Buying a House vs Investing: Make Double-Digit Returns or Settle Down?

Should you take financial advice from a pimple-faced 16-year old? 

That thought probably crossed Ralph's mind when his pubescent son began to lecture him on how the home he's been working his entire adult life to pay off was not a good investment. That it was, in fact, a liability.

"Pfff, what does he know? He's just a kid. He's barely old enough to drive."

Well, that little brat called Robert Kiyosaki went on to write a book (Rich Dad, Poor Dad) that sold 32 million copies, and he amassed a net worth of $100 million. I guess the kid did know a thing or two. 

But why do some people say that buying a home is not a good investment? Are you better off investing in stocks and alternative assets?

It’s an age-old debate. Should you take out a loan on a home that you could sell for a profit in a couple of decades? Or should you just rent a place below your means and invest the savings? Well, it depends, because each side has its pros and cons. Let’s explore a few of these.

• On average, homes tend to appreciate 3.5% annually. That’s more than a 100% increase in prices over 30 years. But of course, not all homes go up in value, and home prices don’t always increase every year. 
• You can fetch a pretty penny (above appraisal value) for your home in a booming market. Just this year, home sales and listing prices soared to record highs unseen since 2006.
• Property is a tangible asset with utility, so it will always be of value to someone. Let’s just hope they’re not squatters.
• With real estate, you can have your cake and eat it too. In other words, you can own an asset that appreciates but also provides passive income in the form of rent.
• The 3.5% average annual appreciation means that home ownership can help you hedge against inflation, but just barely.
• You can take out a loan (at a very low interest rate, if you've got good credit) to fund your investment when it comes to real estate, so you don't need to have all the cash upfront. Good luck finding a bank that will loan you money to buy stock in Tesla.

• Even though home loans are relatively accessible, you still have to put anywhere from 3% to 20% down (depending on your credit). That’s a substantial sum for anyone who’s not a hundred thousandaire. 
• Home ownership has a lot of hidden costs (e.g. taxes, insurance, repairs) that can erase much, if not all, of its price appreciation. 
• Real estate is less liquid than stocks. So, you can’t instantly cash in your home to, let’s say, fund a gambling addiction (thank goodness for that).

• Over an 80-year timeline, stock returns outperform real estate appreciation by as much as 4x. Just make sure you hold on for dear life, because the next 80 years is going to be a bumpy ride. 
• Stocks are generally fast and easy to buy and sell. So if you spot the next bubble, you can get your Michael Burry on and short the market big time. 
• Much like real estate, certain stocks can make you money in two ways: by increasing in value and paying out dividends. Dividend stocks (a la Coca-Cola) generally do show less value appreciation. But hey, at least now you can justify drinking all those cokes by saying that you’re trying to increase shareholder value.

• Renting can feel like throwing money away—like the fun coupons and lobsters Leonardo DiCaprio sent those FBI agents home with in Wolf of Wall Street.
• Even though stocks tend to rise over time, they are still very volatile. Meaning that, out of the blue, they could come falling down harder than Miguel’s leg at the 2013 Billboard Music Awards.

You can figure it out using this calculator. But do keep in mind that there’s no fixed, one-time answer to this question. As you move around, you’ll have to recalculate to get the best recommendation.

The Rent vs Buy calculator takes 22 factors into consideration to make a comparative forecast of your housing costs. While all these numbers are essential to getting the most accurate results, the key variables of buying are:

• What the house costs
• How much you paid upfront
• The interest rate on your mortgage
• How long your mortgage will last
• The expected value appreciation of your home
• How much your home insurance costs 
• What you’re paying in property taxes 
• How much you spend on maintenance 

On the rental side, it’s much simpler. For the most part, it’s just:

• How much your monthly rent is
• How much you have to pay as a security deposit

Let’s channel our inner Will Huntings and do some quick math. 

Imagine you were looking to buy a $215,000 house with 20% down and a 3.01% rate on a 30-year mortgage. Now imagine that a version of you from an alternate universe decided to rent a place for $1,098 a month instead. 

The more profitable choice depends on how many years you’ll live in one place. In this case, buying becomes cheaper in your fifth year of home ownership at $1,294 per month. 

