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?

More about...Investing, Home & Garden

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uri
uri
4 years ago

i faced the choice recently and decided to buy. some reasons: 1. leverage. by putting 5% down, you can leverage the appreciation in your home 19-1. and if things go wrong, it is often possible to walk away from your mortgage without liability, so it’s a relatively low-risk high leverage investment. 2. stability. the flip side of being unable to quickly move is that you can’t be kicked out by a landlord. this not only saves on the expenses of moving, it helps me get the benefits of community, stability for my kid’s school, and time saved from not moving.… Read more »

Beth
Beth
4 years ago
Reply to  uri

“you’re paying twice for the benefit.” — I respectfully disagree. I think it depends on where you live and what your family situation is. I have a two bedroom apartment for reasonable rent — where I live, it would cost me another at least 60% to buy the equivalent space (condo) let alone a house. That doesn’t include renovations, additional furniture or decorating. Of the total cost ownership, less than half — and less than what I pay in rent — actually goes towards the mortgage payment. That mortgage payment is mostly interest for the first five years rather than… Read more »

Mike
Mike
4 years ago
Reply to  Beth

In small town USA, a 3 bedroom house can be had for under $100k. $550 monthly for an $80k mortgage plus property tax. Renting a house of the same size costs $800. So I take the $250 difference and stuff it into a home repair savings account for ‘when things go wrong’ at home. Right now that savings account has $4200 in it. So far, home ownership is winning out over renting.

lmoot
lmoot
4 years ago
Reply to  Mike

Exactly. My attraction to real estate is that you have more control over the deal. I have a 1 bedroom bungalow in a not so small city (but not a large city either). The previous owner paid 125k in 2005. I paid $79k in 2009. My mortgage is $353.91. With taxes and insurance my PITI payment has been under $600 for 4 out of the 6 years I’ve owned the house (and is currently less than $550). Zillow has had the rental rate listed at over $1k for the last 2 years running. I’m paying less than 1/2 that. TBH… Read more »

Beth
Beth
4 years ago
Reply to  Mike

Nice! I admit I’m a little envious of US housing prices. Around here, $100K doesn’t even buy you a place in a trailer park. (I’m not knocking trailer parks, but around here it’s law that you have to vacate for at least 2 months per year.) Bungalows occasionally dip as low as $280K for fixer uppers. Two bedroom condos start at $70K for complete gut jobs. It’s a bit of a mess, so I’m waiting out the market.

uri
uri
4 years ago
Reply to  Beth

i don’t mean that you’re getting double the value, though. i’m just making the point that you are getting both the use value of the house, and storing value that can be released later by sale or mortgage (tangent: reverse mortgages can be a great insurance policy for retirement: https://www.onefpa.org/journal/pages/may14-hecm-reverse-mortgages-now-or-last-resort.aspx).

Tony
Tony
4 years ago
Reply to  uri

“diversification. it’s a different type of asset, one that can serve as a hedge against both inflation and stock market crash.”

Considering the average person puts down as much cash as possible and then a loan for a large amount of money, you’re not very diversified.

A home should not be looked at as an investment unless you’re charging rent. Even then you have to factor taxes, interest, maintenance, purchase fees into your asset.

Just like the stock market, you may get lucky and have your home appreciate. To assume that will happen is a mistake.

uri
uri
4 years ago
Reply to  Tony

Tony, homes are not the highest performing asset class by a long shot, but that doesn’t mean they are not assets. If you buy a home that you can later sell or mortgage, then of course it is an investment. Moreover for some of the reasons I and others stated, homes can be a good investment. When I bought my home a year ago, it was my belief that stocks were overvalued, and bonds and bank accounts yielded abysmally low returns. In contrast, I was able to buy a house worth about 260K for 216K, putting 11K down. That is… Read more »

Beth
Beth
4 years ago
Reply to  uri

Just out of curiosity, how is that an instant $44K acquisition? Really, a home is only work what someone will buy it for and if it was really worth $260K, why wasn’t the previous owner able to sell it for that?

