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