Can someone tell me the pros and cons of buying a house or investing in shares?

Question

My husband is a believer that we at the moment could not afford a house to buy with the facilities or style that we want, on the canal etc (young newly married couple) but he would happily invest in shares and sees that as our security. We may be paying someone elses mortgage, but if we had our own our mortgage we couldnt afford to live where we do. Are we thinkin totally wrong?

Answer 1

When I was a young married (21 years old) I purchase a 480 sq ft apartment in SF for $50,000. It wasn't my dream home, but I wanted equity in something. A year later, I sold it for $100K, then I turned that and bought a 1200 sq foot townhome for $150K, sold that 2 years later for double that and got the house I wanted. Now, I was very lucky that I hit the market when I did. If you go to www.suzeorman.com and click on 'calculators' she has a rent vs buy calculator link that can help. You have to know that most folks DON'T buy their dream home on the first go. It's really up to you, but rent is so crazy expensive in most cities, that it's IS often best to buy. I hope that this helped a little! Good luck!

Answer 2

Do not live beyond your means. Save for your future. I think your husband has a sound financial approach. If you rent, you know what your expenses are and can budget for annual rent increases.
If you purchase a home, you have to have a down payment and closing costs. You have to pay off the principle and interest on the mortgage. You get nothing for the mortgage interest, the principle does not earn any interest. Your hope would be that the value of your home appreciates.
You have to compare rent payments to mortgage payments, to see what you can afford.
What would you do if you had $100,000.00. If you invested the money wisely and earned 10% on your investment, you would have $10,000 to spend on rent and would still have your investment.
On a conventional mortgage, lenders usually want a 20% down payment. $100,000 would be enough of a down payment to buy a $500,000 home. Can you then afford a mortgage payment of $4,400.00 per month?
Besides the monthly mortgage payment, you will have to pay real estate taxes. In my area they would be about $15,000 per year. Then you have to pay for maintenance and upkeep, an unknown amount. If you need financial guidance, get it from an accountant or financial planner. Real estate agents will always tell you that you need to buy a house. Then they work to qualify you for a mortgage. If you cannot afford it, later, it's your problem.

Answer 3

Continue to rent and live where you do, but I'd go for a house as an investment, and here's why.

I don't mind "paying someone else's mortgage" as long as someone else is paying mine. So rent out the house you will buy.

Of course you don't know what the rate of return will be on either investment as the market will determine that.

But for example lets say they are both 10%

With shares, that's 10% of the money you have put into the investment

With a house, your tenant pays all costs of the house, except the money you put down (which you might recover in rents also)

So with shares you get 10% on your money.
With a house, you get 10% on someone elses money.

Answer 4

I want to address two things: Your question and regerugged's math.

1. First, the measure of affording to live in the area is can you afford the mortgage payment. For most people, the threshold is "Mortgage payment and other debt is less than 50% of our total gross monthly income". This leaves 50% or more to pay your income tax, electric bills, food, etc. Investing in the market is great, but if you think house prices are going to continue to rise (and historically, over a period of 10 years most areas experience a significant increase in home price appreciation), you would be significantly more leveraged to be in real estate... (my math is below)

2. I don't agree with regerugged's math.

If you can earn 10% in investments, you'll still have to pay capital gain tax on that. This lowers your actual gain to 8 or 7%.

Second, your mortgage payment on a $400,000 property should not be $4400 a month. I have a mortgage around the same size and with taxes and insurance my monthly payment is closer to $3000. (At 7% interest for 30 years, the payment on a $400K loan is $2661 plus taxes and insurance.)

The interest on this loan ($2333 in the example above) is typically tax deductible. If your marginal tax rate is around 30%, this means that the the government will lower your taxes by ~30% of your mortgage interest amount (~$8400 a year based on the example). This is almost as much as you stood to gain by investing the so called $100,000 in the stock market, plus you've had a house to live in, and you've made a small dent in the principal on the loan, and the value of the property should be moving upwards. If your property values grows at 3% (typical annual home price appreciation rate), your $500,000 house would be worth $515,000 at the end of the year. So, your $100,000 investment in purchasing a home:

-saved you over $8,000 in taxes
-gained $15,000 in value
-gave you a place to live that you like

The benefit in owning outweighs the benefit of investing.

Lastly, I work at a mortgage bank and most of our borrowers are not putting 20% down on a purchase, and certainly not a young couple based on my experience. There are so many loan programs that allow borrowers with good credit to get into a home with nothing down.

Banks offer:

103% financing (100% plus 3% extra to cover closing costs)
100% financing (1 loan)
100% financing with a rebate to pay towards closing costs
80% and 20% financing (2 loans, no need for Mort. Insurance)

Also, some sellers may be willing to kick in towards closing costs.

A final word: Ever hear the term "Starter Home"? It is exactly how it sounds, and is explained nicely by tieia. Get in somewhere that is within your reach. Enjoy the tax benefit and the benefit of home price appreciation. When you are ready for the dream home, you'll have saved a nice piece of change (you can invest your tax refund if you want!) and your starter home has hopefully gone up at least 3% a year which should fetch a nice profit you can use towards a down payment. (I live in CA and our homes grow at least 15% a year over the past 5 years)

Answer 5

Good advice from gbctrading. The SF fellow hit an anomaly in real estate with his investing in San Francisco real estate. Most don't do this even in a "hot" area, but yes, BUY something and acquire your equity, not for someone else.