Not trying to be critical — I’m just wondering at the discrepancy between what a realtor says a home is worth, what value it’s taxed and insured at and how all that figures into one’s net worth, versus what happens when you actually sell it.

uri
uri
4 years ago
Reply to  uri

beth, sometimes a home worth 260K just won’t sell for 260K for whatever reason – it’s a small market with few speculators, mostly people buying for themselves… people don’t like the aesthetics… whatever. i should note that it failed to sell at 250K, and the motivated seller reduced it to 225K. we saw it on the first day it was reduced and offered the 225 they were asking for, then reduced it to 216 when the inspection revealed some issues. i think it’s more likely a 260K house with a motivated seller that we caught a break on, than a… Read more »

uri
uri
4 years ago
Reply to  Tony

By the way, I can’t be the only one who thinks putting down as little money as possible is a good idea, can I? I assume other people have access to credit with 5% down, less for FHA, USDA and VA, no?

Jenna
Jenna
4 years ago
Reply to  uri

Yes, I have one. I think it was the right call, but I am only ~1 year in.

uri
uri
4 years ago
Reply to  uri

let’s not forget about the favorable tax treatment that residential homes get. there’s the mortgage interest income tax deduction, which will be highest in the earliest years of the mortgage – those savings can be put right in your investment fund. And there’s the capital gains tax exclusion for the first 250K (500K if married) of gains. of course, some financial investment instruments get favorable treatment, too.

Nightvid Cole
Nightvid Cole
4 years ago
Reply to  uri

There are plenty of moral problems with defaulting on a mortgage. It doesn’t matter how greedy or profit-maximizing banks are, two wrongs DO NOT make a right!!! And yes, things done against a business can be morally wrong (e.g. shoplifting), so don’t try to argue that it’s a business decision and it follows that morality is not a consideration. The argument fails.

Nightvid Cole
Nightvid Cole
4 years ago
Reply to  Nightvid Cole

Also, the argument that walking away is an option within the contract and thus isn’t immoral also fails, because it does not distinguish between the way a rule is enforced and the rule itself. Consider the analogy of shoplifting again. If you are willing to suffer the consequences imposed by society for shoplifting, does that make it okay? Of course not. So thus the willingness to accept a stated consequence DOES NOT absolve moral responsibility!

uri
uri
4 years ago
Reply to  Nightvid Cole

i don’t agree with the analogy. shoplifting does not involve the consent of the business. defaulting on a mortgage is with consent. there is a note and a mortgage contract (presented by the lender on a take-it-or-leave-it basis, by the way) that anticipates the possibility of default and spells out the consequences.

in any event, i would not advise a person to voluntarily default on their mortgage unless there were extraordinary circumstances. people usually default because they can’t afford to pay it, which takes it out of the realm of moral questions, which presuppose the actor has a choice.

Beth
Beth
4 years ago

Good post! I’m currently favouring investments over buying a home because the total cost of ownership is far lower for where I live and where I’m at in my life. I don’t feel like I’m being left behind because while people boast of how much their home has increased in value, they’re comparing my rent (which, other than my electricity bill, is the all-in cost) with their mortgage payment, not their all-in cost including interest on the mortgage, repairs, maintenance, renovations, closing costs, etc. Don’t get me wrong – I’m certainly not against homeownership. I’m just wary of the idea… Read more »

Elizabeth
Elizabeth
4 years ago

For me personally, investing instead of buying a home makes a lot of sense. I am interested in retiring early and living in different places. I like the flexibility that money provides along the ability to move whenever I choose, and I don’t want to think about the hassle of buying/selling/repairing a house. It seems like such a nightmare to me. There are many “hidden” costs in home ownership and the statements that “renting is throwing away money” or “I’m paying the same to rent so why wouldn’t I buy a home and be putting my money towards something” are… Read more »

mysticaltyger
mysticaltyger
4 years ago
Reply to  Elizabeth

This pretty much describes me as well. I don’t even own a hammer and nails and I don’t really want to. Real estate is expensive in my area and I am not willing to spend every last dime I have on a small condo. It’s just not worth it to me. So I rent a small place close to work with no commute and save the difference. It works for me. Of course, if I were married with kids, the calculus would be completely different. The problem most renters have is that they don’t take the difference between rent and… Read more »

