that we should all be considering these concepts carefully. Where buying a home might be the hands-down best idea for one person, it could be the worst case scenario for another.

Either way, we are all in the same position, that of trying to save something for the future and build wealth that will make our lives easier down the line. If I had to choose one tool chest for my arsenal, it would be a big, fat investment account I could do anything I wanted with – and not a house.

Because, to me, a house is not only an asset, but a liability. But money? Money means choices.

Would you rather buy a house or invest? Which option is the most important for your long-term goals?

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