Given that the upfront costs of buying a house can easily exceed $20,000, and the costs of owning and maintaining a home often add up to over $2,500 per month, we think it’s worth asking: is buying a house a good investment, or might you actually be financially better off forgoing all those costs, sitting tight as a renter, and putting your money in the stock market instead?
Throughout this article we’ll be speaking in terms of long-term investment, basing our assessment in historical averages rather than short-term speculation.
Forewarning: Housing is Expensive
We should start by saying that for most people, housing isn’t going to be a source of short-to-mid-term income. Indeed, with the exception of buying a multi-family home and renting out the units you don’t occupy, you’re probably going to lose money on housing overall for many years, whether as a renter or as a homebuyer.
That said, we all have to live somewhere. So here’s what it boils down to: assuming you can afford to buy a house, would you net less cash lost in the short-term and more gained in the long-term by using your housing budget to buy and maintain a house or by using it instead to pay rent and invest in the stock market?
We’ll start by comparing the expenses of each of these two scenarios, and then we’ll factor in the cost-offsetting upsides like home value appreciation and investment income. Finally, we’ll put it all together and have our answer.
Homebuyer Expenses
Let’s consider the expenses of an average first-time homebuyer purchasing a typical starter home in the United States. We assume that the home’s value is $243,000 per Redfin and that the homebuyer is using a 30-year fixed rate mortgage with an interest rate of 7.58% (the U.S. average as of August 2023) and a 6% down payment per Bankrate.
Onetime Costs
- Down payment: $14,580
- Closing costs: $3,860
- Inspections: $1,046
- Total: $19,486
If you’d like more information about any of these, check out the article we wrote that goes into detail about each one. Note that for our purposes here, we’re assuming the property doesn’t require any upfront repairs, and we’re also not counting prepaid expenses, as those are inherently factored into the home’s ongoing expenses, touched on next.
Average Monthly Costs
- Mortgage payment: $1,610
- Private mortgage insurance: $190
- Property taxes: $233
- Home insurance: $111
- Utilities: $216
- Capital expenses: $239
- Maintenance: $147
- Total: $2,746 monthly
Again, if you’re interested in knowing more about any of the costs listed here, check out a another article we wrote covering each one.
Renter Expenses
For comparison, let’s quickly consider an average scenario for a renter of a single family home in the U.S. Rest assured, the renter’s scenarios are much simpler.
Onetime Costs
- Security deposit: $2,018
- Application fee: $30
- Total: $2,058
The main upfront expense for a renter is the security deposit, which we’ll assume is the same as a monthly rent payment. There is also usually an application fee—we’ll go by what Apartments.com says is average.
Average Monthly Costs
- Asking rent for a single family home: $2,018 World Population Review
- Housing utilities: $141 Bureau of Labor Statistics
- Total: $2,169 monthly
Ongoing expenses are also pretty straightforward for renters. As with onetime expenses, we’ll just focus on the most common ones, i.e., rent and utilities, and ignore less common ones like pet rent, parking, etc.
Homebuyer and Renter Expense Comparison
Considering expenses in isolation, it seems like a much better deal to be a renter than a homebuyer, in terms of both one-time and ongoing costs.
Homebuyer
$19,486 one-time costs
$2,746 monthly cost average
Renter
$2,058 one-time costs
$2,169 monthly cost average
But next, let’s see what happens when we account for the financial upsides of each scenario.
Is Buying a House a Good Investment? Financial Upsides
Both renting and buying have financial upsides that can help offset their expenses. Here we’ll cover what they are and how to factor them in when analyzing a property’s investment potential.
Renter Upsides
The primary plus of being a renter, at least in terms of investing for the long-term, is that you can take most of the money you would have been invested in a house and put it in the stock market instead. More specifically, you can take the $19,486 that you would have spent on homebuying upfront costs, pay $2,018 of it towards a security deposit, and put the remaining $17,468 in stocks. You can also invest an extra $577 per month since your gross ongoing housing costs will be that much lower.
