How I view Investing vs Buying a Home
A $2.1M decision 💸
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The content provided by PROJECT 10X PTY LTD (Filip Brnadic) is for educational purposes only and is not financial or investment advice. PROJECT 10X PTY LTD is not a licensed financial adviser under Australian law.
Investing involves risk, including the potential loss of all funds. Seek independent advice before making any financial decisions.
I got sick and tired of being asked “when are you buying a home” so I thought, fu** it. I’ll run the numbers and see what I’m missing out on.
Spoiler Alert: Buying a property just doesn't add up for me. In fact, the only scenario it makes sense is if I were willing to lose millions of dollars in future net worth.
Now, at least I have a newsletter that I can redirect questions from family and friends when they look at me with pity and say
“ArE yOu sTiLl ReNtInG?
wHeN aRe YoU gOiNg To bUy a HoMe?”
So, what am I trying to do here?
I am figuring out the opportunity cost of allocating $300K to a property instead of renting and continuing to invest that $300K.
This is loosely based on my personal circumstance.
I’ve provided a link to my spreadsheet if you want to run the numbers for yourself.
I have 5 possible scenarios I would consider, and two that I prefer to adopt, all else being equal.
Scenario 1: Pay the minimum mortgage repayment
no additional contribution to the mortgage
no investments
We spend all our spare cash on ballin’ out (cars, clothes, holidays)
as fun as it sounds, this is a playbook straight out of the financially illiterate.
Scenario 2: Pay the mortgage repayment and then some
any additional capital goes into repaying the mortgage as fast as possible.
this is a very common strategy.
Scenario 3: Pay the minimum mortgage repayment and invest
any additional capital goes into investments like stocks and crypto.
this is the scenario I would prefer if I were to buy a property.
Scenario 4: Interest-only mortgage
any additional capital goes into investments like stocks and crypto
this only makes sense if we can get an awesome interest rate.
Scenario 5: Invest 100% of the available capital and continue to rent
this is my current and preferred scenario.
Input Data 🔠
As you’ll see, the input data is straight-forward.
What isn’t straight-forward is the bank interest rate and the capital growth of the property.
I’ve tried to be as optimistic with the property as possible and as pessimistic with investing as it applies to me.
You’ll see what I mean.
The absolute best interest rate for Westpac (Aussie Bank) customers is 6.54% for a principal-and-interest mortgage and 8.24% for an interest-only mortgage.
You and I both know that’s the rate they give us to reel us in.
Unlike USA, Australian’s don’t have the ability to lock in a rate for the term of the loan.
Once the introductory rate is over, the bank starts charging you a 'convenience fee' for breathing air inside the branch.
It’s sad but it’s true.
When was the last time you met a homeowner who raved on about their bank, let alone their mortage?
Who said, “I love the bank I’m with. They treat me fairly and to top it all off they provide the best service!”
In light of this, I’ve assumed a consistent 4% interest rate for the term of the mortgage because I live in Fairyland, and I’m being #optimistic.
Moving onto capital growth of the property. Is it 5%? Is it 6%? Is it eleventy-seven?
It all depends on who you ask and how deep in the hole they are with their mortgage.
What does the data tell us?
The annual change in Perth is 1.5% over the last 10 years.
I don’t know who came up with this data, but I want some of what they’re smoking.
I’ve assumed 7% capital growth because that’s what we’ve seen in Sydney and again, #optimism.
Plugging the numbers 🧑🏽💻
Now that we’ve got that out of the way, here are the numbers I’ve plugged in.
You’re probably thinking, 14% investment return?
Get the f*** out of here Fil.
Well, my portfolio is public as are my stats and my annualised return is ~44%. I’m being pessimistic about my future investment returns and discounting them by 66%.
I’ve also 232 copiers, some of which are readers that can attest!
Even if that wasn’t the case, a 50/50 portfolio split between index funds VOO and QQQ has yielded 14% annualised returns over the last ten years.
Assuming past results are indicative of future results, we end up with 14%.
Results 💯
So what is the opportunity cost of investing $300K and renting instead of buying a home?
As I would only consider scenario 3 and 5, the difference between them is $2.1M.
What does this mean?
If I continued “paying off someone else’s mortgage” as my friends like to put it, and invested my remaining capital each month I would be $2.1M better off than the next best option which is paying the minimum mortgage amount and investing the rest.
$2.1M.
Let that sink in.
It took me a while to process, too.
I know there will be someone reading this going “but but but but”… no buts.
This is cold hard data.
You might be thinking, “why on earth does anyone buy a property if that’s the case”.
Two reasons.
The first reason is simply because buying a property is the general consensus. It’s just what everyone’s been told they need to do. If they actually knew where “the American dream” of owning a home first came from, they would perhaps think twice.
That’s a story for another day.
The second reason is because they don’t run the numbers. It might be hard to believe, but having watched hundreds of episodes of Ramit Sethi’s I Will Teach You to Be Rich on YT, I can confirm that 0% of homeowners “ran the numbers” before buying a property.
Here’s something to think about.
If the general population believe home ownership is the right investment decision and the general population is made up of predominantly low and middle classes, then why would we do as the general population does?
Read that again.
I’ll leave you with one final stat.
What investment return would make scenario 3 and scenario 5 equal for my situation?
11.8%.
This means that if my investment returns are greater than 11.8%, I am better off investing 100% of my available capital and continuing to rent.
That’s all for now.
I’d love to hear your thoughts, so drop a comment below!
✌🏽
Catch you next week.
Fil
DISCLAIMER:
PROJECT 10X (Filip Brnadic) does not provide individually tailored investment advice. Nor is PROJECT 10X registered to provide investment advice, is not a financial adviser, and is not a broker-dealer.
The material provided is FOR EDUCATIONAL PURPOSES ONLY. PROJECT 10X is not responsible for any gains or losses that result from your investments. Investing involves a high degree of risk and should be considered only by persons who can afford to sustain a COMPLETE LOSS OF FUNDS.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.
Yup. So happy to read your article. This was my feeling, though struggled to find anyone talking about it. I’ve been stressing the last 5 years or so saving for a deposit only to find buying a home getting more and more out of reach. In the end I gave up and decided to invest my deposit. Since doing so, I’ve discovered just how much better off I will be. I feel so fortunate now that I didn’t end up buying. The only time I’d buy a home now is if my portfolio was generating more profit than I knew what to do with!
Although I agree with you, that investing in stock is more profitable than buying property on mortgage and one of the biggest benefits in investing in stock is that investment gives you much better liquidity than property, but your calculation is missing 2 important factors.
You need to add inflation to your calculation and also potential income increase (pay rise)
That would give a more realistic outlook for the final figure.
Another thing that is missing on the calculation are the operational costs to run own property (land tax, council fees, Strata fees, insurances and so on)