Originally published 7/10/2019
What’s the best investment for my money? Should I invest in the stock market and let the earnings compound? Or something else?
How does a return of over 600% sound?
Wait, what???? Do I have to sell drugs or something?
Yes, I said over 600%. No, you don’t have to break the law.
We’re talking about real estate. Many people wonder if they should rent and invest their savings, or use the money to buy real estate.
Consider a simple example. Suppose you have $7,000 saved. You can use that as a 3.5% down payment on an FHA loan and purchase a $200,000 home with a $193,000 loan. Home prices go up around 4% per year, so after 5 years, you would expect to sell your home for for a little over $243,000. During that time you will have paid down over $18,400 on the loan balance. After loan payoff and expenses, you would net around $45,000.
On the other hand, suppose that you rent and invest your $7,000 into a low cost S&P 500 index fund. The S&P 500 has returned about 9%, so after 5 years you would have a little over $10,700. Assuming you are in the 15% capital gains tax bracket, you’ll net slightly over $3,200.
Additionally, if you own your home, you will be able to take income tax deductions for property taxes and mortgage interest. If you rent, the landlord gets those deductions.
Keep in mind that whether you rent or buy, you are still paying for your housing. The question is who gets the gain from the value of the property and the tax breaks.
This doesn’t mean buying is always the better option. If you buy, you will need to be able to hold the property at least a few years, whereas if you rent you can leave as soon as your lease ends.
The Daniels Team will be happy to help determine if renting or buying is the right option for you. Call us today!
If you think these numbers are too good to be true,
and we will send you a copy of the spreadsheet.
References
Reasons to Rent: https://www.keepingcurrentmatters.com/2019/07/09/5-powerful-reasons-to-own-instead-of-rent/
Home Price Graph: https://fred.stlouisfed.org/series/CSUSHPINSA
Home Price Reports: https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller
S&P 500 Graphs and Reports: https://us.spindices.com/indices/equity/sp-500