Elizabeth
Elizabeth
4 years ago
Reply to  mysticaltyger

Exactly!If you invest the difference, you should end up ahead in the end. I’ve read some articles/studies about this but can’t find them at the moment…and that even accounts for still having to pay rent when you’re retired or your mortgage is paid off. From a purely monetary point of view, renting is better than buying. Another point: I was speaking to someone the other day who grew up in rural Canada and his parents had a house in a small, but picturesque, community and sold it recently for $12,000. $12,000! For a 4 bedroom house in great condition, lots… Read more »

jestjack
jestjack
4 years ago

Hmmmm. I’d argue these numbers but every market is different. My first home, which I still own and is a rental now, was purchased in 1978 for $41K. I financed $32K @9% and re-financed a couple of times over the years the last time at 3.5%. It is a duplex, I lived in the lower unit for about 6 years and rented the top. The home is now worth right around $209K. When fully rented the house throws off about $2250 per month. There are expenses and being a landlord is a pain BUT there are many rewards to be… Read more »

Beth
Beth
4 years ago
Reply to  jestjack

Yes, but didn’t people also lose fortunes — and their homes — when the housing bubble burst in the U.S.?

What amazes me is how many people in Canada fear a market crash but fail to see our housing bubble hasn’t burst yet. But hey, mortgage rates are low! Surely this is the perfect time to buy? 😉

Derek M
Derek M
4 years ago
Reply to  Beth

The housing bubble existed because people who shouldn’t have been given loans, were. In fact, federal programs were put in place to /encourage/ loans to under-or-un-qualified people. Those who made smart investments in good property, and not over-valued property, didn’t lose. Even when the bubble burst.

uri
uri
4 years ago
Reply to  Derek M

undoubtedly there were some people who did not qualify for loans who were given loans, but i think they were relatively few. more commonly, at least based on my personal experience, people (especially people in black and latino neighborhoods) were steered by lenders to subprime or predatory loans instead of being given conventional loans with better terms that they qualified for. but this was probably not the cause of the housing bubble. robert shiller, a nobel prize-winning economist who is well versed in the economics of residential real estate, believes home prices were driven up to bubble levels by real… Read more »

Jenna
Jenna
4 years ago
Reply to  Derek M

Federal policies did not support the creative home financing that contributed to the housing crash, but private lenders did.

But I agree, Derek, most people survived or will re-coop their losses in home value and be okay.

a
a
4 years ago
Reply to  jestjack

On a side note: I know “Black Monday” was a stock market crash in the 1980’s and “Black Tuesday” was essentially the beginning of the Great Depression, but I always associated “Black Friday” with day after Thanksgiving. But I googled it because I figured I was missing something and it was stock market crash in 1869 caused by a couple gold speculators. Who knew? I didn’t realize the stock market even existed back then.

Jordan
Jordan
4 years ago

Good article. You have to live somewhere though right? 1) you can rent and put your 20,000 down payment to invest but then you have to pay enormous rent that does not build equity, 2) you buy a single family home and put down 20,0000 down payment, but loosing out on the great returns from investing that 20,000 down payment, or 3)buy a duplex in order to build equity, live for free and use some of those profits to invest. Id like to see some math to see which is best in the long run.

Emily @ JohnJaneDoe.com
Emily @ JohnJaneDoe.com
4 years ago

I think some of the decision depends on where you live. I live in Raleigh. It’s a growing city, and home prices are reasonable. I think my house will continue to appreciate in value. It makes sense for me to buy a house.
If I lived near San Francisco, where home values are already sky high, or if I lived in a place with a declining population, then I would not invest in real estate. The risk of not appreciating would be higher, so the stock market would seem a better bet.

