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I found myself in a weird realization right now where I put everything into an Excel sheet, I can’t find a good reason to ever purchase a house vs investing into an index fund.

Ever since I graduated high school, I’ve always operated under the assumption that a key milestone in life is to purchase a house in order to build wealth. It just seems to be a checkbox that everyone in my social circle is crossing off in order to move on with life. In fact, I also did purchase a house a few years ago in my European home country.

A few years back, I moved to the SF bay area for work and I’ve been ever stressed by the housing market and wanted to purchase a house and always felt outpriced (and no, I’m not in Tech). Just recently, I started to question that idea and put everything into an Excel sheet and no matter how I change the numbers (within reasonable bounds), it always seem to favor putting everything into a simple index fund (e.g. S&P 500) white renting.

In the small town I live, I pay $3.4K a month in rent. A similar house would cost at least $1.1M. I do have enough liquid assets as 20% down payment. I put the numbers with some basic assumptions expenses:

  • Property tax: 1.15%
  • Maintenance cost: 1.7% of home price
  • Insurance: $1.4K a year
  • Mortgage interest: 5.5% a year
  • Closing costs: 5%, one time
  • House appreciation: 5.5% a year
  • Index fund return: 7%
  • Assumed inflation: 3% a year

After 30 years, the house would be valued ~$5.5M but with all expenses listed above, my earnings after that period would end up being around $1.8M only!

I know that these costs will increase each year due to inflation, so increase them by the assumed inflation (except for the property tax, which is a 2% increase a year).

If I would simply put the down payment amount plus all the other expenses that I would’ve otherwise paid for the house into a simple index fund and assume an average yearly return of 7% (which is far lower than the historical return of the S&P 500), I would end up with a gain of $5.4M after considering subtracting rent for 30 years (which would cost me ~$2M).

Even if I would be lucky enough to find an average mortgage interest of 3%, I would still have only made gains of $2.3M purchasing the home.

I know people will argue with personal reasons why owning a house is preferred over renting, which I totally get. But I just want to focus purely on the financial aspect of it.

I feel like, I was operating under a very false assumption my whole 40 years of life and now I finally did the eye-opening math. But this feels so opposed to many people's opinion about purchasing a house to build wealth. I feel purchasing a house is simply not that great of a wealth building instrument, at least not in this market. Even if the house prices drops, then my purchase power also drops with it, and buying shares in a S&P 500 index fund would also be at a discount. Or am I missing something?

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    This is pretty close to being a duplicate of past discussion of whether and when to buy a house. In brief: a house you live in can't usually be considered an investment; that leads to accidental double-counting. A house you rent out is an investment in running a business, and it's the business that is producing profit. (Or not.) It isn't house or invest; it's house and invest or rent and invest, and the latter may actually be better financially.
    – keshlam
    Commented Mar 16 at 23:02
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    Does this answer your question? In general, is it financially better to buy or to rent a house?
    – keshlam
    Commented Mar 17 at 13:57
  • Remember in many cases the big pay-off for the house buyer comes in the years after the mortgage is paid off, while a tenant would still be paying rent. Commented Mar 18 at 12:21
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    I would argue that tax makes owning a house better than you assume. House ownership is incentivized with deductible interest and an exemption on capital gains up to a certain amount when sold.
    – Nosjack
    Commented Mar 18 at 15:36
  • You forgot maintenance cost. Landlords are responsible for most maintenance costs, but you would have to pay for them if you own the house. A rule of thumb is that they are between 1% and 2% of the price of the house annually, but Bay Area tends to be on the higher side due to the datedness of the structures. Also remember we haven't counted depreciation-related expenses (e.g., kitchen, bathroom, roof need to be renovated once in a while.) Although I agree with your conclusion (buying a home is a bad deal in Bay Area), the actual number is far more astonishing.
    – xuhdev
    Commented May 29 at 23:33

3 Answers 3

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This sounds more like a rant. There are a lot of questions of rent vs buy and which one is better.

But, I want to correct your numbers. You assumed 5.5% mortgage rate, and about 1.15% tax rate. You also assumed 5.5% appreciation rate.

