Buying a house vs. investing in mutual funds

Doug Greenville · 2008-08-03T10:46:39-07:00

Hello everyone. I currently have a significant amount of money invested in mutual funds with a major investment firm. Considering the current state of the U.S. economy and the prospects, or lack thereof, of a recovery anytime in the not too distant future I'm wondering whether or not it would be wise for me to take my money out of my mutual fund account and use it as a down payment on a house. If it hasn't already been made painfully obvious I have absolutely no experience with real estate investment at all. It just makes sense to me that if I were to take say $30k, use it to buy a house, live in the house until I am ready to move on,(I am ready, willing, and eager to leave my current housing arrangement),then sell the house, it would be better than leaving my money in a mutual fund account that will continually lose money just about every month for god knows how long. I know there are certain "if" factors such as if I were to get suckered into a house that needed thousands of dollars worth of repairs or something like that. But for arguments sake let's say that the house I would purchase would be at a fair price and would be move-in ready with no hidden or surprise expenses, do you think it would be a good idea? The way I see it is like this; yeah the housing market fluctuates but it just seems like a much more secure investment in these economically uncertain times. The house will always be there and as long as I could find a buyer I would get out every penny that I put in unlike mutual funds where 5 years down the road I could very easily have lost thousands of dollars with nothing to show for it. This sounds like a good idea to me but I know that there are probably factors I'm not considering due to my lack of knowledge and experience in this field. All opinions are welcome and I thank you in advance.

Bob McIntosh

Real Estate Investor · Hoboken, NJ · Member since 2008 · 230 posts · 6 votes

18y

Just to throw this out there as another option. If you wanted to take the money out of the mutual funds and put it into real estate but not deal with the hassels that come up with real estate you may want to look into a real estate investment trust (REIT). They buy larger properties or large ammounts of property and offer decent ROI. I always say that REIT's are the mutual funds of REI (except they generally offer better ROI than mutual funds).

Just a thought for consideration :)

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

18y

You say you know nothing about REI. Based on that alone I would recommend you NOT buy RE just yet. If you don't like stocks at the moment (and, I'm with you there), pull you money out into a money market account.

Realize that with real estate, a "round trip" of buying a house and then selling will eat up about 10% of the value. So, if you buy a house today, and sell it 3-5 years down the road for the same price, you will give up 10% of the money invested.

Now, the upside is that's not your money. Its borrowed. So, you put 10% down, get a loan and sell in 5 years. You'll actually have to put in about 12% to cover the buy closing costs. If you sell at the same price, you'll get back 92% of the sales price, after closing costs. After five years, your loan balance will be almost unchanged, so 90% of the sales price will go to pay off the loan. That leaves you 2%. You put in 12% at the start, so your loss is the entire 10% you put in.

If you pay cash, the amount you lose is the same, but the percentage is just the 10% instead of 100%. And, you not have made all those interest payments while you held.

So, leaving your money in a money market account or CDs would have a better return.

If you think prices may appreciate, you might see appreciation about equal to inflation over the coming years. That assumes you're buying in an area where prices have already declined from the boom years, or your area missed the boom entirely.

Do some reading and learning. You say you're worried about getting suckered into a house that needs thousands in repairs. Guess what. Every house needs thousands of dollars in work when you buy it. Unless a house is brand new or has been recently rehabbed, it always needs work when you move it. Even a new house often needs curtains and landscaping. You need to be more concerned about not needing 10's of thousands in repairs.

Also, over time, houses do need maintenance. If you're used to renting, this is an expense you may not have noticed. Do not fall into the "own for less than renting" trap. There are lots of other expenses associated with a house that are not included in the payment.

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Mark N.A

Real Estate Investor · North Carolina · Member since 2008 · 1k+ posts · 483 votes

18y

Well, here is my $0.02:

Owning your own personal residence can be a wonderful thing for many reasons.

But is it an 'investment'? Consider that certain intangible returns, such as your personal enjoyment of your house, are completely tax-free. You may qualify for a home-office deduction, as well as interest deductions, and other benefits an accountant can advise you on, too.

But will your house appreciate at the same rate as the S&P 500 has historically done over long time periods?

It may, or it may not. That depends upon many variables such as location, initial purchase price, neighborhood and city future potential, and so on.

Succesfully investing in real estate is hard work, just as succesfully investing in individual stocks involves hard work. Can it be done? Most certainly. Can just anyone do it? Probably not.

I believe that what makes real estate investors succesful is that they literally 'love' this business. They eat, sleep and dream real estate, and it's their passion, so to speak.

Go read the thread "You know you're a real estate investor when...". Although the posts are pretty humorous to me, they are also pretty true about some of us.

In any event, one key to succesful investing is diversification. If you don't already own your own home, you can do worse things with your money.

Good luck.

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Shari Posey

Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes

18y

Here is my experience with real estate vs. mutual funds...

Last week I had to contribute $10,000 into our IRAs and decide what mutual funds to put it in within the accounts. I did a complete investigation of all our contributions since 1999 until today and the growth of each mutual fund or lack of growth. The end analysis is that our IRAs are up an average of 3.5% per year over the past 7 years. I was happy they weren't down considering the current market.