But if you’re the type to drop everything after a breakup and move to Italy to become an apprentice pasta maker, then you can save up to $2,574 over 4 years by renting instead of buying.

The number one rule for buying a home is to save up enough capital beyond your down payment. The worst thing you could do here is take on too much debt, to the point where you have to pour a whole month’s paycheck into your mortgage and live off of crumbs. 

Let’s not forget that you also have to leave some room in your budget for costs like property tax, insurance, maintenance and repairs.

But outside of that rookie mistake, here are some tips for making home ownership a profitable investment.

This one’s a bit obvious, but to make home ownership financially worthwhile, settle down in an area with higher rents compared to buying costs. Examples of U.S. cities include: Baltimore, Jacksonville, Albuquerque and Oklahoma City.

This is when you buy a home, rent out a portion of it, and use the extra income to pay all or part of your mortgage. You can get creative with this—for example by building a granny flat or turning your garage into an apartment.

Looking to get your feet wet in real estate even if you couldn’t afford to fix a pipe burst?

It used to be that you could only invest in real estate if you had at least 20% to put down. But today, apps like GROUNDFLOOR and Roofstock let you get started investing in residential real estate for the cost of a pack of light bulbs. Here’s how they work.

GROUNDFLOOR offers short-term loans to real estate developers and then sells pieces of those loans to you, the investor. In exchange for fractional ownership, you get a piece of the interest on those loans. Click the invest button once, and earn 10% in annual returns—sounds like a sweet deal. What also sets GROUNDFLOOR apart from many real estate investment platforms is that your money isn’t locked into projects for years, but only months.

The minimum investment for Roofstock is a bit on the pricier side ($20k), but with that also comes a higher annual rate of return at 13%. With Roofstock, you’re buying entire homes that are already occupied by tenants, so you're essentially becoming a landlord without any of the work that goes into scouting, buying, maintaining, and renting out property. Plus, you start earning passive income as soon as you close.

When it comes to out-earning real estate and maximizing your stock returns, we have to clear the air about leverage.

In brief, leverage (or margin trading) is borrowing capital from a broker to buy more shares than you could afford on your own. Doesn’t sound too different from taking out a home loan. Who doesn’t want free money, right? Not so fast Speedy Gonzales. 

While it’s common practice to use leverage in real estate, doing the same with stocks is dangerous. If the market decides to turn on your leveraged position, then there’s a potential to swiftly wipe out all your holdings (and even send you flying into debt). 

Which brings us to the #1 rule of active investing: only invest what you are willing to lose.

The average annual price appreciation on real estate is 3.8%, but that number might be higher or lower in your particular area. San Jose, California, for example, is expected to see 10.8% real estate appreciation in 2021, compared to Arlington, Washington's 6.7%. The stock market, on the other hand, has returned about 10% per year for the past century. So, if real estate returns in your area don’t exceed this, you might want to invest elsewhere. 

Not to mention that alternative investments can out-earn even index and mutual funds. This is all the more reason not to park your money in the same asset that stores your car.

While passive investing can get you some decent returns effortlessly, that ain’t where the big bucks are at. If you’re looking to become more of an active investor, then you should start small and play around with different platforms and strategies to see what gets you the highest returns.

Multi-Asset: Once you’ve got a solid strategy in place, you’ll need an app like WeBull that offers a ton of tradable assets like stocks, options, ETFs, Crypto, and ADRs to diversify your risk.

Crypto: Maybe crypto’s more your speed, since Bitcoin is the best performing asset of this decade by 1,000%. Even stocks pale in comparison. Your best option here is Coinbase, one of the easiest and most secure crypto exchanges in the US.

Startups: There’s a common saying that 1 in 10 startups fail. But who knows? You might pick the next Uber and generate astronomically higher returns than the stock market ever could. With Republic, you can invest in vetted startups for as low as $100.

REITs:  If you feel torn about investing in stocks vs real estate, REITs might be a good options for you as they let you invest in real estate projects similarly to how you invest in companies through the stock market. Fundrise is a REIT (Real Estate Investment Trust) that lets you buy shares of real estate properties and earn money from price appreciation and rental income. While Fundrise's REITs are private, and therefore not publicly traded like stocks, they still allow you to easily invest in real estate without having to purchase or manage a single property.