Alice
Alice
4 years ago

Emily, I agree with your analysis about the area in which one lives. School districts can make or break an area without considering how they affect housing prices. My small city’s school closed their open enrollment policy and now only children that actually live in the district can attend our schools. Since the school district is very desirable people are buying houses just to get or keep their children in this school system. I just bought another house only 2 blocks away and paid a premium price for it but since I’m downsizing it makes sense for me to pay… Read more »

Ali @ Anything You Want
Ali @ Anything You Want
4 years ago

I think it is nearly impossible to answer this question in a way that would work for everyone. For me, buying a home made sense because the cost of renting in my city is so high, and buying allowed me to live affordably. For others, the opposite might be true, in which case investing might be a better alternative.

Another Beth
Another Beth
4 years ago

I agree. We own our home and have made improvements and changes to make it truly “ours.” We just might be here for good, so for us, it’s a good decision to buy a home.

That being said, I have friends who are single and have careers where they might move every year or two. They absolutely love having the flexibility to move anywhere. Buying a place doesn’t make any sense for them.

There truly isn’t a one-size-fits-all answer to the renting vs. owning debate!

Melissa
Melissa
4 years ago

Interesting post, Holly! What about homes you purchase as investments? My fiance and I are considering purchasing a condo in our city for an extremely affordable price, then renting it out (rental income would pay its mortgage and give us a little extra “profit”, which we would either save or reinvest into the property). I love the idea of renting and, personally, would do so if I were single for all of the reasons you mentioned above. However, my fiance prefers to own his own home because he can do many repairs himself, likes to make his own upgrades to… Read more »

Mr. Utopia @ Personal Finance Utopia
Mr. Utopia @ Personal Finance Utopia
4 years ago

It’s a good thing we don’t live in a world where you have to make an “either or” decision otherwise most people wouldn’t own a home. That’s because you are spot on, Holly. Investing in the stock market is the better long term strategy.

KT
KT
4 years ago

I’ll agree that it’s where you live too that can make the difference. I live in NJ, where average property taxes are about $8500-9k a year (give or take). I am fortunate to live in a town where rent control caps rent increases at 2% a year. My rent is only $1,000/month. Now if we do a little math, and say that while yes i’m paying $12k a year in rent, but taxes are $8500 and go up more than 2%/year, that leaves $3500/year for a mortgage and insurance. Where can you buy a house with a $200 mortgage?

Jeff
Jeff
4 years ago

I view this issue differently than the rest of the commentators. While every area is different, for my point I am going to assume an area where rents and mortgages are similar. For example, I could pay rent for $1000 a month so I have a place to live and invest the rest of my money vs paying $1000 a month on a mortgage and investing the rest. In this scenario, with ownership, I am gaining equity on that $1000 I am sending for a place to live vs just paying that $1000. Yes, ownership has extra expenses and the… Read more »

David
David
4 years ago

Great post and enlightening discussion. A couple observations: 1) I don’t think that buy vs. invest must be either/or. Why not do both? Why not have a paid off house and a nice investment account? Seems that’s a nice balance between reducing risk (by having a paid for home) and expanding options/freedom (by having a nice investment account). 2) The buy vs. rent equation is very much a local concern. My wife and I recently purchased a townhome that would rent for $1,500 a month in our area. We plan to remain in the area indefinitely since family is here… Read more »

Alexander @ Cash Flow Diaries
Alexander @ Cash Flow Diaries
4 years ago

I live in Austin TX which is a super hot market. It doesnt make much sense to invest here right now for buy and hold but flippers are doing great. I started buying rental properties out of state and so far am making great returns. I love investing in real estate and dont want to turn back.

I will retire early from real estate investing! Love it!