For the renter’s investment vehicle, we’ll assume it’s a low-fee Exchange Traded Fund with an average fee of 0.16% and composed of diversified stocks growing at an average rate of 9.65% return per year, which is about the average that the S&P 500 rose over 30 years from March 1992 to March 2022.
Given that, the renter would make about $2,042.49 from investment income in the first year—hey, a free month’s rent—and their annual investment earnings grow exponentially form there (assuming the earnings are continually reinvested, and assuming the world doesn’t devolve into hellish struggle for survival due to global warming or something). At the end of a 30 year period, the renter-investor would end up with an ETF account value of $1,352,071.59, having earned earning a whopping $1,126,883.59 from investment income. Can the homeowner compete?
Homeowner Upsides
There are two main financial upsides to being a homeowner: principal payments and home value appreciation.
Principal Payments
Regarding the former, of the $2,746 per month that the average first-time homeowner should expect to pay towards housing costs, they will retain about $635 of that on average in the form of home equity. This reduces the net ongoing costs of the homeowner to about $2,111 per month, which is similar to the ongoing costs of the renter.
Let me emphasize again that we are talking about the long-term, as money paid towards the principal generally is not easy nor easy to access.
Home Value Appreciation
Now let’s talk about the big one. From March 1992 to March 2022—the same time period we used for estimating the performance of the renter’s stocks—home values rose by about 5.3% per year on average according to CEIC. And while that rate isn’t as high as the growth rate of stocks, the amount of equity a homeowner stands to gain in the short-to-medium term is actually much higher. That’s because the homeowner is essentially investing with a high degree of leverage: for an upfront cost of $19,486, they gain access to the appreciation of an asset whose value starts at $243,000—over 1,200% higher than the initial investment. And 5.3% of $243,000 is much greater than 9.65% of $17,468.
Given that all the averages prevail, the first-time homebuyer would get about $12,879 from home value appreciation in the first year, which is enough to offset about 6 months of homeowner costs. And at the end of the 30-year period the homeowner would have a home worth $1,144,082.68, having gained about $901,082.68 in value from appreciation.
Finally, it’s worth noting that the homeowner’s expenses would drop off significantly after 30 years, as at that point their loan would be paid off and they would no longer have to pay towards a mortgage.
So is Buying a House a Good Investment?
To tie everything together and answer our question, let’s compare the net ongoing expenses of the average first-time homebuyer and average renter after the first year, taking into account both the financial upsides and downsides.
Homebuyer First Year
– $32,952 gross ongoing expenses
+ $7620 paid towards the principal
+ $12,879 value gained from appreciation
= $12,453 net expenses
Renter First Year
– $26,028 gross ongoing expenses
+ $2,219.52 investment income
= $23,808.48 net expenses
As you can see, the average homeowner’s net expenses are $11,355.48 lower in the first year than the renter’s. So it looks like in the first year buying a starter house to live in is a good investment compared to renting a single family home and investing the remaining housing budget in stocks.
But what about after 30 years? For simplicity’s sake we’ll assume that the renter and homeowner’s expenses stay the same over the whole time period.
Homebuyer 30 Years
– $988,560 ongoing expenses
+ $228,600
+ $901,082.68
= $141,122.68 net earnings
Renter 30 Years
– $780,840 gross ongoing expenses
+ $1,126,883.59
= $346,043 net earnings
So it seems that somewhere between one and thirty years there is a point after which being a renter-investor may actually be better financially than being a homeowner. And judging by the results outputted from the investment calculator we’ve been using, advantage probably shifts into the renter-investor’s favor somewhere around the 15-20 year mark.
But of course, after 30 years the homeowner’s housing expenses drop off significantly, so it would probably only be a matter of time before they would come out on top again. But then we’re talking about the very long-term.
Closing Thoughts
Of course, your mileage may vary depending on things like which part of the country you intend to live in, the size and type of house you want to buy, the timing of stock and housing market fluctuations, and probably many other factors.
If you’d like to size up the investment potential of houses given your particular circumstances and intentions, check out our HomeEstimator app. It’s designed to help take into account housing costs and all other factors related to whether buying a house is a good investment.
