Is Buying a Home a Good Investment? Here’s How Experts Decide

published Jan 30, 2019
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You’ve saved a good chunk of money, or at least are on a path to do so. Now, you might be wondering what’s better: Invest in real estate or put your money in the stock market?

It’s a question you can wrestle with to no end since several factors come into play. Helping to frame the debate and lend advice below are a host of real estate and finance experts. Here are six questions they suggest you ask yourself if you’re exploring your investment options. (And just as a reminder: these tips should be conversation starters—before you make any decisions, make sure you talk to a professional to see what works for you!):

1. Are you renting now?

“The first chance you have to own a roof over your head, you should do so,” says Michael Tanney, managing director of NYC-based Wanderlust Wealth Management. “The home should be modest at best. It’s not meant to be your forever home.”

Life will inevitably throw you some curveballs, Tanney says. So, having a roof over your head, with a mortgage payment you can afford, will allow you to focus on what’s essential to your mental health and financial well-being, he says.

A caveat, though: If you live in an area like New York City where the rent-to-own ratio is entirely out of whack and it’s cheaper to rent, you shouldn’t feel obligated to own, Tanney says. He does suggest putting away money from each paycheck as if you were paying a mortgage and having this portion be automatically deposited in a retirement or investment account every month. This forced savings plan will help you to compound your money and grow wealth over time, independent of how the economy or stock market are faring.

“Down the road, you’ll have a massive nest egg to use for the purchase of a home, children’s education, or your retirement,” he says.

2. Are you looking to cash out short term or long term?

If you’re looking to accelerate your savings quicker (and are okay with some risk), individual stocks may be the way to go. These stocks, bought through a brokerage account, are liquid, which means they can be sold and converted into cash quickly, unlike real estate, points out Robert Taylor, a house flipper in the Sacramento, California area who has experience as a landlord and investing in stocks. Also, a quality stock that’s paying dividends is likely to give you a better return than a savings account with your bank. “When you’re ready to buy a personal home, you can sell some of your stock and use it to buy your first home,” he says.

However, if it’s longterm savings, like retirement, that you’re looking for you don’t necessarily need the immediate liquidity. Cashing in on retirement savings before retirement will come with an IRS penalty. However, there is some flexibility if you’re borrowing from your retirement fund to buy your first home: You can withdraw from your 401k with a 10 percent penalty, take out a low-interest loan from your 401K, or withdraw up to $10,000 from an Roth IRA penalty-free (if it’s your first home).

Real estate is also a long-term strategy. You can expect your home or property to appreciate in value slowly, says Matt Edstrom, chief marketing officer of GoodLife Home Loans. You need to be prepared to live in the home, or rent it out and manage it during the appreciation period, he says.

Elliot Bogod, managing director of Broadway Realty in NYC, recommends getting a strong team in order: a real estate broker, real estate attorney, mortgage broker, and a real estate title expert. A common strategy? Working with your team to invest in real estate in a growing area, during a buyer’s market when the prices are lowest—but be prepared to wait a few years before selling, he explains. This could bring in a massive return that a stock market couldn’t match, he explains. And, of course, this method does involve financial risk, so make sure you talk to a certified professional who can help you decide if this route is the best for you.

3. How much money do you have to invest?

In addition to the stock market being more liquid than the real estate market, transaction fees are generally lower, points out Gary Beasley, co-founder of Roofstock, a marketplace for investing in the single-family rental sector.

Also, opening a brokerage or retirement account and investing in stock doesn’t require much capital like real estate does, Edstrom points out. An investor can hop into the stock market with as little as $100, he says.

“Stocks are more volatile than real estate, so a profit can be turned more quickly in stocks, but because they are volatile they may become riskier for larger investments,” Edstrom says.

If you’re willing to read up on business trends and do your research, investing in the stock market is a good investment for most people, at many stages of life, he says.

Yes, you may be able to borrow money at low interest rates to purchase real estate. But if you don’t have a sizable chunk of money saved for a down payment, investing your money and watching your savings grow might be a better option for now.

4. Do you want the tax benefits? Do you want to build your credit?

In terms of retirement planning, 401Ks yield an average of 5 percent annually, explains Courtney Poulos, owner and broker at ACME Real Estate in Los Angeles, California. With real estate, the value goes up over time, and, in most markets, far more dramatically than 5 percent. She touches on investment types in her new book, “Break Up! With Your Rental.

“Not only can you live in it, rent it out, or leverage the real estate you purchase, but you receive tax and credit benefits along the way,” she says.

But stocks acquired through tax-deferred accounts come with some tax advantages, points out Scott Cody, a certified fund specialist and partner at Latitude Financial Group in Denver, Colorado. You can take a tax deduction on contributions you make to certain stock accounts, including the following: 401k, 403b, 457, IRAs, college savings 529 plans, and Health Savings Accounts. As for Roth IRAS, you don’t get a tax deduction, but the growth and appreciation is tax deferred and the withdrawals are tax-free.

While a primary residence can wait, you should start saving for retirement as soon as possible, he says. Ideally, you would have started after high school or college—but there is no better time to start than now.

One more thing to consider: Credit-wise, a mortgage allows you to establish a long credit history, and making, on-time, monthly payments can contribute to a strong credit score.

5. How often do you plan to move?

There are plenty of solid reasons not to purchase a home. Buying a home isn’t necessarily a good investment for those who are looking for flexibility in their lives and careers to move cities, change jobs, or grow their families, explains Beasley. There are transaction costs associated with buying and selling a home, as well as moving, he points out. Renting can be a great fit for people who don’t want to budget for repairs or are too busy to take care of a property, Beasley points out.

6. Can you stomach volatility?

The real estate market is more stable than the stock market, says Daniela Andreevska, marketing director at Mashvisor, a real estate data analytics company. While there are occasional ups and downs in the housing market, the general trend is always up, she says. “Even after a crash similar to the 2008 one, the real estate market is bound to come back and recover,” Andreevska says. “People will always need homes to live in, and land is becoming only more and more scarce.”

Plus, rental properties allow you to make money in both the short term through rental income (on monthly basis) and in the long run though appreciation, she points out.

The verdict:

So invest in real estate or the stock market? It’s a lot like determining whether meat lovers pizza is better than a veggie supreme—it depends on your taste, priorities, and what’s available near you. Either way, it’s not always a decision you want to make on your own—talk to a financial professional familiar with your situation to see what makes sense for you and your short and long term investment goals.