Ec
Ec
4 years ago

The math on returns that you present is severely flawed in 2 ways. First you compare the annual return of buying a home on a inflation adjusted basis while you compare it to the total return of a stock index. Secondly, the other big advantage of owning your own home is leverage. If you had 30k to invest in 1940, based on a typical ltv ratio of 80/20 you could buy a home worth 600k. Would you rather have 600k growing at a slightly lower rate or 30k growing at a higher rate? You use numbers as a large basis… Read more »

Sanjeev Shrestha
Sanjeev Shrestha
4 years ago

Interesting Article Holly ! Since I graduated from college and got a job, everyone I met told me, “you need to buy a house, you need to buy a house. House is a great investment.” They told me that interest rates are low and you will have to put nothing down. But for some reason, I have been always weary about that advice. For me, a home is a place to live and enjoy. I do not see as an investment but a place I love to go after work and enjoy the place. It’s like this: I buy a… Read more »

mysticaltyger
mysticaltyger
4 years ago

It depends on your income and home prices in your area. Some people really can’t do both. But it sounds like you have a good plan.

Derek M
Derek M
4 years ago

I find it interesting that no one talks about turning their home into a revenue-producing asset instead of just using it as a place to keep your stuff. My wife and I are purchasing a larger home with several outbuildings so that we can start offsetting the cost of the home itself. We have an extra bedroom which will be a dedicated office for our own home-based businesses. There is an additional garage which we are going to rent out, a storage locker which we will try to rent as well, and plenty of room for a garden and chickens.… Read more »

lmoot
lmoot
4 years ago

I agree with others. Where you live/ buy makes a HUGE difference. Anyone can invest in the market, but not everyone can buy a house in areas of California, NY, Canada, etc. For me the decision will almost always be based on a lifestyle value vs a monetary value. I do invest in my 401K and ROTH, and have a rollover IRA. However I intend to invest in real estate before investing in other types of market stock simply because I believe it will allow me to live a certain lifestyle now, without having to wait out long term investing.… Read more »

Bryan@Just One More Year
[email protected] One More Year
4 years ago

This complex question is difficult to answer and absolutely depends on your situation. Do you think Bill Gates agonizes over if he should buy or rent? He is an example of when your home ownership is a small fraction for your net worth. Here are some other considerations for this debate: mortgage interest rates, investment returns on other investments, location, your age, your income, the economy, cost of the home, cost of rent, square footage, you lack of or intense nesting instinct, your spouse, a pride of ownership, your tax situation, and how often you like to move to new… Read more »

Josh
Josh
4 years ago

There are definitely many factors to consider. For me, even if all things were equal monoetarily, there is something to be said for the quality of living, so to speak, afforded by owning. Here in small town Missouri, you don’t get much for your money as far as renting goes–rougher neighbors and smaller, more rundown, less efficient houses. For considerably less money than I would pay on rent, I can own a newer, more efficient home in a nice subdivision and build equity in that house. Why would I not choose the better lifestyle if I would have the same… Read more »

Jim F
Jim F
4 years ago

This should be a non-emotional decision, but its a piece of each individual’s hierarchy of needs and wants, so this is highly personal. I think what is most important is that it is an informed decision, and that means accounting for as many of the possible the external financial factors up front. Then, even if its more expensive one way, a “rational” decision based on emotion can be made to do the other, knowing you are paying more for what you want and need. There’s a number of good rent vs. buy calculators on the internet. Realtor dot com, the… Read more »

lmoot
lmoot
4 years ago

Also, I don’t buy that purchasing a home limits your choices, or makes a nomadic lifestyle impossible or more difficult. I rented my house out, took 6 months off of work, and travelled in 2 countries in Africa. I wasn’t earning very much moneyto invest then, even if I wanted to. But I was still earning towards my investment both in rental income, and any value inflation that may happen. One day my hope is to be able to live and/or work overseas for 1-2 years. And I will rent out my house again. I consider my house a root,… Read more »

