Stock Market verses Real Estate - Right Now!
(I first published this blog on June 10th.) Based on events today I thought I should republish it. The logic here is unassailable when applied to a US principal residence. I have to laugh looking at the assumptions that investments would go up at the same rate as depressed prices on homes. I will add investment properties and 2nd homes in an update.
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A client has 100% of their substantial assets in the stock market. They are deciding whether to purchase a home as a principal residence or rent and leave the money in the market. Rents are $2,000 per month and homes of quality will require a $150K investment (only a portion of their portfolio) with a monthly cost of $1,500.
How do we look at this?
The purchase of the home needs $150K and loan is available fixed for 10 years at 3.125% with payments (all in) under $1,500 per month. Our client would be buying the home at the bottom of the market and having deductible interest verses that $150K in the stock market and paying $24,000 a year in nondeductible rent.
Assuming both the home (est. purchase price $450K) and the market performed equally at 10% appreciation for 3 years. The gain on the stock investment will be $49,650 and will be taxable. The gain on the home will be $186,950 including tax benefit and reduced monthly cost. The house is ahead by $137,000 or 300% and its sale will be capital gains exempt.
Obviously I am bullish on the home. Appreciation and leverage of your principal residence is fundamentally better. Add that it combines with low interest rates and detectability of interest and property taxes. This makes it affordable and smart. Putting my investor hat on, I should point out that the gain on sale of the home will be capital gains exempt. Should you be all in the market and not even own your primary residence right now? I don't think so.
Even as an investment property, with returns in the 7% to 10% range on cash invested I like the real estate option better. Why? Leverage! $150K at 10% verses the appreciation on the $450K asset.
It goes without saying that you will need a good Realtor to insure a great deal on purchase. The opportunity to own a home now has never been better.
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