Don’t forget that you pay rents with after-tax dollars. So, you rents saved are amplified if you calculate yield in pre-tax dollars.

When you sell stocks, what if the profits can’t cover your rents in the short term? What if you sold at a loss?

Both stocks and home can be good or bad investments depending on what price you paid for them.

Without a house, your stock profits would have to cover your rents annual increases.

“With a house - you just can’t do that very easily unless you downsize or move to a cheaper area.”

No need. With a house, you realize the profits by not having to pay rents and increases. A dollar saved is a dollar earned.

I just ran through some more scenarios in this little rent vs. buy calculator and you can see (when the variables are set right) how real estate can perform better than other investments but in the long term. Although there is still the fact that I think people often don’t tap the equity in their homes before they die (at least my grandparents haven’t) and instead just spend their retirement savings and/or pensions. I think there’s certainly a lot more safety in putting some money into a home and having that home to live in when you retire (or having a home that you can sell when you retire) rather than counting on your other investments being able to cover your rent and/or mortgage payments when you’re 65.

1. True, I kind of glossed over that (by glossed over I mean ignored)
2. Excellent point about short term vs. long term. In addition to the inflation argument, can we also say that in the short-term the home buyer is paying a lot in interest and very little towards the asset and near the end is putting a lot towards the asset?
3. Good point (kind of…). However, if I have been saving a lot towards retirement right now and my friend hasn’t been saving any, then while she won’t be paying mortgage payments in her golden years (and I might), she will be putting a lot of money into retirement savings (and I might not have to). In the end doesn’t it just depend on who had the higher IRR (including all cash flows, towards housing and retirement) once you turn 65 (or whatever). Or more simplisticly, who had the higher return on their investment. If housing prices move with inflation over the next 40 years and my stocks and bonds make 8% ABOVE inflation I don’t see how I could go wrong.
4. Right, however, the interest changes over time, so it gets complicated, and any increases in her home’s value do affect her net worth.

1. While real estate gain in your own home is ‘paper’ until you sell (as are all unrealised profits), you CAN realise it without selling - just get the house reappraised and borrow against your equity. A home equity loan is just about the cheapest finance you can get for gearing - at least 1% less than any margin loan you’ll find

2. Yes, renting is cheaper than buying - in the short term. As your home loan is based on the amount borrowed, it will stay roughly constant over time. While your rent will increase with inflation… Compare your friends home loan payments with what rent will be costing in ten years time.

3. While most home owners probably won’t sell their house, the main benefit will be that in their retirement they will have paid off the loan and have minimal housing costs (just repairs etc.) This will put your friend WAY ahead in her ‘golden years’

4. Don’t forget you compare rents to the Interest only part of a P&I home loan - the principal repayment component of her payments are just shifting her assets from her bank account into home equity - doesn’t affect her net worth at all.