Jen from Boston
Jen from Boston
4 years ago
Reply to  lmoot

I don’t consider stocks to be liquid. To me, cash and cash equivalents are liquid. Everything else is non-liquid. So my emergency fund is all in a money market. One of the reasons I don’t consider stocks to be liquid is that you have to sell them to get the cash, and there could be a delay between the sell and receiving the proceeds. Another reason why I don’t use stocks as an emergency fund is, as Imroot pointed out, your cash value isn’t constant. Also, when you sell $10,000 worth of stock you aren’t get $10,000. You are getting… Read more »

Glorified Plumber
Glorified Plumber
4 years ago

I predict this one will be a plethora of comments… people definitely feel very strongly about this subject. Buying a home cannot be reduced to simply a financial decision and far too many treat it this way, especially when attempting to provide direction or advice to others. I think people need to run the numbers and then use those to concentrate on the intangibles that go with owning a home or renting. Things like: – Are you likely to want to leave the area in a few years? – Are you likely to get married or have kids and want… Read more »

bigdreams
bigdreams
4 years ago

I tend to agree w GloriousPlumber. One of the questions asked is: Do you understand the transaction costs associated with purchasing a house or renting? Most people while making the buying versus renting decision don’t realize that transaction costs in buying can add up to a lot more than chump change (Broker fees, legal fees, notary fees, transfer fees, housing taxes, etc.). I’m talking 20-50K depending on the value of the house. To make it worse, there is also the matter of annual real estate taxes that will need to be paid. Renovation, maintenance and upkeep expenses will also add… Read more »

Erin
Erin
4 years ago

And even when viewed through that lens–lessening risk exposure–people will come up with different answers based on situations we’ve each dealt with and remain top of mind for us. When I think of lessening exposure to risk in association with housing, I think of the stability of owning my own home and making the property decisions myself, vs. being at the mercy of a landlord. This is 100% because of the fact that my last renting situation was a very bad one where we were threatened with lawsuits every other month, appliances would disappear, and the locks were changed 8… Read more »

Glorified Plumber
Glorified Plumber
4 years ago
Reply to  Erin

Yikes! That sounds like a horrible landlord experience! I could VERY much see how that would give someone scars from renting!

You are very much correct, the “perceived risk” will always be through the lens of the individuals experience! People are funny that way!

I’ve been lucky to have had excellent landlords (exception, I know), and I ask myself, what would be easier: Ending my lease and moving, or selling my house and moving? The concept of selling a house and moving in the event of an emergency scares the bajeezus out of me!

Erin
Erin
4 years ago

Or hidden option #3: renting your house out and moving. In my area at least this is very easy to do as single-family rentals are in the minority and vastly preferred by the creative class who is willing to pay a premium for the privacy.

Erin
Erin
4 years ago

Imoot illustrates the other side of the timing issue very well above. Investing might be a more predictable return in that you don’t have to time a big entry but rather dribble in little bits over time, but if you happen to hit on good timing in real estate it’s golden. Partly for this reason I’m choosing to buy. My husband and I are in escrow on a duplex in a neighborhood of our city that is going to get money just poured into it by the government over the next decade in the form of major rehabilitation of adjacent… Read more »

IamNoSpecial
IamNoSpecial
4 years ago

In-spite of having numerous calculators which helps us in deciding for the buy vs rent argument, it is always the heart that wins. This argument is similar to prepay home loan vs investing argument. The brain says something but heart rules and then we buy house and rush to pre-pay it

getagrip
getagrip
4 years ago

The point of this article seems off to me. Basically it is another buy versus rent with the “choice” being pour all your investible income into the house or all of it into your investments to get a “boatload” of money. At the end you have a large sum of money to live on or a paid off home with no money to live on other than possibly Social Security with the author choosing the investment accounts over having a paid off home for the freedom the former offers. To me it’s a poor choice, it’s like asking me if… Read more »

