If you are given $1M, would you buy or rent - which one is better for you?

There is no right or wrong answer when it comes to investing. There are individuals who are comfortable renting a residence and investing available cash flow into the stock market. There are individuals who will never invest into the stock market and will put all of the cash flow into real estate. If you are given $1 million dollar, would you buy or rent a property?

Here's the financial scenario, you have:

  • A family of four with a household income of $6,000
  • $2,000 monthly living expense (bills, auto insurance, food, clothes...etc.)
  • To accommodate for your family, the cost of renting a property is $2,500/mo (e.g. a small detached or semi-detached house in Toronto, Ontario, Canada area)

With $1 million dollar in cash, you decide to rent a property and invest everything into the stock market, like so:

  • For simplicity and ease of comparison, let's invest $1,000,000 into index fund with average 7% annual growth
  • The cost of living + rental for the household is $4,500/mo
  • An additional $500/mo will be invested into the same index fund, leaving $1,000 contingency/emergency fund for the family.

In 5 years, your investment/net worth will grow to approximately $1,437,000

Alternatively, with $1 million dollar in cash, you decide to buy a $1 million dollar property with HELOC (85% LTV). Your portfolio/financial setup looks like this:

  • The cost of living is $2,000/mo as there's no rental
  • $1,000/mo is set aside as contingency/emergency fund for the family
  • You take $850,000 out from your HELOC to invest into index fund with average 7% annual growth (same condition for simplicity)
  • The interest on HELOC will be approximately $1,600/mo (2.19% interest)
  • With your household income of $6,000, you will be left with $1,400/mo available to be invested into the same index fund.
  • Let's be very conservative here and assume the value of your property will grow 2.5%/year (In North America, especially in large cities with similar cost of living, this averages around 10~18%)

In 5 years, the value of your property would have increased to approximately $1,131,000 ($131,000 growth) and your investment will grow to approximately $1,289,000. Your net worth would be approximately $1,131,000 + $1,289,000 - $850,000 = $1,570,000

With the example above, you can see that given the same market conditions and being conservative in both cases, your net worth will actually increase more by buying a property and investing at the same time.

What if we be more aggressive? If we rent a property:

  • Invest $1,000,000 into growth fund with average 18% annual growth (we're assuming the optimal condition here)
  • The cost of living + rental is the same at $4,500/mo
  • An additional $500/mo is invested, keeping $1,000 contingency/emergency fund for the family

In 5 years, your investment/net worth will grow to approximately $2,330,000

Alternatively, if we buy a $1 million dollar property (with HELOC at 85% LTV) and:

  • The cost of living is $2,000/mo and $1,000 is set aside as contingency/emergency fund for the family
  • Take $850,000 out from HELOC and invest into the same growth fund with 18% annual growth
  • The interest on HELOC will be approximately $1,600/mo
  • With your household income of $6,000, you will be left with $1,400/mo available to be invested into the same growth fund.
  • Value of property assumed to grow at a very conservative rate - 2.5%/year

In 5 years, the value of your property would have increased to approximately $1,131,000 ($131,000 growth) and your investment will grow to approximately $2,065,000. Your net worth would be approximately $1,131,000 + $2,065,000 - $850,000 = $2,346,000

With the example above, with the same market conditions, the net worth growth is much closer from both investment approaches.

There are other factors that will significantly impact the outcome of different investment strategies, such as if the interest rate on the HELOC is higher, you would be left with less monthly additional contributions to your investment, which will significantly impact the growth of your investment in the long run.

However, you can also choose to buy a property and not put in additional monthly contributions to your investment and use the cash flow for entertainment, recreational activities, and trips with your family. Your household's net worth would not grow as much, but your family would have had more opportunities to enjoy the world.

We hope this content will help you understand how you can still invest while buying a property, and help you make informed decisions when you invest into different investment vehicles. For simplicity and ease of comparison, we kept many of the variables the same. This will be different between individuals as the comfort/risk tolerance levels will also be different from person to person when it comes to designing an investment strategy. You should always consult with your financial advisor to create the investment strategy that will work for you and your family.

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