I purchased a home and I made an agreement with a guy who is living in that home and paying me monthly rent. Since I live with my brother I don't have to live in my purchased home.

The rent I'm getting is only 10% of total cost of home while stock fund industry (mutual fund) is paying 20% minimum i.e. I'm getting 10% loss every year and that is a big amount.

I'm not really sure if my home also increase it's value by 10% every year. But I don't think it will be.

Now I'm thinking of selling that home and investing all of my money in a growth mutual fund. Any advice?

  • 4
    What makes you think mutual funds are earning "20% minimum" (let alone that they will continue to do so for a long time)?
    – BrenBarn
    Feb 27 '15 at 7:20
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    What country are you in? It is a good idea to have a country code.
    – Victor
    Feb 27 '15 at 10:27
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    @gnasher729: Re "They promise 22% average." Now who does this remind me off? Bernie Madoff, that's who.
    – jamesqf
    Feb 27 '15 at 18:38
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    I'm from Pakistan. You can see some reports from my country here mufap.com.pk/nav_returns_performance.php?tab=01 I'm really wondered why you guys so amazed of listening 22%. Doesn't that seem realistic? Inflation rate? I really didn't thought of it before neither calculated it. Thanks for indicating. But it's around 10%-20% as well (If I'm right by seeing reports tradingeconomics.com/pakistan/inflation-cpi and pbs.gov.pk/content/…) Feb 28 '15 at 5:49
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    Given the OP's country, he has a legitimate question. The downvoters should offer some explanation. Feb 28 '15 at 17:57

It wouldn't surprise me to see a country's return to show Inflation + 2-4%, on average. The members of this board are from all over the world, but those in a low inflation country, as the US,Canada, and Australia are right now, would be used to a long term return of 8-10%, with sub 2% inflation.

In your case, the 20% return is looking backwards, hindsight, and not a guarantee. Your country's 10 year bonds are just under 10%. The difference between the 10% gov bond and the 20% market return reflects the difference between a 'guaranteed' return vs a risky one.

Stocks and homes have different return profiles over the decades. A home tends to cost what some hour's pay per month can afford to finance.

(To explain - In the US, the median home cost will center around what the median earner can finance with about a week's pay per month. This is my own observation, and it tends to be correct in the long term. When median homes are too high or low compared to this, they must tend back toward equilibrium.)

Your home will grow in value according to my thesis, but an investment home has both value that can rise or fall, as well as the monthly rent. This provides total return as a stock had growth and dividends.

Regardless of country, I can't predict the future, only point out a potential flaw in your plan.

  • Thanks for your answer. I'm still really not cleared what should I do? Maybe I don't understand the finance properly. Should I have to deduct inflation from a given return to calculate exact return? Also, what do you prefer as my main question? Feb 28 '15 at 20:25
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    I can't tell you what to do with this investment. I can tell you to keep reading, and learn all you can. Asset allocation is wise, and in general, having real estate and stocks is better than having all your investment in one asset class. Feb 28 '15 at 20:59
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    The page the OP linked to showing investment returns appears to show returns over periods no greater than one year. This is a major weak point of his thinking. There were times when the S&P 500 was up 22% (or more) as well; that doesn't mean it was a good idea to sell your house at that time.
    – BrenBarn
    Mar 2 '15 at 17:26

The 20%+ returns you have observed in the mutual funds are not free money. They are compensation for the risk associated with owning those funds. Given the extraordinarily high returns you are seeing I would expect extremely high risk. This means there is a good possibility of extreme losses at some point. By putting a lot of money in those mutual funds you are taking a gamble that may or may not pay off.

Assuming what your friend is paying you for rent is fair, you are not losing money on your house relative to the market. You are earning less because you are invested in a less risky asset. If you want a higher return, you should borrow some money (or sell your house) and invest in the market. You may make more money that way. But if you do that, you will have a larger chance of losing a lot of money at some point. That's the way risk works. No one can promise a 20% return on a risky asset, they can only hint that it may do in the future what it did in the past.

A reasonable approach to investment is to get invested in lots of different things: stocks, bonds, real estate. If you are afraid of risk and willing to earn less, keep more money in safe assets. If you are willing to take big risks in exchange for the possibility of high returns, move more assets into risky stuff. If you want extreme returns and are willing to take extreme risk, borrow and use the money to invest in risky assets.

As you look over investment options, remember that anything that pays high returns most likely has high risk as well.

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