Beth
Beth
4 years ago
Reply to  getagrip

Good point about the false dichotomy. For many of us, it’s not an either/or — especially if our retirement plans are completely separate from our housing decisions. For some people, it might be “I’ve got an extra $x — should I invest it or make an extra mortgage payment?” For others, it’s “buying costs $x more than renting, is that how I want to allocate my resources at this point in my life?” I think there’s a lot more pressure on the buy versus rent debate if you look at a home as part of your retirement plan, or buying… Read more »

uri
uri
4 years ago
Reply to  getagrip

getagrip: it’s also a false dichotomy because the situation you mention – “a paid off home with no money to live on other than possibly Social Security” – has a solution that works for a lot of people – the HECM reverse mortgage. if you’re over 62 and own your home outright (or, i believe, if you have substantial equity in your home), you can mortgage the home and not have to repay until you sell the house, move out or die, at which point you (or your next of kin) must repay the loan or face foreclosure. so if… Read more »

Beth
Beth
4 years ago
Reply to  uri

The rules in Canada http://www.fcac-acfc.gc.ca/eng/resources/publications/mortgages/Pages/Understa-Comprend.aspx Many consumers here consider it predatory lending because interest rates are higher and the interest compounds over time — and the loans typically target people who are vulnerable. (The older you are, the more money you can get) Ads here encourage people to take out the money so they can travel, buy consumer goods, give money to grandkids, etc. Between repaying the principle and what could be 15-20 years worth of compound interest, you can wipe out most of your equity. Oh… and don’t forget the legal fees, home appraisal, etc. That’s not a problem… Read more »

uri
uri
4 years ago
Reply to  Beth

looks about the same as the US, except that the age in the US is 62 vs 55 in canada, and the percentage of the value of the home you can borrow in the US can be higher or lower than 50, depending on factors such as the age of the youngest owner and the interest rate on the loan. i agree it’s very important that people who take on reverse mortgages know what they’re getting into. in particular, they should know that they may not be aable to pass the home on to their children, and they should understand… Read more »

Elisabeth
Elisabeth
4 years ago

This is all assuming that renting is significantly cheaper than buying, and that it will remain so. One way or another, housing costs: a mortgage is stable, and will eventually be paid off, while paying rent offers flexibility and little else. In our area rents have doubled in the last decade, so in spite of having bought at the top of the market in 2005, we can now invest more than we could if we were renting.

Buying a home is more than an investment decision, and this is more than an either-or question.

Beth
Beth
4 years ago
Reply to  Elisabeth

But for many of us, the question isn’t “Should I rent or buy?” it’s “Should I continue renting or buy?” Not sure what it’s like elsewhere, but in Ontario the government limits how much landlords can increase the rent each year. (It’s been roughly 1-2%.) If I was a home owner now, I couldn’t look back over the past several years and say “look how much I’ve saved!” because my rent would have been below market value, not keeping pace with it. Currently, I’m comparing staying where I am versus buying, not moving to another rental versus buying. Market value… Read more »

uri
uri
4 years ago
Reply to  Beth

are you in toronto, beth? i hear it’s turning into san francisco north. although maybe vancouver is SF north and toronto is SF east. in any event, given the widespread view that housing prices in such cities are artificially inflated, you might be wise to wait until after the bubble bursts, especially given your favorable rental situation. if i could be assured of such a cap on increases, i might well have decided to stay a renter.

Beth
Beth
4 years ago
Reply to  uri

I’m not in Toronto, but I have friends who live there. They love the city, and are willing to pay a higher cost of living for the big city lifestyle. Toronto, Calgary and Vancouver are the ones you likely hear about in the news because they are the most extreme cases and will probably fall the hardest. I don’t think there will be a big bubble burst in my area, but even a modest decrease in housing would tip the scales in favour of ownership for me. I’ve been watching the market for the past five year and condos have… Read more »