Here's our real estate portfolio since 2000--
Our first house purchased as our primary residence in 2000 for $125,000 with $10,000 down and is now worth about $275,000. We have a 15-yr fixed mortgage and tenants that pay the mortgage plus $200/mo.

Our second purchase was a rental condo in 2001 for $118,000 with $23,000 down. It is currently worth $165,000 and the tenants pay the mortgage plus $300/mo. (Not our best investment if we had to sell right now because the condo market is saturated.)

We also have a rental out of state that we paid $53,000 for in 2004 and is now worth about $75,000. We actually paid cash for this with our ROTH IRA so $575/mo rent go into the ROTH and is completely tax free when we retire.

Another primary residence was purchased in 2004 for $510,000 with $102,000 down. We totally remodeled it with $60,000 and sold it 2 years later (just past the peak of our market) for $675,000. I think we were lucky with this property buying the worst house in a great neighborhood and remodeling very cost effectively, plus the market was good.

Granted, if we had an earthquake tomorrow we'd be in deep doo doo but I think if you buy a cute cosmetic fixer you can afford on a 15-yr loan, work on the house yourself, live in it about 5 years until things turn around and turn it into a rental, and keep doing that a few times until you retire, you would do better than mutural funds.

I am sure there are better strategies than mine but we have been able to grow a little nest egg because of real estate not because of mutual funds.

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Lynn Z

Member since 2008 · 689 posts · 23 votes

18y

Ditto on the benefit of a 15 year mortgage. The pay down is terrific over even a 5 year period on a moderate priced investment and forces discipline that comes in handy when there's a sudden downturn in the market or you're stuck with a weak rental market (hey that's right now).

I set up a 15 year 5.875% investment loan 3 years ago with a partner and it pays about $465 a month on principle. We acquired/remodeled with cash so ended up with zero $$ of our own money when we got the loan.

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

18y

Between early 2000 and early 2003, the S&P 500 index lost about 50% of its value. Between early 2003 and last summer, it had gained all that back. Its now down about 15% off the highs from last summer? So, if you compared early 2000 to now, its a loser. From Apr 03 to now, its average 7.7% return. From Apr 2001 to now -0.9% (so, Boheminana, you did well over that period) From From Apr 98 to now, 1.82%. From Apr 88 to now, 8.5%. Since Apr 1951, 7.5%.

Which is the right number? None of them. What matters is the time period thats applicable to you.

I bought a house in 1995 in Bakersfield, CA for $240K, sold it in 1999 for $235K and a bunch of concessions. Its worth maybe $500K now and peaked about $650K a couple of years back (at least according to zillow, for what little that's worth.) Those number have little more meaning than those various S&P numbers. Betting on appreciation is speculation.

If you bought in 2004 for $510K and you sold it for $675K in 2006, you were just plain lucky. I'd guess its not worth anywhere near $675 now. People who bought Microsoft or Dell at the start of the PC revolution were much luckier than those who bough Kaypro (remember them), Grid (how about them?) or Microcropolis (any bells here?) Don't confuse luck with skill.

So, I'm not beating up on Boehmiana here. My point is, you need to diversify. Making predictions, especially about the future, is very difficult. IMHO, the CA real estate market right now is much more similar to the stock market in Apr 2001 than to the CA real estate market in 2004. I predict that in five years, well look back and say "the house I bought in LA in 2008 is worth less than what I paid."

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Shari Posey

Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes

18y

The house we sold for $675,000 last year would probably sell for $625,000 now but we would have still profited. Regardles, I totally realize that we were pretty lucky and I wouldn't plan on doing a flip like that now. And we have a portion of our investments in stocks and mutual funds. BUT, based on my limited experience tracking 10 years of the stock market and real estate market, as long as you can buy a property with 10-20% down and it cashflows, you will probably be better off with real estate at the end of 10 years. It kind of pains me to put money into my IRA (mutual funds) to reduce my taxes when I would much prefer to put the same amount of money into the down payment on a piece of property to reduce my taxes. (I don't mean through depreciation and expenses but just the investment.)

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Lynn Z

Member since 2008 · 689 posts · 23 votes

18y

And what I love is paying taxes in a lower bracket then recapturing depreciation upon sale of the investment at 25%. It's very difficult to cash flow in our area with 50% equity because 1) house prices are still high 2) wages are low and 3) competition from builders take most of the student market because they can afford to build new structures and offer amenities

I bought a 2/1 in a great area in 2002. Taxes and insurance run over $2000 a year and the $3000 depreciation every year has to be recaptured at a 25% rate if I sell it. The lots are large so yard care chip in is a must. For six years I've tried to rent the house for more than $650-700 and the market just isn't there. I net about $1200 a year. Students want to live 4 to a house so a 2/1 will never do. I talked to a broker who is trying to rent a similar house up the street for $700 and he doesn't understand why it stands vacant. Oh, and I've got 67% equity in the house.

Lots of investors are placing their properties on the market and the flippers are just stuck with empties. I think another year will produce some decent (not great) buys. It'll be 5 years before this mess settles out.

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Buying a house vs. investing in mutual funds

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