Calculating using annual compounding formula, your house will be worth around 5.4M in 30 years. That's value, not gains. Your gains would be 4.3M accordingly, which is about 390% on the initial 1.1M value. But, more importantly, your gain would be more than x18% over your downpayment (your actual investment)! You put in 25% of the house price (including the one time expenses), and you ended up with almost 20 times that in 30 years.

Now, lets compare to the index fund, with assumption of compounding 7%/yr gain. If you invest similar $275K, you'd end up with mere $2.1M. About x7 of the initial investment.

So your monthly costs for your home would double compared to the rent (mortgage interest/taxes/insurance/maintenance), but even if you add $3300/mo to your index (the difference in cash flow, since you'd still have to pay rent, and we'll assume it is fixed which it rarely is) - you'll end up with about $5.8M accumulated, still less than the $5.9M you expect your house to be worth.

That's not to say that house ownership is necessarily the right decision. Your assumptions are very specific and may not be realistic. But with the numbers you presented, and the timeline you calculated, ownership makes financial sense.

You mentioned SF Bay area - for the long term, it is almost universally better in the area to own property than to rent it. There are several factors skewing the calculations towards the benefits of ownership, you can ask a separate question to discuss those.

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  • But you have to subtract the cost of home ownership correct? That’d be: $5,482,346.42 (home value) - $934,082.96 (total interest) - $944,517.04 (total paid principal) - $536,099.93 (total property tax) - $70,003.75 (total insurance) - $935,050.08 (total maintainance) = $1,787,592.66 (earnings on the house after 30y) Anything I’m overlooking here? Thanks! Commented Mar 17 at 2:06
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    You also have to remember that until end of life, anything else you move into in an attempt to realize those gains will have gone up in price just as much. Buy a house because you want to live in a house, not because you think you will profit on it. In real terms, unless you put a lot of sweat equity into it, you probably won't. And that's fine if you want the other things having a house brings and are willing to pay the costs that go with them.
    – keshlam
    Commented Mar 17 at 3:09
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    @PrinceHairy that's your "doubled" monthly payment. In fact, principal is not actually a cost, it converts to equity which is an asset. You're also not including maintenance of your rental (true, you don't have capital expenses, but you still need to change those light bulbs and buy your own appliances), and you're not accounting for rents going up while mortgage doesn't (and in CA - neither does the tax).
    – littleadv
    Commented Mar 17 at 6:32
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    Ok, it makes some more sense. You are right, the principal is just conversion into equity. It brings it closer to the index fund case. Commented Mar 17 at 16:10
  • @keshlam 1. If you move from the Bay Area to somewhere else, your new house will probably be cheaper. 2. If you don't buy a house, you'll have to deal with increasing rent prices. Commented Mar 18 at 2:25
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There is one major fact about investing in a house: Once you invest in a house, the money is in a fixed place, you cannot just take it and spend it.

Let’s say in 5 years you have either $40,000 in equity or $50,000 in an investment account. And you see a really nice car for $50,000. It’s very very easy to take the $50,000 in savings and buy the car, and much harder to get the money out of your home. Chances of actually having money when you retire are much higher with the house.

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  • Assuming there is no war where you have a house :)
    – Darius.V
    Commented Jun 2 at 17:59
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That's some good math there, I'll give you that, but I think they are also oversimplified, especially for the homeownership calculation. I think you are missing out on a lot of added benefits of owning a house.

If I put it simply, I personally wouldn't want to continue to pay rent for an apartment for the rest of my life when I can pay the same amount for a mortgage and build equity on my home.

For instance, homeownership offers stability and a sense of permanence that renting will not provide. Sooner or later, you will have to switch apartments or houses, and that's an additional problem. If you are worried about the valuation, there are some tricks to manage that and enhance its value. This is because owning a home allows for customization and the potential for appreciation beyond just financial gains.

Furthermore, as some comments pointed out, there are tax incentives and potential long-term benefits to homeownership, such as equity build-up and the eventual elimination of mortgage payments. And consider the fact of renting out a house or apartment that you own. I mean, let's say you buy a house in a different area where the housing cost is lower; you can then rent that out and offset your mortgage payments.

So what I am trying to say is that while your analysis suggests that investing in an index fund may yield greater financial returns in the short term, owning a home will definitely give you higher returns in the long term.

Having said that, it's always a good idea to consult with a financial advisor who can give you a more detailed calculation of the returns you can expect.

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