Joe
Joe
4 years ago

Most people are terrible at investing. They buy when everyone is buying (high) and sell when everyone is selling (low). Few people who were in a stable financial situation were scared into selling their house during a downturn, but many sold stocks in 2008 and did not buy back until 2010 locking their losses. Most people know how to tell a desirable property from an undesirable, but few have even a clue how to judge stock market valuation, which is needed even if you invest in index funds. For all these reasons few people loose their shirts buying houses (2006-2008… Read more »

Sarah B
Sarah B
4 years ago

I find it interesting that so far no one else finds themselves in my current predicament, so I’d like to share my perspective and welcome any advice. I believe the original analysis assumes stagnant rental prices as well as slowly growing/’catchable’ house prices. I live in Portland Oregon, where house prices are skyrocketing faster than you can catch them; prices this year were up 24% over last year and show no signs of slowing down. The average home price here just flew past $350K and people who qualify for mortgages are getting outbid by cash investors. At the same time,… Read more »

Beth
Beth
4 years ago
Reply to  Sarah B

That’s a tough one. What’s included in that $1500 mortgage payment you mention? (Is it just the mortgage or mortgage + PITI?) I think you have to look at the all-in cost, including mortgage, PITI, closing costs, maintenance and repairs, renovations, decorating, increase utilities, etc. The actual cost per month could be much higher — and only your mortgage payment is locked in. Utilities, property taxes, insurance, etc. will likely all increase. You’re also assuming that housing values will continue to increase indefinitely and that you aren’t buying near the top of the market. (And that you plan to live… Read more »

Father Budget
Father Budget
4 years ago

Great article Holly, this highlights the complicated nature of personal finance. Who would imagine such a simple question of “buy or rent” could ignite such debate and different views. I have always had the bias for owning my primary resident but your article broadens my view on the subject. I always believe I am “numbers guy” and make my decisions on cold hard facts. In reality, we have never calculated the advantage/disadvantage of our decision to buy our house instead of renting. As in a lot of personal finance decisions, intangible aspects end up being important. Kudos to you for… Read more »

Fred
Fred
4 years ago

The one flaw that most of the analyses of buying real estate versus investing in stocks is that the returns are based on the gross amounts. In other words, how much the total value of a house increases versus stocks. However, most people don’t pay all cash for a house, they only put down 10% to 20% (in the US). So the returns for real estate based on the down payment are at least five times greater than what is reported by the US Census Bureau. Whereas, very few people buy stocks on margin, they pay all cash, so what… Read more »

Edward Gate
Edward Gate
4 years ago

Investing for house is really a good idea in this generation. However, when making the decision it is important to understand that buying a home might not be a great financial investment and to not forgo all of your investable assets just in order to purchase a home because you are really purchasing a right to housing and not a long-term investment designed to generate income.

Kokes
Kokes
4 years ago

In this article, it sounds like the home purchase is for you to live in. In that case, you would have to subtract the cost of rent from the investment earnings, otherwise you are not evaluating the whole picture. Doing so will reduce your return on the investment significantly. I do not view a primary residence as an investment, so there is little point in comparing the “investment return”. When the price is high, people rarely sell their house just to capture the gain, which is what you would do with an investment. It is a place to live (a… Read more »

Blah Johnson
Blah Johnson
3 years ago

I and several others are thinking along the lines of downsizing our homes or renting. Taking the proceeds and investing to provide a steady income.
Primary Residence as an owner; investment. Primary Residence as a renter; expense. Many people do not see their homes as investments…..truth is….often its one of the biggest investments they will ever make.

Rolf Vellek
Rolf Vellek
3 years ago

I live across river in Vancouver, Wa. Depressing is the key word here, for sure. I wound up selling in a divorce two years ago and kicking myself for not buying her out and keeping the home for a while longer. I can now downsize, which was a goal, but for nearly the same home price as what I sold my home for. No yard, smaller home. We need to get more of a trend for higher density affordable housing, similar to what the Europeans enjoy. It’s all very frustrating when after 20+ yrs of homeownership, tho have had equity… Read more »

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