Pay off a house or invest?
Which is better? Paying off a house or investing in the stock market?
On a 100k house after 30 years you would have repaid about 300k (roughly). That is 200k in interest, and 100k in principal. (roughly). Your house would be worth 446,775 if it increased in value 5% a year. So you would have had a capital gain of 446,775 - 300,000 = $146,775 Plus all along you write off the interest payments (200k worth).
If you invested $500 a month for 30 years in the stock market and averaged 8% returns a year you would end up with $745,000. You would pay taxes on the 745,000.
Thus 745,000*(1-.4) = 447000
But then you would have to spend 446,774 to get that house for a net gain of 225 bucks.
$146,775 is obviously considerably more than 225. Thus, if my math is right, you are considerably better off paying off real estate, than playing the stock market.
A few years ago I debated this with JR. Now I am not so sure. What do you guys think? Use math if you comment.
Side note: I love the stock market. You can easily get financial independance with it. There is nothing wrong with buying a house or more, AND systematically investing.
Pay your investments first, your bills 2nd, and your spending money third and you will not have to work in 20 to 30 years.
posted by Greg at 5:04 PM
5 Comments:
Your math is a little wrong when calculating the earnings on the stock market investment. Are you investing in a regular taxable account? The earnings on that money would be taxed at the capital gains rate which is much lower (is it 15%?). I don't think I can communicate this correctly. I'll give you a call this week to discuss. I say paying off a house holds a more psychological advantage (you would know better than I would though), but you may be better off investing in the stock market. There are too many variables to say one is better than the other in all instances. Why not just buy multiple houses and rent them out? Isn't that the way to make real money. Earn the 5% a year while someone else pays for the investment...
that is why I am glad I posted.
My math was wrong there. I am no tax expert but you would paid on capital gains. (I was thinking of tax deferred accounts, where you get taxed at the income rate of how much you take out each year).
Thus (745k*.85)=633k
633k-447k= net profit of 186 after buying the house with stock market earnings (assuming capital gains rate stays the same)...this is vs. 146k that you would net off of the house, except you would write off 200k in interest. You are still better off with the real estate.
Why not buy houses and rent them out? It's alot of work.
Here's what I do: I buy 1 or 2 stocks at a time. I systematically buy mutual funds with 20% of each of my pay checks. I own 2 houses, with a total of 4 renters as of today. I am shopping to buy another house in the near future.
The stock market is a fun game for me. I like seeing the numbers grow (more than that I like when my portfolio goes down. It means everyone else is wrong again, and I should buy more!). But Real Estate will make me financially comfortable eventually.
As far as a psychological advantage? I fail to see how psychology or emotion has anything at all to do with a house or a stock.
Making money in stocks has a much much greater psychological advantage than a house ever will to me. People over react. I buy. The stock market is just that, its a market. What drives stock prices. If you think its financials of companies, then I recommend you tuck your money under your pillow. Stock prices are driven by human emotion and irrationality.
Houses and stocks are just things. Once you seperate emotion from investments (including your house/home) you become an investor, instead of a speculator/gamblor.
I have 0 emotional attachment to any of my investments. Logic rules.
I was thinking that owning a house outright would provide some sort of extra satisfaction above owning a stock. No matter what happens (to a certain extent and barring natural disasters) you will have a place to sleep at night. That was the point of the psychological advantage. I thought that might be a deciding point for some folks.
-JR
In principle, a good happen, support the views of the author
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